**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, 2005**





*****
            **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 *





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).   Yes * No T





**APPLICABLE
      ONLY TO CORPORATE ISSUERS**





State
      the
      number of shares outstanding of each of the registrant's classes of common
      equity, as of the latest practicable date: 45,720,632 shares issued and
      outstanding as of November 11, 2005





Traditional
      Small Business Disclosure Format (Check one):     Yes * No T













**INDEX**




**PAGE**PART
                I - FINANCIAL INFORMATIONItem
                1. - Financial
                StatementsConsolidated
                Condensed Balance Sheets - September
                30, 2005 (unaudited) and December 31, 2004
            1Consolidated
                Condensed Statements of
                Operations - Three and Nine Months Ended September 30, 2005 and 2004
                and
                March 19, 2001 (inception) to September 30, 2005
                (unaudited)
            2Consolidated
                Condensed Statements of
                Changes in Stockholders' Equity (unaudited)
            3Consolidated
                Condensed Statements of Cash Flows - Nine
                Months Ended September 30, 2005 and 2004 and March 19, 2001 (inception)
                to
                September 30, 2005 (unaudited)
            4Notes
                to Consolidated Condensed Financial Statements
                (unaudited)
            5Item
                2. - Management's Discussion and Analysis or
                Plan of Operation
            15Item
                3. Controls and
                Procedures
            30PART
                II - OTHER INFORMATIONItem
                1. Legal Proceedings
            32Item
                2. Unregistered Sales of Securities and Use of
                Proceeds
            32Item
                3. Defaults Upon Senior Securities
            32Item
                4. Submission of Matters to a Vote of Security
                Holders
            32Item
                5. Other Information
            32Item
                6. Exhibits
            33





*Index*





**PART
      I - FINANCIAL INFORMATION**





**Item
      1** **.
      - Financial Statements**





**REXAHN
      PHARMACEUTICALS** , **INC. AND SUBSIDIARY**


**(A
      Development Stage Company)**





**Consolidated
      Condensed Balance Sheets**





**September
                30,**
              **2005**
            
            December
                31,
              2004(Unaudited)**ASSETS****Current
                Assets**Cash
                and cash equivalents
            
            **$**
            **4,311,765**
            
            $
            1,015,979Short-term
                investments
            
            
            **7,383,033**
            
            
            -Prepaid
                expenses and other
            
            
            **31,440**
            
            
            16,195**Total
                Current Assets**
            
            
            **11**,**726**,**238**
            
            
            1,032,174**Equipment**,**Net**(note
                3)
            
            
            **180**,**320**
            
            
            189,623**Intangible
                Assets**(note 4)
            
            
            **347**,**528**
            
            
            -**Total
                Assets**
            
            **$**
            **12,254,086**
            
            $
            1,221,797**LIABILITIES
                AND STOCKHOLDERS' EQUITY**(**DEFICIT**)**Current
                Liabilities:**Accounts
                payable and accrued expenses
            
            **$**
            **584,321**
            
            $
            435,968Current
                portion of long-term obligation (note 4)
            
            
            **187**,**500**
            
            
            -**Total
                Current Liabilities**
            
            
            **771**,**821**
            
            
            435,968Long-term
                obligation, net of current portion (note 4)
            
            
            **30**,**149**
            
            
            -Long-term
                convertible debt (note 5)
            
            
            **5**,**150**,**000**
            
            
            -Deferred
                revenue (note 6)
            
            
            **1**,**293**,**750**
            
            
            1,350,000**Total
                Liabilities**
            
            
            **7**,**245**,**720**
            
            
            1,785,968**Commitments
                and Contingencies****Stockholders'
                Equity**(**Deficit**)****(note
                7):Common
                Stock, par value $0.0001 at September 30, 2005 and $0.01 at December
                31,
                2004
            
            
            **4,571**
            
            
            76,281Additional
                Paid In Capital
            
            
            **16,101,450**
            
            
            7,214,331Accumulated
                Deficit During the Development Stage
            
            
            **(11,097,655**
            **)**
            
            (7,854,783
            )**Total
                Stockholders' Equity**(**Deficit**)
            
            
            **5**,**008**,**366**
            
            
            (564,171
            )**Total
                Liabilities and Stockholders' Equity**(**Deficit**)
            
            **$**
            **12**,**254**,**086**
            
            $
            1,221,797





1
 *Index*





**REXAHN
      PHARMACEUTICALS** , **INC. AND SUBSIDIARY**


**(A
      Development Stage Company)**





**Consolidated
      Condensed Statements of Operations**


**(Unaudited)**





Cumulative
                from
              March
                19, 2001
              (Inception)
                to
              September
                30,
            
            Three
                Months Ended
              September
                30,
            
            Nine
                Months Ended
              September
                30,2005
            
            **2005**
            
            2004
            
            **2005**
            
            2004**Revenue**Interest
                and other income
            
            $
            295,150
            
            **$**
            **57,542**
            
            **$**
            22,403
            
            **$**
            **94,311**
            
            $
            51,255Research
            
            
            206,250
            
            
            **18,750**
            
            
            18,750
            
            
            **56,250**
            
            
            56,250501,400
            
            
            **76,292**
            
            
            41,153
            
            
            **150,561**
            
            
            107,505**Expenses**General
                and administrative
            
            
            5,134,076
            
            
            **682,789**
            
            
            386,231
            
            
            **1,879,620**
            
            
            799,610Research
                and development
            
            
            4,707,871
            
            
            **185,334**
            
            
            619,224
            
            
            **740,771**
            
            
            1,489,767Stock
                option compensation expense (note 8)
            
            
            1,234,271
            
            
            **238**,**118**
            
            
            88,771
            
            
            **465**,**427**
            
            
            251,159Patent
                fees
            
            
            156,542
            
            
            **52**,**039**
            
            
            -
            
            
            **107**,**481**
            
            
            9,748Interest
            
            
            141,707
            
            
            **59**,**808**
            
            
            1,993
            
            
            **137**,**027**
            
            
            2,993Depreciation
            
            
            224,588
            
            
            **30**,**074**
            
            
            9,530
            
            
            **63**,**107**
            
            
            32,82111,599,055
            
            
            **1**,**248**,**162**
            
            
            1,105,749
            
            
            **3**,**393**,**433**
            
            
            2,586,098**Net
                Loss**
            
            $
            (11,097,655
            )
            **$**
            **(1,171,870**
            **)**
            $
            (1,064,596
            )
            **$**
            **(3,242,872**
            **)**
            $
            (2,478,593
            )Loss
                per weighted average number of shares outstanding basic and
                diluted
            
            
            
            
            **$**
            **(0.03**
            **)**
            $
            (0.03
            )
            **$**
            **(0.08**
            **)**
            $
            (0.06
            )Weighted
                average number of shares outstanding basic and diluted
            
            
            
            
            
            **43,943,795**
            
            
            38,133,330
            
            
            **40,648,411**
            
            
            38,133,330





2
 *Index*





**REXAHN
      PHARMACEUTICALS** , **INC. AND SUBSIDIARY**


**(A
      Development Stage Company)**





**Consolidated
      Condensed Statements of Changes in Stockholders' Equity
      (Unaudited)**


**March
      19, 2001 (Inception) to September 30, 2005**


**(Unaudited)**





**Number
                of**
              **Shares**
            
            **Common**
              **Stock**
            
            **Additional**
              **Paid
                In**
              **Capital**
            
            **Accumulated**
              **Deficit**
              **During
                the**
              **Development**
              **State**
            
            **Total**
              **Stockholders'**
              **Equity**Opening
                balance, March 19, 2001
            
            
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Common
                shares issued
            
            
            7,126,666
            
            
            71,266
            
            
            4,448,702
            
            
            -
            
            
            4,519,968Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (625,109
            )
            
