UNITED
STATES   SECURITIES AND EXCHANGE
COMMISSION




Washington,
D.C. 20549





FORM
10-Q





QUARTERLY
REPORT





PURSUANT
TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934





For
the quarterly period ended September 30, 2008





Rexahn
Pharmaceuticals, Inc.





(Exact
name of registrant as specified in its charter)





Delaware
              
              11-3516358(State
      or other jurisdiction of incorporation
              
              (I.R.S.
      Employer Identification Number) or
organization)





9620
Medical Center Drive


Rockville,
Maryland 20850


(Address
of principal executive offices, including zip code)





Telephone:
(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
preceding 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 xNo q




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of "accelerated filer", "large accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):


Large
      Accelerated Filer q
                
                Accelerated
      Filer qNon-Accelerated
      Filer q (Do
      not check if a smaller reporting company)
                
                Smaller
      reporting company x


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




Yes qNo x




Indicate
the number of shares outstanding of each of the issuer' s classes of common
stock, as of the latest practicable date: 56,025,649 shares of common stock
outstanding as of November 14, 2008.













REXAHNPHARMACEUTICALS, INC.


(A
Development Stage Company)


TABLE
OF CONTENTS




PART
      I FINANCIAL INFORMATIONPageItem1
                                                            
                                                            Financial
      Statements1.
                                                            Condensed Balance Sheets at September 30, 2008 (unaudited) and
      December 31, 2007
                                                            
                                                            32.
                                                            Condensed Statements of Operations for the three months and
      nine months ended September 30, 2008and 2007 and March 19, 2001
      (inception) to September 30, 2008 (unaudited)
                                                            
                                                            43.
                                                            Statements of Stockholders' Equity and Comprehensive Loss for
      the nine months ended September 30, 2008 (unaudited)
                                                            
                                                            54.
                                                            Statements of Cash Flows for the nine months ended September
      30, 2008 and 2007 and March 19, 2001 (inception)
      to September 30, 2008 (unaudited)
                                                            
                                                            65.
                                                            Notes to condensed financial statements
      (unaudited)
                                                            
                                                            7Item
      2
                                                            
                                                            Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                                                            
                                                            19Item
      3
                                                            
                                                            Quantitative and Qualitative Disclosures About Market
      Risk
                                                            
                                                            28Item
      4T
                                                            
                                                            Controls and Procedures
                                                            
                                                            28PART
      II OTHER INFORMATIONItem
      1
                                                            
                                                            Legal Proceedings
                                                            
                                                            29Item
      2
                                                            
                                                            Unregistered Sales of Equity Securities and Use of
      Proceeds
                                                            
                                                            29Item
      3
                                                            
                                                            Defaults Upon Senior Securities
                                                            
                                                            29Item
      4
                                                            
                                                            Submission of Matters to a Vote of Security
      Holders
                                                            
                                                            29Item
      5
                                                            
                                                            Other Information
                                                            
                                                            29Item
      6
                                                            
                                                            Exhibits
                                                            
                                                            29SIGNATURES
                                                            
                                                            30





2
 Table of Contents





REXAHNPHARMACEUTICALS, INC.
 (A
Development Stage Company)
 Condensed
Balance Sheets


September 30,
                          2008
                        
                        
                        December 31,
                          2007(Unaudited)ASSETSCurrent
      Assets:Cash
      and cash equivalents
                        
                        $
                        221,510
                        
                        
                        $
                        3,809,571Short-term
      investments
                        
                        
                        4,624,875
                        
                        
                        
                        3,550,000Prepaid
      expenses and other
                        
                        
                        736,760
                        
                        
                        
                        717,205Total
      Current Assets
                        
                        
                        5,583,145
                        
                        
                        
                        8,076,776Equipment,
      Net
                        
                        
                        100,433
                        
                        
                        
                        102,951Intangible
      Assets, Net
                        
                        
                        290,584
                        
                        
                        
                        303,943Total
      Assets
                        
                        $
                        5,974,162
                        
                        
                        $
                        8,483,670LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      payable and accrued expenses
                        
                        $
                        364,850
                        
                        
                        $
                        606,832Total
      Current Liabilities
                        
                        
                        364,850
                        
                        
                        
                        606,832Deferred
      Revenue
                        
                        
                        1,068,750
                        
                        
                        
                        1,125,000Total
      Liabilities
                        
                        
                        1,433,600
                        
                        
                        
                        1,731,832Commitment
      and ContingenciesStockholders'
      Equity:Preferred
      stock, par value $0.0001, 100,000 authorized shares, none issued and
      outstanding
                        
                        
                        -
                        
                        
                        
                        -Common
      stock, par value $0.0001, 500,000,000 authorized shares, 56,039,854
      (2007-55,306,996) issued and 56,025,649 (2007-55,292,791)
      outstanding
                        
                        
                        5,604
                        
                        
                        
                        5,530Additional
      paid-in capital
                        
                        
                        33,097,178
                        
                        
                        
                        31,769,049Accumulated
      deficit during the development stage
                        
                        
                        (28,258,455
                        )
                        
                        
                        (24,994,331
                        )Treasury
      stock, 14,205 shares, at cost
                        
                        
                        (28,410
                        )
                        
                        
                        (28,410
                        )Accumulated
      other comprehensive (loss)
                        
                        
                        (275,355
                        )
                        
                        
                        -Total
      Stockholders' Equity
                        
                        
                        4,540,562
                        
                        
                        
                        6,751,838Total
      Liabilities and Stockholders' Equity
                        
                        $
                        5,974,162
                        
                        
                        $
                        8,483,670






(See the
notes accompanying the condensed financial statements)


3
 Table of Contents





REXAHNPHARMACEUTICALS, INC.
 (A
Development Stage Company)
 Condensed
Statements of Operations
 (Unaudited)


CumulativeFrom
      March 19,Three
      Months
                                                                            
                                                                            
                                                                            Nine
      Months
                                                                            
                                                                            
                                                                            2001Ended September 30,
                                                                            
                                                                            
                                                                            Ended September 30,
                                                                            
                                                                            
                                                                            (Inception)
      to2008
                                                                            
                                                                            
                                                                            2007
                                                                            
                                                                            
                                                                            2008
                                                                            
                                                                            
                                                                            2007
                                                                            
                                                                            
                                                                            September 30, 2008Revenues:Research
                                                                            
                                                                            $
                                                                            18,750
                                                                            
                                                                            
                                                                            $
                                                                            18,750
                                                                            
                                                                            
                                                                            $
                                                                            56,250
                                                                            
                                                                            
                                                                            $
                                                                            56,250
                                                                            
                                                                            
                                                                            $
                                                                            431,250Expenses:General
      and administrative
                                                                            
                                                                            
                                                                            645,368
                                                                            
                                                                            
                                                                            
                                                                            555,625
                                                                            
                                                                            
                                                                            
                                                                            1,893,819
                                                                            
                                                                            
                                                                            
                                                                            1,971,891
                                                                            
                                                                            
                                                                            
                                                                            14,232,553Research
      and development
                                                                            
                                                                            
                                                                            567,905
                                                                            
                                                                            
                                                                            
                                                                            465,934
                                                                            
                                                                            
                                                                            
                                                                            1,419,077
                                                                            
                                                                            
                                                                            
                                                                            1,441,225
                                                                            
                                                                            
                                                                            
                                                                            12,221,414Patent
      fees
                                                                            
                                                                            
                                                                            57,574
                                                                            
                                                                            
                                                                            
                                                                            45,698
                                                                            
                                                                            
                                                                            
                                                                            163,778
                                                                            
                                                                            
                                                                            
                                                                            120,536
                                                                            
                                                                            
                                                                            
                                                                            869,251Depreciation
      and amortization
                                                                            
                                                                            
                                                                            13,875
                                                                            
                                                                            
                                                                            
                                                                            14,475
                                                                            
                                                                            
                                                                            
                                                                            41,574
                                                                            
                                                                            
                                                                            
                                                                            46,212
                                                                            
                                                                            
                                                                            
                                                                            489,035Total
      Expenses
                                                                            
                                                                            
                                                                            1,284,722
                                                                            
                                                                            
                                                                            
                                                                            1,081,732
                                                                            
                                                                            
                                                                            
                                                                            3,518,248
                                                                            
                                                                            
                                                                            
                                                                            3,579,864
                                                                            
                                                                            
                                                                            
                                                                            27,812,253Loss
      from Operations
                                                                            
                                                                            
                                                                            (1,265,972
                                                                            )
                                                                            
                                                                            
                                                                            (1,062,982
                                                                            )
                                                                            
                                                                            
                                                                            (3,461,998
                                                                            )
                                                                            
                                                                            
                                                                            (3,523,614
                                                                            )
                                                                            
                                                                            
                                                                            (27,381,003
                                                                            )Other
      (Income) ExpenseRealized
      loss on securities available-for-sale
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            22,365
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            22,365Interest
      income
                                                                            
                                                                            
                                                                            (52,122
                                                                            )
                                                                            
                                                                            
                                                                            (23,606
                                                                            )
                                                                            
                                                                            
                                                                            (220,239
                                                                            )
                                                                            
