**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-QSB**





(Mark
      One)


xQUARTERLY REPORT UNDER SECTION 13 OR 15(d)


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**For
      the Quarterly Period Ended March 31, 2006**





**o** **TRANSITION REPORT UNDER SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**For
      the Transition Period from _________ to _________**





**Commission
      file number:  000-50590**





**REXAHN
      PHARMACEUTICALS, INC.**


(Exact
      name of registrant as specified on its charter)





**Delaware**
            
            **11-3516358**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (IRS
                Employer
              Identification
                No.)





**9620
      Medical Center Drive**


**Rockville,
      Maryland 20850**


(Address
      of principle executive offices)





**(240)
      268-5300**


(Registrant’s
      telephone number, including area code)





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      past 12 months (or for such shorter period that the registrant was required
      to
      file such reports), and (2) has been subject to such filing requirements for
      the
      past 90 days.     Yes x No o





**APPLICABLE
      ONLY TO CORPORATE ISSUERS:**





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


o Yes **** x No





State
      the
      number of shares outstanding of each of the registrant's classes of common
      equity, as of the latest practicable date: 46,415,632 shares issued and
      outstanding as of May 4, 2006





Transitional
      Small Business Disclosure Format (check one): **** Yes o No x
















**REXAHNPHARMACEUTICALS,
      INC.**




**INDEX**





**PAGE(S)**_____________
            
            __________**PART
                I**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                Statements:Balance
                Sheets - March 31, 2006 (unaudited) and December
                31, 2005
            1Statements
                of Operations - Three Months Ended March 31,
                2006 and 2005 and March 19, 2001 (inception) to March
                31, 2006 (unaudited)
            2Statements
                of Cash Flows - Three Months Ended March 31,
                2006 and 2005 and March 19, 2001 (inception) to March
                31, 2006 (unaudited)
            3Notes
                to Financial Statements
                (unaudited)
            4Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition or
                Plan of Operation
            15Item
                3.
            Controls
                and Procedures
            34**PART
                II**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            35Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            35Item
                3.
            Defaults
                upon Senior Securities
            35Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            35Item
                5.
            Other
                Information
            35Item
                6.
            Exhibits
            36





i
 *Index*




**PARTI
      - FINANCIAL INFORMATION**





**Item1.  FINANCIAL
      STATEMENTS**


**REXAHN
      PHARMACEUTICALS, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


Balance
      Sheets





**March
                31,**
              **2006**
            
            December
                31,
              2005(Unaudited)**ASSETS****Current
                Assets:**Cash
                and cash equivalents
            
            **$**
            **507,182**
            
            $
            1,679,441Short-term
                investments
            
            
            **7,339,687**
            
            
            8,437,184Prepaid
                expenses and other
            
            
            **59,874**
            
            
            54,774**Total
                Current Assets**
            
            
            **7,906,743**
            
            
            10,171,399**Equipment,
                Net**
            
            
            **186,899**
            
            
            203,632**Intangible
                Assets, Net**
            
            
            **335,546**
            
            
            339,890**Total
                Assets**
            
            **$**
            **8,429,188**
            
            $
            10,714,921**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                Liabilities:**Accounts
                payable and accrued expenses
            
            **$**
            **702,696**
            
            $
            587,612Licensing
                fee payable
            
            
            **128,640**
            
            
            172,813**Total
                Current Liabilities**
            
            
            **831,336**
            
            
            760,425Long-term
                convertible debt
            
            
            **3,850,000**
            
            
            3,850,000Deferred
                revenue
            
            
            **1,256,250**
            
            
            1,275,000**Total
                Liabilities**
            
            
            **5,937,586**
            
            
            5,885,425**Commitment
                and Contingencies****Stockholders'
                Equity**Common
                stock, par value $0.0001
            
            
            **4,642**
            
            
            4,641Additional
                paid-in capital
            
            
            **19,366,471**
            
            
            19,029,178Accumulated
                deficit****during
                the development stage
            
            
            **(16,879,511**
            **)**
            
            (14,204,323
            )**Total
                Stockholders' Equity**
            
            
            **2,491,602**
            
            
            4,829,496**Total
                Liabilities and Stockholders' Equity**
            
            **$**
            **8,429,188**
            
            $
            10,714,921




See
      notes
      accompanying the financial statements.




1
 *Index*





**REXAHNPHARMACEUTICALS,
      INC.**


**(A
      Development Stage Company)**


Statements
      of Operations


(Unaudited)




Cumulative
                fromMarch
                19, 2001(Inception)
                to
            
            Three
                MonthsMarch
                31,
            
            Ended
                March 31,2006
            
            **2006**
            
            2005**Revenue:**Interest
                and other income
            
            $
            502,641
            
            **$**
            **111,192**
            
            $
            4,809Research
            
            
            243,750
            
            
            **18,750**
            
            
            18,750746,391
            
            
            **129,942**
            
            
            23,559**Expenses:**General
                and administrative
            
            
            6,378,591
            
            
            **566,969**
            
            
            312,880Beneficial
                conversion feature
            
            
            1,625,000
            
            
            **-**
            
            
            **-**Research
                and development
            
            
            7,292,630
            
            
            **1,801,135**
            
            
            378,497Stock
                option compensation expense
            
            
            1,541,686
            
            
            **336,094**
            
            
            73,963Patent
                fees
            
            
            247,089
            
            
            **19,403**
            
            
            28,584Interest
            
            
            261,948
            
            
            **60,452**
            
            
            19,469Depreciation
                and amortization
            
            
            278,958
            
            
            **21,077**
            
            
            16,51717,625,902
            
            
            **2,805,130**
            
            
            829,910**Net
                Loss**
            
            $
            (16,879,511
            )
            **$**
            **(2,675,188**
            **)**
            $
            (806,351
            )Loss
                per weighted average number ofshares
                outstanding basic and diluted
            
            
            
            
            **$**
            **(0.06**
            **)**
            $
            (0.02
            )Weighted
                average number of shares outstanding basic and diluted
            
            
            
            
            
            **46,412,688**
            
            
            38,133,330




See
        notes
        accompanying the financial statements.


