**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM 10-KSB**




**(Mark
      One)**




xANNUAL
      REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934




For
      the
      Fiscal Year Ended December 31, 2006




OR




oTRANSITION
      REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934




For
      the
      Transition Period from _________ to _________




Commission
      file number: 000-50590




**REXAHN
      PHARMACEUTICALS, INC.**


(Name
      of
      small business issuer in its charter)




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




**9620
      Medical Center Drive**


**Rockville,
      Maryland 20850**


(Address
      of principle executive offices)




**(240)
      268-5300**


(Issuer's
      telephone number)




Securities
      registered under Section 12(b) of the Exchange Act: None




Securities
      registered under Section 12(g) of the Exchange Act:


Common
      Stock, par value $0.0001 per share


(Title
      of
      class)




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


Yes x No o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to the best of registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x




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




State
      issuer's revenues for its most recent fiscal year: $75,000




As
      of
      March 30, 2007, the aggregate market value of the voting common equity held
      by
      non-affiliates of the issuer was approximately $ 57,195,481 based on
      the closing trade reported on the Over-the-Counter Bulletin Board.




As
      of
      March 30, 2007, the number of shares of the issuer's common stock outstanding
      was: 50,308,132




Documents
      incorporated by reference: None




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










**Cautionary
      Statement Regarding Forward-Looking Statements.** This
      Annual Report on Form 10-KSB contains statements (including certain
      projections and business trends) accompanied by such phrases as "believe",
      "estimate", "expect", "anticipate", "will", "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 set forth herein under the
                caption "Risk Factors" and 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.


i


**REXAHN
      PHARMACEUTICALS, INC.**




**INDEX**




**PAGE**PART
                IItem
                1.
            Description
                of Business
            1Item
                2.
            Description
                of Property.
            27Item
                3.
            Legal
                Proceedings.
            27Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders.
            27PART
                IIItem
                5.
            Market
                for Common Equity and Related Stockholder
                Matters.
            28Item
                6.
            Management's
                Discussion and Analysis or Plan of
                Operation
            29Item
                7.
            Financial
                Statements
            40Item
                8.
            Changes
                In and Disagreements With Accountants on Accounting and
                Financial Disclosure
            66Item
                8A.
            Controls
                and Procedures
            66Item
                8B.
            Other
                Information
            66PART
                IIIItem
                9.
            Directors,
                Executive Officers, Promoters and Control Persons;
                Compliance With Section 16(a) of the Exchange Act
            67Item
                10.
            Executive
                Compensation
            70Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters
            77Item
                12.
            Certain
                Relationships and Related Transactions; and Director
                Independence
            79Item
                13.
            Exhibits
            80Item
                14.
            Principal
                Accountant Fees and Services
            81SIGNATURES
            82




ii
 *Index*


**PART
      I**




**Item
                1.**
            **Description
                of Business**




Any
      references to "we", "us", "our," the "Company" or "Rexahn" shall mean Rexahn
      Pharmaceuticals, Inc.




We
      are a
      clinical stage biopharmaceutical company dedicated to the discovery,
      development, and commercialization of innovative treatments for cancer, central
      nervous system (CNS) disorders, sexual dysfunction and other unmet medical
      needs. We develop therapies that make it possible to regain normalcy for
      patients suffering from disease. We have one drug candidate entering
      Phase II clinical trials this year and five other drug candidates in
      pre-clinical development. We plan to enter two drug candidates into Phase II
      clinical trials this year, subject to obtaining sufficient additional
      financing. We intend to leverage our drug-discovery technologies,
      scientific expertise and developmental know-how to develop and commercialize
      signal inhibitor cancer drugs with greater clinical benefits for patients and
      new drugs for the treatment of diseases of the central nervous system. We will
      continue to identify internally developed compounds as potential drug
      candidates, as well as assess compounds developed by others and, if necessary,
      license the rights to these compounds in order to develop and commercialize
      them
      as drugs. For a description of our pipeline drug candidates, see "Our Pipeline
      Drug Candidates" in this Item 1.




Our
      principal corporate offices are located at 9620 Medical Center Drive,
      Rockville, Maryland 20850 in Maryland's I-270 technology corridor. Our
      telephone number is (240) 268-5300.