                                                                            
                                                                            (116,499
                                                                            )
                                                                            
                                                                            
                                                                            (1,071,060
                                                                            )Interest
      expense
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            301,147Beneficial
      conversion feature
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            1,625,000(52,122
                                                                            )
                                                                            
                                                                            
                                                                            (23,606
                                                                            )
                                                                            
                                                                            
                                                                            (197,874
                                                                            )
                                                                            
                                                                            
                                                                            (116,499
                                                                            )
                                                                            
                                                                            
                                                                            877,452Net
      Loss Before Provision for Income Taxes
                                                                            
                                                                            
                                                                            (1,213,850
                                                                            )
                                                                            
                                                                            
                                                                            (1,039,376
                                                                            )
                                                                            
                                                                            
                                                                            (3,264,124
                                                                            )
                                                                            
                                                                            
                                                                            (3,407,115
                                                                            )
                                                                            
                                                                            
                                                                            (28,258,455
                                                                            )Provision
      for Income Taxes
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -Net
      Loss
                                                                            
                                                                            $
                                                                            (1,213,850
                                                                            )
                                                                            
                                                                            $
                                                                            (1,039,376
                                                                            )
                                                                            
                                                                            $
                                                                            (3,264,124
                                                                            )
                                                                            
                                                                            $
                                                                            (3,407,115
                                                                            )
                                                                            
                                                                            $
                                                                            (28,258,455
                                                                            )Net
      Loss per share outstanding, basic and diluted
                                                                            
                                                                            $
                                                                            (0.02
                                                                            )
                                                                            
                                                                            $
                                                                            (0.02
                                                                            )
                                                                            
                                                                            $
                                                                            (0.06
                                                                            )
                                                                            
                                                                            $
                                                                            (0.07
                                                                            )Weighted
      average number of shares outstanding, basic and diluted
                                                                            
                                                                            
                                                                            56,025,649
                                                                            
                                                                            
                                                                            
                                                                            50,338,393
                                                                            
                                                                            
                                                                            
                                                                            55,800,977
                                                                            
                                                                            
                                                                            
                                                                            50,323,209




(See the
notes accompanying the condensed financial statements)





4
 Table of Contents





REXAHNPHARMACEUTICALS, INC.


(A
Development Stage Company)


Statement
of Stockholders' Equity and Comprehensive Loss


(Unaudited)





Common Stock
                      
                      
                      Additional paid-in Capital
                      
                      
                      Accumulated Deficit
                      
                      
                      Treasury
                        Stock
                      
                      
                      Accumulated
                        Other
                        Comprehensive
                        Loss
                      
                      
                      Total
                      
                      
                      Total Comprehensive LossBalances
      at December 31, 2007
                      
                      $
                      5,530
                      
                      
                      $
                      31,769,049
                      
                      
                      $
                      (24,994,331
                      )
                      
                      $
                      (28,410
                      )
                      
                      $
                      -
                      
                      
                      $
                      6,751,838
                      
                      
                      $
                      -Stock
      compensation expense
                      
                      
                      -
                      
                      
                      
                      397,002
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      397,002
                      
                      
                      
                      -Common
      stock issued
                      
                      
                      65
                      
                      
                      
                      899,936
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      900,001
                      
                      
                      
                      -Exercise
      of stock options
                      
                      
                      9
                      
                      
                      
                      31,191
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      31,200
                      
                      
                      
                      -Net
      (loss)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (3,264,124
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (3,264,124
                      )
                      
                      
                      (3,264,124
                      )Unrealized loss on securities available for
      sale
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (275,355
                      )
                      
                      
                      (275,355
                      )
                      
                      
                      (275,355
                      )Balances atSeptember 30, 2008
                      
                      $
                      5,604
                      
                      
                      $
                      33,097,178
                      
                      
                      $
                      (28,258,455
                      )
                      
                      $
                      (28,410
                      )
                      
                      $
                      (275,355
                      )
                      
                      $
                      4,540,562
                      
                      
                      $
                      (3,539,479
                      )






(See the
notes accompanying the condensed financial statements)


5
 Table of Contents




REXAHNPHARMACEUTICALS, INC.
 (A
Development Stage Company)
 Statement
of Cash Flows
 (Unaudited)




CumulativeFrom
      March 19,Nine
      Months
                  
                  
                  2001Ended September 30,
                  
                  
                  (Inception)
      to2008
                  
                  
                  2007
                  
                  
                  September 30, 2008Cash
      Flows from Operating Activities:Net
      loss
                  
                  $
                  (3,264,124
                  )
                  
                  $
                  (3,407,115
                  )
                  
                  $
                  (28,258,455
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Beneficial
      conversion feature
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,625,000Compensatory
      stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  21,877Depreciation
      and amortization
                  
                  
                  41,574
                  
                  
                  
                  46,212
                  
                  
                  
                  489,035Stock
      option compensation expense
                  
                  
                  397,002
                  
                  
                  
                  786,094
                  
                  
                  
                  3,769,153Amortization
      of deferred revenue
                  
                  
                  (56,250
                  )
                  
                  
                  (56,250
                  )
                  
                  
                  (431,250
                  )Realized
      losses on securities available-for-sale
                  
                  
                  22,365
                  
                  
                  
                  -
                  
                  
                  
                  22,365Changes
      in assets and liabilities:Prepaid
      expenses and other
                  
                  
                  (19,555
                  )
                  
                  
                  65,856
                  
                  
                  
                  (736,760
                  )Accounts
      payable and accrued expenses
                  
                  
                  (241,982
                  )
                  
                  
                  (143,056
                  )
                  
                  
                  364,850Net
      Cash Used in Operating Activities
                  
                  
                  (3,120,970
                  )
                  
                  
                  (2,708,259
                  )
                  
                  
                  (23,134,185
                  )Cash
      Flows from Investing Activities:Purchase
      of equipment
                  
                  
                  (25,697
                  )
                  
                  
                  -
                  
                  
                  
                  (523,836
                  )Purchase
      of securities available-for-sale
                  
                  
                  (5,848,176
                  )
                  
                  
                  -
                  
                  
                  
                  (9,398,176
                  )Proceeds
      from sales of securities available-for-sale
                  
                  
                  4,475,581
                  
                  
                  
                  -
                  
                  
                  
                  4,475,581Net
      Cash Used in Investing Activities
                  
                  
                  (1,398,292
                  )
                  
                  
                  -
                  
                  
                  
                  (5,446,431
                  )Cash
      Flows from Financing Activities:Issuance
      of common stock
                  
                  
                  931,201
                  
                  
                  
                  42,000
                  
                  
                  
                  22,536,752Proceeds
      from long-term debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,150,000Proceeds
      from research contribution
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,500,000Payment
      of licensing fees
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (356,216
                  )Principal
      payments on long-term debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (28,410
                  )Net
      Cash Provided by Financing Activities
                  
                  
                  931,201
                  
                  
                  
                  42,000
                  
                  
                  
                  28,802,126Net
      Increase (Decrease) in Cash and Cash Equivalents
                  
                  
                  (3,588,061
                  )
                  
                  
                  (2,666,259
                  )
                  
                  
                  221,510Cash
      and Cash Equivalents - beginning of period
                  
                  
                  3,809,571
                  
                  
                  
                  4,034,060
                  
                  
                  
                  -Cash
      and Cash Equivalents - end of period
                  
                  $
                  221,510
                  
                  
                  $
                  1,367,801
                  
                  
                  $
                  221,510




Supplemental
schedule of non-cash investing activities:





The
Company’s securities classified as available-for-sale decreased in fair value by
$275,355 in 2008 and was recorded as comprehensive loss as a component of
stockholders’ equity.




(See the
notes accompanying the condensed financial statements)


6
 Table of Contents




REXAHNPHARMACEUTICALS, INC.
 Notes
to Unaudited Condensed Financial Statements
 September
30, 2008


1.
            Operations
      and Organization




Operations




Rexahn
Pharmaceuticals, Inc. (the "Company" or "Rexahn Pharmaceuticals"), a Delaware
corporation, is a development stage biopharmaceutical company dedicated to the
discovery, development and commercialization of innovative treatments for
cancer, central nervous system (CNS) disorders, sexual dysfunction and other
medical needs.




The
accompanying condensed financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
("US GAAP") for interim financial information and the instructions to Form
10-Q.  Accordingly, they do not include all of the information and
footnotes required by US GAAP for complete financial statements. In the opinion
of the Company's management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended September 30, 2008
are not necessarily indicative of the results that may be expected for the full
fiscal year ending December 31, 2008. The accompanying condensed financial
statements should be read in conjunction with the audited financial statements
of the Company for the fiscal year ended December 31, 2007.




2.
            Summary
      of Significant Accounting Policies




a)
            Basis
      of Accounting




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.




b)
            Short-term
      investments




Short-term
investments are considered “available-for-sale” in accordance with SFAS
No. 115, “Accounting for Certain Investments in Debt and Equity
Securities”, and thus are reported at fair value in our accompanying Condensed
Balance Sheets, with unrealized gains and losses excluded from earnings and
reported in a separate component of stockholders’ equity.  Realized
gains and losses are accounted on the basis of specific identification and are
included in other income (expense) in our condensed income
statements.  We classify such investments as current on our balance
sheets as the investments are readily marketable and available for use in our
current operations.  Comprehensive loss for the nine and three month
periods ended September 30, 2008 was $275,355 and $71,876, and none for the year
ended December 31, 2007, respectively.