2
 *Index*





**REXAHNPHARMACEUTICALS,
      INC.**


**(A
      Development Stage Company)**


Statements
      of Cash Flows


(Unaudited)





Cumulative
                fromMarch
                19, 2001(Inception)
                to
            
            Three
                Months EndedMarch
                31,
            
            March
                31,2006
            
            **2006**
            
            2005**Cash
                Flows from Operating Activities:**Net
                loss
            
            $
            (16,879,511
            )
            **$**
            **(2,675,188**
            **)**
            $
            (806,351
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Beneficial
                conversion feature
            
            
            1,625,000
            
            
            **—**
            
            
            —Compensatory
                stock
            
            
            21,877
            
            
            **—**
            
            
            —Depreciation
                and amortization
            
            
            278,958
            
            
            **21,077**
            
            
            16,517Stock
                option compensation expense
            
            
            1,541,686
            
            
            **336,094**
            
            
            73,963Deferred
                revenue
            
            
            1,256,250
            
            
            **(18,750**
            **)**
            
            (18,750
            )Changes
                in assets and liabilities:Prepaid
                expenses and other
            
            
            (59,874
            )
            
            **(5,100**
            **)**
            
            8,127Accounts
                payable and accrued expenses
            
            
            702,696
            
            
            **115,084**
            
            
            16,485**Net
                Cash Used in Operating Activities**
            
            
            (11,512,918
            )
            
            **(2,226,783**
            **)**
            
            (710,009
            )**Cash
                Flows from Investing Activities**Short-term
                investments
            
            
            (7,339,687
            )
            
            **1,097,497**
            
            
            —Purchase
                of equipment
            
            
            (445,187
            )
            
            **—**
            
            
            —**Net
                Cash (Used in) Provided by Investing Activities**
            
            
            (7,784,874
            )
            
            **1,097,497**
            
            
            —**Cash
                Flows from Financing Activities**Issuance
                of common stock
            
            
            14,882,550
            
            
            **1,200**
            
            
            —Proceeds
                from long-term debt
            
            
            5,150,000
            
            
            **—**
            
            
            3,850,000Principal
                payments on long-term debt
            
            
            (227,576
            )
            
            **(44,173**
            **)**
            
            (46,875
            )**Net
                Cash (Used in) Provided by Financing Activities**
            
            
            19,804,974
            
            
            **(42,973**
            **)**
            
            3,803,125**Net
                (Decrease) Increase in Cash and Cash Equivalents**
            
            
            507,182
            
            
            **(1,172,259**
            **)**
            
            3,093,116**Cash
                and Cash Equivalents - beginning of period**
            
            
            **—**
            
            
            **1,679,441**
            
            
            1,015,979**Cash
                and Cash Equivalents - end of period**
            
            $
            507,182
            
            **$**
            **507,182**
            
            $
            4,109,095**Supplemental
                Cash Flow Information**Interest
                paid
            
            $
            12,377
            
            **$**
            **2,702**
            
            $
            659





Non-cash
      investing and financing activities:


In
      February 2005, the Company entered into a licensing agreement in exchange for
      debt of $356,215




See
        notes
        accompanying the financial statements.


3
 *Index*





**REXAHNPHARMACEUTICALS,
      INC.**


**(A
      Development Stage Company)**


Notes
      to
      Financial Statements


Three
      Months Ended March 31, 2006 and 2005


(Unaudited)






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





The
      accompanying unaudited financial statements of Rexahn Pharmaceuticals, Inc.
      ("the Company") have been prepared in accordance with accounting principles
      generally accepted in the United States of America for financial information
      and
      the requirements of item 310 (b) of Regulation S-B. Accordingly, certain
      information and disclosures normally included in financial statements prepared
      in accordance with accounting principles generally accepted in the United States
      of America have been condensed or omitted pursuant to the rules and regulations
      of the Securities and Exchange Commission. The financial statements reflect
      all
      adjustments (consisting only of normal recurring adjustments), which, in the
      opinion of management, are necessary for a fair presentation of the results
      for
      the periods presented. Except for the adoption of new accounting policies as
      disclosed in note 2, there have been no significant changes in our accounting
      policies since December 31, 2005. The results from operations for the period
      are
      not necessarily indicative of the results expected for the full fiscal year
      or
      any future period.





Reverse
      Merger Acquisition





Pursuant
      to an Agreement and Plan of Merger by and among Rexahn, Corp ("Rexahn"),
      Corporate Road Show.Com Inc. ("CRS"), a New York corporation and predecessor
      corporation of the Company, CRS Merger Sub, Inc., a Delaware corporation and
      wholly owned subsidiary of CRS ("Merger Sub"), CRS Delaware, Inc., a Delaware
      corporation and wholly owned subsidiary of CRS ("CRS Delaware"), immediately
      after giving effect to a 1 for 100 reverse stock split and the reincorporation
      of CRS as a Delaware corporation under the name Rexahn Pharmaceuticals, Inc.
      ("Rexahn Pharmaceuticals"), on May 13, 2005, Merger Sub merged with and into
      Rexahn, with Rexahn surviving as a wholly owned subsidiary of Rexahn
      Pharmaceuticals (the "Acquisition Merger"). In the Acquisition Merger, (i)
      each
      share of the issued and outstanding common stock of Rexahn (other than
      dissenting shares) was converted into the right to receive five shares of Rexahn
      Pharmaceuticals common stock; and (ii) each issued, outstanding and unexercised
      option to purchase a share of Rexahn common stock was converted into an option
      to purchase five shares of Rexahn Pharmaceuticals common stock.





Shares
      of
      Rexahn Pharmaceuticals common stock issued in the Acquisition Merger were exempt
      from the registration requirements of the Securities Act of 1933, as amended
      (the "Securities Act"), pursuant to Regulation D under the Securities Act and/or
      Regulation S under the Securities Act. These shares of Rexahn Pharmaceuticals
      common stock are deemed "restricted securities" and bear an appropriate
      restrictive legend indicating that the resale of such shares may be made only
      pursuant to registration under the Securities Act or pursuant to an available
      exemption from such registration.





4
 *Index*





**REXAHN
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


Notes
      to
      Financial Statements


Three
      Months Ended March 31, 2006 and 2005


(Unaudited)







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





Reverse
      Merger Acquisition (cont'd)





As
      part
      of the Acquisition Merger, the Company assumed the convertible notes and the
      conversion price was adjusted to reflect the merger exchange ratio.





For
      accounting purposes, the Acquisition Merger is accounted for as a reverse
      acquisition of CRS (legal acquirer) by Rexahn (accounting acquirer). As a
      result, following the Acquisition Merger, the historical financial statements
      of
      Rexahn became the historical financial statements of the Company.