Our
      current therapeutic focus in the anti-cancer area is on therapies that target
      signal transduction molecules of cancer cells. Signal transduction is the
      process of transforming external information from the cell surface to a specific
      internal response, such as cell growth or cell death. Signals are conveyed
      through tightly regulated communication networks. The signaling pathways are
      comprised of functionally diverse molecules, including proteins. Most, if not
      all, cancer disease states arise from aberrant cell communication. Recent trends
      in anti-cancer chemotherapy drug development involve signal transduction
      inhibitors that are target-specific. Our signal transduction inhibitors directly
      attack these signaling pathways and halt the growth of cancer cells. We believe
      this approach will lead to the development of more targeted and less toxic
      drugs
      than are currently available to help treat cancer and that may also have
      potential applications in other disease areas.




We
      currently have a number of drug candidates in clinical development for cancer,
      CNS disorders and sexual dysfunction. Our lead anti-cancer drug candidate,
      Archexin, which we previously referred to as RX-0201, completed Phase I clinical
      trials in 2006 and will begin its Phase II clinical trials in the second quarter
      of 2007 in patients with advanced stage renal cell carcinoma (RCC), an abnormal
      growth of cells lining the tubules of the kidney. Additional Archexin Phase
      II
      clinical trials in gastrointestinal (GI) indications, such as pancreatic and
      stomach cancers, are expected to follow. Archexin received "orphan drug"
      designation from the Food and Drug Administration, or FDA, for five cancer
      indications (RCC, pancreatic cancer, stomach cancer, brain cancer and ovarian
      cancer). The FDA's orphan drug program is intended to stimulate research,
      development and approval of products that treat rare diseases. With orphan
      drug
      designation, sponsor companies benefit from an expedited FDA approval process,
      seven years of marketing exclusivity after approval and tax incentives for
      clinical research. We plan to enter our RX-10100 drug candidates into Phase
      II trials for two separate indications, anxiety (as Serdaxin) and sexual
      dysfunction (as Zoraxel), in 2007, subject to obtaining sufficient additional
      financing. Based on early studies, both candidates appear to act on serotonin
      and dopamine, which are key neurotransmitters in the brain implicated in anxiety
      and sexual dysfunction.




1
 *Index*


**Company
      Background**




Our
      company resulted from a merger of Corporate Road Show.Com Inc., originally
      a New
      York corporation ("CPRD"), and Rexahn, Corp, a Maryland corporation, immediately
      after giving effect to a 1-for-100 reverse stock split and the
      reincorporation of CPRD as a Delaware corporation under the name "Rexahn
      Pharmaceuticals, Inc." ("Rexahn Pharmaceuticals"), with Rexahn, Corp surviving
      as a wholly owned operating subsidiary of ours (the "Merger"). The Merger was
      effective as of May 13, 2005. On September 29, 2005, Rexahn, Corp, was
      merged with and into us and Rexahn, Corp's separate existence was
      terminated.




Rexahn,
      Corp was founded in March 2001 and began as a biopharmaceutical company
      focusing on oncology drugs. Dr. Chang Ahn, our Chairman, a former Food and
      Drug
      Administration, or FDA, reviewer, and National Cancer Institute, or NCI,
      research scientist, helped guide the company's initial research efforts toward
      signal inhibitor therapies. Our mission is to discover, develop and market
      innovative therapeutics that address unmet medical needs.




**Industry
      Background**




***Overview***




Our
      research and development focuses on three therapeutic areas that affect the
      lives of many people—cancer, diseases of the central nervous system (namely
      anxiety, depression) and sexual dysfunction. All of these disorders can have
      a
      debilitating effect on the quality of life for patients who suffer from them.
      Our strategy is to develop drugs that satisfy unmet needs in the market and
      to
      allow patients suffering from disease to regain normalcy in their
      lives.




According
      to the American Cancer Society's Cancer Facts & Figures 2007, cancer is
      the second leading cause of death among Americans and is responsible for one
      of
      every four deaths in the United States. In 2007, more than 560,000
      Americans are expected to die of cancer and close to 1.4 million
      new cases are expected to be diagnosed .
      These
      estimates do not include non-invasive cancer or more than 1 million cases
      of basal and squamous cell skin cancers expected to be diagnosed in
      2007.