Short-term
investments are reviewed periodically to identify possible other-than-temporary
impairment.  When evaluating the investments, the Company reviews
factors such as the length of time and extent to which fair value has been below
the cost basis, the financial condition of the issuer, the underlying net asset
value of the issuer's assets and liabilities, and the Company’s ability and
intent to hold the investment for a period of time which may be sufficient for
anticipated recovery in market value.  Should the decline in the value
of any investment be deemed to be other-than-temporary, the investment basis
would be written down to fair market value, and the write-down would be recorded
to earnings as a loss.




c)
              Recent
      Accounting Pronouncements Affecting the
Company




7
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.
 Notes
to Unaudited Condensed Financial Statements
 September
30, 2008




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) Statement of Financial Accounting Standards
("SFAS")  No. 157, “Fair Value Measurements” (“SFAS No. 157”),
which defines fair value, establishes a framework for measuring fair value and
expands the related disclosure requirements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements and
does not require any new fair value measurements. SFAS No. 157 indicates, among
other things, that a fair value measurement assumes that the transaction to sell
an asset or transfer a liability occurs in the principal market for the asset or
liability or, in the absence of a principal market, the most advantageous market
for the asset or liability. SFAS No. 157 defines fair value based upon an exit
price model. In February 2008, the FASB issued FSP on SFAS No. 157-1,
“Application of FASB Statement No. 157 to FASB Statement No. 13 and
Its Related Interpretive Accounting Pronouncements That Address Leasing
Transactions,” and FSP SFAS No. 157-2, “Effective Date of FASB Statement
No. 157.” FSP SFAS No. 157-1 removes leasing transactions from the scope of
SFAS No. 157, while SFAS No. 157-2 defers the effective date of SFAS
No. 157 to the fiscal year beginning after November 15, 2008 for
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. It
does not defer recognition and disclosure requirements for financial assets and
financial liabilities, or for nonfinancial assets and nonfinancial liabilities
that are remeasured at least annually. Effective January 1, 2008, the
Company adopted SFAS No. 157, with the exception of the application of the
statement to non-recurring nonfinancial assets and nonfinancial liabilities. The
adoption of SFAS No. 157 did not impact the Company’s financial position or
results of operations.




In
December 2007, FASB issued SFAS No. 141 (revised 2007), "Business Combinations"
("SFAS No. 141(R)"). This statement replaces SFAS No. 141, "Business
Combinations" and requires an acquirer to recognize the assets acquired, the
liabilities assumed, including those arising from contractual contingencies, any
contingent consideration, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions specified in the statement. SFAS No. 141(R) also requires the
acquirer in a business combination achieved in stages (sometimes referred to as
a step acquisition) to recognize the identifiable assets and liabilities, as
well as the noncontrolling interest in the acquiree, at the full amounts of
their fair values (or other amounts determined in accordance with SFAS No.
141(R)). In addition, SFAS No. 141(R)'s requirement to measure the
noncontrolling interest in the acquiree at fair value will result in recognizing
the goodwill attributable to the noncontrolling interest in addition to that
attributable to the acquirer. SFAS No. 141(R) amends SFAS No. 109, "Accounting
for Income Taxes", to require the acquirer to recognize changes in the amount of
its deferred tax benefits that are recognizable because of a business
combination either in income from continuing operations in the period of the
combination or directly in contributed capital, depending on the circumstances.
It also amends SFAS No. 142, "Goodwill and Other Intangible Assets", to, among
other things, provide guidance on the impairment testing of acquired research
and development intangible assets and assets that the acquirer intends not to
use. SFAS No. 141(R) applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The adoption of SFAS No. 141(R)
will have no impact on the Company's financial statements.




In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—amendment of Accounting Research Bulletin No.
51” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the
consolidated  entity that should be reported as equity in the
consolidated financial statements. SFAS No. 160 also changes the way the
consolidated income statement is presented by requiring consolidated net income
to be reported at amounts that include the amounts attributable to both the
parent and the noncontrolling interest. It also requires disclosure, on the face
of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the noncontrolling interest. SFAS No.
160 requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated and requires expanded disclosures in the
consolidated financial statements that clearly identify and distinguish between
the interests of the parent owners and the interests of the noncontrolling
owners of a subsidiary. SFAS No.160 is effective for fiscal periods, and interim
periods within those fiscal years, beginning on or after December 15,
2008.  The adoption of SFAS No. 160 will have no impact on the
Company’s financial statements.





8
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.
 Notes
to Unaudited Condensed Financial Statements
 September
30, 2008


In March
2008, FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and
Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS
No. 161 changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. SFAS No. 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. The Company is currently assessing the
potential impact that the adoption of SFAS 161 could have on its financial
statements.




In May
2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting
Principles" ("SFAS No. 162"). SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (“GAAP”)
in the United States (the GAAP hierarchy). SFAS No. 162 is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles". The Company is currently reviewing
the effect, if any; the proposed guidance will have on its financial
statements.




d)
            Earnings
      Per Share




The
following weighted average number of shares was used for the computation of
basic and diluted loss per share:




For the three months ended
                      
                      
                      For the nine months endedSeptember30,
      2008
                      
                      
                      September30,
      2007
                      
                      
                      September30,
      2008
                      
                      
                      September30,
      2007Basic
                      
                      
                      56,025,649
                      
                      
                      
                      50,338,393
                      
                      
                      
                      55,800,977
                      
                      
                      
                      50,323,209Diluted
                      
                      
                      56,025,649
                      
                      
                      
                      50,338,393
                      
                      
                      
                      55,800,977
                      
                      
                      
                      50,323,209





Basic
loss per share is computed by dividing net loss attributable to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted loss per share reflects the potential dilution from the exercise
or conversion of other securities into Common Stock, but only if
dilutive.





Diluted
loss per share for the three and nine month periods ended September 30, 2008 and
2007 is the same as basic loss per share, since the effects of the calculation
were anti-dilutive due to the fact that the Company incurred losses for all
periods presented. The following securities, presented on a common share
equivalent basis, have been excluded from the per share
computations:





9
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.
 Notes
to Unaudited Condensed Financial Statements
 September
30, 2008


For the three months ended
                      
                      
                      For the nine months endedSeptember 30, 2008
                      
                      
                      September 30, 2007
                      
                      
                      September 30, 2008
                      
                      
                      September30,
      2007Stock
      Options
                      
                      
                      5,086,795
                      
                      
                      
                      3,093,420
                      
                      
                      
                      5,086,795
                      
                      
                      
                      3,093,420Warrants
                      
                      
                      1,207,151
                      
                      
                      
                      -
                      
                      
                      
                      1,207,151
                      
                      
                      
                      -




3.
            Equipment,
      Net




September
      30,
                  
                  
                  December
      31,2008
                  
                  
                  2007Furniture
      and fixtures
                  
                  $
                  31,713
                  
                  
                  $
                  31,713Office
      equipment
                  
                  
                  69,345
                  
                  
                  
                  43,648Lab
      and computerequipment
                  
                  
                  423,159
                  
                  
                  
                  423,159524,217
                  
                  
                  
                  498,520Less:
      Accumulated depreciation
                  
                  
                  423,784
                  
                  
                  
                  395,569Net
      carrying amount
                  
                  $
                  100,433
                  
                  
                  $
                  102,951




Depreciation
expense was $9,422 and $10,022 for the three months ended September 30, 2008 and
2007, respectively, and $28,215 and $32,637 for the nine months ended September
30, 2008 and 2007, respectively.




4.
            Intangible
      Assets, Net




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 called 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 license component of
$356,216 was determined by discounting the stream of future quarterly
payments of $46,875 at 6%, the prevailing market rate for a debt instrument of
comparable maturity and credit quality.  The asset is amortized on a
straightline basis over an estimated useful life of 20 years.  The
discount was accreted over the term of the liability, calculated based on the
Company's estimated effective market interest rate of 6%.  During 2006
the outstanding balance was paid.  Amortization expense was $4,453 and
$4,453 for the three months ended September 30, 2008 and 2007,
respectively.  Amortization expense was $13,359 and $13,575 for the
nine months ended September 30, 2008 and 2007, respectively. Management does not
believe that there is an impairment of intangible assets at September 30,
2008.