Merger
      of
      Subsidiary





On
      September 29, 2005, the Company's wholly owned subsidiary, Rexahn, was merged
      with and into the Company and Rexahn's separate existence was
      terminated.






**2.**
            **Summary
                of Significant Accounting
                Policies**





The
      accounting policies of the Company are in accordance with accounting principles
      generally accepted in the United States of America and their basis of
      application is consistent with that of the previous year.





Recent
      Accounting Pronouncements





In
      December 2004, the Financial Accounting Standards Board ("FASB") issued
      Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
      "Share Based Payment" ("SFAS No. 123R"). SFAS No. 123R requires the Company
      to
      measure the cost of employee services received in exchange for an award of
      equity instruments based on the grant date fair value of the award. The cost
      of
      the employee services is recognized as compensation cost over the period that
      an
      employee provides service in exchange for the award. SFAS No. 123R is effective
      January 1, 2006 for the Company and was adopted using a modified prospective
      method during the quarter ended March 31, 2006. Note 4 provides disclosure
      on
      the effect of the adoption of SFAS No. 123R on net income and earnings per
      share.





5
 *Index*





**REXAHN
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


Notes
      to
      Financial Statements


Three
      Months Ended March 31, 2006 and 2005


(Unaudited)







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





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





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





**3.**
            **Common
                Stock**





Authorized


500,000,000shares of common stock, voting, par value $0.0001**March
                31,**
              **2006**
            
            December
                31,
              200546,415,632shares (2005 - 46,410,632) of common stock
            
            **$**
            **4,642**
            
            $
            4,641





6
 *Index*





**REXAHN
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


Notes
      to
      Financial Statements


Three
      Months Ended March 31, 2006 and 2005


(Unaudited)






**3.**
            **Common
                Stock**(cont'd)





Pursuant
      to the agreement and plan of merger as disclosed in Note 1, in the Acquisition
      Merger, (i) each share of the issued and outstanding common stock of Rexahn
      (other than dissenting shares) was converted into the right to receive five
      shares of Rexahn Pharmaceuticals common stock; and (ii) each issued, outstanding
      and unexercised option to purchase a share of Rexahn common stock was converted
      into an option to purchase five shares of Rexahn Pharmaceuticals common stock.
      In the Acquisition Merger, 289,780,000 CRS pre-reverse stock split shares were
      converted into 2,897,802 post-reverse stock split Rexahn Pharmaceuticals shares,
      and an additional 500,000 post-reverse stock split Rexahn Pharmaceuticals shares
      were issued to a former executive of CRS.





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





**4.**
            **Stock-Based
                Compensation**





On
      August
      5, 2003, the Company established a stock option plan. Under the plan, the
      Company grants stock options to key employees, directors and consultants of
      the
      Company. For all grants prior to September 12, 2005 and grants to employees
      of
      the Company after September 12, 2005, the vesting period is 30% on the first
      anniversary of the grant date, an additional 30% on the second anniversary
      and
      the remaining 40% on the third anniversary. For grants to non employee directors
      and consultants of the Company after September 12, 2005, the vesting period
      is
      100% on the first anniversary of the grant date, subject to the fulfillment
      of
      certain conditions in the individual stock option grant agreements, or 100%
      upon
      the occurrence of certain events specified in the individual stock option grant
      agreements, subject to the fulfillment of certain conditions in the individual
      stock option grant agreements. Options authorized for issuance under the plan
      total 6,992,500 and as of March 31, 2006, 1,182,500 options are available for
      issuance.





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





**Accounting
      for Employee Awards**




Effective
        January 1, 2006, the plan is accounted for in accordance with the recognition
        and measurement provisions of SFAS No. 123R, which replaces SFAS No. 123,
        "Accounting for Stock-Based Compensation", and supersedes Accounting Principles
        Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees",
        and
        related interpretations. SFAS No. 123R requires compensation costs related
        to
        share-based payment transactions, including employee stock options, to be
        recognized in the financial statements. In addition, the Company adheres
        to the
        guidance set forth in Securities and Exchange Commission ("SEC") Staff
        Accounting Bulletin ("SAB") No. 107, which provides the SEC staff's views
        regarding the interaction between SFAS No. 123R and certain SEC rules and
        regulations and provides interpretations with respect to the valuation of
        share-based payments for public companies.


7
 *Index*





**REXAHN
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


Notes
      to
      Financial Statements


Three
      Months Ended March 31, 2006 and 2005


(Unaudited)






**4.**
            **Stock-Based
                Compensation**(cont'd)





Prior
      to
      January 1, 2006, the Company accounted for similar employee transactions in
      accordance with APB No. 25 which employed the intrinsic value method of
      measuring compensation cost. Accordingly, compensation expense was not
      recognized for employee fixed stock options if the exercise price of the option
      equaled or exceeded the fair value of the underlying stock at the grant
      date.





While
      SFAS No. 123, for employee options, encouraged recognition of the fair value
      of
      all stock-based awards on the date of grant as expense over the vesting period,
      companies were permitted to continue to apply the intrinsic value-based method
      of accounting prescribed by APB No. 25 and disclose certain pro forma amounts
      as
      if the fair value approach of SFAS No. 123 had been applied. In December 2002,
      SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
      Disclosure, an amendment of SFAS No. 123", was issued, which, in addition to
      providing alternative methods of transition for a voluntary change to the fair
      value method of accounting for stock-based employee compensation, required
      more
      prominent pro-forma disclosures in both the annual and interim financial
      statements. The Company complied with these disclosure requirements for all
      applicable periods prior to January 1, 2006.





In
      adopting SFAS No. 123R, the Company applied the modified prospective approach
      to
      transition. Under the modified prospective approach, the provisions of SFAS
      No.
      123R are to be applied to new employee awards and to employee awards modified,
      repurchased, or cancelled after the required effective date. Additionally,
      compensation cost for the portion of employee awards for which the requisite
      service has not been rendered that are outstanding as of the required effective
      date will be recognized as the requisite service is rendered on or after the
      required effective date. The compensation cost for that portion of employee
      awards will be based on the grant-date fair value of those awards as calculated
      for either recognition or pro-forma disclosures under SFAS No. 123.




As
        a
        result of the adoption of SFAS No. 123R, the Company's results of operations
        for
        the three months ended March 31, 2006 include share-based employee compensation
        expense totaling approximately $151,482. Such amounts have been included
        in the
        Statements of Operations in stock option compensation expense. No income
        tax
        benefit has been recognized in the Statements of Operations for share-based
        compensation arrangements as the Company has provided for 100% valuation
        allowance on net deferred tax assets. No stock option compensation expense
        was
        recorded under APB No. 25 in the Statements of Operations for the three months
        ended March 31, 2005.
 
