UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION




Washington,
D.C. 20549





FORM
10-Q




QUARTERLY
REPORT




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




For
the quarterly period ended March 31, 2009





Rexahn
Pharmaceuticals, Inc.


(Exact
name of registrant as specified in its charter)





Delaware
                
                11-3516358(State
      or other jurisdiction of incorporation or organization)
                
                (I.R.S.
      Employer Identification Number)9620
      Medical Center Drive
                  Rockville,
      Maryland 20850(Address
      of principal executive offices, including zip code)Telephone:
      (240) 268-5300(Registrant’s
      telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.


Yes þ  No






Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈ No  ̈





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


Large
      Accelerated Filer o
              Accelerated
      Filer þNon-Accelerated
      Filer o    (Do
      not check if a smaller reporting company)
              Smaller
      reporting company o





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


Yes o No þ





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 56,025,649  shares of common
stock outstanding as of May 11, 2009.







1




REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


TABLE
OF CONTENTS





PagePART
      I
                FINANCIAL
      INFORMATIONItem
      1
                Financial
      Statements1)
                Condensed Balance Sheets at March 31, 2009 (unaudited) and
      December 31, 2008
                32)
                Condensed Statements of Operations for the three months ended
      March 31, 2009 and 2008 (unaudited) and Cumulative from March 19,
      2001 (inception) to March 31, 2009 (unaudited)
                43)
                Condensed Statements of Cash Flows for the three months ended
      March 31, 2009 and 2008 (unaudited) and Cumulative from March 19, 2001
      (inception) to March 31, 2009 (unaudited)
                54)
                Notes to unaudited condensed financial statements
      (unaudited)
                6Item
      2
                Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                21Item
      3
                Quantitative and Qualitative Disclosures About Market
      Risk
                30Item
      4
                Controls and Procedures
                30PART
      II
                OTHER
      INFORMATIONItem
      1
                Legal Proceedings
                32Item
      1A
                Risk Factors
                32Item
      2
                Unregistered Sales of Equity Securities and Use of
      Proceeds
                32Item
      3
                Defaults Upon Senior Securities
                32Item
      4
                Submission of Matters to a Vote of Security
      Holders
                32Item
      5
                Other Information
                32Item
      6
                Exhibits
                32SIGNATURES
                33




2
 Table of Contents




REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Condensed
Balance Sheets




March
      31,
                              2009
                            
                            
                            December
      31,
                              2008(Unaudited)ASSETSCurrent
      Assets:Cash
      and cash equivalents
                            
                            $
                            1,859,980
                            
                            
                            $
                            369,130Marketable
      securities (note 3)
                            
                            
                            994,870
                            
                            
                            
                            2,999,750Prepaid
      expenses and other (note 4)
                            
                            
                            182,579
                            
                            
                            
                            366,765Total
      Current Assets
                            
                            
                            3,037,429
                            
                            
                            
                            3,735,645Equipment, Net(note
      5)
                            
                            
                            85,508
                            
                            
                            
                            92,212Intangible Assets, Net(note 6)
                            
                            
                            281,680
                            
                            
                            
                            286,132Total
      Assets
                            
                            $
                            3,404,617
                            
                            
                            $
                            4,113,989LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      payable and accrued expenses (note 7)
                            
                            $
                            474,388
                            
                            
                            $
                            358,894Deferred Revenue(note
      8)
                            
                            
                            1,031,250
                            
                            
                            
                            1,050,000Total
      Liabilities
                            
                            
                            1,505,638
                            
                            
                            
                            1,408,894Commitment and Contingencies(note 12)Stockholders' Equity(note 9):Preferred
      stock, par value $0.0001, 100,000 authorized shares, none issued and
      outstanding
                            
                            
                            -
                            
                            
                            
                            -Common
      stock, par value $0.0001, 500,000,000 authorized shares, 56,039,854
      issued
                            
                            
                            5,604
                            
                            
                            
                            5,604Additional
      paid-in capital
                            
                            
                            33,319,770
                            
                            
                            
                            33,184,860Accumulated
      deficit during the development stage
                            
                            
                            (31,391,281
                            )
                            
                            
                            (29,906,479
                            )Treasury
      stock, 14,205 shares, at cost
                            
                            
                            (28,410
                            )
                            
                            
                            (28,410
                            )Accumulated
      other comprehensive (loss)
                            
                            
                            (6,704
                            )
                            
                            
                            (550,480
                            )Total
      Stockholders' Equity
                            
                            
                            1,898,979
                            
                            
                            
                            2,705,095Total
      Liabilities and Stockholders' Equity
                            
                            $
                            3,404,617
                            
                            
                            $
                            4,113,989


See the
notes accompanying the condensed financial statements





3
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Condensed Statements of
Operations


(Unaudited)





CumulativeFrom
      March 19,Three
      Months
                                                    
                                                    
                                                    2001Ended
      March 31,
                                                    
                                                    
                                                    (Inception)
      to2009
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    March
      31, 2009Revenues:Research
                                                    
                                                    $
                                                    18,750
                                                    
                                                    
                                                    $
                                                    18,750
                                                    
                                                    
                                                    $
                                                    468,750Expenses:General
      and administrative
                                                    
                                                    
                                                    723,107
                                                    
                                                    
                                                    
                                                    565,980
                                                    
                                                    
                                                    
                                                    15,587,546Research
      and development
                                                    
                                                    
                                                    721,926
                                                    
                                                    
                                                    
                                                    779,966
                                                    
                                                    
                                                    
                                                    13,953,770Patent
      fees
                                                    
                                                    
                                                    54,137
                                                    
                                                    
                                                    
                                                    43,665
                                                    
                                                    
                                                    
                                                    975,970Depreciation
      and amortization
                                                    
                                                    
                                                    11,991
                                                    
                                                    
                                                    
                                                    17,645
                                                    
                                                    
                                                    
                                                    515,195Total
      Expenses
                                                    
                                                    
                                                    1,511,161
                                                    
                                                    
                                                    
                                                    1,407,256
                                                    
                                                    
                                                    
                                                    31,032,481Loss
      from Operations
                                                    
                                                    
                                                    (1,492,411
                                                    )
                                                    
                                                    
                                                    (1,388,506
                                                    )
                                                    
                                                    
                                                    (30,563,731
                                                    )Other
      (Income) ExpenseRealized
      loss on marketable securities
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    22,365
                                                    
                                                    
                                                    
                                                    20,366Interest
      income
                                                    
                                                    
                                                    (7,609
                                                    )
                                                    
                                                    
                                                    (107,441
                                                    )
                                                    
                                                    
                                                    (1,118,963
                                                    )Interest
      expense
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    301,147Beneficial
      conversion feature
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    1,625,000Total
      Other (Income) Expense
                                                    
                                                    
                                                    (7,609
                                                    )
                                                    
                                                    
                                                    (85,076
                                                    )
                                                    
                                                    
                                                    827,550Net
      Loss Before Provision for Income Taxes
                                                    
                                                    
                                                    (1,484,802
                                                    )
                                                    
                                                    
                                                    (1,303,430
                                                    )
                                                    
                                                    
                                                    (31,391,281
                                                    )Provision
      for Income Taxes
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Net
      Loss
                                                    
                                                    $
                                                    (1,484,802
                                                    )
                                                    
                                                    $
                                                    (1,303,430
                                                    )
                                                    
                                                    $
                                                    (31,391,281
                                                    )Loss
      per share, basic and diluted
                                                    
                                                    $
                                                    (0.03
                                                    )
                                                    
                                                    $
                                                    (0.02
                                                    )Weighted
      average number of shares outstanding, basic and diluted
                                                    
                                                    
                                                    56,025,649
                                                    
                                                    
                                                    
                                                    55,342,242








See the
notes accompanying the condensed financial statements





4
 Table of Contents




REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Condensed
Statements of Cash Flows


(Unaudited)





Cumulative
      From March 19,Three
      Months
                                                  
                                                  
                                                  2001Ended
      March 31,
                                                  
                                                  
                                                  (Inception)
      to2009
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  March
      31, 2009Cash
      Flows from Operating Activities:Net
      loss
                                                  
                                                  $
                                                  (1,484,802
                                                  )
                                                  
                                                  $
                                                  (1,303,430
                                                  )
                                                  
                                                  $
                                                  (31,391,281
                                                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Beneficial
      conversion feature
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,625,000Compensatory
      stock
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  21,877Depreciation
      and amortization
                                                  