10
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.
 Notes
to Unaudited Condensed Financial Statements
 September
30, 2008


The
following table sets forth the intangible asset:





September
      30,
                  
                  
                  December
      31,2008
                  
                  
                  2007Revaax
      license, original cost
                  
                  $
                  356,216
                  
                  
                  $
                  356,216Less:
      Accumulated amortization
                  
                  
                  65,632
                  
                  
                  
                  52,273Balance
                  
                  $
                  290,584
                  
                  
                  $
                  303,943





Amortization over the next five (5)
years and thereafter is as follows:





2008
                              
                              $
                              4,4532009
                              
                              
                              17,8112010
                              
                              
                              17,8112011
                              
                              
                              17,8112012
                              
                              
                              17,811Thereafter
                              
                              
                              214,887$
                              290,584





5.
            Deferred
      Revenue




In 2003,
the Company entered into a collaborative research agreement with Rexgene Biotech
Co., Ltd. ("Rexgene"), a minority shareholder.  Rexgene is engaged in
the development of pharmaceutical products in Asia and has agreed to assist the
Company with the research, development and clinical trials necessary for
registration of the Company's drug candidate, RX-0201, in Asia.  This
agreement provides Rexgene with exclusive rights to license, sublicense, make,
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 $18,750 and $56,250 was included in revenues for the three and nine
months ended September 30, 2008 and 2007.  The remaining $1,068,750 at
September 30, 2008 (December 31, 2007-$1,125,000) is reflected as deferred
revenue on the balance sheet.  The Company adopted SAB No. 104,
"Revenue Recognition Nonrefundable Up-front Fees" with respect to the accounting
for this transaction. These fees are being used in the cooperative funding of
the costs of development of RX-0201.  Royalties of 3% of net sales of
licensed products will become payable to the Company on a quarterly basis once
commercial sales of RX-0201 begin. The product is still under development and
commercial sales are not expected to begin until at least 2009.




6.
            Common
      Stock




The
following transactions occurred during fiscal years 2001 through September 30,
2008:




a)           On
May 10, 2001 the Company issued 3,600,000 shares of common stock to the
Company's founders for $1.





11
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.
 Notes
to Unaudited Condensed Financial Statements
 September
30, 2008


b)           On
August 10, 2001 the Company issued:




i)
            1,208,332
      shares of common stock to the directors of the Company for cash of
      $1,450,000.




ii)
            958,334
      shares of common stock to Rexgene for cash of
  $550,000.




iii)
            360,000
      shares of common stock in a private placement to individual investors for
      cash of  $1,080,000.




These
share purchases were negotiated by the parties at various dates prior to the
August 10, 2001 share issuance date.




c)           
On October 10, 2001 the Company issued 400,000 shares of common stock to Chong
Kun Dang Pharmaceutical Corp. ("CKD") for cash of $479,991 and 400,000 shares of
common stock to an individual investor for cash of $479,991.




d)           On
October 10, 2001 the Company issued 200,000 shares of common stock to CKD for
cash of $479,985.




e)           Since
inception, the Company's founders have transferred 800,000 shares of the common
stock described in a) to officers and directors of the Company.




f)        
   In July 2003, the shareholders described in b)(iii) and e)
transferred an aggregate of 1,268,332 shares of common stock to a voting
trust.  The trust allows for the unified voting of the stock by the
trustees.  The appointed trustees are senior management of the Company
who, together with their existing shares, control a majority of the voting power
of the Company.




g)           On
August 20, 2003 the Company issued 500,000 shares of common stock to KT&G
Corporation for cash of $2,000,000.




h)           On
October 29, 2004, an option holder exercised options to purchase shares of the
Company’s common stock for cash of $1,800 and the Company issued an aggregate of
1,500 shares.




i)         
  Pursuant to the 2005 Agreement and Plan of 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; (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 and (iii) the par value of
Rexahn's common stock was adjusted.




j)            
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.




k)          
 On October 3, 2005, the Company issued 7,000 shares of common stock for
$21,877 and $7,500 cash in exchange for services.




l)            
On December 2, 2005, the holders of a convertible note, representing $1,300,000
aggregate principal amount, exercised their option to convert the entire
principal amount of the note into the Company's common stock.  Based
on a $2.00 per share conversion price, the holders received an aggregate of
650,000 shares.




12
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.
 Notes
to Unaudited Condensed Financial Statements
 September
30, 2008


m)           On
December 27, 2005, option holders exercised options to purchase shares of the
Company's common stock for cash of $9,600 and the Company issued an aggregate of
40,000 shares.




n)           On
February 22, 2006, an option holder exercised options to purchase shares of the
Company's common stock for cash of $1,200 and the Company issued an aggregate of
5,000 shares.




o)           On
April 12, 2006, an option holder exercised options to purchase shares of the
Company’s common stock for cash of $3,409 and the Company issued an aggregate of
14,205 shares.  On the same date, the Company agreed to repurchase
common stock from the option holder based on the then market price for treasury
in exchange for the aggregate purchase price of $28,410 in cash.




p)           On
May 13, 2006, holders of the $3,850,000 convertible notes issued on February 28,
2005, exercised their rights to convert the entire principal amount of the notes
into shares of the Company’s common stock.   Based on a $1.00 per
share conversion price, the Company issued 3,850,000 shares of common stock in
connection with the conversion.




q)           On
October 9, 2006, an option holder exercised options to purchase shares of the
Company’s common stock for cash of $2,400 and the Company issued an aggregate of
10,000 shares.




r)           On
November 19, 2006, an option holder exercised options to purchase shares of the
Company's common stock for cash of $1,800 and the Company issued an aggregate of
7,500 shares.




s)           On
December 19, 2006, an option holder exercised options to purchase shares of the
Company's common stock for cash of $6,000 and the Company issued an aggregate of
25,000 shares.




t)          
 On April 18, 2007, an option holder exercised options to purchase shares
of the Company's common stock for cash of $14,400 and the Company issued an
aggregate of 18,000 shares.




u)           On
July 23, 2007, an option holder exercised options to purchase shares of the
Company's common stock for cash of $12,000 and the Company issued an aggregate
of 15,000 shares.




v)           On
September 27, 2007, an option holder exercised options to purchase shares of the
Company's common stock for cash of $15,600 and the Company issued an aggregate
of 19,500 shares.




w)           On
December 18, 2007, the Company issued 4,857,159 units in a private placement at
a price $1.40 per unit for total gross proceeds of $6,800,023.  Investors
also were issued one warrant for every five shares purchased.  One
warrant will entitle the holder to purchase an additional share of common stock
at a purchase price of $1.80 at any time over a period of three years from the
date of the closing of the private placement.  The warrants have been
valued at $1,103,164 and were charged to additional paid in
capital.  Private placement closing costs of $139,674, including
107,144 warrants issued, valued at $91,119, were recorded as a reduction of the
issuance proceeds.




x)        
   On December 27, 2007 an option holder exercised options to
purchase shares of the Company's common stock for cash of $18,000 and the
Company issued an aggregate of 75,000 shares.




y)           On
March 20, 2008, the Company issued 642,858 units consisting of one share of the
Company’s common stock and one warrant for every five common shares purchased in
a private placement at a price of $1.40 per unit for total gross proceeds of
$900,001.  One warrant will entitle the holder to purchase an
additional share of common stock at a price of $1.80 at any time over a period
of three years from the date of the private placement.  The warrants
were valued at $220,005 and were charged to additional
paid-in-capital.




13
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.
 Notes
to Unaudited Condensed Financial Statements
 September
30, 2008


z)           
On May 30, 2008, an option holder exercised options to purchase shares of the
Company's common stock for cash of $7,200 and the Company issued an aggregate of
30,000 shares.




aa)        
 On June 2, 2008, an option holder exercised options to purchase shares of
the Company's common stock for cash of $12,000 and the Company issued an
aggregate of 50,000 shares.




bb)      
  On June 30, 2008, an option holder exercised options to purchase
shares of the Company's common stock for cash of $12,000 and the Company issued
an aggregate of 10,000 shares.




7.
            Stock-Based
      Compensation




On August
5, 2003, the Company established a stock option plan (the
“Plan”).  Under the Plan, the Company grants stock options to key
employees, directors and consultants of the Company.  For all grants
prior to September 12, 2005 and grants to employees of the Company after
September 12, 2005, the vesting period is 30% on the first anniversary of the
grant date, an additional 30% on the second anniversary and the remaining 40% on
the third anniversary.  Options expire between 5 and 10 years from the
date of grant.




For
grants to non-employee directors and consultants of the Company after September
12, 2005, the vesting period is between 1 to 3 years, 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.  Options authorized for issuance under the Plan
total 17,000,000 after giving effect to an amendment to the Plan approved at the
Annual Meeting of the Stockholders of the Company on June 2, 2006 and
at September 30, 2008, 9,927,500options were available
for issuance.




Prior to
adoption of the plan, the Company made restricted stock
grants.  During 2003 all existing restricted stock grants were
converted to stock options.  The converted options maintained the same
full vesting period as the original restricted stock grants.




Accounting
for Employee Awards




Effective
January 1, 2006, the plan is accounted for in accordance with the recognition
and measurement provisions of SFAS No. 123R, which replaces SFAS No. 123 and
supersedes APB No. 25, and related interpretations.




The
Company's results of operations for the three and nine months ended September
30, 2008 include share-based employee compensation expense totaling $59,325 and
$174,122, respectively, and for the three and nine months period ended September
30, 2007, include share-based employee compensation expense totaling $144,880
and $447,996, respectively. Such amounts have been included in the Statements of
Operations in general and administrative and research and development
expenses.  No income tax benefit has been recognized in the Statements
of Operations for share-based compensation arrangements as the Company has
provided for a 100% valuation allowance on its deferred tax assets.