 Employee
        stock option compensation expense in 2006 is the estimated fair value of
        options
        granted amortized on a straight-line basis over the requisite service period
        for
        the entire portion of the award. The Company has not adjusted the expense
        by
        estimated forfeitures, as required by SFAS No. 123R for employee options,
        since
        the forfeiture rate based upon historical data was determined to be
        immaterial.




8
 *Index*





**REXAHN
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


Notes
      to
      Financial Statements


Three
      Months Ended March 31, 2006 and 2005


(Unaudited)






**4.**
            **Stock-Based
                Compensation**(cont'd)





Accounting
      for Non-employee Awards:





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





Stock
      compensation expense related to non-employee options was $184,613 and $73,963
      for the three month periods ended March 31, 2006 and 2005, respectively. Such
      amounts have been included in the Statements of Operations in stock option
      compensation expense.





The
      weighted average estimated fair value of stock options granted in the three
      months ended March 31, 2006 and 2005 was $0 and $0.61, respectively. The fair
      value of options at the date of grant was estimated using the Black-Scholes
      option pricing model. During 2006, the Company took into consideration guidance
      under SFAS No. 123R and SAB No. 107 when reviewing and updating assumptions.
      The
      expected volatility is based upon historical volatility of the Company's stock
      and other contributing factors. The expected term is based upon observation
      of
      actual time elapsed between the date of grant and exercise of options for all
      employees. Previously, such assumptions were determined based on historical
      data.





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




Three
                  Months Ended
                March
                  31,**2006**
              
              2005Black-Scholes
                  Weighted Average Assumptions:Expected
                  dividend yield
              
              
              **0**
              
              
              0Expected
                  volatility
              
              
              **100%**
              
              
              100%Risk
                  free interest rate
              
              
              **4.82%**
              
              
              4.46%Expected
                  term (in years)
              
              
              **4.75
                  years**
              
              
              5
                  years
 
 Pro
        Forma
        Information under SFAS No. 123 for Periods Prior to Adoption of SFAS No.
        123R:
  The
        following table illustrates the pro forma effect on net loss and loss per
        share
        as if the fair value recognition provisions of SFAS No. 123 had been applied
        to
        all outstanding and unvested awards in the prior year comparable period.


9
 *Index*





**REXAHN
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


Notes
      to
      Financial Statements


Three
      Months Ended March 31, 2006 and 2005


(Unaudited)







**4.**
            **Stock-Based
                Compensation**(cont'd)





Three
                Months Ended
              March
                31,
              2005Net
                loss, as reported
            
            $
            (806,351
            )Add:
                Employee stock option compensation expense included in reported net
                loss
            
            
            —Deduct:
                Employee stock option compensation expense determined under fair
                value-based method for all employee awards (no tax effect)
            
            
            (132,828
            )Pro
                forma net loss
            
            $
            (939,179
            )Net
                loss per share:
            
            
            __________________Basic
                and diluted-as reported
            
            $
            (0.02
            )Basic
                and diluted-pro forma
            
            $
            (0.02
            )





The
      Company did not grant any options under the plan during the three months ended
      March 31, 2006.




The
      following table represents the Company's stock
      options granted, exercised, and forfeited during the three months ended March
      31, 2006.




10
 *Index*





**REXAHN
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


Notes
      to
      Financial Statements


Three
      Months Ended March 31, 2006 and 2005


(Unaudited)






**4.**
            **Stock-Based
                Compensation**(cont'd)





**Shares**
              **Subject**
              **to
                Options**
            
            **Weighted
                Avg.**
              **Option**
              **Prices**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Term**
            
            **Aggregated**
              **Intrinsic**
              **Value**Outstanding
                at January 1, 2006
            
            
            5,770,000
            
            $
            0.84
            
            
            **-**
            
            
            **-**Granted
            
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            (5,000
            )
            $
            0.24
            
            
            -
            
            
            -Cancelled
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-****Outstanding
                at March 31, 2006**
            
            
            **5,765,000**
            
            **$**
            **0.84**
            
            
            **8.5
                years**
            
            $
            **4,093,150****Exercisable
                at March 31, 2006**
            
            
            **2,070,125**
            
            **$**
            **0.65**
            
            
            **7.9
                years**
            
            **$**
            **1,863,113**





A
      total
      of 5,000 and no options were exercised the first quarter of 2006 and 2005,
      respectively. The intrinsic value of the options exercised was $9,550 for the
      period ended March 31, 2006 and 2005.





As
      of
      March 31, 2006, there was $2,984,194 of total unrecognized compensation cost,
      net of estimated forfeitures, related to all unvested stock options, which
      is
      expected to be recognized over a weighted average period of
      approximately two years.





11
 *Index*





**REXAHN
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


Notes
      to
      Financial Statements


Three
      Months Ended March 31, 2006 and 2005


(Unaudited)






**5.**
            **Income
                Taxes**





As
      of
      March 31, 2006 and 2005, the Company had $14,774,728 and $7,879,793,
      respectively, of federal and state net operating loss carryforwards available
      to
      offset future taxable income; such carryforwards expire in various years through
      2024.





12
 *Index*





**REXAHN
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


Notes
      to
      Financial Statements


Three
      Months Ended March 31, 2006 and 2005


(Unaudited)







**6.**
            **Commitments
                and Contingencies**





a)
            On
                January 3, 2006, the Company contracted with Formatech to perform
                RX-0201
                experiments in an effort to develop a more concentrated dosage form.
                The
                cost of the project is $40,000, of which $20,000 was paid in the
                three
                months ended March 31, 2006. The remaining $20,000 will be paid upon
                delivery of the formal report, expected in 2006. In addition, on
                January
                6, 2006, the Company entered into a drug packaging agreement with
                Formatech for Phase II clinical trials of RX-0201. In accordance
                with the
                agreement, the cost of the project is $128,250, of which $51,300
                was paid
                during the three months ended March 31, 2006. The remainder will
                be paid
                during 2006.





b)
            On
                January 6, 2006, the Company contracted with Amarex, LLC to conduct
                Phase
                II clinical studies. In accordance with the agreement, the estimated
                contract duration is 24 months for a total cost of $596,244. The
                service
                costs are payable in 24 monthly payments of $18,633 plus an initiation
                fee
                of $149,061 due upon signing. The Company paid $174,027 towards the
                cost
                of the study in the three months ended March 31, 2006 and a monthly
                payment of $18,633 was included in accounts payable and accrued expenses
                at March 31, 2006.





c)
            On
                March 1, 2006, the Company entered into a research program with Ewha
                Womans University. The effective period of the agreement is from
                March 1,
                2006 to February 28, 2007. In accordance with the agreement, the
                cost of
                the research program is $40,000 and is payable upon full execution
                of the
                agreement. The Company included $40,000 in accounts payable and accrued
                expenses at March 31, 2006.





d)
            The
                Company entered into numerous consulting agreements in connection
                with the
                RX-0201 drug discovery and development program as well as strategic
                development and other areas of corporate activity. The remaining
                terms of
                the agreements range from 6 months to 5 years and result in a minimum
                commitment of $58,000.