            (625,109
            )Balance,
                December 31, 2001
            
            
            7,126,666
            
            
            71,266
            
            
            4,448,702
            
            
            (625,109
            )
            
            3,894,859Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,181,157
            )
            
            (1,181,157
            )Balance,
                December 31, 2002
            
            
            7,126,666
            
            
            71,266
            
            
            4,448,702
            
            
            (1,806,266
            )
            
            2,713,702Common
                shares issued
            
            
            500,000
            
            
            5,000
            
            
            1,995,000
            
            
            -
            
            
            2,000,000Stock
                option compensation
            
            
            -
            
            
            -
            
            
            538,074
            
            
            -
            
            
            538,074Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,775,075
            )
            
            (2,775,075
            )Balance,
                December 31, 2003
            
            
            7,626,666
            
            
            76,266
            
            
            6,981,776
            
            
            (4,581,341
            )
            
            2,476,701Common
                shares issued
            
            
            1,500
            
            
            15
            
            
            1,785
            
            
            -
            
            
            1,800Stock
                option compensation
            
            
            -
            
            
            -
            
            
            230,770
            
            
            -
            
            
            230,770Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,273,442
            )
            
            (3,273,442
            )Balance,
                December 31, 2004
            
            
            7,628,166
            
            
            76,281
            
            
            7,214,331
            
            
            (7,854,783
            )
            
            (564,171
            )Stock
                split (5 for 1)
            
            
            30,512,664
            
            
            (72,467
            )
            
            72,467
            
            
            -
            
            
            -Common
                shares issued in connection with the merger
            
            
            3,397,802
            
            
            340
            
            
            (340
            )
            
            -
            
            
            -Stock
                option compensation
            
            
            -
            
            
            -
            
            
            465,427
            
            
            -
            
            
            465,427Common
                shares issued for cash
            
            
            4,175,000
            
            
            417
            
            
            8,349,565
            
            
            -
            
            
            8,349,982Net
                loss (unaudited)
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,242,872
            )
            
            (3,242,872
            )Balance,
                September 30, 2005
            
            
            **45**,**713**,**632**
            
            **$**
            **4**,**571**
            
            **$**
            **16**,**101**,**450**
            
            **$**
            (**11**,**097**,**655**
            )
            **$**
            **5**,**008**,**366**





3
 *Index*





**REXAHN
      PHARMACEUTICALS** , **INC. AND SUBSIDIARY**


( **A
      Development Stage Company)**





**Consolidated
      Condensed Statements of Cash Flows**


**(Unaudited)**





Cumulative
                from
              March
                19, 2001
              (Inception)
                to
              September
                30,
            
            Nine
                Months Ended
              September
                30,2005
            
            **2005**
            
            2004**Cash
                Flows from Operating Activities:**Net
                loss
            
            $
            (11,097,655
            )
            **$**
            (**3**,**242**,**872**
            )
            $
            (2,478,593
            )Adjustments
                to reconcile net loss to net cash (used in) operating
                activities:Depreciation
            
            
            224,588
            
            
            **63**,**107**
            
            
            32,821Stock
                option compensation expense
            
            
            1,234,271
            
            
            **465**,**427**
            
            
            251,159Deferred
                revenue
            
            
            1,293,750
            
            
            (**56**,**250**
            )
            
            (56,250
            )Changes
                in assets and liabilitiesPrepaid
                expenses and other
            
            
            (31,440
            )
            
            (**15**,**245**
            )
            
            (10,034
            )Accounts
                payable and accrued expenses
            
            
            584,321
            
            
            **148**,**354**
            
            
            (43,677
            )**Net
                Cash Used in Operating Activities**
            
            
            (7,792,165
            )
            
            **(2,637,479**
            **)**
            
            (2,304,574
            )**Cash
                Flows from Investing Activities:**Short-term
                investments
            
            
            (7,383,033
            )
            
            (**7**,**383**,**033**
            )
            
            2,000,000Purchase
                of equipment
            
            
            (396,220
            )
            
            (**45**,**117**
            )
            
            (121,287
            )**Net
                  Cash**(**Used
                  in**)**Provided by**Investing
                  Activities
            
            
            (7,779,253
            )
            
            (**7**,**428**,**150**
            )
            
            1,878,713**Cash
                Flows from Financing Activities**Issuance
                of common stock
            
            
            14,871,750
            
            
            **8**,**349**,**982**
            
            
            -Proceeds
                from long-term debt
            
            
            5,150,000
            
            
            **5**,**150**,**000**
            
            
            140,000Principal
                payments on long-term debt
            
            
            (138,567
            )
            
            (**138**,**567**
            )
            
            -**Net
                Cash Provided by Financing Activities**
            
            
            19,883,183
            
            
            **13**,**361**,**415**
            
            
            140,000**Net
                Increase**(**Decrease**)**in Cash and Cash Equivalents**
            
            
            4,311,765
            
            
            **3**,**295**,**786**
            
            
            (285,861
            )**Cash
                and Cash Equivalents**,**beginning of period**
            
            
            -
            
            
            **1**,**015**,**979**
            
            
            2,016,092**Cash
                and Cash Equivalents, end of period**
            
            $
            4,311,765
            
            **$**
            **4**,**311**,**765**
            
            $
            1,730,231**Supplemental
                Cash Flow Information**Cash
                paid for interest:Interest
            
            $
            6,956
            
            **$**
            **2,277**
            
            $
            2,665Non-Cash
                Investing and Financing Activities**:**In
                February 2005, the Company entered into a licensing agreement in
                exchange
                for debt of $356,215.





4
 *Index*





**REXAHN
      PHARMACEUTICALS, INC. AND SUBSIDIARY**


(A
      Development Stage Company)


Notes
      to
      Consolidated Condensed Financial Statements


Three
      and
      Nine Months Ended September 30, 2005 and 2004


(Unaudited)





**1.**
            **Organization
                and Summary of Significant Accounting
                Policies**





The
      accompanying unaudited consolidated financial statements of Rexahn
      Pharmaceuticals, Inc. and Subsidiary (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 consolidated 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 consolidated 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 of
      accounting policy since December 31, 2004. The results from operations for
      the
      period are not necessarily indicative of the results expected for the full
      fiscal year or any future period.




The
        accounting policies followed by the Company are set forth in Note 1 to the
        Company's financial statements included in its quarterly report on Form 10-QSB
        for the period ended June 30, 2005, which note is incorporated herein by
        reference. Specific reference is made to that report for more detailed
        description of the Company's securities and the notes to financial statements
        included therein, since certain information and footnote disclosures normally
        included in financial statements in accordance with accounting principles
        generally accepted in the United States of America have been condensed or
        omitted from this report.


Going
      Concern





The
      Company's consolidated condensed financial statements are presented on a going
      concern basis, which contemplates the realization of assets and satisfaction
      of
      liabilities in the normal course of business. The Company has experienced
      recurring losses from operations since inception that raise substantial doubt
      as
      to its ability to continue as a going concern. For the nine-month periods ended
      September 30, 2005 and 2004, the Company experienced net losses of $3,242,872
      and $2,478,593, respectively. At September 30, 2005, the Company has an
      accumulated deficit of $11,097,655.





The
      Company's ability to continue as a going concern is contingent upon its ability
      to maintain the financing and strategic alliances necessary to complete product
      development, attain the necessary licensing for its products and attain
      profitable operations.





Although
      the Company is in clinical trials for its first drug candidate, there can be
      no
      assurance of the success of the clinical trials or of the marketability of
      the
      drug.





Management
      is pursuing various sources of financing. The Company has entered into
      negotiations on strategic alliances including research funding collaborations,
      as well as equity financing with international pharmaceutical companies and
      other investors in the United States, Europe and Asia. In addition, the
      Company has completed private placements of common stock and convertible debt
      during 2005 that raised an aggregate of $13.5 million and may pursue additional
      financings in the future. Although the Company plans to pursue additional
      financing, there can be no assurance that the




5
 *Index*




**1.**
            **Organization
                and Summary of Significant Accounting Policies**
                (cont'd)




Company
      will be able to secure financing when needed or to obtain such financing on
      terms satisfactory to the Company, if at all.