                                                  
                                                  11,991
                                                  
                                                  
                                                  
                                                  17,645
                                                  
                                                  
                                                  
                                                  515,576Stock
      option compensation expense
                                                  
                                                  
                                                  134,910
                                                  
                                                  
                                                  
                                                  165,825
                                                  
                                                  
                                                  
                                                  3,991,744Amortization
      of deferred revenue
                                                  
                                                  
                                                  (18,750
                                                  )
                                                  
                                                  
                                                  (18,750
                                                  )
                                                  
                                                  
                                                  (468,750
                                                  )Realized
      losses on marketable securities
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  22,365
                                                  
                                                  
                                                  
                                                  20,366Changes
      in assets and liabilities:Prepaid
      expenses and other
                                                  
                                                  
                                                  184,
      186
                                                  
                                                  
                                                  
                                                  (52,967
                                                  )
                                                  
                                                  
                                                  (182,579
                                                  )Accounts
      payable and accrued expenses
                                                  
                                                  
                                                  115,494
                                                  
                                                  
                                                  
                                                  (17,390
                                                  )
                                                  
                                                  
                                                  474,388Net
      Cash (Used in) Operating Activities
                                                  
                                                  
                                                  (1,056,971
                                                  )
                                                  
                                                  
                                                  (1,186,702
                                                  )
                                                  
                                                  
                                                  (25,393,659
                                                  )Cash
      Flows from Investing Activities:Purchase
      of equipment
                                                  
                                                  
                                                  (835
                                                  )
                                                  
                                                  
                                                  (25,274
                                                  )
                                                  
                                                  
                                                  (526,548
                                                  )Purchase
      of marketable securities
                                                  
                                                  
                                                  (1,001,345
                                                  )
                                                  
                                                  
                                                  (5,848,176
                                                  )
                                                  
                                                  
                                                  (10,445,000
                                                  )Proceeds
      from sales of marketable securities
                                                  
                                                  
                                                  3,550,001
                                                  
                                                  
                                                  
                                                  4,450,583
                                                  
                                                  
                                                  
                                                  9,423,060Net
      Cash (Used in) Provided by Investing Activities
                                                  
                                                  
                                                  2,547,821
                                                  
                                                  
                                                  
                                                  (1,422,867
                                                  )
                                                  
                                                  
                                                  (1,548,488
                                                  )Cash
      Flows from Financing Activities:Issuance
      of common stock
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  900,001
                                                  
                                                  
                                                  
                                                  22,536,753Proceeds
      from long-term debt
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  5,150,000Proceeds
      from research contribution
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,500,000Payment
      of licensing fees
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (356,216
                                                  )Principal
      payments on long-term debt
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (28,410
                                                  )Net
      Cash Provided by Financing Activities
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  900,001
                                                  
                                                  
                                                  
                                                  28,802,127Net
      Increase (Decrease) in Cash and Cash Equivalents
                                                  
                                                  
                                                  1,490,850
                                                  
                                                  
                                                  
                                                  (1,709,568
                                                  )
                                                  
                                                  
                                                  1,859,980Cash
      and Cash Equivalents - beginning of period
                                                  
                                                  
                                                  369,130
                                                  
                                                  
                                                  
                                                  3,809,571
                                                  
                                                  
                                                  
                                                  -Cash
      and Cash Equivalents - end of period
                                                  
                                                  $
                                                  1,859,980
                                                  
                                                  
                                                  $
                                                  2,100,003
                                                  
                                                  
                                                  $
                                                  1,859,980Supplemental
      Cash Flow InformationInterest paid
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  301,147Non-cash
      financing and investing activities: Warrants issued
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  $
                                                  1,414,287








See the
notes accompanying the condensed financial statements





5
 Table of Contents




REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


Three
Months Ended March 31, 2009 and 2008








1.
            Operations
      and Organization





Operations


Rexahn
Pharmaceuticals, Inc. (the "Company" or "Rexahn Pharmaceuticals"), a Delaware
corporation, is a development stage biopharmaceutical company dedicated to the
discovery, development and commercialization of innovative treatments for
cancer, central nervous system (CNS) disorders, sexual dysfunction and other
medical needs.  The Company had an accumulated deficit during the
development stage of $31,391,281 at March 31, 2009 and anticipates incurring
losses through the year 2009 and beyond.  The Company has not yet
generated commercial sales revenue and has been able to fund its operating
losses to date through the sale of its common stock, issuance of long-term debt,
and proceeds from reimbursed research and development costs.  The
Company believes that its existing cash and cash equivalents and marketable
securities will be sufficient to cover its cash flow requirements through March
31, 2010.  Management has the capability of managing the Company’s
operating activities within existing cash and marketable securities available by
reducing research and development activities and general and administrative
expenses.  This may result in slowing down clinical studies, but will
conserve the Company’s cash to allow it to operate for the next twelve
months.




Basis
of
Presentation


The accompanying unaudited
condensed financial statements of the Company have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (“SEC”) for
interim financial information.  Accordingly they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.  In
the opinion of the Company’s management, all adjustments (consisting of only
normal recurring adjustments) considered necessary for a fair presentation have
been included.  Operating results for the three-month period ended
March 31, 2009 are not necessarily indicative of results that may be expected
for the full fiscal year ending December 31, 2009.  The accompanying
condensed financial statements should be read in conjunction with the audited
financial statements of the Company for the fiscal year ended December 31,
2008.


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
the Company may undertake in the future. Actual results may ultimately differ
from those estimates. These estimates are reviewed periodically and as
adjustments become necessary, they are reported in earnings in the period in
which they become available.





6
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


Three
Months Ended March 31, 2009 and 2008








2.
            Recent
      Accounting Pronouncements Affecting the
Company





In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements (“SFAS 157”) , to define how the fair
value of assets and liabilities should be measured in accounting standards where
it is allowed or required. In addition to defining fair value, the Statement
established a framework within GAAP for measuring fair value and expanded
required disclosures surrounding fair value measurements. In February 2008, the
FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No.
157, which delayed the effective date by one year for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis. In
October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active , to clarify
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. This FSP
was effective immediately. In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly , to provide
additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased. This FSP will
be effective for interim and annual reporting periods ending after June 15,
2009. We adopted SFAS 157 for financial assets and financial liabilities on
January 1, 2008, and the adoption did not have a material impact on our
financial position, results of operations, or cash flows. We adopted SFAS 157
for nonfinancial items on January 1, 2009, and the adoption did not have a
material impact on our financial position, results of operations, or cash flows.
We currently do not have any financial assets that are valued using inactive
markets, and as such are not impacted by the issuances of FSP 157-3 and FSP
157-4. See Note 13 to the Condensed Financial Statements for additional
discussion on fair value measurements.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
141(R)”) . SFAS 141(R)
establishes principles and requirements for how a company (a) recognizes and
measures in their financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest (previously referred to as
minority interest); (b) recognizes and measures the goodwill acquired in a
business combination or a gain from a bargain purchase; and (c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of a business combination. SFAS 141(R) requires
fair value measurements at the date of acquisition, with limited exceptions
specified in the Statement. Some of the major impacts of this new standard
include expense recognition for transaction costs and restructuring costs. SFAS
141(R) was effective for fiscal years beginning on or after December 15, 2008
and is applied prospectively. The adoption of this Statement has not had a
material impact on our financial position, results of operations, or cash flows
during the first quarter of 2009.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS
160”). SFAS 160 addresses the accounting and reporting for the outstanding
noncontrolling interest (previously referred to as minority interest) in a
subsidiary and for the deconsolidation of a subsidiary. It also establishes
additional disclosures in the consolidated financial statements that identify
and distinguish between the interests of the parent’s owners and of the
noncontrolling owners of a subsidiary. This Statement is effective for fiscal
years beginning on or after December 15, 2008. We have adopted SFAS No. 160
beginning in the first quarter of our 2009 fiscal year and it did not have a
material impact to our financial position.




In December 2007, the EITF
reached a consensus on EITF No. 07-1, Accounting for Collaborative Arrangements,
or EITF 07-1. EITF 07-1 discusses the appropriate income statement presentation
and classification for the activities and payments between the participants in
arrangements related to the development and commercialization of intellectual
property. The sufficiency of disclosures related to these arrangements is also
specified. EITF 07-1 is effective for fiscal years beginning after December 15,
2008. As a result, EITF 07-1 is effective for the Company in the first quarter
of fiscal 2009. The adoption did not have an impact on either the Company's
financial position or results of operations as of March 31, 2009.