The
      high
      rate of cancer prevalence and the inadequacy of available treatments justify
      continued investment in new therapies. In the United States alone, over
      $25 billion in cancer therapeutics are sold annually. According to a market
      research report by Datamonitor, sales of anti-cancer drugs are predicted to
      grow
      each year, reaching $55 billion globally in 2009. The report attributes the
      growth in sales to increased demand for innovative drugs, which are expected
      to
      rise in market share from 18% to 33% of total anti-cancer drug sales by
      2009.




The
      National Institute of Mental Health, or NIMH, estimates that 26.2 percent of
      adults, or 57.7 million people, suffer from a diagnosable mental disorder
      in a given year. The NIMH also reports that nearly half of those with a mental
      disorder suffer from two or more disorders. With this large prevalence and
      given
      many people suffer from more than one mental disorder at a given time, the
      burden of illness is significant and mental disorders are the leading cause
      of
      disability in the United States. The anti-anxiety and anti-depression market
      is
      estimated to be over $22 billion by 2010 according to a Business
      Communications article entitled "The Expanding Market for Psychotherapeutic
      Drugs".




**Current****Cancer
      Treatments**




Traditional
      cancer treatments include surgery, radiation therapy, and chemotherapy. Surgery
      is widely used to treat cancer, and in many cases cure cancer, provided the
      cancer has not metastasized. However, the complications associated with surgery
      are significant. Even if a cure may be achieved through surgery, the costs
      to
      the patient in terms of health and reduced quality of life often does not
      support the surgical option.




2
 *Index*


Radiation
      therapy, or radiotherapy, is the treatment of cancer and other diseases with
      ionizing radiation and can be highly effective for treating cancers. Ionizing
      radiation deposits energy that injures or destroys cells in the area being
      treated by damaging their genetic material, making it impossible for these
      cells
      to continue to grow. Although radiation damages both cancer cells and normal
      cells, the normal cells are generally able to repair themselves and function
      properly. In certain cancer tumor types, radiotherapy cure rates are as high
      as
      for surgery and can be used when surgery would be unable to remove the tumor
      completely or is deemed inappropriate.




Chemotherapy
      destroys cancer tumor cells by interfering with various stages of the cell
      division process. Chemotherapy is used as a primary treatment for leukemia,
      other blood cancers, and inoperable or metastatic solid cancer tumors. However,
      many current chemotherapy drugs have limited efficacy and debilitating adverse
      side effects and may result in the development of multi-drug resistance.




***Unmet
      Needs in Cancer Therapies***




While
      surgery remains the best available treatment for long-term survival provided
      the
      cancer is still localized and radiation and chemotherapy offer more limited
      benefits for those whose disease is more widespread at the time of diagnosis,
      a
      considerable number of unmet needs remain in the treatment of
      cancer.




·
            *Long-term
                control of advanced tumors*:
                For advanced cancer (particularly stage III-IV disease in which the
                cancer
                has spread throughout the body), surgery cannot eliminate the tumor
                and
                the patient becomes reliant on chemotherapy and/or radiation. However,
                current chemotherapy, in the majority of cases, fails to eliminate
                the
                tumor, tending to, at best, shrink the tumor and fails to extend
                the
                patient’s life. These limitations translate into a need for safer and
                effective cancer therapies offering a significant improvement in
                survival
                time or long-term chronic disease control.




·
            *Decreased
                relapse for early-stage patients*:
                While many early-stage patients will enter remission as a result
                of
                treatment with surgery and radiation therapy and chemotherapy as
                well, the
                rate of relapse is high, as small numbers of tumor cells remain after
                the
                treatments despite standard surgical and radiation therapies. Upon
                relapse, the tumor is often more aggressive than the initial occurrence,
                and unresponsive to standard first-line therapies. The development
                of
                therapies that can maintain a patient in remission following treatment
                for
                the initial tumor, rather than permitting relapse, is a significant
                unmet
                need.




·
            *Less
                toxic therapies*:
                Current chemotherapeutic drugs are associated with a high level of
                toxicities, due to their nonspecific mechanism of targeting all rapidly
                dividing cells, rather than cancer tumor cells in particular. For
                patients
                with terminal disease, the maintenance of quality of life, in addition
                to
                extending life, is of prime importance; however, treatment-related
                toxicities severely impair the quality of life of cancer patients.