The
          consolidated condensed financial statements do not include any adjustments
          to
          reflect the possible future effects on the recoverability and classification
          of
          assets or the amounts and classification of liabilities that may result
          from the
          possible inability of the Company to continue as a going concern.
 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.





As
      part
      of the Acquisition Merger, the Company assumed the convertible notes further
      described in Note 5 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 by Rexahn. 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 Affecting the Company





In
      December 2004, the FASB issued SFAS No. 153, "Exchanges of Non monetary Assets,
      an amendment of APB Opinion No. 29". SFAS No. 153 replaces the exception from
      fair value measurement in APB Opinion No. 29 for non-monetary exchanges of
      similar productive assets with a




6
 *Index*





**2.**
            **Summary
                of Significant Accounting Policies**
                (cont'd)




general
      exception from fair value measurement for exchanges of non-monetary assets
      that
      do not have commercial substance. A non-monetary exchange has commercial
      substance if the future cash flows of the entity are expected to change
      significantly as a result of the exchange. SFAS No. 153 is to be applied
      prospectively, and is effective for non-monetary asset exchanges occurring
      in
      fiscal periods after the December 2004 issuance of SFAS No. 153. The Company
      does not believe the adoption of SFAS No. 153 will be significant to the overall
      results of operations or financial position.




Recent
      Accounting Pronouncements Affecting the Company (cont'd)





In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share Based
      Payment" ("SFAS No. 123R"). SFAS No. 123R requires the Company to measure the
      cost of employee services received in exchange for an award of equity
      instruments based on the grant date fair value of the award. The cost of the
      employee services is recognized as compensation cost over the period that an
      employee provides service in exchange for the award. SFAS No. 123R will be
      effective January 1, 2006 for the Company and may be adopted using a modified
      prospective method or a modified retrospective method. Although the Company
      has
      not yet completed an analysis to quantify the exact impact the new standard
      will
      have on its future financial performance, the disclosures in Note 8 provide
      detail as to the Company's financial performance as if the Company had applied
      the fair value based method and recognition provisions of SFAS No. 123R to
      stock
      based employee compensation to the current reporting periods.





In
      March
      2005, the FASB issued FASB Staff Position ("FSP") No. 46(R)-5, "Implicit
      Variable Interests under FASB Interpretation No. ("FIN") 46 (revised December
      2003), Consolidation of Variable Interest Entities" ("FSP FIN 46R-5"). FSP
      FIN
      46R-5 provides guidance for a reporting enterprise on whether it holds an
      implicit variable interest in Variable Interest Entities ("VIEs") or potential
      VIEs when specific conditions exist. This FSP is effective in the first period
      beginning after March 3, 2005 in accordance with the transition provisions
      of
      FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities
—
an Interpretation of Accounting Research Bulletin No. 51" ("FIN 46R"). The
      Company has determined that the adoption of FSP FIN 46R-5 will not have an
      impact on its results of operations and financial position.




7
 *Index*




**3.**
              **Equipment,
                  Net**
 
 **Cost**
              
              **September
                    30, 2005**
                **Accumulated**
                **Depreciation**
              
              Cost
              
              December
                    31, 2004
                Accumulated
                DepreciationFurniture
                  and fixtures
              
              **$**
              **30**,**943**
              
              **$**
              **13,350**
              
              $
              30,943
              
              $
              8,551Office
                  equipment
              
              
              **39,048**
              
              
              **21,998**
              
              
              28,848
              
              
              18,336Lab
                  equipment
              
              
              **321,544**
              
              
              **176,941**
              
              
              286,628
              
              
              131,492Computer
                  equipment
              
              
              **5,066**
              
              
              **3,992**
              
              
              5,066
              
              
              3,483**$**
              **396,601**
              
              **$**
              **216,281**
              
              $
              351,485
              
              $
              161,862Net
                  carrying amount
              
              
              
              
              **$**
              **180,320**
              
              
              
              
              $
              189,623
 
 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
                  line


**4.**
            **Intangible
                Assets**




On
      February 10, 2005, the Company entered into a licensing agreement with Revaax
      Pharmaceuticals LLC ("Revaax"), whereby the Company received an exclusive,
      worldwide, royalty bearing license with the right to sub-license Revaax's
      licensed technology and products.





The
      agreement calls for an initial licensing fee of $375,000 to be payable to Revaax
      in eight quarterly installments ending on November 10, 2006. Accordingly, the
      Revaax license has been measured at fair value at the date the licensing
      agreement was entered into. The fair value of the liability component of
      $347,528 as of September 30, 2005 has been determined by discounting the stream
      of future payments of $46,875 at 6%, the prevailing market rate for a debt
      instrument of comparable maturity and credit quality. The liability component
      is
      being accreted over the term of the liability, calculated based on the Company's
      estimated effective market interest rate. Pursuant to the agreement, at
      September 30, 2005, three installments had been paid. As at September 30, 2005,
      the outstanding balance was $217,649.




8
 *Index*





**5.**
            **Long-Term
                Debt**





**September
                30,**
              **2005**
            
            December
                31,
              20046%
                Convertible Note (a)
            
            **$**
            **3,850,000**
            
            $
            -Convertible
                Note (b)
            
            
            **1,300,000**
            
            
            -**$**
            **5,150,000**
            
            $
            -





a)
              On
                  February 28, 2005, the Company issued, in a transaction exempt
                  from
                  registration under the Securities Act, $3,850,000 aggregate principal
                  amount of 6% convertible notes due on February
                  28,


9
 *Index*




**5.**
                **Long-Term
                    Debt** (cont'd)
 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 and (ii) May 26, 2006 to the maturity date, February 28,
                    2008, at a
                    conversion price. The notes will 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.
 b)
              On
                  August 8, 2005, the Company issued, in a transaction exempt from
                  registration under the Securities Act, $1,300,000 aggregate principal
                  amount of convertible notes due on August 8, 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 September 19, 2005 to the maturity
                  date, August 8, 2008 or upon the occurrence and continuation of
                  any events
                  of default at a conversion price of $2.00 per share. The notes
                  will 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 notes do not bear interest, except that any overdue principal
                  of the
                  notes will bear interest for each day from the maturity date to
                  the date
                  of actual payment, at a rate equal to 5% per annum, or, if an event
                  of
                  default occurs and is continuing, the notes will bear interest,
                  from the
                  date of the occurrence of such event of default until such event
                  of
                  default is cured or waived, at a rate equal to 5% per
                  annum.
 
 **6.**
              **Deferred
                  Revenue**
 
 In
        2003,
        the Company entered into a collaborative research agreement with Rexgene
        Biotech
        Co., Ltd. ("Rexgene"), a minority shareholder. This agreement provides
        Rexgene with exclusive rights to license, sublicense, make, have made, use,
        sell
        and import RX-0201 in Asia. A one time contribution to the joint development
        and
        research of RX-0201 of $1,500,000 was paid to the Company in 2003 in accordance
        with the agreement. The amount of revenue from this contribution is being
        recognized as income over the term of the agreement which terminates at the
        later of 20 years or the term of the patent on the licensed product. The
        Company
        is using 20 years as its basis for recognition and accordingly
        $56,250 was included in revenue for the nine months ended September 30, 2005
        and
        2004 and $75,000 was included in revenues in each of the fiscal years ended
        2004
        and 2003. The remaining $1,293,750 at September 30, 2005 ($1,350,000 at December
        31, 2004) is reflected as deferred revenue on the balance sheet.