7
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


Three
Months Ended March 31, 2009 and 2008








In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”). SFAS 161 requires
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. This Statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. This Statement encourages, but does not
require, comparative disclosures for earlier periods at initial adoption. The
adoption of this Statement requires us to present currently disclosed
information in a tabular format and also expands our disclosures concerning
where derivatives are reported on the balance sheet and where gains/losses are
recognized in the results of operations. We have adopted SFAS No. 161 beginning
in the first quarter of our 2009 fiscal year and it did not have a material
impact to our financial position.





In April
2008, the FASB issued FASB FSP No. 142-3, Determination of the Useful Life of
Intangible Assets (“FSP FAS 142-3”) . FSP FAS 142-3 removed the
requirement of SFAS No. 142 ,
Goodwill and Other Intangible Assets (“SFAS 142”) , for an entity to consider,
when determining the useful life of an acquired intangible asset, whether the
intangible asset can be renewed without substantial cost or material
modification to the existing terms and conditions associated with the intangible
asset. FSP FAS 142-3 replaces the previous useful life assessment criteria with
a requirement that an entity considers its own experience in renewing similar
arrangements. If the entity has no relevant experience, it would consider market
participant assumptions regarding renewal. This should lead to greater
consistency between the useful life of recognized intangibles under SFAS 142 and
the period of expected cash flows used to measure fair value of such assets
under SFAS No. 141(R), Business Combinations . FSP
FAS 142-3 is being applied prospectively beginning January 1, 2009. The adoption
of this Statement has not had a material impact on our financial position,
results of operations, or cash flows during the first quarter 2009.





In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments . This FSP amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, Interim Financial
Reporting, to require those disclosures in summarized financial
information at interim reporting periods. This FSP shall be effective for
interim reporting periods ending after June 15, 2009. The Company will comply
with the additional disclosure requirements beginning in the second quarter of
2009.





In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments . This FSP amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. The FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. The FSP shall be effective for interim and annual reporting periods
ending after June 15, 2009. The Company is currently evaluating the impact of
what this standard will have on its financial statements.





8
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


Three
Months Ended March 31, 2009 and 2008








In April
2009, the SEC released Staff Accounting Bulletin No. 111 (“SAB 111”), which
amends SAB Topic 5-M. SAB 111 notes that FSP No. 115-2 and FAS 124-2 were scoped
to debt securities only, and the FSP referred readers to SEC SAB Topic 5-M for
factors to consider with respect to other-than-temporary impairments for equity
securities. With the amendments in SAB 111, debt securities are excluded from
the scope of Topic 5-M, but the SEC staff’s views on equity securities are still
included within the topic. The Company currently does not have any financial
assets that are other-than-temporary impaired.





In April
2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies , to address some of the application issues under SFAS
141(R). The FSP deals with the initial recognition and measurement of an asset
acquired or a liability assumed in a business combination that arises from a
contingency provided the asset or liability’s fair value on the date of
acquisition can be determined. When the fair value can’t be determined, the FSP
requires using the guidance under SFAS No. 5, Accounting for Contingencies,
and FASB Interpretation (FIN) No. 14, Reasonable Estimation of the Amount
of a Loss . This FSP was effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition date is on or
after January 1, 2009. The adoption of this FSP has not had a material impact on
our financial position, results of operations, or cash flows during the first
quarter of 2009.





3.
            Marketable
      Securities





The
following is a summary of marketable securities:





Cost
                                                
                                                
                                                Gross
                                                  Unrealized
                                                  Gains
                                                
                                                
                                                Gross
                                                  Unrealized
                                                  Losses
                                                
                                                
                                                Estimated
                                                  Fair
                                                  ValueMarch
      31, 2009Market
      Index Target Term Securities
                                                
                                                $
                                                1,001,345
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                6,475
                                                
                                                
                                                $
                                                994,870$
                                                1,001,345
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                6,475
                                                
                                                
                                                $
                                                994,870December
      31, 2008State
      authority auction rate bonds
                                                
                                                $
                                                3,550,000
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                550,250
                                                
                                                
                                                $
                                                2,999,750$
                                                3,550,000
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                550,250
                                                
                                                
                                                $
                                                2,999,750





Marketable
securities as of March 31, 2009 have contractual maturities of one
year or less.





9
 Table of Contents




REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


Three
Months Ended March 31, 2009 and 2008





4.
            Prepaid
      Expenses and Other





March
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008Deposits
      on contracts
                      
                      $
                      132,906
                      
                      
                      $
                      294,337Other
      assets
                      
                      
                      49,673
                      
                      
                      
                      72,428$
                      182,579
                      
                      
                      $
                      366,765





5.
            Equipment,
      Net





March
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008Furniture
      and fixtures
                      
                      $
                      31,713
                      
                      
                      $
                      31,713Office
      equipment
                      
                      
                      70,276
                      
                      
                      
                      70,276Lab
      and computer equipment
                      
                      
                      424,559
                      
                      
                      
                      423,724526,548
                      
                      
                      
                      525,713Less:
      Accumulated depreciation
                      
                      
                      (441,040
                      )
                      
                      
                      (433,501
                      )Net
      carrying amount
                      
                      $
                      85,508
                      
                      
                      $
                      92,212





Depreciation
expense was $7,539 and $13,192 for the three months ended March 31, 2009 and
2008, respectively.





6.
            Intangible
      Assets, Net





On
February 10, 2005, the Company entered into a licensing agreement with Revaax
Pharmaceuticals LLC ("Revaax"), whereby the Company received an exclusive,
worldwide, royalty bearing license, with the right to sub-license Revaax's
licensed technology and products.  The agreement called for an initial
licensing fee of $375,000 to be payable to Revaax in eight quarterly
installments ending on November 10, 2006.  Accordingly, the Revaax
license was measured at fair value at the date the licensing agreement was
entered into.  The fair value of the license component of
$356,216 was determined by discounting the stream of future quarterly
payments of $46,875 at 6%, the prevailing market rate for a debt instrument of
comparable maturity and credit quality.  The asset is amortized on a
straightline basis over an estimated useful life of 20 years.  The
discount was accreted over the term of the liability, calculated based on the
Company's estimated effective market interest rate of
6%.  Amortization expense was $4,452 for each of the three months
ended March 31, 2009 and 2008.




The
following table sets forth the intangible asset:





March
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008Revaax
      License, original cost
                    
                    $
                    356,216
                    
                    
                    $
                    356,216Less:
      Accumulated amortization
                    
                    
                    (74,536
                    )
                    
                    
                    (70,084
                    )Net
      carrying amount
                    
                    $
                    281,680
                    
                    
                    $
                    286,132




10
 Table of Contents




REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


Three
Months Ended March 31, 2009 and 2008






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





2009
      (remainder)
                        
                        $
                        13,3582010
                        
                        
                        17,8112011
                        
                        
                        17,8112012
                        
                        
                        17,8112013
                        
                        
                        17,811Thereafter
                        
                        
                        197,078$
                        281,680





7.
            Accounts
      Payable and Accrued Expenses




March
      31,
                          
                          
                          December
      31,2009
                          
                          
                          2008Trade
      payables
                          
                          $
                          233,388
                          
                          
                          $
                          136,906Accrued
      expenses
                          
                          
                          144,228
                          
                          
                          
                          98,486Payroll
      liabilities
                          
                          
                          96,772
                          
                          
                          
                          123,502$
                          474,388
                          
                          
                          $
                          358,894




8.
            Deferred
      Revenue





In 2003,
the Company entered into a collaborative research agreement with Rexgene Biotech
Co., Ltd. ("Rexgene"), a minority stockholder.  Rexgene is engaged in
the development of pharmaceutical products in Asia and has agreed to assist the
Company with the research, development and clinical trials necessary for
registration of the Company's drug candidate, RX-0201, in Asia.  This
agreement provides Rexgene with exclusive rights to license, sublicense, make,
have made, use, sell and import RX-0201 in Asia. A one-time contribution to the
joint development and research of RX-0201 of $1,500,000 was paid to the Company
in 2003 in accordance with the agreement.  The amount of revenue from
this contribution is being recognized as income over the term of the agreement
which terminates at the later of 20 years or the term of the patent on the
licensed product. The Company is using 20 years as its basis for recognition and
accordingly $18,750 was included in revenues for the three months ended March
31, 2009 and 2008.  The remaining $1,031,250 at March 31, 2009
(December 31, 2008 - $1,050,000) is reflected as deferred revenue in the
condensed balance sheet.  The Company adopted SAB No. 104, "Revenue
Recognition Nonrefundable Up-front Fees" with respect to the accounting for this
transaction. These fees are being used in the cooperative funding of the costs
of development of RX-0201.  Royalties of 3% of net sales of licensed
products will become payable to the Company on a quarterly basis once commercial
sales of RX-0201 begin. The product is still under development and commercial
sales are not expected to begin until at least 2010.