13
 *Index*





**REXAHN
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


Notes
      to
      Financial Statements


Three
      Months Ended March 31, 2006 and 2005


(Unaudited)







**7.**
            **Subsequent
                Events**





On
      April
      19, 2006, the Company executed definitive agreements with Future Systems, Inc.
      ("FSI"), a Korean stock exchange (KOSDAQ) listed information technology company
      based in Seoul, Korea. Pursuant to the agreements, the Company will transfer
      to
      FSI exclusive rights and a non-exclusive license to develop, manufacture, and
      sell products based on Rexahn’s RX-0201, RX-0047 and RX-10100 drug candidates in
      certain territories for approximately $35.8 million, and simultaneously, FSI
      will issue and sell 4,326,854 shares of its common stock to the Company,
      representing approximately 28% of FSI’s outstanding shares, after giving effect
      to the subscription. The investment, of approximately $35.8 million, would
      make
      the Company the largest single stockholder of FSI. In addition, the Company
      entered into an agreement with FSI and Core F.G. Co., Ltd., the general partner
      of Triplewin Corporate Restructuring Partnership, the current majority
      shareholder of FSI, with respect to the management of FSI in connection with
      redirecting FSI’s business focus to the biopharmaceutical industry. Completion
      of the transactions is subject to customary closing conditions, including
      approval by FSI shareholders, and the transactions are expected to close during
      the second quarter of 2006.





**8.**
            **Comparative
                Information**





Certain
      amounts for fiscal 2005 have been reclassified to conform with the current
      year's financial statement presentation.





14
 *Index*




**Item2.  MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**





**OVERVIEW**





Our
      company resulted from the merger of Corporate Road Show.Com Inc., a New York
      corporation incorporated in November 1999 ("CPRD"), and Rexahn, Corp, a Maryland
      corporation, immediately after giving effect to our reincorporation as a
      Delaware corporation under the name "Rexahn Pharmaceuticals, Inc." In connection
      with that transaction, a wholly owned subsidiary of ours merged with and into
      Rexahn, Corp, with Rexahn, Corp remaining as the surviving corporation and
      a
      wholly owned subsidiary of ours. In exchange for their shares of capital stock
      in Rexahn, Corp, the former stockholders of Rexahn, Corp received shares of
      common stock representing approximately 91.8% of our outstanding equity after
      giving effect to the transaction. Further, upon the effective time of the
      merger, our historic business was abandoned and the business plan of Rexahn,
      Corp was adopted. The transaction was therefore accounted for as a reverse
      acquisition with Rexahn, Corp as the accounting acquiring party and CPRD as
      the
      acquired party. In September 2005, Rexahn, Corp was merged with and into our
      company.





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





**RECENT
      DEVELOPMENTS**





On
      April
      19, 2006, we executed definitive agreements with Future Systems, Inc., or FSI,
      a
      Korean stock exchange (KOSDAQ) listed information technology company based
      in
      Seoul, Korea, pursuant to which we will transfer to FSI exclusive rights and
      a
      non-exclusive license to develop, manufacture, and sell products based on our
      RX-0201, RX-0047 and RX-10100 drug candidates in certain territories for
      approximately $35.8 million, and simultaneously, FSI will issue and sell
      4,326,854 shares of its common stock to us, representing approximately 28%
      of
      FSI’s outstanding shares, after giving effect to the subscription. The
      investment, of approximately $35.8 million, would make us the largest single
      stockholder of FSI. In addition, we entered into an agreement with FSI and
      Core
      F.G. Co., Ltd., the general partner of Triplewin Corporate Restructuring
      Partnership, the current majority shareholder of FSI, with respect to the
      management of FSI in connection with redirecting FSI’s business focus to the
      biopharmaceutical industry. Completion of the transactions is subject to
      customary closing conditions, including approval by FSI shareholders, and the
      transactions are expected to close during the second quarter of
      2006.





The
      principal agreements include a share subscription agreement, an intellectual
      property assignment and license agreement and a management agreement.





This
      acquisition will allow us to exploit an additional source of capital, exploit
      additional market opportunities by taking advantage of skilled labor,
      manufacturing, and market extension, extend the reach of our intangible assets
      and reduce risk through diversification.





15
 *Index*





FSI
      is
      expected to redirect its business focus to the biopharmaceutical industry and
      will be organized into the following three major departments:





·
            Generic
                drug development;


·
            Nano
                DDS drug development; and


·
            Marketing
                Rexahn’s cancer and neuro drug candidates in
                Asia.





In
      the
      future, we believe this acquisition will allow us to collaborate with FSI on
      new
      drug developments, merge or acquire a pharmaceutical company in Korea, license
      late stage or marketed products, establish business development in Asia
      ( *e.g.* ,
      manufacturing, licensing, sales, marketing, strategic partnering, etc.) and
      obtain financing through public offerings in Korea.





**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





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





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


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


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


·
            demand
                for and market acceptance of our drug
                candidates;


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


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


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





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





**CRITICAL
      ACCOUNTING POLICIES**





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





16
 *Index*





**Use
      of Estimates**





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





**Stock-Based
      Compensation**





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





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





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





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





**RECENTLY
      ISSUED ACCOUNTING STANDARDS**





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





17
 *Index*





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





**RESULTS
      OF OPERATIONS**





**Comparison
      of Three Months Ended March 31, 2005 and 2006:**





***Total
      Revenues***





For
      the
      three months ended March 31, 2006, we recorded revenue of $129,942, including
      $18,750 from the recognition of deferred revenue from a $1,500,000 contribution
      made in 2003 to us under a collaborative research agreement with Rexgene Biotech
      Co., Ltd., a minority shareholder. We recorded $111,192 of interest and other
      income from the investment of our cash and cash equivalents and other short-term
      investments for the three months ended March 31, 2006, compared to $4,809 for
      the same period in 2005. The increase of $106,383 in total revenues, or 452%,
      was primarily due to an increase in interest income in the three months ended
      March 31, 2006, compared to the same period in 2005 as a result of higher cash
      and cash equivalent balances during the 2006 period.