**7.**
            **Capital
                Stock**





Authorized500,000,000
                shares of common stock, par value $0.0001**September
                30, 2005**
            
            December
                31, 200445,713,632
                shares (2004 7,628,166 shares, par value $0.01) of common
                stock
            
            **$**
            **4,571**
            
            $
            76,281





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




10
 *Index*




**7.**
                **Capital
                    Stock** (cont'd)
 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
        August
        8, 2005, the Company issued, in a transaction exempt from registration under
        the
        Securities Act, 4,175,000 shares of common stock at a purchase price of $2.00
        per share.
 
 **8.**
              **Stock-Based
                  Compensation**
 
 On
        August
        5, 2003, the Company established a stock option plan. The plan grants stock
        options to key employees, directors and consultants of the Company. For grants
        prior to September 12, 2005 and grants to employees of the Company after
        September 12, 2005, the vesting period is 30% after the first year, an
        additional 30% after the second year and the remaining 40% after the third
        year.
        For grants to non-employee directors and consultants of the Company after
        September 12, 2005, the vesting period is 100% after the first year, 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.
 
 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.
 
 The
        exercise price of the options granted to employees were below the fair market
        value of the common stock on the date of the grant. Using the intrinsic value
        method, the total compensation cost for the nine- month
        period ended September 30, 2005 amounted to $2,056,500 (2004-$672,000) and
        is
        being amortized over the vesting period. This total cost includes a recovery
        of
        compensation cost through the cancellation of 752,500 (2004 - 367,500) stock
        options during the nine month periods. Accordingly, $465,427 (2004 - $251,159)
        has been expensed in the statement of operations for the nine month periods
        then
        ended.





Pro
      forma
      information regarding net income is required to be disclosed in financial
      statements by SFAS No. 148, "Accounting for Stock Based Compensation -
      Transition and Disclosure", and has been determined as if the Company had
      accounted for its employee stock options and employee stock purchase plan under
      the fair value method of SFAS No. 123. The fair value for these options was
      estimated at the dates of grant using the Black Scholes pricing model. The
      weighted average fair value of the options granted to employees under this
      method is $2.99 per option for a total cost of $2,343,700 (2004 - $729,600).
      The
      assumptions are evaluated annually and revised as necessary to reflect market
      conditions and additional experience.





Nine
                Months Ended
              September
                30,**2005**
            
            2004Net
                (loss), as reported
            
            **$**
            (**3**,**242**,**872**
            )
            $
            (2,478,593
            )Add:
                Stock based employee compensation expense recorded under APB No.
                25
                intrinsic value method
            
            
            **305**,**946**
            
            
            127,540Deduct:
                Stock based employee compensation expense determined under Fair Value
                based method for all employee awards
            
            
            (**403**,**476**
            )
            
            (143,184
            )Pro
                forma net loss
            
            **$**
            (**3**,**340**,**402**
            )
            $
            (2,494,237
            )Net
                loss per share:Basic
                and diluted as reported
            
            **$**
            (**0.08**
            )
            $
            (0.06
            )Basic
                and diluted pro forma
            
            **$**
            (**0.08**
            )
            $
            (0.07
            )Black
                Scholes Methodology Weighted Average Assumptions:Dividend
                yield
            
            
            **0**
            
            
            0Volatility
            
            
            **7**
            **%**
            
            1
            %Risk-free
                interest rate
            
            
            **4.13**
            **%**
            
            4.54
            %Expected
                lives of options
            
            
            **5
                years**
            
            
            5
                years





11
 *Index*





**8.**
            **Stock-Based
                Compensation** (cont'd)





Stock
      option compensation has been expensed in the statement of operations for the
      nine months ended September 30, 2005 and 2004, as follows:





Nine
                Months Ended September 30,**2005**
            
            2004Employee
            
            **$**
            **306,896**
            
            $
            112,340Non
                employees
            
            
            **158,531**
            
            
            138,819Stock
                option compensation expense
            
            **$**
            **465,427**
            
            $
            251,159





Stock
      option activity related to employees and non employees from December 31, 2003
      to
      September 30, 2005 are listed below.





**Shares**
              **Subject**
              **to
                Options**
            
            **Weighted
                Avg.**
              **Option**
              **Prices**Outstanding
                at December 31, 2003
            
            
            1,850,000
            
            $
            0.24Granted
            
            
            1,300,000
            
            
            0.24Exercised
            
            
            (7,500
            )
            
            0.24Cancelled
            
            
            (367,500
            )
            
            0.24Outstanding
                at December 31, 2004
            
            
            2,775,000
            
            
            0.24Granted
            
            
            3,810,000
            
            
            0.50Cancelled
            
            
            (752,500
            )
            
            0.24Outstanding
                at September 30, 2005
            
            
            5,832,500
            
            $
            0.41





The
      weighted average remaining contractual life of the stock options is
      approximately 9 years.





**9.**
            **Income
                Taxes**





The
      Company accounts for income taxes in accordance with SFAS No. 109, "Accounting
      for Income Taxes". SFAS No. 109 prescribes the use of the liability method
      whereby deferred tax asset and liability account balances are determined based
      on differences between financial reporting and tax bases of assets and
      liabilities and are measured using the enacted tax rates. The effects of future
      changes in tax laws or rates are not anticipated.





Under
      SFAS No. 109 income taxes are recognized for the following: a) amount of tax
      payable for the current year, and b) deferred tax liabilities and assets for
      future tax consequences of events that have been recognized differently in
      the
      financial statements than for tax purposes.




The
        Company has tax losses available to be applied against future years income.
        Due
        to the losses incurred in the current year and expected future operating
        results, management has determined that, at the current time, it is more
        likely
        than not that the deferred tax asset resulting from the tax losses available
        for
        carryforward and stock option compensation expense will not be realized through
        the reduction of future income tax payments. Accordingly a 100% valuation
        allowance has been recorded to offset deferred income tax assets.
 
 As
        of
        September 30, 2005 and 2004, the Company had approximately $1,978,432 and
        $1,147,079 respectively, of federal and state net operating loss carryforwards
        available to offset future taxable income; such carryforwards expire in various
        years through 2024.





12
 *Index*




**10.**
            **Government
                Assistance**





On
      December 13, 2003, the Company accepted an offer of a conditional grant from
      the
      Montgomery County Department of Economic Development for $100,000 to assist
      in
      the growth and expansion of the Company, which amount was received in February
      2004. The terms of the offer state that $50,000 of the grant is convertible
      to a
      loan repayable over three years bearing interest at 20% per annum if, at any
      time within five years from receipt of the grant, the Company's annual net
      revenues exceed $1,000,000 or the Company obtains aggregate equity financing
      of
      over $2,000,000. This portion of the grant was recorded in accounts payable
      at
      December 31, 2004. The terms of the grant also state that the remaining $50,000
      balance of the grant would be permanently forgiven when performance criteria
      relating to lease of premises and employment commitments are met, provided
      that
      the forgiven amounts may only be applied to reducing business-related expenses.
      In 2004 upon satisfaction of the performance criteria, the $50,000 amount was
      forgiven and applied to lease payments and was recorded as a reduction of
      business-related expenses. Following the Company's February 2005 convertible
      debt financing, the remaining $50,000 was converted into a loan pursuant to
      the
      terms of the grant and was paid off by the Company in March 2005.