11
 Table of Contents




REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


Three
Months Ended March 31, 2009 and 2008





9.
            Common
      Stock





The
following transactions occurred from March 19, 2001 (inception) through
March 31, 2009:





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





b)
            On
      August 10, 2001 the Company issued:





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





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





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





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





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





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





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





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





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





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





i)
            Pursuant
      to the agreement and plan of merger which occurred on May 13, 2005, (i)
      each share of the issued and outstanding common stock of Rexahn, Corp
      (“Rexahn”) (other than dissenting shares) was converted into the right to
      receive five shares of Rexahn Pharmaceuticals common stock; (ii) each
      issued, outstanding and unexercised option to purchase a share of Rexahn
      common stock was converted into an option to purchase five shares of
      Rexahn Pharmaceuticals common stock and (iii) the par value of Rexahn's
      common stock was adjusted to reflect the par value of Corporate Road Show.
      Com Inc. (“CRS”) 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. For purposes of the Statement of
      Stockholders' Equity, the five-for-one stock split is reflected as a
      one-line adjustment.  All shares and earnings per share
      information has been retroactively restated in these financial
      statements.




12
 Table of Contents




REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


Three
Months Ended March 31, 2009 and 2008





j)
            On
      August 8, 2005, the Company issued, in a transaction exempt from
      registration under the Securities Act, 4,175,000 shares of common stock at
      a purchase price of $2.00 per
share.





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





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





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





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





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





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





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





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





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





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





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





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





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




13
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


Three
Months Ended March 31, 2009 and 2008





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





y)
            On
      March 20, 2008, the Company issued 642,858 units consisting of one share
      of the Company’s common stock and one warrant for every five common shares
      purchased in a private placement at a price of $1.40 per unit for total
      gross proceeds of $900,001. One warrant will entitle the holder to
      purchase an additional share of common stock at a price of $1.80 at any
      time over a period of three years from the date of the private placement.
      The warrants were valued at $220,004 and were charged to additional
      paid-in-capital.





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





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





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





cc)
            There
      were no common stock transactions from January 1, 2009 to March 31,
      2009.





10.
            Stock-Based
      Compensation





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





For
grants to non-employee directors and consultants of the Company after September
12, 2005, the vesting period is between 1 to 3 years, subject to the fulfillment
of certain conditions in the individual stock option grant agreements, or 100%
upon the occurrence of certain events specified in the individual stock option
grant agreements.  Shares of common stock authorized for issuance
pursuant to options granted under the Plan total 17,000,000 after giving effect
to an amendment to the Plan approved at the Annual Meeting of the Stockholders
of the Company on June 2, 2006.  At March 31, 2009, options for
8,912,500shares of
common stock were available for issuance.





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





14
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


Three
Months Ended March 31, 2009 and 2008






Accounting
for Employee Awards





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





The
Company's results of operations for the three months ended March 31, 2009 and
2008 include share-based employee compensation expense totaling $130,698 and
$55,337, respectively. Such amounts have been included in the Condensed
Statements of Operations in general and administrative and research and
development expenses.  No income tax benefit has been recognized in
the Condensed Statements of Operations for share-based compensation
arrangements as the Company has provided for a 100% valuation allowance on its
deferred tax assets.





Employee
stock option compensation expense in the first quarter of 2009 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.





Accounting
for Non-Employee Awards





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





Stock
compensation expense related to non-employee options was $4,212 for the period
ended March 31, 2009 and $110,352 for the period ended March 31,
2008.  Such amounts have been included in the Statements of Operations
in general and administrative and research and development
expenses.





Total
stock-based compensation recognized by the Company in the three months ended
March 31, 2009 and 2008, and the period from inception (March 19, 2001) to
March 31, 2009, all of which relates to stock options and warrants, is as
follows:





March
      31,
                        
                        
                        March
      31,
                        
                        
                        Inception
      (March 19, 2001) to
                          March
      31, 20092009
                        
                        
                        2008Income
      statement line item:General
      and administrativePayroll
                        
                        $
                        82,761
                        
                        
                        $
                        9,200
                        
                        
                        $
                        1,239,839Consulting
      and other professional fees
                        
                        
                        4,187
                        
                        
                        
                        71,655
                        
                        
                        
                        738,207Research
      and development:Payroll
                        
                        
                        47,937
                        
                        
                        
                        46,273
                        
                        
                        
                        725,155Consulting
      and other professional fees
                        
                        
                        25
                        
                        
                        
                        38,696
                        
                        
                        
                        1,288,583Total
                        
                        $
                        134,910
                        
                        
                        $
                        165,824
                        
                        
                        $
                        3,991,784




15
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


Three
Months Ended March 31, 2009 and 2008






There
were no stock options granted during the three months ended March 31,
2009.  Options for a total of 100,000 shares of common stock were
granted in the same period last year. The fair value of options at the date of
grant was estimated using the Black-Scholes option pricing model. During 2009,
the Company took into consideration guidance under SFAS No. 123(R) and SAB No.
107 when reviewing and updating assumptions. The expected volatility is based
upon historical volatility of the Company's stock. The expected term is based
upon the simplified method as allowed under SAB 107.





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





Three
      Months Ended
                            March
      31,2008Black-Scholes
      weighted average assumptions:Expected
      dividend yield
                          0Expected
      volatility
                          104%Risk
      free interest rate
                          1.38%-4.99%Expected
      term (in years)
                          0.2
      - 5
years





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





2009
                        
                        
                        2008Shares
                        
                        
                        Weighted
      Avg.
                        
                        
                        Shares
                        
                        
                        Weighted
      Avg.Subject
                        
                        
                        Option
                        
                        
                        Subject
                        
                        
                        Optionto
      Options
                        
                        
                        Prices
                        
                        
                        to
      Options
                        
                        
                        PricesOutstanding
      at January 1
                        
                        
                        7,760,795
                        
                        
                        $
                        1.01
                        
                        
                        
                        6,045,795
                        
                        
                        $
                        0.97Granted
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        100,000
                        
                        
                        
                        2.19Exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Cancelled
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (50,000
                        )
                        
                        
                        1.34Outstanding
      at March 31
                        
                        
                        7,760,795
                        
                        
                        $
                        1.01
                        
                        
                        
                        6,095,795
                        
                        
                        $
                        0.99




16
 Table of Contents








REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


Three
Months Ended March 31, 2009 and 2008





The
following table summarizes information about stock options outstanding as of
March 31, 2009 and 2008:





WeightedAverageShares
                    
                    
                    Weighted
                    
                    Remaining
                    
                    AggregateSubject
                    
                    
                    Avg.
      Option
                    
                    Contractual
                    
                    Intrinsicto Options
                    
                    
                    Prices
                    
                    Term
                    
                    ValueOutstanding
      at March 31, 2009
                    
                    
                    7,760,795
                    
                    
                    $
                    1.01
                    
                    6.6 years
                    
                    $
                    375,266Exercisable
      at March 31, 2009
                    
                    
                    5,625,920
                    
                    
                    $
                    0.94
                    
                    6.5 years
                    
                    $
                    375,266














WeightedAverageShares
                            
                            
                            Weighted
                            
                            Remaining
                            
                            AggregateSubject
                            
                            
                            Avg.
      Option
                            
                            Contractual
                            
                            Intrinsicto Options
                            
                            
                            Prices
                            
                            Term
                            
                            ValueOutstanding
      at March 31, 2008
                            
                            
                            6,095,795
                            
                            
                            $
                            0.99
                            
                            6.7
      years
                            
                            $
                            9,399,997Exercisable
      at March 31, 2008
                            
                            
                            4,252,045
                            
                            
                            $
                            0.89
                            
                            6.5
      years
                            
                            $
                            7,003,709





As of
March 31, 2009 and 2008, there was $2,276,558 and $1,401,761 of total
unrecognized compensation cost, respectively, related to all unvested stock
options, which is expected to be recognized over a weighted average vesting
period of 1.3 years and 1.1 years, respectively.