***General
      and Administrative Expenses***





General
      and administrative expenses consist primarily of salaries and related 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 $254,089 ,
      or 81% ,
      from
      $312,880 for the three months ended March 31, 2005 to $566,969 ,
      for the
      three months ended March 31, 2006. The increase was due primarily to
      professional fees and expenses incurred in connection with our being a public
      company following our reverse merger transaction completed on May 13, 2005,
      including legal and accounting fees and expenses.





18
 *Index*





***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 $1,422,638, or 376%, from $378,497 for the
      three months ended March 31, 2005 to $1,801,135 for the three months ended
      March
      31, 2006. The increase was due primarily to the fact that the clinical trials
      of
      RX-0201, one of our drug candidates, are continuing and we have taken
      preliminary steps to prepare other drug candidates for clinical trials. We
      expect that research and development expenses will continue to increase as
      our
      other drug candidates move into the clinical trials phases of
      development.





***Stock
      Option Compensation Expenses***





In
      2003
      our board of directors adopted and our shareholders approved the Rexahn Stock
      Option Plan. Under the plan, we incurred compensation expenses of $336,094
      for
      the three months ended March 31, 2006, compared to compensation expenses of
      $73,963 for options issued to employees and non-employees for the three months
      ended March 31, 2005.





***Patent
      Fees***





Our
      patent fees decreased $9,181 ,
      or 32%,
      from $28,548 for the three months ended March 31, 2005 to $19,403 for the
      three months ended March 31, 2006. The decrease was due primarily to a decrease
      in the number of patent filings made during the three months ended March 31,
      2006 compared to the three months ended March 31, 2005.





***Interest
      Expense***





Interest
      expense increased $40,983, or 211% from $19,469 for the three months ended
      March
      31, 2005 to $60,452 for the three months ended March 31, 2006. The increase
      was
      attributable to the interest on the convertible notes issued February 2005
      being
      reflected for a full period compared to a partial period in 2005.





***Depreciation
      and Amortization***





Depreciation
      and amortization expenses increased $4,560, or 28%, from $16,517 for the three
      months ended March 31, 2005 to $21,077 for the three months ended March 31,
      2006. The increase was due primarily to a move to a new facility in
      July 2004 and the related purchase of new laboratory
      equipment.





***Net
      Loss***





As
      a
      result of the above, the net loss for the three months ended March 31, 2006
      was
      $2,675,188, or $0.06 per share, compared to a net loss of $806,351 or $0.02
      per
      share, for the three months ended March 31, 2005.





19
 *Index*





**Research
      and Development Projects**





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





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





*RX-0201*





RX-0201
      is currently our leading drug candidate and has been in a Phase I clinical
      trial
      at Georgetown University's Lombardi Cancer Center since September 2004 and
      the
      University of Alabama at Birmingham since August 2005. The costs incurred for
      the clinical trial to date have been approximately $800,000. As the main purpose
      of this clinical trial is to establish the safety of RX-0201, the parameters
      that determine the completion of this project are a direct function of the
      safety profile of this compound in humans. As this is the first time that
      RX-0201 has been administered to humans, the safety profile in humans is unknown
      and therefore, the number of doses required to determine the dosage at which
      the
      FDA safety endpoints are met is an estimate. If more doses are required than
      estimated, completion of the Phase I clinical trials may be delayed. Therefore,
      the costs, timing and efforts necessary to complete this program also are
      estimates. We currently estimate that the completion of the Phase I clinical
      trial will require approximately $250,000 and anticipate its completion in
      the
      third quarter of 2006.





*RX-0047
      and RX-5902*





RX-0047
      and RX-5902 are all in a pre-clinical stage of development and the next
      scheduled program for each compound is a pre-clinical toxicology study required
      prior to submission of an Investigational New Drug ("IND") application to the
      FDA. To date, the costs incurred for development of these compounds to date
      have
      been approximately $750,000 for RX-0047, and $250,000 for RX-5902. The estimated
      cost to complete pre-clinical toxicology and Phase I clinical trials is
      estimated to be approximately $1,500,000 per compound for a total of $3,000,000.
      These compounds may be entered into these Phase I clinical trials in late 2006
      or early 2007.





20
 *Index*





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





*RX-10100*





RX-10100
      is in early pre-IND stages of development and the next scheduled event is the
      synthesis and testing of novel formulations for pre-clinical and clinical
      evaluations. We currently estimate that these studies will require approximately
      $300,000 and $450,000, respectively. We are preparing to initiate a Phase I/II
      clinical trial of RX-10100 during 2006.





**LIQUIDITY
      AND CAPITAL RESOURCES**





Cash
      used
      in operating activities was $2,226,783 for the three months ended March 31,
      2006
      compared to cash used in operating activities of $710,009 for the same period
      ended March 31, 2005. The operating cash flows during the three months ended
      March 31, 2006 reflect our loss from operations of $2,675,188, offset by
      non-cash charges of $338,421 and a net increase in cash components of working
      capital of $109,984. Non-cash charges consist of depreciation and amortization
      of $21,077, stock option compensation expense of $336,904 and deferred revenue
      of $18,750. The increase in working capital primarily consists of a $115,084
      increase in accounts payable and accrued expenses.





There
      was
      no cash provided by or used in investing activities during the three months
      ended March 31, 2005. Cash investing activities of $1,097,497 during the three
      months ended March 31, 2006 reflects short-term investments of $1,097,497.
      Cash
      provided by financing activities of $3,803,125 during the three months ended
      March 31, 2005 consisted of proceeds from the issuance of long-term debt in
      financing transactions of $3,850,000, offset by principal payments on long-term
      debt of $46,875. Cash used in financing activities of $42,973 during the three
      months ended March 31, 2006 consisted of principal payments on long-term debt
      of
      $44,173, offset by proceeds from the issuance of common stock.