***Current
      Renal Cell Carcinoma Treatments***




Renal
      cell carcinoma (RCC) is one of the most difficult cancers to treat. Current
      treatments for RCC include radiation, surgery and chemotherapy. Only 20% of
      metastatic RCC tumors respond to standard therapy, leaving 80% of advanced
      RCC
      patients without any effective treatment. Further, up to 50% of stage I-III
      RCC
      patients relapse following treatment. With existing therapies, the five-year
      survival rate for RCC patients is less than 20%.




3
 *Index*


Given
      the
      poor prognosis of patients with advanced stage RCC disease, we believe the
      development of an effective and less toxic treatment for RCC represents a
      significant unmet need in the marketplace.




***Unmet
      Needs in RCC Treatment***




Our
      first
      anti-cancer drug candidate on the market will focus on patients with RCC. Each
      year nearly 208,000 people worldwide are diagnosed with RCC, the most common
      form of kidney cancer. More than 102,000 die from RCC annually according to
      the
      Kidney Cancer Association (2005). In the United States, approximately 30,000
      new
      cases are diagnosed each year, accounting for 3% of all cancer cases and
      approximately 1.5% of all cancer deaths.




***Current
      CNS Treatments***




Anxiety
      is the stress response (e.g., fight, fright, flight) that is provoked by a
      genuine threat or challenge. In a healthy individual, such stress is used as
      a
      spur for appropriate action. However, in an individual with anxiety, such stress
      induces an excessive or inappropriate state of arousal characterized by feelings
      of apprehension, uncertainty and/or fear, resulting in paralyzing the individual
      into action or withdrawal. An anxiety disorder persists once the threat is
      removed, while a healthy response to a threat resolves. Anxiety is linked to
      high levels of amygdale action that are associated with an increased prevalence
      of anxiety symptoms and dispositional negative affect.




Anxiety
      disorders are classified according to the severity and duration of their
      symptoms and specific behavioral characteristics. Categories
      include:




·
            Generalized
                anxiety disorder (GAD), which is long lasting and low-grade.


·
            Panic
                disorder, which has more dramatic symptoms.


·
            Phobias.


·
            Obsessive−compulsive
                disorder (OCD).


·
            Post−traumatic
                stress disorder (PTSD)


·
            Separation
                anxiety disorder (which is almost always seen in
                children).





Social
      phobia, also known as social anxiety disorder, is the fear of being publicly
      scrutinized and humiliated and is exhibited by extreme shyness and discomfort
      in
      social settings. This phobia often leads people to avoid situations and is
      not
      due to a physical, mental problem. According to the U.S. National **** Morbidity
      Survey from 1994, social phobia is the third most common psychiatric disorder
      in
      the United States. Prevalence has been estimated at 7%.




The
      anxiety and depression markets are dominated by a few classes of products.
      Selective serotonin reuptake inhibitors (SSRIs) and serotonin
      norepinephrine reuptake inhibitors (SNRIs) are the two major classes of
      anti-depressants. SSRIs and benzodiazepines are the most frequently used
      products to treat anxiety. While many of these products help to control anxiety
      and depression for some patients, they have significant drawbacks that limit
      patient use, such as being potentially habit-forming, causing drowsiness,
      limitations on use with certain pre-existing medical conditions, slow onset
      of
      action, causing sexual dysfunction, insomnia and interacting with certain food
      or drugs. The marketing exclusivity period of many currently marketed drugs
      for
      the treatment of anxiety and depression are close to ending, resulting in fierce
      competition from generic drug makers. While major pharmaceutical companies
      are
      trying to extend the protection of their blockbuster drugs, they also want
      to
      develop new classes of drugs that will give another decade of exclusivity with
      better efficacy. Serdaxin, as a dual action drug candidate, has a potential
      to
      address this market.




4
 *Index*


***Unmet
      Needs in CNS Therapies***




The
      marketing exclusivity period of many key drugs for the treatment of anxiety
      and
      depression has expired or is close to expiration and has resulted in fierce
      competition from generic drug makers. Major pharmaceutical companies are waiting
      for better and safer new classes of drugs that will give them another decade
      of
      exclusivity in the market.




·
            *Better
                safety profile*:**Adverse
                reactionsassociated
                with current SSRI anxiolytics and antidepressants include nausea,
                sexual
                dysfunction, insomnia, suicidal tendency and weight gain. The occurrence
                of one or more of these side effects in patients is the primary reason
                thatover
                30% ofpatients discontinue use of these
                treatments.