11.
            Income
      Taxes





No
provision for Federal or state income taxes was required for the period ended
March 31, 2009, due to the Company’s operating losses.  At March 31,
2009, the Company has unused net operating loss carry-forwards of approximately
$31,390,000 which expire at various dates through 2029.  Most of this
amount is subject to annual limitations under certain provisions of the Internal
Revenue Code related to “changes in ownership”.





As of
March 31, 2009, the deferred tax assets related to the aforementioned
carry-forwards have been fully offset by valuation allowances, since significant
utilization of such amounts is not presently expected in the foreseeable
future.





Deferred
tax assets and valuation allowances consist of:





17
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REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


Three
Months Ended March 31, 2009 and 2008






March
      31,
                      2009
                    
                    
                    December
      31,
                      2008Net
      operating loss carry-forwards
                    
                    $
                    11,928,687
                    
                    
                    $
                    11,364,336Valuation
      allowance
                    
                    
                    (11,928,687
                    )
                    
                    
                    (11,364,336
                    )Net
      deferred tax assets
                    
                    $
                    -
                    
                    
                    $
                    -








We file
income tax returns in the U.S. federal and Maryland state
jurisdictions. Tax years for fiscal 2006 through 2008 are open and
potentially subject to examination by the federal and Maryland state taxing
authorities.





12.
            Commitments
      and Contingencies





a)
            The
      Company has contracted with various vendors to provide research and
      development services. The terms of these agreements usually require an
      initiation fee and monthly or periodic payments over the terms of the
      agreement, ranging from 6 months to 24 months. The costs to be incurred
      are estimated and are subject to revision. As of March 31, 2009, the total
      value of these agreements was approximately $3,766,330 and the Company had
      made payments totaling $2,599,912 under the terms of the agreements as at
      March 31, 2009.  All of these agreements may be terminated by
      either party upon appropriate notice as stipulated in the respective
      agreements.





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





c)
            In
      April 2004, the Company signed a 5 year lease for 8,030 square feet of
      office space in Rockville, Maryland commencing July 2004. The lease
      requires annual base rents of $200,750 subject to annual increases of 3%
      of the preceding year’s adjusted base rent. Under the leasing agreement,
      the Company also pays its allocable portion of real estate taxes and
      common area operating charges.  Rent paid during the three month
      period ended March 31, 2009 was $56,487 (2008 - $54,841). Minimum future
      rental payments under this lease as of March 31, 2009 total $56,487 for
      2009. We are currently in negotiations with a new party to enter into a
      lease for new office space.





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





18
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REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


Three
Months Ended March 31, 2009 and 2008





e)
            On
      August 19, 2008, the Company entered into an agreement with KCSA Strategic
      Communications (“KCSA”) for KCSA to provide investor relations services to
      the Company.  Under this agreement, the Company agreed to a
      monthly fixed retainer amount of $7,000 commencing on August 19,
      2008.  In December 2008, the monthly retainer was reduced to
      $4,000 per month.  In accordance with the agreement, the
      contract may be terminated by either party upon thirty (30) days prior
      written notice to the other party.





f)
            On
      April 20, 2009, Amarex, LLC filed suit against the Company in the Circuit
      Court of Montgomery County, Maryland, seeking damages for an alleged
      breach of a contract between the Company and Amarex LLC entered into on
      January 6, 2006.  Amarex, LLC claims damages of $93,156 plus
      interest.








13.
            Fair
      Value Measurements





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





Level 1 Inputs
      —
            Unadjusted
      quoted prices in active markets for identical assets or liabilities that
      is accessible by the Company;


Level
      2 Inputs —
            Quoted
      prices in markets that are not active or financial instruments for which
      all significant inputs are observable, either directly or
      indirectly;


Level
      3 Inputs —
            Unobservable
      inputs for the asset or liability including significant assumptions of the
      Company and other market
participants.





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





Investments,
at fair value—The Company investments consist of marketable indexed securities
which are valued at fair value based on market prices and classified within
level 2 of the fair value hierarchy.





19
 Table of Contents





REXAHN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Notes to
Unaudited Condensed Financial Statements


Three
Months Ended March 31, 2009 and 2008





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




Fair
      Value Measurements as of March 31, 2009Total
                                  
                                  
                                  Level 1
                                  
                                  
                                  Level 2
                                  
                                  
                                  Level 3Assets:Market
      Index Target Term Securities
                                  
                                  $
                                  994,870
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  994,870
                                  
                                  
                                  
                                  -Total
      Assets
                                  
                                  $
                                  994,870
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  994,870
                                  
                                  
                                  $
                                  -





14.
            Subsequent
      Events





On April
14, 2009, the Company signed a non-binding Letter of Intent (“LOI”) with the
Health Policy and Research Foundation (“HPRF”) of California to receive up to
$8.55 million to conduct further clinical development of SerdaxinTM.  The
proceeds will be used to the complete the subsequent trials of Serdaxin so that
the Company can bring the treatment through regulatory approval and then to
patients.  The receipt of proceeds is subject to the negotiation of
the definitive agreement and other contingencies and
requirements.





20
 Table of Contents




Item 2
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations





OVERVIEW





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





SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS





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





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


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


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


·
            demand
      for and market acceptance of our drug
  candidates;


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


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


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





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




CRITICAL
ACCOUNTING POLICIES





A
"critical accounting policy" is one which is both important to the portrayal of
our financial condition and results and requires our management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently
uncertain.  Our accounting policies are in accordance with United
States generally accepted accounting principles, or GAAP, and their basis of
application is consistent with those disclosed on form 10-K for the fiscal year
ended December 31, 2008.





Use
of Estimates





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




21
 Table of Contents




RECENTLY
ISSUED ACCOUNTING STANDARDS





In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements (“SFAS 157”) , to define how the fair
value of assets and liabilities should be measured in accounting standards where
it is allowed or required. In addition to defining fair value, the Statement
established a framework within GAAP for measuring fair value and expanded
required disclosures surrounding fair value measurements. In February 2008, the
FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No.
157, which delayed the effective date by one year for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis. In
October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active , to clarify
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. This FSP
was effective immediately. In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly , to provide
additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased. This FSP will
be effective for interim and annual reporting periods ending after June 15,
2009. We adopted SFAS 157 for financial assets and financial liabilities on
January 1, 2008, and the adoption did not have a material impact on our
financial position, results of operations, or cash flows. We adopted SFAS 157
for nonfinancial items on January 1, 2009, and the adoption did not have a
material impact on our financial position, results of operations, or cash flows.
We currently do not have any financial assets that are valued using inactive
markets, and as such are not impacted by the issuances of FSP 157-3 and FSP
157-4. See Note 13 to the Condensed Financial Statements for additional
discussion on fair value measurements.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
141(R)”) . SFAS 141(R)
establishes principles and requirements for how a company (a) recognizes and
measures in their financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest (previously referred to as
minority interest); (b) recognizes and measures the goodwill acquired in a
business combination or a gain from a bargain purchase; and (c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of a business combination. SFAS 141(R) requires
fair value measurements at the date of acquisition, with limited exceptions
specified in the Statement. Some of the major impacts of this new standard
include expense recognition for transaction costs and restructuring costs. SFAS
141(R) was effective for fiscal years beginning on or after December 15, 2008
and is applied prospectively. The adoption of this Statement has not had a
material impact on our financial position, results of operations, or cash flows
during the first quarter of 2009.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS
160”). SFAS 160 addresses the accounting and reporting for the outstanding
noncontrolling interest (previously referred to as minority interest) in a
subsidiary and for the deconsolidation of a subsidiary. It also establishes
additional disclosures in the consolidated financial statements that identify
and distinguish between the interests of the parent’s owners and of the
noncontrolling owners of a subsidiary. This Statement is effective for fiscal
years beginning on or after December 15, 2008. We have adopted SFAS No. 160
beginning in the first quarter of our 2009 fiscal year and it did not have a
material impact to our financial position.




In December 2007, the EITF
reached a consensus on EITF No. 07-1, Accounting for Collaborative Arrangements,
or EITF 07-1. EITF 07-1 discusses the appropriate income statement presentation
and classification for the activities and payments between the participants in
arrangements related to the development and commercialization of intellectual
property. The sufficiency of disclosures related to these arrangements is also
specified. EITF 07-1 is effective for fiscal years beginning after December 15,
2008. As a result, EITF 07-1 is effective for the Company in the first quarter
of fiscal 2009. The adoption did not have an impact on either the Company's
financial position or results of operations as of March 31,
2009.