For
      the
      three months ended March 31, 2006, and the years ended December 31, 2005
      and 2004, we experienced net losses of $2,675,188, $6,349,540 and $3,723,442,
      respectively. Our accumulated deficit as of March 31, 2006, and
      December 31, 2005 and 2004 was $16,879,511, $14,204,323 and $7,854,783,
      respectively.





We
      have
      financed our operations since inception primarily through equity and convertible
      debt financings. During the three months ended March 31, 2006, we had a net
      decrease in cash and cash equivalents of $1,172,259. This decrease primarily
      resulted from net losses of $2,675,188. Total cash resources as of March 31,
      2006 were $507,182 compared to $4,109,095 as of March 31, 2005.





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





21
 *Index*





**CONTRACTUAL
      OBLIGATIONS**





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





On
      August
      17, 2004, we entered into an agreement with Formatech, Inc. to monitor and
      perform stability studies on our drug candidate, RX-0201. The total cost of
      these services is $46,700. For the three months ended March 31, 2006 and the
      years ended December 31, 2005 and 2004, we paid $0, $10,400 and $22,900,
      respectively, towards the cost of these studies. The remainder consists of
      a
      $5,200 payment due during 2006 and $8,200 due during 2007.





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





Minimum
      future rental payments under this lease are as follows:





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








On
      August
      1, 2005, we signed a one year contract with the University of Massachusetts
      Medical School ("UMASS") to test proprietary drugs in preclinical behavioral
      assays of anxiety and cognition. We agreed to provide UMASS with a grant of
      $76,666, which includes the full direct and indirect costs of the preclinical
      study, payable in four equal quarterly installments of $19,167. For the year
      ended December 31, 2005, we made two quarterly payments totaling $38,334 and
      an
      additional $19,167 payment during the quarter ended March 31, 2006. The
      remainder is due in 2006.





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





22
 *Index*





On
      October 6, 2005, we entered into an agreement with Avecia Biotechnology Inc.
      ("Avecia"). Avecia will manufacture and supply us with RX-0201 and related
      drug
      services. The total cost of the project is $1,749,443. For the three months
      ended March 31, 2006 and the years ended December 31, 2005, we paid $1,228,043
      and $521,400, respectively, towards the cost of these studies. We included
      $45,000 in accrued expenses at March 31, 2006.





On
      January 3, 2006, we contracted with Formatech to perform RX-0201 experiments
      in
      an effort to develop a more concentrated dosage form. The cost of the project
      is
      $40,000, of which $20,000 was paid in the three months ended March 31, 2006.
      The
      remaining $20,000 will be paid upon delivery of the formal report, expected
      in
      2006. In addition, on January 6, 2006, we entered into a drug packaging
      agreement with Formatech for Phase II clinical trials of RX-0201. In accordance
      with the agreement, the cost of the project is $128,250, of which $51,300 was
      paid during the three months ended March 31, 2006. The remainder will be paid
      during 2006.





On
      January 6, 2006, we contracted with Amarex, LLC to conduct Phase II clinical
      studies. In accordance with the agreement, the estimated contract duration is 24
      months for a total cost of $596,244. The service costs are payable in 24 monthly
      payments of $18,633 plus an initiation fee of $149,061 due upon signing. We
      paid
      $174,027 towards the cost of the study in the three months ended March 31,
      2006
      and a monthly payment of $18,633 was included in accrued expenses at March
      31,
      2006.





On
      March
      1, 2006, we entered into a research program with Ewha Womans University. The
      effective period of the agreement is from March 1, 2006 to February 28, 2007.
      In
      accordance with the agreement, the cost of the research program is $40,000
      and
      is payable upon full execution of the agreement. We included $40,000 in accrued
      expenses at March 31, 2006.





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





**CURRENT
      AND FUTURE FINANCING NEEDS**





We
      have
      incurred negative cash flow from operations since we started our business.
      We
      have spent, and expect to continue to spend, substantial amounts in connection
      with implementing our business strategy, including our planned product
      development efforts, our clinical trials, and our research and discovery
      efforts. Based on our current plans and our capital resources (including the
      proceeds of our 2005 financings), we believe that our cash and cash equivalents
      will be sufficient to enable us to meet our minimum planned operating needs
      for
      at least the next 12 months, which would entail focusing our resources on
      Phase II clinical trials of RX-0201 and the pre-clinical studies and Phase
      I clinical trials for RX-10100. Over the next 12 months we expect to spend
      a
      minimum of approximately $3 million on clinical development for
      Phase I and Phase II clinical trials of RX-0201 (including our
      commitments described under "Contractual Commitments" of this Item 2), $2.5
      million on general corporate expenses, and $250,000 on facilities rent. We
      may
      seek additional financing to implement and fund other drug candidate
      development, clinical trial and research and development efforts to the maximum
      extent of our operating plan, including pre-clinical studies and Phase I
      clinical trials for RX-0047 and in-vivo animal and pre-clinical studies and
      Phase I clinical trials for RX-5209, RX-10100 and other new product
      candidates, as well as other research and development projects, which together
      with the minimum operating plan for the next 12 months, could aggregate
      $10 million through the first quarter of 2007.





23
 *Index*





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





·
            the
                progress of our product development
                activities;





·
            the
                number and scope of our product development
                programs;





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





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





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





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





·
            the
                costs and timing of regulatory
                approvals.





**IMPACT
      OF INFLATION**





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





**OFF-BALANCE
      SHEET ARRANGEMENTS**





We
      do not
      have any off-balance sheet arrangements.





**CERTAIN
      BUSINESS RISKS**





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





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





However,
      changes may occur that would consume our existing capital at a faster rate
      than
      projected, including but not limited to, the progress of our research and
      development efforts, the cost and timing of regulatory approvals and the costs
      of protecting our intellectual property rights. We may seek additional financing
      to implement and fund other drug candidate development, clinical trial and
      research and development efforts, including Phase I clinical trials for RX-0047
      and other new drug candidates, as well as other research and development
      projects, which together with the current operating plan for the next year,
      could aggregate $20 million through the second quarter of 2007.