**11.**
            **Commitments**





a)
            In
                April 2004, the Company 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, enrolment and completion of 20 patients and is payable
                based
                on the progress of the treatment over the effective period of the
                agreement. During the first nine months in 2005 and the 2004 fiscal
                year,
                the Company paid $0 and $17,426, respectively, towards the cost of
                this
                program. In addition, the Company extended a research agreement,
                initially
                entered into on January 1, 2004, until December 31, 2005 with Georgetown
                University. For the nine-month period ended September 30, 2005, the
                Company paid $60,000 in consideration of the
                extension.





b)
            On
                August 17, 2004 the Company entered into an agreement for
                Formatech, Inc. to monitor and perform stability studies on our drug
                candidate, RX-0201. The total cost of these services is $46,700,
                of which
                $22,900 was paid in 2004, $5,200 was paid during the three months
                ended
                September 30, 2005, $5,200 is due during the fourth quarter of 2005,
                $5,200 is due during 2006 and $8,200 is due during
                2007.





c)
            In
                April 2004, the Company 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,




the
        Company also pays its allocable portion of real estate taxes and common area
        operating charges. Minimum future rental payments under this lease are as
        follows:
 
 For
                  the year ended
                December
                  31,2005
              
              $
              203,7612006
              
              
              209,8742007
              
              
              216,1702008
              
              
              222,6562009
              
              
              112,973$
              965,434


13
 *Index*




**11.**
              **Commitments**
                  (cont'd)


d)
            On
                June 1, 2005, the Company signed a one year research project agreement
                with the Korea Research Institute of Chemical Technology ("KRICT")
                relating to the development of a synthetic process for the lead compound
                of the quinoxalines acting on human cancer cells. In accordance with
                the
                agreement, the Company will pay KRICT a total sum of $100,000, of
                which
                $50,000 was paid in the three-month period ended September 30, 2005.
                The
                remaining $50,000 is due on or about October 30,
                2005.





e)
            On
                August 1, 2005, the Company 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. The Company
                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. In the three-month period ended
                September 30, 2005, the Company made one quarterly payment of
                $19,167.





f)
            On
                August 3, 2005, the Company engaged Montgomery Pacific Group ("MPG")
                to
                act as the Company's financial advisor for a one-year term in connection
                with its growth strategies, certain in-licensing activities and
                acquisition of certain assets. In consideration of the services,
                the
                Company 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. A retainer
                fee of $50,000 was paid in the three-month period ended September
                30,
                2005.





**12.**
            **Comparative
                Information**





Certain
      amounts for fiscal 2004 have been reclassified to conform with the current
      year's financial statement presentation.





14
 *Index*




**Item
      2. - Management** **'s
      Discussion and Analysis or Plan of Operation**





**OVERVIEW**





Our
      efforts and resources have been focused primarily on acquiring and developing
      our technologies, raising capital and recruiting personnel. We are a development
      stage company and have no product sales to date and we will not have 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 our common stock and debt
      securities, and collaboration agreements with our strategic
      investors.





**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", "will", "intend"
      and
      other similar expressions, that are forward-looking statements. 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, our auditor's going concern qualification
                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 of 1995 are unavailable to issuers of "penny stock". Our shares are
      considered a penny stock and, as a result, the safe harbors are 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.





**Use
      of Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires our management
      to
      make estimates and assumptions that affect certain reported amounts of assets
      and liabilities and disclosure of contingent assets and liabilities at the
      date
      of the financial statements and the reported amounts of expenses during the
      reporting period. Actual results could differ from those estimates.





15
 *Index*





**Stock-based
      Compensation**





We
      account for stock-based employee compensation arrangements in accordance with
      the provisions of Accounting Principles Board ("APB") Opinion No. 25,
      "Accounting for Stock Issued to Employees" and comply with the disclosure
      provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
      "Accounting for Stock-Based Compensation." Stock-based awards issued to
      non-employees are recorded at their fair values as determined in accordance
      with
      SFAS No. 123.





In
      our
      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. In addition, option valuation
      models require the input of highly subjective assumptions, and changes in such
      subjective assumptions can materially affect the fair value estimate of employee
      stock options.





**Recently
      Issued Accounting Standards**





For
      a
      discussion of recent significant accounting pronouncements applicable to us,
      see
      Note 2 of the Notes to Consolidated Condensed Financial Statements.





**Going
      Concern**





Our
      independent auditors have included an explanatory paragraph in their audit
      report issued in connection with our year end financial statements, which states
      that our recurring operating losses since inception raise substantial doubt
      about our ability to continue as a going concern. Our financial statements
      do
      not include any adjustments to reflect the possible future effects on the
      recoverability and classification of assets or the amounts o r classification of liabilities that might be necessary should we be unable to
      continue as a going concern. For the foreseeable future, we will have to fund
      all our operations and capital expenditures from the net proceeds of equity
      or
      debt offerings we may make, cash on hand, licensing fees and grants. Although
      we
      completed convertible debt and equity financing transactions during the nine
      months ended September 30, 2005 that raised approximately $13.5 million, and
      may
      pursue additional financing, there can be no assurance that we will be able
      to
      secure financing when needed or to obtain such financing on terms satisfactory
      to us, 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 planned
      pre-clinical and clinical trials or obtain approval of our drug candidates
      from
      the FDA and other regulatory authorities. In addition, we could 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.





**RESULTS
      OF OPERATIONS**





**Comparison
      of Three Months and Nine Months Ended September 30, 2005 and
      2004**





***Total
      Revenues***





For
      the
      three-month and nine-month periods ended September 30, 2005, we recorded revenue
      of $76,292 and $150,561, respectively, including $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. We recorded $57,542 and $94,311 of interest and other
      income from the investment of our cash and cash equivalents and other short-term
      investments for the three-month and nine-month periods ended September 30,
      2005,
      respectively, compared to $22,403 and $51,255 for the same periods in 2004.
      The
      increase of $35,139 and $43,056 in revenues, or 85.4% and 40.1%, was primarily
      due to an increase in interest income in the three-month and nine-month periods
      ended September 30, 2005, respectively, compared to the same periods in 2004
      as
      a result of higher cash and cash equivalent balances from our financing
      activities during the 2005 periods.





16
 *Index*





***General
      and Administrative Expenses***





General
      and administrative expenses increased $296,558 and $1,080,010, or 76.8% and
      135.1%, from $386,231 and $799,610 for the three-month and nine-month periods
      ended September 30, 2004 to $682,789 and $1,879,620, respectively, for the
      same
      periods ended September 30, 2005. The increase was due primarily to professional
      fees and expenses incurred in connection with our reverse merger transaction
      completed on May 13, 2005, including legal and accounting fees and expenses,
      and
      increased compliance costs associated with being a public company.





***Research
      and Development Expenses***





Research
      and development expenses decreased $433,890 and $748,996, or 70.1% and 50.3%,
      from $619,224 and $1,489,767 for the three-month and nine-month periods ended
      September 30, 2004 to $185,334 and $740,771 for the same periods ended
      September 30, 2005. The
      decrease was due primarily to the fact that the clinical trials of RX-0201,
      one
      of our drug candidates, have been ongoing without additional
      payment during the nine-month period ended September 30, 2005. From
      the fourth quarter of 2005, we expect that research and development expenses
      will increase as our drug candidates move into the clinical trials phases of
      development .





***Stock
      Option Compensation Expenses***





In
      2003
      our board of directors adopted and our shareholders approved the Rexahn Stock
      Option Plan. Under the plan, we incurred compensation expenses of $238,118
      and
      $465,427 for the three-month and nine-month periods ended September 30, 2005,
      compared to compensation expenses of $88,771 and $251,159 for options issued
      to
      employees and non-employees for the same periods ended September 30,
      2004.





***Patent
      Fees***





Our
      patent fees increased $52,039 from $0 and $97,733, or 1002%, from $9,748
      for the three-month and nine-month periods ended September 30, 2004, to $52,039
      and $107,481, respectively, for the same periods ended September 30, 2005.
      The increase was due primarily to an increase in the number of patent filings
      made during the nine-month period ended September 30, 2005 compared to the
      same
      period ended September 30, 2004.





***Depreciation***





Depreciation
      expense increased $20,544 and $30,286, or 215.6% and 92.3%, from $9,530 and
      $32,821 for the three-month and nine-month periods ended September 30, 2004
      to
      $30,074 and $63,107 for same periods ended September 30, 2005. The increase
      was
      due primarily to a move to a new facility in July 2004 and the related purchase
      of new laboratory equipment.