In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”). SFAS 161 requires
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. This Statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. This Statement encourages, but does not
require, comparative disclosures for earlier periods at initial adoption. The
adoption of this Statement requires us to present currently disclosed
information in a tabular format and also expands our disclosures concerning
where derivatives are reported on the balance sheet and where gains/losses are
recognized in the results of operations. We have adopted SFAS No. 161 beginning
in the first quarter of our 2009 fiscal year and it did not have a material
impact to our financial position.





22
 Table of Contents




In April
2008, the FASB issued FASB FSP No. 142-3, Determination of the Useful Life of
Intangible Assets (“FSP FAS 142-3”) . FSP FAS 142-3 removed the
requirement of SFAS No. 142 ,
Goodwill and Other Intangible Assets (“SFAS 142”) , for an entity to consider,
when determining the useful life of an acquired intangible asset, whether the
intangible asset can be renewed without substantial cost or material
modification to the existing terms and conditions associated with the intangible
asset. FSP FAS 142-3 replaces the previous useful life assessment criteria with
a requirement that an entity considers its own experience in renewing similar
arrangements. If the entity has no relevant experience, it would consider market
participant assumptions regarding renewal. This should lead to greater
consistency between the useful life of recognized intangibles under SFAS 142 and
the period of expected cash flows used to measure fair value of such assets
under SFAS No. 141(R), Business Combinations . FSP
FAS 142-3 is being applied prospectively beginning January 1, 2009. The adoption
of this Statement has not had a material impact on our financial position,
results of operations, or cash flows during the first quarter 2009.





In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments . This FSP amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, Interim Financial
Reporting, to require those disclosures in summarized financial
information at interim reporting periods. This FSP shall be effective for
interim reporting periods ending after June 15, 2009. The Company will comply
with the additional disclosure requirements beginning in the second quarter of
2009.





In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments . This FSP amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. The FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. The FSP shall be effective for interim and annual reporting periods
ending after June 15, 2009. The Company is currently evaluating the impact of
what this standard will have on its financial statements.





In April
2009, the SEC released Staff Accounting Bulletin No. 111 (“SAB 111”), which
amends SAB Topic 5-M. SAB 111 notes that FSP No. 115-2 and FAS 124-2 were scoped
to debt securities only, and the FSP referred readers to SEC SAB Topic 5-M for
factors to consider with respect to other-than-temporary impairments for equity
securities. With the amendments in SAB 111, debt securities are excluded from
the scope of Topic 5-M, but the SEC staff’s views on equity securities are still
included within the topic. The Company currently does not have any financial
assets that are other-than-temporary impaired.





In April
2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies , to address some of the application issues under SFAS
141(R). The FSP deals with the initial recognition and measurement of an asset
acquired or a liability assumed in a business combination that arises from a
contingency provided the asset or liability’s fair value on the date of
acquisition can be determined. When the fair value can’t be determined, the FSP
requires using the guidance under SFAS No. 5, Accounting for Contingencies,
and FASB Interpretation (FIN) No. 14, Reasonable Estimation of the Amount
of a Loss . This FSP was effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition date is on or
after January 1, 2009. The adoption of this FSP has not had a material impact on
our financial position, results of operations, or cash flows during the first
quarter of 2009.





RESULTS
OF OPERATIONS





Comparison
of Three Months Ended March 31, 2009 and 2008:





Total
Revenues





For each
of the three month periods ended March 31, 2009 and 2008, we recorded
revenues of $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 stockholder.





23
 Table of Contents




General
and Administrative Expenses





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





General
and administrative expenses increased $157,127, or 27.8%, to $723,107 for the
three months ended March 31, 2009 from $565,980 for the three months ended
March 31, 2008.  The increase was primarily due to the NYSE Amex
annual fee of $36,500 paid during the first quarter, increased payroll expenses
and increased accounting and legal expenses.





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 decreased $58,040, or 7.4%, to $721,926 for the three
months ended March 31, 2009 from $779,966 for the three months ended
March 31, 2008.  The decrease was primarily due to a decrease in
drug manufacturing and a decrease in research and development stock based
compensation.





Patent
Fees





Our
patent fees increased $10,472, or 24.0%, to $54,137 for the three months ended
March 31, 2009 from $43,665 for the three months ended March 31,
2008.  The increase during the 2009 period was due primarily due to
the growth of our patent portfolio and additional office actions over the past
year.





Interest
Expense





We had no
interest expense for the three month periods ended March 31, 2009 and
March 31, 2008.





Interest
Income





Interest
income decreased $99,832, or 92.9%, for the three months ended March 31, 2009 to
$7,609, compared to $107,441 for the three months ended March 31,
2008.  The decrease was primarily due to lower interest earned as a
result of less cash and short term investments.





Depreciation
and Amortization





Depreciation
and amortization expenses decreased by $5,654, or 32.0%, for the three months
ended March 31, 2009 to $11,991, compared to $17,645 for the three months
ended March 31, 2008.  The decrease was primarily due to lower
amortization recorded on equipment due to limited additions and declining asset
balances.





Net
Loss





As a
result of the above, the net loss for the three months ended March 31, 2009 was
($1,484,802), or ($0.03) per shares, compared to a net loss of ($1,303,430) for
the three months ended March 31, 2008.





24
 Table of Contents




Research
and Development Projects





Research
and development costs are expensed as incurred.  Research and
development expenses consist primarily of salaries and related personnel costs,
costs to acquire pharmaceutical products and product rights for development and
amounts paid to contract research organizations, hospitals and laboratories for
the provision of services and materials for drug development and clinical
trials.  Costs incurred in obtaining the license rights to technology
in the research and development stage and that have no alternative future uses
are expensed as incurred.  Our research and development programs are
related to our three clinical stage lead drug candidates, ArchexinTM, SerdaxinTM
and ZoraxelTM and pre-clinical stage oncology drug candidates, RX-0183, RX-3117
and RX-5902. Each of our lead drug candidates is in various stages of completion
as described below.  As we expand our clinical studies, we will enter
into additional development agreements.  Significant additional
expenditures will be required if we complete our clinical trials, start new
trials, apply for regulatory approvals, continue development of our
technologies, expand our operations and bring our products to
market.  The eventual total cost of each clinical trial is dependent
on a number of uncertainties such as trial design, the length of the trial, the
number of clinical sites and the number of patients.  The process of
obtaining and maintaining regulatory approvals for new therapeutic products is
lengthy, expensive and uncertain.  Because the successful development
of our most advanced drug candidates, ArchexinTM, SerdaxinTM and ZoraxelTM, is
uncertain, and because RX-0183, RX-3117 and RX-5902 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.





ArchexinTM





In
October 2006, we announced the conclusion of the Phase I clinical trial of
ArchexinTM, our leading drug candidate.  The costs incurred for the
clinical trial were approximately $1,500,000.





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





The Phase
II clinical trial of ArchexinTM began in the third quarter of 2007 in patients
with advanced renal cell carcinoma who have failed previous
treatments.  The trial is the first of multiple trials planned for
ArchexinTM. Phase II clinical trials for pancreatic cancer began in the
first quarter of 2009.  We estimate that the Phase II trials of each
indication will be completed in 2010 and will require approximately
$5,000,000.  In January 2005, we received "orphan drug designation"
from the FDA for ArchexinTM for five cancer indications, including renal cell
carcinoma, ovarian cancer, glioblastoma, stomach cancer, and pancreatic
cancer.  The orphan drug program is intended to provide patients with
faster access to drug therapies for diseases and conditions that affect fewer
than 200,000 people.  Companies that receive orphan drug designation
are provided an accelerated review process, tax advantages, and seven years of
market exclusivity in the United States.  In the future, we plan to
apply ArchexinTM to the treatment of other orphan indications and other
cancers.




SerdaxinTM





SerdaxinTM is
being developed to treat depression and mood disorders, and has proven and
well-established safety in humans.  Phase II trials began in the first
quarter of 2009.  We currently estimate that Phase II trials will
require $1,750,000 through the end of 2011.





ZoraxelTM





ZoraxelTM
is a CNS-based sexual dysfunction drug that has extensive and excellent safety
in humans.  ZoraxelTM entered Phase II trials in the first half of
2008. We currently estimate that these studies will require approximately
$1,250,000 through the end of 2010.