24
 *Index*





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





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





We
      have
      generated no revenues to date from product sales. Our accumulated deficit as
      of
      March 31, 2006 and December 31, 2005 was $16,879,511 and $14,204,323,
      respectively. For the quarter ended March 31, 2006 and the year ended December
      31, 2005, we had net losses of $2,675,188 and $6,349,540, respectively,
      primarily as a result of expenses incurred through a combination of research
      and
      development activities related to the various technologies under our control
      and
      expenses supporting those activities. Even if we succeed in developing and
      commercializing one or more of our drug candidates, we expect to incur
      substantial losses for the foreseeable future and may never become profitable.
      We also expect to continue to incur significant operating and capital
      expenditures and anticipate that our expenses will increase substantially in
      the
      foreseeable future, based on the following considerations:





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





·
            efforts
                to seek regulatory approvals for our drug
                candidates;





·
            implementing
                additional internal systems and
                infrastructure;





·
            licensing
                in additional technologies to develop;
                and





·
            hiring
                additional personnel.





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





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





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





·
            conducting
                pre-clinical and clinical trials;





·
            participating
                in regulatory approval processes;





25
 *Index*





·
            formulating
                and manufacturing products; and





·
            conducting
                sales and marketing activities.





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





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





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





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





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





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





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





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





26
 *Index*





·
            unforeseen
                safety issues;





·
            determination
                of dosing issues;





·
            lack
                of effectiveness during clinical
                trials;





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





·
            slower
                than expected rates of patient
                recruitment;





·
            inability
                to monitor patients adequately during or after treatment;





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





·
            lack
                of sufficient funding to finance the clinical
                trials.





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





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





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





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





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





·
            awareness
                of the drug's availability and
                benefits;





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





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





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





27
 *Index*





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





·
            the
                price at which we sell our
                products.





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





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





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





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





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





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





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





28
 *Index*





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





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





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





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





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





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




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





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





·
            developing
                drugs;





·
            undertaking
                pre-clinical testing and human clinical trials;





29
 *Index*





·
            obtaining
                FDA and other regulatory approvals of
                drugs;





·
            formulating
                and manufacturing drugs; and





·
            launching,
                marketing and selling drugs.





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





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





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





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





·
            if
                and when patents will issue;





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





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





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





30
 *Index*





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





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





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





·
            redesign
                our products or processes to avoid infringement;





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





·
            pay
                damages; or





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





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





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





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





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





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





31
 *Index*





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





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





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





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





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





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





To
      date,
      we have generated no revenues from product sales and only minimal revenues
      from
      a research agreement with a minority shareholder, and interest on bank account
      balances and short-term investments. Our accumulated deficit as of March 31,
      2006 and December 31, 2005 was $16,879,511 and $14,204,323, respectively. For
      the quarter ended March 31, 2006 and the year ended December 31, 2005, we had
      net losses of $2,675,188 and $6,349,540, respectively, primarily as a result
      of
      expenses incurred through a combination of research and development activities
      related to the various technologies under our control and expenses supporting
      those activities. Until we receive approval from the FDA and other regulatory
      authorities for our drug candidates, we cannot sell our drugs and will not
      have
      product revenues.





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





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





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





·
            developments
                concerning intellectual property rights and regulatory
                approvals;





32
 *Index*





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





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





·
            developments
                in the biotechnology industry.





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





Some
      or
      all of the "restricted" shares of our common stock issued in the merger of
      CPRD
      and Rexahn, Corp or held by other stockholders may be offered from time to
      time
      in the open market pursuant to Rule 144, and these sales may have a depressive
      effect on the market for our common stock. In general, a person who has held
      restricted shares for a period of one year may, upon filing with the SEC a
      notification on Form 144, sell into the market common stock in an amount equal
      to 1 percent of the outstanding shares (approximately 464,416 shares) during
      a
      three month period. Any of the restricted shares may be freely sold by a
      non-affiliate after they have been held two years.





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





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





These
      factors may result in lower prices for our common stock than might otherwise
      be
      obtained and could also result in a larger spread between the bid and asked
      prices for our common stock. Currently, there are approximately 110 holders
      of
      record of our common stock.





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





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





33
 *Index*





**Item3.  CONTROLS
      AND
      PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





As
      of
      March 31, 2006, our management carried out an evaluation, under the supervision
      of our Chief Executive Officer and Chief Financial Officer of the effectiveness
      of the design and operation of our system of disclosure controls and procedures
      pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act
      of
      1934, as amended, or the Exchange Act. Based upon that evaluation, the Chief
      Executive Officer and the Chief Financial Officer have concluded that our
      disclosure controls and procedures were effective, as of the date of this
      evaluation, for the purposes of recording, processing, summarizing and timely
      reporting material information required to be disclosed in reports filed by
      us
      under the Exchange Act.





There
      were no changes in our internal control over financial reporting during the
      quarter ended March 31, 2006 that have materially affected, or are reasonably
      likely to affect, our financial reporting.





34
 *Index*





**PARTII
      - OTHER INFORMATION**





**Item1.  LEGAL
      PROCEEDINGS**





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





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





None.





**Item3.  DEFAULTS
      UPON SENIOR
      SECURITIES**





None.





**Item4.  SUBMISSION
      OF MATTERS TO A VOTE OF
      SECURITY HOLDERS**





None.





**Item5.  OTHER
      INFORMATION**





None.





35
 *Index*





**Item6.  EXHIBITS**





Exhibit
              Number
            Description10.1
            Extension
                of Stock Option Agreements dated May 2, 2006 by and between the Company
                and John Holaday, filed as Exhibit 10.1 to the Company's Current
                Report on
                Form 8-K filed on May 5, 2006, is incorporated by
                reference.31.1
            Certification
                of Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(e)
                or Rule 15d-15(e)31.2
            Certification
                of Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(e)
                or Rule 15d-15(e)32.1
            Certification
                of Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C.
                Section 135032.2
            Certification
                of Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
                Section 1350





36
 *Index*








**SIGNATURES**





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





**REXAHN
                PHARMACEUTICALS, INC.**/s/
                Ted T.H. JeongName:
                Ted T. H. JeongTitle:
                Chief Financial
              Officer
                and SecretaryDate:
                May 15, 2006





37
 *Index*





**EXHIBIT
      INDEX**








Exhibit
              Number
            Description10.1
            Extension
                of Stock Option Agreements dated May 2, 2006 by and between the Company
                and John Holaday, filed as Exhibit 10.1 to the Company's Current
                Report on
                Form 8-K filed on May 5, 2006, is incorporated by
                reference.31.1
            Certification
                of Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(e)
                or Rule 15d-15(e)31.2
            Certification
                of Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(e)
                or Rule 15d-15(e)32.1
            Certification
                of Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C.
                Section 135032.2
            Certification
                of Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
                Section 1350