***Interest
      Expense***





Interest
      expense increased $57,815 and $134,034, or 2900% and 4478%, from $1,993 and
      $2,993 for the three-month and nine-month periods ended September 30, 2004
      to
      $59,808 and $137,027 for same periods ended September 30, 2005. The increase
      was
      due primarily to interest payable on the convertible notes issued in February
      2005.





As
      a
      result of the above, the net loss for the three-month and nine-month periods
      ended September 30, 2005 was $1,171,870 or $0.03 per share, and $3,242,872
      or
      $0.08 per share, respectively, compared to a net loss of $1,064,596 or $0.03
      per
      share, and $2,478,593 or $0.06 per share, respectively, for the same periods
      ended September 30, 2004.





17
 *Index*





**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 five lead
      drug candidates, RX-0201, RX-0047, RX-0183, RX-3117 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-0183, RX-3117
      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*





RX-0201
      is currently our leading drug candidate and has been in a Phase I clinical
      trial
      at Georgetown University's Lombardi Cancer Center since September 2004. The
      costs incurred for the clinical trial to date have been approximately $750,000.
      As the main purpose of this clinical trial is to establish the safety of
      RX-0201, the parameters that determine the completion of this project are a
      direct function of the safety profile of this compound in humans. As this is
      the
      first time that RX-0201 has been administered to humans, the safety profile
      in
      humans is unknown and therefore, the number of doses required to determine
      the
      dosage at which the FDA safety endpoints are met is an estimate. If more doses
      are required than estimated, completion of the Phase I clinical trials may
      be
      delayed. Therefore, the costs, timing and efforts necessary to complete this
      program also are estimates. We currently estimate that the completion of the
      Phase I clinical trial will require approximately $300,000 and this Phase I
      clinical trial is anticipated to be completed in 2006.





*RX-0047,
      RX-0183 and RX-3117*





RX-0047,
      RX-0183 and RX-3117 are all 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.
      The costs incurred for development of these compounds to date has been
      approximately $500,000 for RX-0047, $450,000 for RX-0183 and $350,000 for
      RX-3117. The estimated cost to complete each toxicology study is estimated
      to be
      approximately $650,000 per compound for a total of $1,950,000. These compounds
      will be entered into these toxicology trials in 2006.





The
      conduct of the clinical trial and toxicology studies described above are being
      accomplished in conjunction with third-party 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.





18
 *Index*





*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
      $100,000 and $500,000, respectively.





**LIQUIDITY
      AND CAPITAL RESOURCES**





Cash
      used
      in operating activities was $2,637,479 for the nine-month period ended September
      30, 2005 compared to cash used in operating activities of $2,304,574 for the
      same period ended September 30, 2004. The operating cash flows during the
      nine-month period ended September 30, 2005 reflect our loss from continuing
      operations of $3,242,872, offset by non-cash charges of $472,284 and a net
      increase in cash components of working capital of $133,109. Non-cash charges
      consist of depreciation of $63,107, stock option compensation expense of
      $465,427 and deferred revenue of $56,250. The increase in working capital
      primarily consists of a $148,354 increase in accounts payable. Fiscal 2004
      operating cash flows reflect our loss from continuing operations of $3,273,442,
      offset by non-cash charges of $208,559 and a net increase in cash components
      of
      working capital of $184,258. Non-cash charges consist of depreciation of
      $52,789, stock option compensation expense of $230,770 and deferred revenue
      of
      $75,000. The increase in working capital primarily consists of $189,486 increase
      in accounts payable and $5,228 decrease in prepaid expenses and
      other.





Cash
      used
      in investing activities of $7,428,150 during the nine-month period ended
      September 30, 2005 reflects $7,383,033 for the purchase of short-term
      investments and $45,117 of capital expenditures for the purchase of equipment.
      Cash provided by investing activities of $1,878,713 during the nine-month period
      ended September 30, 2004 reflects a capital expenditure of $121,287 for the
      purchase of equipment and $2,000,000 proceeds from the sale of short-term
      investments. Cash provided by financing activities of $13,361,415 during the
      nine-month period 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, and principal payments on long-term debt of $138,567.
      Cash provided by financing activities of $140,000 during the nine-month period
      ended September 30, 2004 consisted of proceeds from a bank loan.





For
      the
      nine-month period and the years ended September 30, 2005, December 31, 2004
      and
      2003, we experienced net losses of $3,242,872, $3,273,442 and $2,775,075,
      respectively. Our accumulated deficit as of September 30, 2005, and December
      31,
      2004 and 2003 was $11,097,655, $7,854,783 and $4,581,341, respectively. Our
      independent auditors have included an explanatory paragraph in their audit
      opinion issued in connection with our year end financial statements which states
      that our recurring operating losses since inception raise substantial doubt
      about our ability to continue as a going concern.





We
      have
      financed our operations since inception primarily through equity and convertible
      debt financings. During the nine-month period ended September 30, 2005, we
      had a
      net increase in cash and cash equivalents of $3,295,786. This increase primarily
      resulted from $5,150,000 and $8,349,982 proceeds from the issuance of
      convertible debt and common stock, respectively. Total cash resources as of
      September 30, 2005 were $4,311,765 compared to $1,730,231 as of September 30,
      2004.





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. 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.





19
 *Index*





**Contractual
      Obligations**





In
      April
      2004, we entered into an office lease for a period of five years, commencing
      on
      July 1, 2004 and ending on June 30, 2009. The minimum rent increases at the
      end
      of each lease year by 3% of the rent amount that is then currently being paid.
      Minimum annual lease payments for the 2005 to 2009 years are as follows:
      $203,761; $209,874; $216,170; $222,655; and $112,972.





On
      September 1, 2003 we entered into an agreement for The University of Texas
      to
      perform research on our behalf with respect to RX-0201 and RX-0047. On June
      1,
      2004 we extended the agreement to be carried out through February 28, 2005.
      As
      consideration for the services we paid a total of $78,069, of which $14,356
      was
      paid during the first quarter of 2005.





On
      September 24, 2003 we entered into an agreement with Amarex, LLC to obtain
      services to assist in the product development of RX-0201 during clinical trials.
      The cost of these services is based on estimated hours to complete the study
      and
      is $239,337. 25% was due upon execution of the contract and the remaining amount
      is due in four equal payments every 5 months with the final payment due upon
      acceptance of the clinical study report. At December 31, 2004, we had paid
      a
      total of $194,461 with the balance of $44,876 due upon acceptance of the
      clinical study report. On November 19, 2004 we amended our September 2003
      agreement with Amarex, LLC providing for additional services to be performed
      that were not included in the original agreement. The total cost of these
      services is $67,011, of which $16,753 was paid upon execution of the agreement
      in 2004, $25,129 is due during 2005, $12,565 is due in January 2006 and $12,565
      is due upon acceptance of the final clinical study report. We paid Amarex,
      LLC
      $28,110 during the three months ended September 30, 2005.





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 costs of the program is $223,126, based on the fees and
      the
      enrollment and completion of 20 patients and is payable based on the progress
      of
      the treatment over the effective period of the agreement. During the first
      nine
      months in 2005 and the 2004 fiscal year, we paid $0 and $17,426, respectively,
      towards the cost of this program. In addition, we extended a research agreement,
      initially entered on January 1, 2004, until December 31, 2005 with Georgetown
      University. For the nine-month period ended September 30, 2005, we paid $60,000
      as consideration for the extension.





On
      August
      17, 2004 we entered into an agreement for Formatech, Inc. to monitor and perform
      stability studies on our drug candidate, RX-0201. The total cost of these
      services is $46,700, of which $22,900 was paid in 2004, $5,200 was paid during
      the three months ended September 30, 2005, $5,200 is due during the fourth
      quarter of 2005, $5,200 is due during 2006 and $8,200 is due during
      2007.