Pre-clinical
pipeline





RX-0183,
RX-3117 and RX-5902 are in a pre-clinical stage of development and the next
scheduled program for each compound is a pre-clinical toxicology study required
prior to submission of an Investigational New Drug ("IND") application to the
FDA. The estimated cost to complete pre-clinical toxicology and Phase I clinical
trials is estimated to be approximately $1,500,000 per each compound for a total
of $4,500,000.  These compounds may enter Phase I clinical trials in
2010.





25
 Table of Contents




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 may result in additional cost, a higher than expected expense may
result.





We will
need to raise additional money through debt offerings, equity offerings and
research funding from outside parties in order to continue to develop our drug
candidates.  If we are not able to raise sufficient additional money,
we will have to severely reduce our research and development
activities.  We will first stop research and development activities
associated with our preclinical compounds.  To the extent necessary,
we will then reduce our research and development activities related to some or
all of our clinical drugs and may also reduce our general and administrative
expenses.




LIQUIDITY
AND CAPITAL RESOURCES





Cash used
in operating activities was $1,056,971 for the three months ended March 31,
2009 compared to cash used in operating activities of $1,186,702 for the same
period ended March 31, 2008.  The operating cash flows during the
three months ended March 31, 2009 reflect our loss from operations of
$1,484,802 and a net increase in cash components of working capital of $299,680
and is offset by non-cash charges of $128,151.  Non-cash charges
consist of depreciation and amortization of $11,991, stock option compensation
expense of $134,910 and amortization of deferred revenue of
$18,750.  The increase in working capital primarily consists of a
$115,494 increase in accounts payable and accrued expenses and a decrease of
$184,186 to prepaid and other assets.





Cash
provided by investing activities of $2,547,821 during the three months ended
March 31, 2009 consisted of $835 used in the purchase of equipment, $1,001,345
used in the purchase of marketable securities and $3,550,001 from the proceeds
from the sales of marketable securities.  Cash used in investing
activities was $1,422,867 during the three months ended March 31,
2008.





For the
three months ended March 31, 2009, we experienced net losses of
$1,484,802.  Our accumulated deficit as of March 31, 2009 was
$31,391,281.





We have
financed our operations since inception primarily through equity and convertible
debt financings and interest income from investments of cash and cash
equivalents.  During the three months ended March 31, 2009, we
had a net increase in cash and cash equivalents of $1,490,850 resulting from the
sale of marketable securities as offset by the cash used in operating
activities.  Total cash and cash equivalents as of March 31, 2009
were $1,859,980 compared to $369,130 as of December 31, 2008.





The
Company has not yet generated commercial sales revenue and has been able to fund
its operating losses to date through the sale of its common stock, issuance of
long-term debt, and proceeds from reimbursed research and development
costs.  The Company believes that its existing cash and cash
equivalents and marketable securities will be sufficient to cover its cash flow
requirements through March 31, 2010.  Management has the capability of
managing the Company’s operations within existing cash and marketable securities
available by reducing research and development activities and general and
administrative expenses.  This may result in slowing down clinical
studies, but will conserve the Company’s cash to allow it to operate for the
next twelve months.





CONTRACTUAL
OBLIGATIONS





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.  The clinical
trial has been completed and $121,359 was paid in 2008.





In April
2004, we signed a 5-year lease for 8,030 square feet of office space in
Rockville, Maryland from July 2004 to June 2009.  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. We
are currently in negotiations with a new party to enter into a lease for new
office space. Minimum future rental
payments under our current lease is $56,487





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On
January 6, 2006, we contracted with Amarex, LLC to conduct Phase II clinical
studies for ArchexinTM.  In accordance with the agreement, the
estimated contract duration is 24 months for a total cost of $596,244 plus pass
through expenses.  The service costs are payable in 24 monthly
payments of $18,633 plus an up front payment of $149,061 due upon
signing.  In 2007, we added additional services to the Phase II
clinical studies.   The cost of these services totals $106,220,
all of which was paid as of December 31, 2008.  We paid $721,096 and
$614,876 towards the cost of the study as of March 31, 2009 and December 31,
2008, respectively.  On April 20, 2009 Amarex filed a lawsuit against
us for breach of contract claims due to a billing dispute.  We intend
to defend the lawsuit vigorously.





On
October 2, 2003, we contracted with Amarex to conduct Phase I clinical studies
for ArchexinTM (then RX-0201).  Of the $239,337 to be paid under this
contract, $194,461 was paid as of March 31, 2009.  The balance will be
paid when the final report is accepted, which is expected to be in
2009.  Since 2003, additional services were added to the
study.  These services were contracted for $200,043, all of which was
paid as of March 31, 2009.





From
April 3, 2006 through 2008, we have contracted with UPM Pharmaceuticals, Inc. to
develop several release formulations for SerdaxinTM and ZoraxelTM drug
manufacturing.  In accordance with the agreements, the estimated total
cost is $974,980, of which $852,030 was paid as of March 31,
2009.  The service costs are payable based upon a payment schedule
related to certain milestones.





On April
15, 2007 we entered into research agreement with University of Maryland
Biotechnology Institute to identify new JNK inhibitors using their NMR
technology.  The total amount to be paid under this contract is
$17,000, of which $10,000 was paid in 2007.  The balance will be paid
when the final report is submitted, which is expected to be in
2009.





On May
18, 2007, we contracted with LabConnect to provide sample management and central
laboratory services for Phase II clinical studies for ArchexinTM.  The
total amount of the original contract was estimated to be
$197,220.  On March 16, 2009, we entered into a new contract that
replaces the May 18, 2007 contract.  The total amount to be paid is
estimated to be $134,000, of which $43,694 (including $36,944 prepaid from the
previous contract) was paid as of March 31, 2009.  The balance will be
paid as services are performed over the next 3 months.





On
December 29, 2008, we contracted with LabConnect to provide sample management
and central laboratory services for Phase II clinical studies for
SerdaxinTM.  The total of the contract amount is estimated to be
$35,899, of which $5,552 was paid as of March 31, 2009.  The balance
will be paid as services are performed over the next 12 months.





On June
13, 2007, we contracted with Formatech to test the stability of the ArchexinTM
package.  The total amount to be paid for this contract is $21,500, of
which $14,500 was paid in 2007.The balance will be paid when the final report is
submitted, which is expected to be in 2010.





On May 6,
2008, we contracted with Delaware Valley Urology, LLC as a clinical site for our
Phase IIa erectile dysfunction study for ZoraxelTM.  In accordance with
the agreement, the estimated contract duration is 17 months for an estimated
cost of $57,365, with lab costs included.  A total of $47,596 has been
made as of March 31, 2009.





On April
14, 2008, we contracted with Myron I Murdock M.D. LLC as a clinical site for our
12 month Phase IIa erectile dysfunction study for ZoraxelTM.  The
estimated amount of this contract, without lab costs, is $104,559, of which
$47,210 was paid as of March 31, 2009.





On April
15, 2008, we entered into a 24 month contract with Radiant Development CRO to
manage clinical trials for our Phase IIa erectile dysfunction study for
ZoraxelTM.  The total contract amount is estimated to be $109,655, of
which $83,840 was paid as of March 31, 2009.





On
September 5, 2008, we contracted with Radiant Research - Greer as a clinical
site for our Phase IIa clinical study for ZoraxelTM for erectile
dysfunction.  The estimated cost for the 12 month study is $62,532, of
which $120,768 was paid as of March 31, 2009.  The study exceeded the
initial estimated cost.  We estimate that the cost for the study will
be $130,000.





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 Table of Contents




On
December 23, 2008, we entered into a 12 month contract with Radiant Development
CRO to manage clinical trials for our Phase IIa major depressive disorder study
for SerdaxinTM.  The total contract amount is estimated to be $169,343,
of which $57,466 was paid as of March 31, 2009.





On
January 9, 2009, we contracted with Radiant Research - Denver as a clinical site
for our Phase IIa clinical study for SerdaxinTM for major depressive
disorder.  The estimated cost for the 18 month study is $131,600, of
which $9,561 was paid as of March 31, 2009.





On
January 17, 2008, we entered into a Research Services Agreement with the
University of Maryland, Baltimore to conduct in vivo studies of the PC-3 tumor
model with ArchexinTM and RX-0047.  The total cost of the contract is
$27,288, all of which was paid as of March 31, 2009.





On
December 1, 2008, we entered into Research Services Agreement with the
University of Tromso, Norway to conduct statistical analysis regarding sexual
incentive motivation for our erectile dysfunction study.  The total
cost for these services is $19,000, of which $9,500 was paid as of March 31,
2009.