Employee
stock option compensation expense in the third quarter of 2008 is the estimated
fair value of options granted amortized on a straight-line basis over the
requisite service period for the entire portion of the award. The Company has
not adjusted the expense by estimated forfeitures, as required by SFAS No. 123R
for employee options, since the forfeiture rate based upon historical data was
determined to be immaterial.





14
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.
 Notes
to Unaudited Condensed Financial Statements
 September
30, 2008


Accounting
for Non-Employee Awards




The
Company previously accounted for options granted to its non-employee consultants
and non-employee registered representatives using the fair value cost in
accordance with SFAS No. 123 and EITF 96-18.  The adoption of SFAS No.
123R and SAB No. 107, as of January 1, 2006, had no material impact on the
accounting for non-employee awards.  The Company continues to consider
the additional guidance set forth in EITF Issue No. 96-18.




Stock
compensation expenses related to non-employee options were $19,766 and $222,880
for the three and nine months period ended September 30, 2008 and $69,188 and
$338,098 for the three and nine months period ended September 30,
2007.  Such amounts have been included in the Statements of Operations
in general and administrative and research and development
expenses.




Total
stock-based compensation recognized by the Company in the nine months ended
September 30, 2008 and 2007, and the period from inception (March 19, 2001) to
September 30, 2008, all of which relates to stock options and warrants, is as
follows:




For the three months ended
                                  
                                  
                                  For the nine months ended
                                  
                                  
                                  Cumulative
      from March 19, 2001September 30,
                                    2008
                                  
                                  
                                  September 30,
                                    2007
                                  
                                  
                                  September 30,
                                    2008
                                  
                                  
                                  September 30,
                                    2007
                                  
                                  
                                  (Inception) to
                                    September 30, 2008Income
      statement line item:General
      and administrativePayroll
                                  
                                  $
                                  9,200
                                  
                                  
                                  $
                                  100,331
                                  
                                  
                                  $
                                  27,600
                                  
                                  
                                  $
                                  308,400
                                  
                                  
                                  $
                                  1,124,328Consulting
      and other professional fees
                                  
                                  
                                  17,402
                                  
                                  
                                  
                                  15,230
                                  
                                  
                                  
                                  134,448
                                  
                                  
                                  
                                  113,083
                                  
                                  
                                  
                                  731,552Research
      and development:Payroll
                                  
                                  
                                  50,125
                                  
                                  
                                  
                                  44,552
                                  
                                  
                                  
                                  146,523
                                  
                                  
                                  
                                  139,596
                                  
                                  
                                  
                                  630,893Consulting
      and other  professional fees
                                  
                                  
                                  2,364
                                  
                                  
                                  
                                  53,956
                                  
                                  
                                  
                                  88,431
                                  
                                  
                                  
                                  225,015
                                  
                                  
                                  
                                  1,282,380Total
                                  
                                  $
                                  79,091
                                  
                                  
                                  $
                                  214,069
                                  
                                  
                                  $
                                  397,002
                                  
                                  
                                  $
                                  786,094
                                  
                                  
                                  $
                                  3,769,153








There
were 100,000 stock options granted at an exercise price of $2.19 with a fair
value of $161,415, 150,000 stock options at an exercise price of $1.47 with a
fair value of $125,968, 400,000 stock options at an exercise price of $1.29 with
a fair value of $418,665 and there were 100,000 stock options granted at an
exercise price of $3.24 with a fair value of $17,880 during the nine months
ended September 30, 2008. The fair value of options at the date of grant was
estimated using the Black-Scholes option pricing model. The Company took into
consideration guidance under SFAS No. 123(R) and SAB No. 107 when reviewing and
updating assumptions. The expected volatility is based upon historical
volatility of the Company's stock. The expected term is based upon the
simplified method as allowed under SAB 107.





15
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.
 Notes
to Unaudited Condensed Financial Statements
 September
30, 2008


The
assumptions made in calculating the fair values of options are as
follows:




Nine Months Ended September
    30,2008
                                
                                
                                2007Black-Scholes
      weighted average assumptions:Expected
      dividend yield
                                
                                0
                                
                                
                                0Expected
      volatility
                                
                                100% - 114%
                                
                                
                                100%Risk
      free interest rate
                                
                                1.60%
      - 4.99%
                                
                                
                                2.67%
      - 4.99%Expected
      term (in years)
                                
                                0.52-5
      years
                                
                                
                                0.3-5
      years








The
following table summarizes the employee and non-employee share-based
transactions:





2008
                  
                  
                  2007Shares
      Subjectto Options
                  
                  
                  Weighted
      Avg.OptionPrices
                  
                  
                  Shares
      Subjectto Options
                  
                  
                  Weighted
      Avg.OptionPricesOutstanding
      at January 1
                  
                  
                  6,045,795
                  
                  
                  $
                  0.97
                  
                  
                  
                  6,123,295
                  
                  
                  $
                  0.94Granted
                  
                  
                  750,000
                  
                  
                  
                  1.71
                  
                  
                  
                  425,000
                  
                  
                  
                  1.44Exercised
                  
                  
                  (90,000
                  )
                  
                  
                  0.35
                  
                  
                  
                  (52,500
                  )
                  
                  
                  0.80Cancelled
                  
                  
                  (50,000
                  )
                  
                  
                  1.34
                  
                  
                  
                  (352,500
                  )
                  
                  
                  1.35Outstanding
      at September 30
                  
                  
                  6,655,795
                  
                  
                  $
                  1.05
                  
                  
                  
                  6,143,295
                  
                  
                  $
                  0.95





The
following table summarizes information about stock options outstanding as of
September 30, 2008 and 2007:





Shares
      Subjectto Options
                                
                                
                                Weighted
      Avg. OptionPrices
                                
                                
                                
                                Weighted
      Average Remaining ContractualTerm
                                
                                
                                Aggregate
      IntrinsicValueOutstanding
      at September 30, 2008
                                
                                
                                6,655,795
                                
                                
                                $
                                1.05
                                
                                
                                
                                7.0 years
                                
                                
                                $
                                2,655,485Exercisable
      at September 30, 2008
                                
                                
                                4,996,795
                                
                                
                                $
                                1.11
                                
                                
                                
                                6.5 years
                                
                                
                                $
                                2,486,567








Shares
      Subjectto Options
                            
                            
                            Weighted
      Avg. OptionPrices
                            
                            
                            
                            Weighted
      Average Remaining ContractualTerm
                            
                            
                            Aggregate
      IntrinsicValueOutstanding
      at September 30, 2007
                            
                            
                            6,143,295
                            
                            
                            $
                            0.95
                            
                            
                            
                            7.1 years
                            
                            
                            $
                            3,415,622Exercisable
      at September 30, 2007
                            
                            
                            3,093,420
                            
                            
                            $
                            0.84
                            
                            
                            
                            6.9 years
                            
                            
                            $
                            2,621,822




16
 Table of Contents


REXAHN
PHARMACEUTICALS, INC.
 Notes
to Unaudited Condensed Financial Statements
 September
30, 2008


As of
September 30, 2008 and 2007, there was $1,851,934 and $1,883,885 of total
unrecognized compensation cost, respectively, related to all unvested stock
options, which is expected to be recognized over a weighted average vesting
period of 1.68 years and 1.2 years, respectively.





8.
            Commitments
      and Contingencies





a)           The
Company has contracted with various vendors to provide research and development
services. The terms of these agreements usually require an initiation fee and
monthly or periodic payments over the terms of the agreement, ranging from 6
months to 24 months. The costs to be incurred are estimated and are subject to
revision.





As of
September 30, 2008, the total maximum commitment under these agreements was
estimated to be $2,892,094 and the Company had made payments totaling $2,072,044
and has accrued $66,313 under the terms of the agreements as at September 30,
2008.  All of these agreements may be terminated by either party upon
appropriate notice as stipulated in the respective agreements.





b)           The
Company and three of its key executives have entered into employment agreements.
One of the two agreements was renewed on September 12, 2007 and results in an
annual commitment of $160,000 through September 12, 2009. The second agreement
expires on September 12, 2010 and results in an annual commitment of
$350,000.  The third agreement expires on July 13, 2009 and results in
an annual commitment of $200,000.





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 year’s
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 as of September 30, 2008 are as
follows:





Remainder
      of 2008
                  
                  $
                  56,4142009
                  
                  
                  112,972$
                  169,386







d)           Regulation
by governmental authorities in the United States and in other countries
constitutes a significant consideration in our product development,
manufacturing and marketing strategies. The Company expects that all of its drug
candidates will require regulatory approval by appropriate governmental agencies
prior to commercialization and will be subjected to rigorous pre-clinical,
clinical, and post-approval testing, as well as to other approval processes by
the FDA and by similar health authorities in foreign countries. United States
federal regulations control the ongoing safety, manufacture, storage, labeling,
record keeping, and marketing of all biopharmaceutical products intended for
therapeutic purposes. The Company believes that it is in compliance in all
material respects with currently applicable rules and regulations.