On
      June
      1, 2005, we signed a one year research project with the Korea Research Institute
      of Chemical Technology ("KRICT") relating to the development of a synthetic
      process for the lead compound of the quinoxalines acting on human cancer cells.
      In accordance with the agreement, we will pay KRICT a total sum of $100,000
      of
      which $50,000 was paid in the three-month period ended September 30, 2005.
      The
      remaining $50,000 is due on or about October 30, 2005.





On
      August
      1, 2005, we signed a one year contract with the University of Massachusetts
      Medical School ("UMASS") to test proprietary drugs in pre-clinical 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 pre-clinical
      study, payable in four equal quarterly installments of $19,167. In the
      three-month period ended September 30, 2005, we made one quarterly payment
      of
      $19,167.





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
      in 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. A retainer fee of $50,000
      was
      paid in the three-month period ended September 30, 2005.





20
 *Index*





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 discovery
      efforts. Over the next 24 months we expect to spend approximately $5 million
      on
      clinical development for Phase I and Phase II clinical trials of RX-0201
      (including our commitments described under "− Contractual Obligations"), $3
      million on pre-clinical studies and Phase I clinical trials for RX-0047,
      pre-clinical studies and Phase I clinical trials for RX-10100 and in-vivo animal
      and pre-clinical studies and Phase I clinical trials for RX-0183, $3 million
      on
      general corporate expenses, and $500,000 on facilities rent. 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 24 months, which would entail focusing our resources
      on
      Phase I and Phase II clinical trials of RX-0201 and the pre-clinical studies
      and
      Phase I clinical trials for RX-0183, RX-0047 and RX-10100. 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 RX-3117 and other new drug candidates, as well as other research
      and
      development projects, which together with the current operating plan for the
      next 24 months, could aggregate $20 million through the second quarter of 2007.





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.





21
 *Index*





**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 24 months we expect to spend approximately $5 million
      on clinical development for Phase I and Phase II clinical trials of RX-0201,
      $3
      million on pre-clinical studies and Phase I clinical trials for RX-0047,
      pre-clinical studies and Phase I clinical trials for RX-10100 and in-vivo animal
      and pre-clinical studies and Phase I clinical trials for RX-0183, $3 million
      on
      general corporate expenses, and $500,000 on facilities rent. 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 24 months, which would entail focusing our resources
      on
      Phase I and Phase II clinical trials of RX-0201 and the pre-clinical studies
      and
      Phase I clinical trials for RX-0183, RX-0047 and RX-10100.





However,
      changes may occur that would consume our existing capital at a faster rate
      than
      projected, including, among others, 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 RX-3117 and other
      new
      drug candidates, as well as other research and development projects, which
      together with the current operating plan for the next 24 months, could aggregate
      $20 million through the second quarter of 2007.





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, 2005, and December 31, 2004 and 2003 was $11,097,655, $7,854,783
      and $4,581,341, respectively. For the nine months and the years ended September
      30, 2005, December 31, 2004 and 2003, we had net losses of $3,242,872,
      $3,273,442 and $2,775,075, 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 as we:





•
            continue
                to undertake pre-clinical development and clinical trials for our
                current
                and new drug candidates;





22
 *Index*





•
            seek
                regulatory approvals for our drug
                candidates;





•
            implement
                additional internal systems and
                infrastructure;





•
            seek
                to license in additional technologies to develop;
                and





•
            hire
                additional personnel.





In
      addition, we will continue to have an increased level of expenses associated
      with being a public company. 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 and maintain profitability. We may not be able to generate
      these revenues or achieve profitability in the future. Our failure to achieve
      or
      maintain profitability could negatively impact the value of our common
      stock.





***We
      have a limited operating history upon which to base an investment
      decision*** .





We
      are a
      development stage company that was founded in 2001. We have only five 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:





•
            continuing
                to undertake pre-clinical development and clinical
                trials;





•
            participating
                in regulatory approval processes;





•
            formulating
                and manufacturing products; and





•
            conducting
                sales and marketing activities.





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. To date, only one drug candidate, RX-0201, is in the late stages
      of
      Phase I clinical trials, another drug candidate, RX-0047, will commence Phase
      I
      clinical trials in early 2006, and the other three drug candidates are in or
      will soon move into the pre-clinical toxicology trial phase of development.
      These operations provide a limited basis for you to assess our ability to
      commercialize our drug candidates and the advisability of investing in
      us.





***Our
      independent auditors' opinions on our audited year end financial statements
      includes a going concern qualification*** .





Our
      independent auditors for 2004 have included an explanatory paragraph in their
      audit report issued in connection with our financial statements, which states
      that our recurring operating losses since inception raise substantial doubt
      about our ability to continue as a going concern. Our financial statements
      do
      not include any adjustments to reflect the possible future effects on the
      recoverability and classification of assets or the amounts and classification
      of
      liabilities that might be necessary should we be unable to continue as a going
      concern.





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. Although we have obtained $13.5 million
      during 2005 and plan 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. Obtaining additional
      financing may be more difficult because of the uncertainty regarding our ability
      to continue as a going concern. If we are unable to secure additional financing
      in the future on acceptable terms, or at all, we may be unable to complete
      planned pre-clinical and clinical trials or obtain approval of our drug
      candidates from the FDA and other regulatory authorities. In addition, we could
      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. We may also be forced to abandon development of several of the
      earlier stage drug candidates, which will significantly impair our ability
      to
      generate product revenues.





23
 *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 any of our drug candidates, we must submit to the FDA a New Drug
      Application, or 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 antisense oligonucleotide (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.





The
      approval process may also be delayed by changes in government regulation, future
      legislation or administrative action or changes in FDA policy that occur prior
      to or during our regulatory review. Delays in obtaining regulatory approvals
      may:





•
            delay
                commercialization of, and our ability to derive product revenues
                from, our
                drug candidates;





•
            impose
                costly procedures on us; and





•
            diminish
                any competitive advantages that we may otherwise
                enjoy.





Even
      if
      we comply with all FDA requests, the FDA may ultimately reject one or more
      of
      our NDAs. We cannot be sure that we will ever obtain regulatory clearance for
      our drug candidates. Failure to obtain FDA approval of any of our drug
      candidates will severely undermine our business by reducing our number of
      salable products and, therefore, corresponding product revenues.





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
      2004, the FDA approved our Investigational New Drug (IND) application for
      RX-0201 and we initiated a Phase I clinical trial of RX-0201 at Lombardi
      Comprehensive Cancer Center of Georgetown Medical Center. Pre-clinical studies
      to support an IND application for each of RX-0047, RX-0183 and RX-3117 are
      still
      under development and we do not expect to commence Phase I clinical trials
      for
      these drug candidates until at least the first quarter of 2006, third quarter
      of
      2006 and fourth quarter of 2006, respectively. We expect to commence Phase
      I
      clinical trials for RX-10100 in late 2005. We cannot predict with any certainty
      that we will ever receive regulatory approval to sell our drug
      candidates.





24
 *Index*





***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. For example,
      to date the Phase I clinical trials for RX-0201 have cost approximately $750,000
      and we estimate that we will require an additional approximately $300,000 to
      complete the trial. The clinical trial process is also time consuming. We
      estimate that clinical trials of our current drug candidates will take at least
      several 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:





•
            unforeseen
                safety issues;





•
            determination
                of dosing issues;





•
            lack
                of effectiveness during clinical
                trials;





•
            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.





Although
      to date, we have not experienced any significant delays in our Phase I clinical
      trials for RX-0201, other than a two-month delay due to delays in obtaining
      drug
      candidate samples and a delay in determining the appropriate dosing levels
      during the three months ended September, 30, 2005, there can be no assurance
      that further delays in the RX-0201 Phase I clinical trial or other future
      clinical trials will not occur.