On
January 7, 2009, we contracted with Atlanta Center for Medical Research as a
clinical site for our Phase IIa clinical study for SerdaxinTM for major
depressive disorder.  The estimated cost for the 18 month study is
$167,713, of which $37,187 was paid as of March 31, 2009.





On March
27, 2009, we contracted with Base Pair Communications in connection with our
media relations development.  The cost of the consulting contract is
$10,000, of which $5,000 was paid as of March 31, 2009.





On
February 5, 2009, we contracted with Capital Clinical Research Associates, LLC
as a clinical site for our Phase IIa clinical study for SerdaxinTM for major
depressive disorder.  The estimated cost for the 18 month study is
$129,568, of which $12,300 was paid as of March 31, 2009.





On March,
3 2009, we entered into a Licensing Agreement with David Ferguson for use of the
Sexual Encounter Profile (SEP) for our Phase IIa clinical study for SerdaxinTM
for major depressive disorder.  The cost of the license was $10,000,
all of which was paid as of March 31, 2009.





On
January 9, 2009, we entered into a consulting agreement with Sang Kook Lee for
his consulting expertise in the evaluation of antitumor activity and mechanism
study of in vitro cell
culture systems.  The cost for the services is $20,000, all of which
was paid as of March 31, 2009.





On March
18, 2009, we contracted with SIRO Clinpharm Pvt. Ltd and SIRO Clinpharm, USA to
manage clinical trials for our Phase II pancreatic cancer study for
ArchexinTM.  The estimated cost for the study is $362,708, of which
$10,000 was paid as of March 31, 2009




CURRENT
AND FUTURE FINANCING NEEDS




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





Over the
next twelve months we expect to spend a minimum of approximately $1.2 million on
clinical development for Phase II clinical trials of ArchexinTM, SerdaxinTM and
ZoraxelTM (including our commitments described under "Contractual Commitments" of
this Item 6), $2 million on general corporate expenses, and approximately
$120,000 on facilities rent.  We will need to seek additional
financing to implement and fund other drug candidate development, clinical trial
and research and development efforts to the maximum extent of our operating
plan, including in-vivo animal and pre-clinical studies, Phase II clinical
trials for new product candidates, as well as other research and development
projects, which together with the minimum operating plan over the next twelve
months, could aggregate up to $3.5 million. If we are not able to secure
additional financing, we will not be able to implement and fund the research and
development.





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 Table of Contents




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





·
            the
      progress of our product development
activities;





·
            the
      number and scope of our product development
  programs;





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





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





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





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





·
            the costs and timing of
      regulatory approvals.





OFF-BALANCE
SHEET ARRANGEMENTS





We do not
have any off-balance sheet arrangements.





29
 Table of Contents




Item 3
            Quantitative
      and Qualitative Disclosures About Market
Risk





Foreign
Exchange





We
currently incur a portion of our operating expenses in currencies other than
U.S. dollars, the reporting currency for our consolidated financial
statements, and we have determined that such operating expenses have not been
significant to date. As a result, we have not been impacted materially by
changes in exchange rates and do not expect to be impacted materially for the
foreseeable future. However, if our operating expenses incurred outside of the
United States increase, our results of operations could be adversely impacted by
changes in exchange rates. We do not currently hedge foreign currency exposure
and do not intend to do so in the foreseeable future.





Interest
Rates


Our
exposure to market risk is currently confined to our cash and cash equivalents,
marketable securities and restricted cash. We currently do not hedge interest
rate exposure. We have not used derivative financial instruments for speculation
or trading purposes. Because of the short-term maturities of our cash and cash
equivalents and marketable securities, we do not believe that a change in market
rates would have any significant impact on the realized value of our
investments.


Effects of
Inflation


Our most
liquid assets are cash and cash equivalents and marketable securities. Because
of their liquidity, these assets are not directly affected by inflation. We also
believe that we have intangible assets in the value of our intellectual
property. In accordance with generally accepted accounting principles, we have
not capitalized the value of this intellectual property on our balance sheet.
Due to the nature of this intellectual property, we believe that these
intangible assets are not affected by inflation. Because we intend to retain and
continue to use our equipment, furniture and fixtures and leasehold
improvements, we believe that the incremental inflation related to replacement
costs of such items will not materially affect our operations. However, the rate
of inflation affects our expenses, such as those for employee compensation and
contract services, which could increase our level of expenses and the rate
at which we use our resources.


Marketable
securities


We
deposit our cash with financial institutions that we consider to be of high
credit quality and purchase marketable securities which are generally investment
grade, liquid, short-term fixed income securities and money-market instruments
denominated in U.S. dollars. The notes are expected to mature in May
and June 2009 and the Company expects minimal losses, if any.






Item
      4
            Controls and
Procedures





Evaluation of Disclosure Controls and
Procedures





With the
participation of our management, including the Company’s principal executive
officer and principal financial officer, our management has evaluated the
effectiveness of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange
Act”)) as of the end of the period covered by this Quarterly Report on Form
10-Q. Based upon that evaluation, the Company’s principal executive officer and
principal financial officer have concluded that:





•
            information
      required to be disclosed by the Company in this Quarterly Report on Form
      10-Q and other reports that the Company files or submits under the
      Exchange Act would be accumulated and communicated to the Company’s
      management, including its principal executive officer and principal
      financial officer, as appropriate to allow timely decisions regarding
      required disclosure;





30
 Table of Contents




•
            information
      required to be disclosed by the Company in this Quarterly Report on Form
      10-Q and other reports that the Company files or submits under the
      Exchange Act would be recorded, processed, summarized and reported within
      the time periods specified in the SEC’s rules and forms;
    and





•
            the
      Company’s disclosure controls and procedures are effective as of the end
      of the period covered by this Quarterly Report on Form 10-Q to ensure that
      material information relating to the Company is made known to them,
      particularly during the period in which the periodic reports of the
      Company, including this Quarterly Report on Form 10-Q, are being
      prepared.





Changes in Internal Control over
Financial Reporting





There
were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) during the period covered by this
Quarterly Report on Form 10-Q that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.





31
 Table of Contents





PART
II





Item
      1
            Legal
      Proceedings





On April
20, 2009, Amarex, LLC filed suit against us in the Circuit Court of Montgomery
County, Maryland, seeking damages for an alleged breach of a contract between
the Company and Amarex LLC entered into on January 6, 2006.  Amarex,
LLC claims damages of $93,156 plus interest.





Item
      1A
            Risk
      Factors





In
response to Item 1A of our 2008 Annual Report, we described a billing dispute
between the Company and a pharmaceutical research provider, Amarex,
LLC.  The dispute has resulted in a legal proceeding as described in
Item 1 above. There were no other material changes in risk factors
from those disclosed in the Company's Form 10-K for fiscal year ended December
31, 2008.





Item
      2
            Unregistered Sales of Equity Securities and Use of
      Proceeds





None





Item
      3
            Defaults Upon Senior
Securities





None





Item
      4
            Submission of Matters to a Vote of Security
      Holders





None





Item
      5
            Other
      Information





None





Item
      6
            Exhibits





Exhibit No
                      Description
                      Location31.1
                      Rule 13a-14(a)/15d-14(a)
      Certification (Principal Executive Officer)
                      Filed
      herewith31.2
                      Rule 13a-14(a)/15d-14(a)
      Certification (Principal Financial Officer)
                      Filed
      herewith32.1*
                      Section
      1350 Certificate (Principal Executive Officer)
                      Filed
      herewith32.2*
                      Section
      1350 Certificate (Principal Financial Officer)
                      Filed
      herewith99.1
                      Press
      Release dated April 14, 2009
                      Filed
      as Exhibit 99.1 to the Current Report on Form 8-K of Rexahn
      Pharmaceuticals, Inc., filed on April 15,
2009





*
            This
      exhibit is furnished rather than filed, and shall not be incorporated by
      reference into any filing of the registrant in accordance with Item 601 of
      Registration S-K




32
 Table of Contents




SIGNATURES





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





REXAHN PHARMACEUTICALS, INC.
                        (Registrant)By:
                      /s/
      Chang H. AhnDate:
      May 11, 2009
                      
                      Chang
      H. AhnChairman
      and Chief Executive Officer





By:
                  /s/
      Ted T.H. JeongDate:
      May 11, 2009
                  
                  Ted
      T.H. JeongChief
      Financial Officer and
Secretary




33
 Table of Contents




INDEX
TO EXHIBITS


Quarterly
Report on Form 10-Q


Dated
March 31, 2009





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







34