9.
            Fair
      Value Measurements






The Company adopted Statement of
Financial Accounting Standards (“SFAS”) No.157, “Fair Value Measurements” (“SFAS
157”) as of January 1, 2008. SFAS 157 defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date, not adjusted
for transaction costs. SFAS 157 also establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels giving the highest priority to quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3) as described below:




17
 Table of Contents




REXAHN
PHARMACEUTICALS, INC.
 Notes
to Unaudited Condensed Financial Statements
 September
30, 2008




Level 1 Inputs
              
              —
              
              Unadjusted
      quoted prices in active markets for identical assets or liabilities that
      is accessible by the Company;Level
      2 Inputs
              
              —
              
              Quoted
      prices in markets that are not active or financial instruments for which
      all significant inputs are observable, either directly or
      indirectly;Level
      3 Inputs
              
              —
              
              Unobservable
      inputs for the asset or liability including significant assumptions of the
      Company and other market
participants.




The
Company determines fair values for its investment assets as
follows:




Investments,
at fair value—The Company's investments, at fair value, consists of marketable
equity securities and government obligations—marked to market. The Company’s
marketable equity securities are classified within level 1 of the fair value
hierarchy as they are valued using quoted market prices from an
exchange.




The
following tables present our assets and liabilities that are measured at fair
value on a recurring basis and are categorized using the fair value hierarchy.
The fair value hierarchy has three levels based on the reliability of the inputs
used to determine fair value.




Fair Value Measurements at Reporting Date
      UsingDescription
                          
                          Book/
                            Carrying
                            Value
                            September30, 2008
                          
                          
                          Quoted Prices in Active Markets for Identical
      Assets
                            (Level 1)
                          
                          
                          Significant Other Observable
      Inputs
                            (Level 2)
                          
                          
                          Significant Unobservable
Inputs
                            (Level 3)Assets:Equity
      Investments
                          
                          $
                          1,350,000
                          
                          
                          $
                          1,350,000
                          
                          
                          $
                          - -
                          
                          
                          $
                          -Government
      Obligations
                          
                          
                          3,274,875
                          
                          
                          
                          3,274,875
                          
                          
                          
                          -
                          
                          
                          
                          -Total
      Assets
                          
                          $
                          4,624,875
                          
                          
                          $
                          4,624,875
                          
                          
                          $
                          - -
                          
                          
                          $
                          -





18
 Table of Contents




Item2 Management's Discussion and Analysis of Financial Condition
and Results of Operations




OVERVIEW




Our
efforts and resources have been focused primarily on acquiring and developing
our pharmaceutical technologies, raising capital and recruiting personnel. We
are a development stage company and have no product sales to date and we will
not generate any product sales until we receive approval from the FDA or
equivalent foreign regulatory bodies to begin selling our pharmaceutical
candidates. Our major sources of working capital have been proceeds from various
private financings, primarily private sales of common stock and debt securities,
and collaboration agreements with our strategic investors.




SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS




The
following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto set forth in Item 1 of this
Quarterly Report. This Quarterly Report contains statements accompanied by such
phrases as "believe", "estimate", "expect", "anticipate", "may", "intend" and
other similar expressions, that are "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. Actual results may differ
materially from those projected as a result of certain risks and uncertainties,
including but not limited to the following:




·
            our
      lack of profitability and the need for additional capital to operate our
      business;


·
            our
      ability to obtain the necessary U.S. and worldwide regulatory approvals
      for our drug candidates;


·
            successful
      and timely completion of clinical trials for our drug
      candidates;


·
            demand
      for and market acceptance of our drug
  candidates;


·
            the
      availability of qualified third-party researchers and manufacturers for
      our drug development programs;


·
            our
      ability to develop and obtain protection of our intellectual property;
      and


·
            other
      risks and uncertainties, including those detailed from time to time in our
      filings with the Securities and Exchange
  Commission.




These
forward-looking statements are made only as of the date hereof, and we undertake
no obligation to update or revise the forward-looking statements, whether as a
result of new information, future events or otherwise. The safe harbors for
forward-looking statements provided by the Private Securities Litigation Reform
Act are unavailable to issuers of "penny stock". Our shares may be considered a
penny stock and, as a result, the safe harbors may not be available to
us.




CRITICAL
ACCOUNTING POLICIES




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




Use
of Estimates




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




19
 Table of Contents




Stock-Based
Compensation




Effective
January 1, 2006, the Plan is accounted for in accordance with the recognition
and measurement provisions of Statement of Financial Accounting Standards
("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"), which
replaces FAS No. 123, Accounting for Stock-Based Compensation, and supersedes
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees, and related interpretations. FAS 123(R) requires compensation
costs related to share-based payment transactions, including employee stock
options, to be recognized in the financial statements. In addition, the Company
adheres to the guidance set forth within Securities and Exchange Commission
("SEC") Staff Accounting Bulletin No. 107 ("SAB 107"), which provides the Staffs
views regarding the interaction between SFAS No. 123(R) and certain SEC rules
and regulations and provides interpretations with respect to the valuation of
share-based payments for public companies. See Note 7 to the Financial
Statements in Item 1 of this Quarterly Report for further details.




RECENTLY
ISSUED ACCOUNTING STANDARDS




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) Statement of Financial Accounting Standards
("SFAS")  No. 157, “Fair Value Measurements” (“SFAS 157”), which
defines fair value, establishes a framework for measuring fair value and expands
the related disclosure requirements. SFAS 157 applies under other accounting
pronouncements that require or permit fair value measurements and does not
require any new fair value measurements. SFAS 157 indicates, among other things,
that a fair value measurement assumes that the transaction to sell an asset or
transfer a liability occurs in the principal market for the asset or liability
or, in the absence of a principal market, the most advantageous market for the
asset or liability. SFAS 157 defines fair value based upon an exit price model.
In February 2008, the FASB issued FASB Staff Positions (FSP) SFAS
No. 157-1, “Application of FASB Statement No. 157 to FASB Statement
No. 13 and Its Related Interpretive Accounting Pronouncements That Address
Leasing Transactions,” and FSP SFAS No. 157-2, “Effective Date of FASB
Statement No. 157.” FSP SFAS 157-1 removes leasing transactions from the
scope of SFAS No. 157, while SFAS No. 157-2 defers the effective date
of SFAS 157 to the fiscal year beginning after November 15, 2008 for
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. It
does not defer recognition and disclosure requirements for financial assets and
financial liabilities, or for nonfinancial assets and nonfinancial liabilities
that are remeasured at least annually. Effective January 1, 2008, the
Company adopted SFAS 157, with the exception of the application of the statement
to non-recurring nonfinancial assets and nonfinancial liabilities. The adoption
of SFAS 157 did not impact the Company’s financial position or results of
operations.




In
December 2007, FASB issued SFAS No. 141 (revised 2007), "Business Combinations"
("SFAS 141(R)"). This statement replaces SFAS No. 141, "Business Combinations"
and requires an acquirer to recognize the assets acquired, the liabilities
assumed, including those arising from contractual contingencies, any contingent
consideration, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions specified in the statement. SFAS 141(R) also requires the acquirer in
a business combination achieved in stages (sometimes referred to as a step
acquisition) to recognize the identifiable assets and liabilities, as well as
the noncontrolling interest in the acquiree, at the full amounts of their fair
values (or other amounts determined in accordance with SFAS 141(R)). In
addition, SFAS 141(R)'s requirement to measure the noncontrolling interest in
the acquiree at fair value will result in recognizing the goodwill attributable
to the noncontrolling interest in addition to that attributable to the acquirer.
SFAS 141(R) amends SFAS No. 109, "Accounting for Income Taxes", to require the
acquirer to recognize changes in the amount of its deferred tax benefits that
are recognizable because of a business combination either in income from
continuing operations in the period of the combination or directly in
contributed capital, depending on the circumstances. It also amends SFAS 142,
"Goodwill and Other Intangible Assets", to, among other things, provide guidance
on the impairment testing of acquired research and development intangible assets
and assets that the acquirer intends not to use. SFAS 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company is currently assessing the potential impact that
the adoption of SFAS 141(R) could have on its financial statements.




20
 Table of Contents




In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—amendment of Accounting Research Bulletin No.
51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. SFAS 160 also changes the way
the consolidated income statement is presented by requiring consolidated net
income to be reported at amounts that include the amounts attributable to both
the parent and the noncontrolling interest. It also requires disclosure, on the
face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the noncontrolling interest. SFAS 160
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated and requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish between the interests
of the parent owners and the interests of the noncontrolling owners of a
subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within
those fiscal years, beginning on or after December 15, 2008.  The
adoption of SFAS 160 will have no impact on the Company’s financial
statements.




In March
2008, FASB issued SFAS 161, "Disclosures about Derivative Instruments and
Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS
161 changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity's financial position, financial performance, and cash flows.
SFAS 161 is effective for fiscal years and interim periods beginning after
November 15, 2008. The Company is currently assessing the potential impact that
the adoption of SFAS 161 could have on its financial
statements.




In May
2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting
Principles" ("SFAS 162"). SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (“GAAP”)
in the United States (the GAAP hierarchy). SFAS 162 is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles". The Company is currently reviewing
the effect, if any, the proposed guidance will have on its financial
statements.