In
      addition, we or the FDA may suspend our 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 do not 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 their
      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, our ability to commercialize our drug
      candidates and generate product revenues. In addition, our clinical trials
      involve a small patient population, less than 20 for RX-0201. Because of the
      small sample size, the results of these early clinical trials may not be
      indicative of future results.





25
 *Index*





***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:





•
            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.





***Because
      our drug development program depends upon third-party researchers, the results
      of our clinical trials and such research activities are, to a certain 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 under
      agreements with us. For example, the Phase I clinical trials of RX-0201 are
      being 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. Also, we 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. 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 as great a 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 exposes 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 and do not intend to
      establish our own manufacturing facilities. We lack the resources and expertise
      to formulate or manufacture our own drug candidates. As a result, we have
      entered into contracts with third-party manufacturers such as Raylo Chemicals
      Inc., Formatech, Inc. and Avecia Biotechnology 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 anticipated future
      reliance on a limited number of third-party manufacturers, exposes us to the
      following potential risks:





26
 *Index*





•
            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 manufacturer. 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
                and
                commercial needs. For example, we experienced a two-month delay in
                the
                development timeline for RX-0201 due to delays in obtaining RX-0201
                samples.





•
            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 inspections
                by
                the FDA, the Drug Enforcement Agency, or 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.





•
            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, the approval, if any, of our drug
      candidates by the FDA, or the commercialization of our drug candidates or result
      in higher costs or deprive us of potential product revenues.





***We
      have no experience selling, marketing or distributing products and 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. For example, we have entered into a collaboration agreement
      with
      Rexgene Biotech Co., Ltd. ("Rexgene") for the sale and marketing of RX-0201
      in
      Asia. We intend to pursue additional collaborative arrangements regarding the
      sales and marketing of our products; however, we cannot assure you that we
      will
      be able to establish or maintain such collaborative arrangements, or if able
      to
      do so, that they will have effective sales forces. 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 our 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.





27
 *Index*





***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., with respect to oncology, and Eli Lilly and Company, Pfizer,
      Inc., GlaxoSmithKline PLC, Forest Laboratories, Inc., Indevus Pharmaceuticals,
      Inc., and Elan Corporation, with respect to neurosciences. In addition, many
      of
      these competitors, either alone or together with their collaborative partners,
      operate larger research and development programs and have substantially greater
      financial resources than we do, as well as significantly greater 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.





***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, anti-HIF compounds, including RX-0047. 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 ("Revaax"), 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;





28
 *Index*





•
            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
      of
      our employees to enter into agreements which 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, 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 we 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;





•
            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, the
      public profile of us and 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.





29
 *Index*





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





In
      addition to our own internally developed drug candidates, we seek to review
      proactively opportunities to license in and advance compounds in oncology and
      other therapeutic areas, such as neurological diseases, 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 if our employees do not have the time necessary to devote to
      developing those drug candidates or we do not have the necessary capital
      resources to develop all of our drug candidates. Alternatively, we may be
      required to hire even 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.





***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 entitle us to
      indemnification against losses, such indemnification may not be available or
      adequate should any claim arise.





**Item
                3.**
            **Controls
                and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**





As
      of
      September 30, 2005, the Company's management carried out an evaluation, under
      the supervision of the Company's Chief Executive Officer and Chief Financial
      Officer of the effectiveness of the design and operation of the Company's 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. Based upon that
      evaluation, the Chief Executive Officer and the Chief Financial Officer have
      concluded that the Company's 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 the Company under the Securities Exchange Act of
      1934.





30




There
      were no changes in the Company's internal control over financial reporting
      during the quarter ended September 30, 2005 that have materially affected,
      or
      are reasonably likely to affect, the Company's financial reporting.






31
 *Index*





PART
      II- OTHER INFORMATION





**Item
                1.**
            **Legal
                Proceedings**





None





**Item
                2.**
            **Unregistered
                Sales of Securities and Use of
                Proceeds**





On
      August
      8, 2005, the Company completed a private placement of 4,175,000 shares of
      Company common stock, $.0001 par value per share, at $2.00 per share for
      aggregate gross proceeds of $8.35 million pursuant to the Subscription
      Agreements dated August 8, 2005. The offers and sales occurred outside the
      United States to persons other than U.S. persons in offshore transactions
      meeting the requirements of Regulation S under the Securities Act of 1933,
      as
      amended (the "Securities Act"). After payment of certain expenses by the
      Company, the Company received approximately $8.31 million in net proceeds upon
      closing of the private placement of the common stock. The proceeds will be
      used
      to fund clinical trials of the Company's drug candidates and other general
      corporate purposes. Shares of the common stock have not been registered under
      the Securities Act and may not be offered or sold in the Unites States absent
      registration under the Securities Act or an applicable exemption from
      registration requirements under the Securities Act. On August 8, 2005, the
      Company also completed a private placement of $1.3 million aggregate principal
      amount of its convertible notes (the "Convertible Notes") in offers and sales
      that occurred outside the United States to persons other than U.S. persons
      in
      offshore transactions meeting the requirements of Regulation S under the
      Securities Act. The holders of the Convertible Notes are entitled any time
      after
      September 19, 2005 until August 8, 2008 (the "Maturity Date"), or upon the
      occurrence and continuance of any of the events of default, to convert the
      principal amount of any Convertible Notes or portions thereof into Company
      common stock at a conversion price of $2.00 per share. The initial conversion
      price of $2.00 per share of Company common stock is subject to adjustment upon
      the occurrence of certain events, including the issuance of any additional
      capital stock after August 8, 2005, without consideration or for a consideration
      per share less than the current market price per share of additional capital
      stock as of the time of such issuance. On the Maturity Date, any unconverted
      Convertible Notes will automatically convert into shares of Company common
      stock
      at a conversion price of $2.00 per share. The Convertible Notes do not bear
      interest, except that any overdue principal of the Convertible Notes will bear
      interest for each day from the Maturity Date to the date of actual payment,
      at a
      rate equal to 5% per annum, or, if an event of default occurs and is continuing,
      the Convertible Notes will bear interest, from the date of the occurrence of
      such event of default until such event of default is cured or waived, at a
      rate
      equal to 5% per annum. The Convertible Notes and the underlying Company common
      stock issuable upon conversion of the Convertible Notes have not been registered
      under the Securities Act and may not be offered or sold in the Unites States
      absent registration under the Securities Act or an applicable exemption from
      registration requirements under the Securities Act. The net proceeds of the
      Convertible Notes sale will also be used to fund clinical trials of the
      Company's drug candidates and for general corporate purposes.





**Item
                3****.**
            **Defaults
                Upon Senior Securities**





None





**I****tem
                4.**
            **Submission
                of Matters to a Vote of Security
                Holders**





None





**Item
                5.**
            **Other
                Information**





None




32
 *Index*


**Item
                  6.**
              **Exhibits******


Exhibit
              Number
            Description4.1
            Form
                of Convertible Note is incorporated by reference to Exhibit 4.1 to
                the
                Company's Current Report on Form 8-K filed on August 11,
                2005.10.1
            Form
                of Subscription Agreement is incorporated by reference to Exhibit
                10.1 to
                the Company's Current Report on Form 8-K filed on August 11,
                2005.31.1
            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




33
 *Index*





**SIGNA** **T** **URES**





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 Financial Officer and SecretaryDate:
                November 14, 2005






*Index*





**EXHIBIT
      INDEX**





Exhibit
              Number
            Description4.1
            Form
                of Convertible Note is incorporated by reference to Exhibit 4.1 to
                the
                Company's Current Report on Form 8-K filed on August 11,
                2005.10.1
            Form
                of Subscription Agreement is incorporated by reference to Exhibit
                10.1 to
                the Company's Current Report on Form 8-K filed on August 11,
                2005.31.1
            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




34