21
 Table of Contents




RESULTS
OF OPERATIONS




Comparison
of Three Months and Nine Months Ended September 30, 2008 and 2007:




Total
Revenues




For the
three and nine month periods ended September 30 2008 and 2007, we recorded
revenues of $18,750 and $56,250, respectively.  In all periods the
revenue reflects the recognition of deferred revenue from a collaborative
research agreement with Rexgene Biotech Co., Ltd., a minority
shareholder.




General
and Administrative Expenses




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




General
and administrative expenses increased $89,743, or 16.2%, from $555,625 for the
three months ended September 30, 2007 to $645,368 for the three months ended
September 30, 2008.  General and administrative expenses decreased by
$78,072 or 4.0% from $1,971,891 for the nine months ended September 30, 2007 to
$1,893,819 for the nine months ended September 30, 2008.  The increase
in the three month period of 2008 is primarily due to an increase in the number
of employees.  The decrease in the nine month period of 2008 was
primarily due to lower stock option compensation expense during
2008.




Research
and Development Expenses




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




Research
and development expenses increased $101,971 or 21.9% from $465,934 for the three
months ended September 30, 2007 to $567,905 for the three months ended September
30, 2008.  This increase is primarily due to a new project initiated
during the three months. Research and development expenses decreased $22,148 or
1.5% from $1,441,225 for the nine months ended September 30, 2007 to $1,419,077
for the nine months ended September 30, 2008.  This decrease was
primarily due to a decline in clinical study expenses.




Patent
Fees




Our
patent fees increased $11,876 or 26.0%, from $45,698 for the three months ended
September 30, 2007 to $57,574 for the three months ended September 30, 2008.
Patent fees increased by $43,242, or 35.9% from $120,536 for the nine months
ended September 30, 2007 to $163,778 for the nine months ended September 30,
2008.  The increases during the 2008 periods were due primarily to
more patent issuances during 2008.




Depreciation
and Amortization




Depreciation
and amortization expense remained largely unchanged for the three and nine
months ended September 30, 2008, respectively, compared to the three months
ended September 30, 2007, respectively.




22
 Table of Contents





Interest
Income




Interest
income increased $28,516, or 120.8%, from $23,606 for the three months ended
September 2007 to $52,112 for the three months ended September 30, 2008.
Interest income increased $103,740 or 89.0% from $116,499 for the nine months
ended September 30, 2007 to $220,239 for the nine months ended September 30,
2008.  The increases are primarily due to higher short term
investments balances during the 2008 periods.




Net
Loss




As a
result of the above, the net loss for the three months and nine months ended
September 30, 2008 was $1,213,850 and $3,264,124, respectively, or $0.02 and
$0.06 per share, respectively, compared to a net loss of $1,039,376 and
$3,407,115, respectively, or $0.02 and $0.07 per share, respectively, for the
three months and nine months ended September 30, 2007.




Research
and Development Projects




Research
and development costs 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 three lead
drug candidates, Archexin (which was previously referred to as RX-0201),
Serdaxin and Zoraxel (Serdaxin and Zoraxel were previously referred to as
RX­10100) and preclinical candidates including RX-0201-Nano, RX-0047-Nano,
and Nano-polymer Anticancer Drugs.




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 candidates, Archexin, Serdaxin and Zoraxel, is uncertain, and because
RX-0201-Nano, RX-0047-Nano, and Nano-polymer Anticancer Drugs 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.




Archexin




In
October 2006, we announced the conclusion of the Phase I clinical trial of
Archexin, our leading drug candidate. In May 2007, we received approval from the
U.S. Food & Drug Administration (FDA) to initiate a Phase IIclinical trial for
Archexin, in patients with renal cell carcinoma (RCC). Archexin is currently in
Phase IItrials.
The costs incurred for the clinical trial were approximately
$3,000,000.




23
 Table of Contents




The Phase
I clinical trial of Archexin, which took place at Georgetown University's
Lombardi Cancer Center beginning in September 2004 and at the University of
Alabama at Birmingham beginning in August 2005, was primarily to determine the
safety and tolerability of the drug in patients with advanced cancer. As the
main purpose of the clinical trial was to establish the safety of Archexin, the
parameters that determined the completion of this project were a direct function
of the safety profile of this compound in humans. As this was the first time
that Archexin had been administered to humans, the safety profile in humans was
unknown and therefore, the number of doses required to determine the dosage at
which the FDA safety endpoints would be met was estimated.




The Phase
II clinical trial of Archexin began in the third quarter of 2007 in patients
with advanced RCC who have failed previous treatments. The trial is the first of
multiple trials planned for Archexin. We estimate that the Phase II trials will
be completed in 2009 and will require approximately $5,000,000. In January 2005,
we received "orphan drug designation" from the FDA for Archexin for five cancer
indications, including renal cell carcinoma, ovarian cancer, glioblastoma,
stomach cancer, and pancreatic cancer. The orphan drug program is intended to
provide patients with faster access to drug therapies for diseases and
conditions that affect fewer than 200,000 people. Companies that receive orphan
drug designation are provided an accelerated review process, tax advantages, and
seven years of market exclusivity in the United States. In the fourth quarter of
2008, we plan to apply Archexin to the treatment of pancreatic
cancer.




Serdaxin




SerdaxinTm is
being developed to treat depression and mood disorders, and has proven and
well-established safety in humans. Serdaxin is scheduled to enter Phase II
trials in the second half of 2008. We currently estimate that Phase II trials
will be completed in 2010 and will require approximately
$2,500,000.




Zoraxel




ZoraxelTm is a
CNS-based sexual dysfunction drug that has extensive and excellent safety in
humans. The Phase II clinical trial of Zoraxel began in the first half of 2008.
We currently estimate that the Phase IItrials will be completed
in 2009 and will require a total of approximately $1,500,000.




Pre-clinical
pipeline




Our
pre-clinical pipeline includes:




(1)
            RX-0201-Nano:
      Nanoliposomal anti-cancer Akt-1
inhibitor




RX-0201,
the active ingredient of Archexin, is a first-in-class, potent inhibitor of the
Akt-1 protein kinase. RX-0201-Nano is a nanoliposomal product of RX-0201 with
high incorporation efficiency and good stability. Nanoliposomal delivery of
RX-0201 may provide significant clinical benefits including targeted higher
cellular uptake, extended circulation time, reduced drug-related toxicity, and
improved efficacy. Phase I trials are planned for 2009.




(2)
            RX-0047-Nano:
      Nanoliposomal anti-cancer HIF-la
inhibitor




RX-0047-Nano
is a nanoliposomal cancer drug candidate that selectively inhibits expression of
the HIF-la transcription factor. HIF-la is a key signaling molecule in
angiogenesis, cancer cell survival and invasion, and radiation resistance.
RX-0047 is a first-in-class anticancer candidate that directly inhibits
expression of mRNA and protein of HIF-la. RIF- la is over-expressed in a broad
range of human cancers, and associated with increased cancer mortality and
resistance. In pre-clinical studies, RX-0047 significantly downregulated
expression of HIF-la mRNA and protein. At nanomolar concentrations, RX-0047
inhibited proliferation of cancer cells from human solid tumors and growth of
implanted tumors in xenograft animal models, and reversed resistance in
radiation-resistant cancer cells. RX-0047 inhibited growth of solid tumors in
lung as well as prostate cancer xenograft models, and significantly blocked
metastasis in a lung metastatic model. RX-0047-Nano is expected to provide
significant clinical benefits including targeted higher cellular uptake,
extended circulation time, reduced drug-related toxicity, and improved efficacy.
Phase I trials are planned for 2009.




24
 Table of Contents




(3)
            Nano-polymer
      Anticancer Drugs- HPMA-docetaxel and
  HPMA-gemcitabine




A major
problem with many cancer drugs is their lack of tumor specificity and
dose-limiting toxicity. Nano-polymer conjugated drugs may deliver drugs more
precisely to tumor tissues with less toxic effects. Rexahn's HPMA-docetaxel and
HPMA­ gemcitabine are expected to achieve the anticancer effects of
docetaxel and gemcitabine, respectively, at much lower dose levels with
significantly fewer side effects. Phase I trials are planned in
2009.




Through
September 30, 2008, the costs incurred for development of these compounds to
date have been approximately $1,000,000. The estimated cost to complete
pre-clinical toxicology and Phase I clinical trials is estimated to be
approximately $1,500,000 per compound for a total of $4,500,000.




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




LIQUIDITY
AND CAPITAL RESOURCES




Cash used
in operating activities was $3,120,970 for the nine months ended September 30,
2008 compared to cash used in operating activities of $2,708,259 for the same
period ended September 30, 2007. The operating cash flows during the nine months
ended September 30, 2008 reflect our loss from operations of $3,264,124 and a
net increase in cash components of working capital of and by non-cash charges
totaling $143,154. Non-cash charges consist of depreciation and amortization of
$41,574, stock option compensation expense of $397,002, amortization of deferred
revenue of $(56,250), and realized loss on securities of $22,365. The decrease
in working capital consists of a $241,982 decrease in accounts payable and
accrued expenses and an increase of $19,555 in prepaid and other
assets.




Cash used
in investing activities of $1,398,292 during the nine months ended September 30,
2008 consisted of $25,697 used for purchases of equipment, $5,848,176 used for
purchases of securities available-for-sale, and $4,475,581 received from
proceeds of disposition of securities available-for-sale.




Cash
provided by financing activities of $931,201 during the nine months ended
September 30, 2008 was primarily the result of the $900,001 of proceeds from a
private placement of 642,858 units in May 2008 as well as approximately $30,000
in proceeds from the exercise of stock options.





25
 Table of Contents




For the
nine months ended September 30, 2008, we experienced net losses of $3,264,124.
Our accumulated deficit as of September 30, 2008, was $28,258,455.




We have
financed our operations since inception primarily through equity and convertible
debt financings and interest income from investments of cash and cash
equivalents. During the nine months ended September 30, 2008, we had a net
decrease in cash and cash equivalents of $3,588,061 resulting primarily from the
cash used in current year operations and purchases of securities in excess of
the proceeds from sales of securities. Total cash and cash equivalents as of
September  30, 2008 were $221,510 compared to $3,809,571 as of
December 31, 2007.




For the
foreseeable future, we will have to fund all of our operations and capital
expenditures from the net proceeds of equity or debt offerings we may have, cash
on hand, collaboration fee, 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.  Management believes there is
sufficient cash and cash equivalents and investments to fund operations for the
next twelve months.




CONTRACTUAL
OBLIGATIONS


On
October 2, 2003, we contracted with Amarex to conduct certain Phase I clinical
studies for ArchexinTM (then
RX­0201). Of the $239,337 to be paid under this contract, $194,461 was paid
as of September 30, 2007. The balance will be paid when the final report is
accepted, which is expected to be later this year. Since 2003, additional
services were added to the study. These services were contracted for $200,043,
of all which have been paid.




In April
2004, we entered into a clinical development agreement with Georgetown
University with an effective period from April 5, 2004 through April 5, 2006.
The total estimated cost of the program is $121,359 based on the fees,
enrollment and completion of 13 patients. The clinical trial has been completed
and Rexahn has paid $48,150 as of September 30, 2008. We expect to make a
remaining payment under the agreement in 2008.




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




Minimum
future rental payments under this lease as of September 30 2008 are as
follows:




Remainder
      of 2008
                  
                  $
                  56,4142009
                  
                  $
                  112,972$
                  169,386




On
September 12, 2005, we entered into an employment agreement with the Chief
Executive Officer. The agreement expires on September 12, 2010 and results in an
annual commitment of $350,000.




On
January 6, 2006, we contracted with Amarex, LLC to conduct Phase IIclinical studies for
ArchexinTM. In
accordance with the initial agreement, the estimated contract duration is 24
months for a total cost of $596,244 plus pass through expenses. The service
costs are payable in 24 monthly payments of $18,633 plus an up front payment of
$149,061 due upon signing. We paid $614,816 and $540,346 towards the initial
cost of the study as of September 30, 2008 and as of December 31, 2007
respectively.  In 2007, additional services were added to the project.
The cost of the additional services is $106,220, of all which have been
paid.
  26
 Table of Contents
  On April
3, 2006, we contracted with UPM Pharmaceuticals, Inc. to develop several release
formulations for SerdaxinTM and
ZoraxelTM.  In
2007 and 2008, additional services were added to the project.  Total
contracted amount is $937,630, of which $539,565 has been paid as of September
30, 2008.
  On
February 1, 2007, we entered into research agreement with University of Maryland
Baltimore Biotechnology Institute to identify new JNK inhibitors using their NMR
technology. The total amount to be paid under this contract is $17,000, of which
$10,000 was paid in the year ended December 31, 2007. The balance will be paid
later this year.
  On May
18, 2007, we contracted with Lab Connect to provide sample management and
central laboratory services for Phase II clinical studies for ArchexinTM
clinical trials. The total contract amount is estimated to be $197,220. We paid
$54,444 towards the cost of the study as of September 30, 2008.
  On June
13, 2007, we contracted with Formatech to test the stability of the
ArchexinTM
package. The total amount to be paid for this contract was $21,500, of which
$14,500 was paid in 2007, $1,000 was paid in 2008 and the balance will be paid
when the final report is submitted, which is expected to be in three
years.


Effective
as of September 12, 2007, we entered into an employment agreement with our Chief
Financial Officer. The agreement expires on September 12, 2009 and results in an
annual commitment of $160,000.




On July
14, 2008, we entered into an employment agreement with a key executive to serve
as Chief Business Officer of the Company.  The agreement results in an
annual commitment of $200,000 through July 13, 2009.




CURRENT
AND FUTURE FINANCING NEEDS




We have
incurred negative cash flow from operations since we started our business. We
have spent, and expect to continue to spend, substantial amounts in connection
with implementing our business strategy, including our planned product
development efforts, our clinical trials, and our research and development
efforts. Based on our current plans and our capital resources, we believe that
our cash and cash equivalents will be sufficient to enable us to meet our
minimum planned operating needs for at least the next 12 months, which would
entail focusing our resources on Phase II clinical trials of Archexin, Serdaxin
and Zoraxel.




Over the
next 12 months we expect to spend a minimum of approximately $500,000 on
clinical development for Phase II clinical trials of Archexin, $1 million on
clinical development for Phase II clinical trials of Serdaxin and Zoraxel, $2
million on general corporate expenses, and approximately $170,000 on facilities
rent. We plan to initiate additional Phase II clinical trials of Archexin for
pancreatic cancer patients later this year at an additional cost of up to
approximately $500,000 for the next 12 months. We may seek additional financing
to implement and fund other drug candidate development, clinical trial and
research and development efforts to the maximum extent of our operating plan,
including in-vivo animal and pre-clinical studies, Phase IIclinical trials for new
product candidates, as well as other research and development projects, which
together with the minimum operating plan for the next 12 months, could aggregate
up to $4.5 million through the third quarter of 2009.





27
 Table of Contents







Management
believes there is sufficient cash and cash equivalents and investments to fund
operations for next 12 months.  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.




OFF-BALANCE
SHEET ARRANGEMENTS




We do not
have any off-balance sheet arrangements.




Item3 Quantitative and Qualitative Disclosures About Market
Risk




Per Item
305(e) of Regulation S-K, a smaller reporting company is not required to provide
the information required by this item.




Item4T Controls and Procedures




As of
September 30, 2008, our management carried out an evaluation, under the
supervision of our Chief Executive Officer and Chief Financial Officer of the
effectiveness of the design and operation of our system of disclosure controls
and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, or the Exchange Act. Based upon that
evaluation, the Chief Executive Officer and the Chief Financial Officer have
concluded that our disclosure controls and procedures were effective, as of the
date of this evaluation, for the purposes of recording, processing, summarizing
and timely reporting material information required to be disclosed in reports
filed by us under the Exchange Act.




There
were no changes in our internal control over financial reporting during the
quarter ended September 30, 2008 that have materially affected, or are
reasonably likely to affect, our financial reporting.





28
 Table of Contents







PART
II




Item 1 Legal Proceedings




None




Item2 Unregistered Sales of Equity Securities and Use of
Proceeds




None




Item3 Defaults Upon Senior Securities




None




Item4 Submission of Matters to a Vote of Security
Holders




None




Item5 Other Information




None




Item6 Exhibits




Exhibit No.
                              
                              Description
                              
                              Location10.1
                              
                              Employment
      Agreement with Rakesh Soni dated July 14, 2008
                              
                              Incorporated
      by reference to Registrant's Current Report on Form 8-K filed July 16,
      200831.1
                              
                              Rule
      13a-14(a)/15d-14(a) Certification (Principal Executive
      Officer)
                              
                              Filed
      herewith31.2
                              
                              Rule
      13a-14(a)/15d-14(a) Certification (Principal Financial
      Officer)
                              
                              Filed
      herewith32.0*
                              
                              Section
      1350 Certificate
                              
                              Filed
      herewith*
                              
                              This
      exhibit is furnished rather than filed, and shall not be incorporated by
      reference into any filing of the registrant in accordance with Item 601 of
      Registration
S-K





29
 Table of Contents





SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





REXAHN
      PHARMACEUTICALS, INC.(Registrant)Date:  November
      14, 2008
                  
                  By: /s/
      Chang H. AhnChang
      H. AhnChairman
      and Chief Executive OfficerDate:  November
      14, 2008
                  
                  By: /s/ Ted
      T.H. JeongTed
      T.H. JeongChief
      Financial Officer and
Secretary





30
 Table of Contents





INDEX
TO EXHIBITS


Quarterly
Report on Form 10-Q


Dated
September 30, 2008





Exhibit
      No.
                
                Description
                
                Location31.1
                
                Rule
      13 a-14(a)/15d-14(a) Certification (Principal Executive
      Officer)
                
                Filed
      herewith31.2
                
                Rule
      13 a-14(a)/15d-14(a) Certification (Principal Financial
      Officer)
                
                Filed
      herewith32.0
                
                Section
      1350 Certificate
                
                Filed
      herewith






31