·
            *Fast
                therapeutic onset with immediate results*:****Onset
                of therapeutic action within the first week of use has been one of
                the key
                goals for all drug discovery programs involved in treating anxiety
                and
                depression. All current medications require several weeks to see
                therapeutic onset.




·
            *Broad
                spectrum of activity*:The
                vast majority of patients who suffer from anxiety also display symptoms
                of
                depression and vice versa. In the past, each disorder was treated
                with
                separate medications. Recent clinical studies have demonstrated the
                ability of SSRIs to be somewhat effective in treating both anxiety
                and
                depression. Newer drugs should have more potent efficacy with better
                safety profiles than SSRIs to address both symptoms of anxiety and
                depression.




***Current
      Sexual Dysfunction Treatment*** ****




There
      are
      currently only three oral drugs approved on the market to treat erectile
      dysfunction. All three products are selective inhibitors of phosphodiesterase
      type 5 (PDE5). These drugs may result in numerous adverse reactions, including
      cardiovascular effects and death. Zoraxel is not a PDE5 inhibitor, but works
      through a brain mediated mechanism that produces release of serotonin and
      dopamine. There are currently no products on the market to treat premature
      ejaculation, although a few products are in development.




***Unmet
      Needs in Sexual Dysfunction*** ****




Premature ejaculation represents the largest segment of male sexual dysfunction. An
      estimated 30 million men in the United States and 36 million in Europe
      suffer from premature ejaculation, however, there are few treatment options
      available. There
      is
      presently no approved drug for treatment of premature ejaculation.




**Market
      Opportunity**




We
      believe that several factors make drug development for cancer and diseases
      of
      the central nervous system attractive to large pharmaceutical companies,
      including:




·
            *Favorable
                Environment for Formulary Access and Reimbursement*.
                Given the significant death rate, the relatively poor performance
                of
                existing drugs, and the life threatening nature of cancer, decisions
                by
                medical providers and health insurance companies are more heavily
                focused
                on outcomes than product cost for cancer drugs compared to drugs
                from
                other therapeutic classes. As a result cancer drugs with proven efficacy
                are expected to gain rapid formulary listing and patient reimbursement,
                and in addition, drugs that have orphan designations are generally
                reimbursed by insurance companies given that there are few, if any,
                alternatives. Since mental disorders affect an estimated 57.7 million
                people in the United States, the burden of illness is significant
                for
                insurance companies as well as for employers. Given the significant
                cost
                of treating behavioral health problems, there is a favorable environment
                for formulary access and reimbursement for effective products that
                treat
                multiple disorders.




5
 *Index*


·
            *Focus
                on Specialty Markets*.
                Cancer patients are treated by oncologists, a group of physician
                specialists who are early adopters of new therapies. Marketing products
                to
                this physician group can be accomplished with a specialty sales force
                that
                requires less investment than a typical product sales force that
                markets
                to primary care physicians and general practitioners.




·
            *Lower
                Development Expenses/Shorter Development Time*.
                Drugs for life-threatening diseases such as cancer are often treated
                by
                the Food and Drug Administration (FDA) as candidates for fast track,
                priority and accelerated reviews. Clinical studies for cancer require
                fewer patients than those for non-life threatening diseases. This
                results
                in reduced cost and shorter clinical trials. Our lead CNS product,
                Serdaxin, is also expected to have lower development expenses as
                well as
                shorter development time given the drug has been on the market for
                20
                years for other treatments, with a well-established safety
                record.




Our
      therapeutic areas focus on large markets with significant unmet needs. The
      high
      rate of cancer prevalence and the inadequacy of available treatments justify
      continued investment in new therapies. Datamonitor estimates that in 2004,
      drugs
      for the treatment of cancer represented a $40 billion market. In the United
      States alone, over $25 billion in cancer therapeutics are sold annually.
      Sales of cancer drugs are predicted to grow annually reaching $55 billion
      globally in 2009. Datamonitor attributes the sales growth will be driven mainly
      by innovative drugs, increasing the market share of innovative cancer therapy
      from 18% presently to 33% of total cancer sales by 2009.




**Our
      Strategy**




Our
      goal
      is to build value through a strong drug pipeline and marketed products in each
      of our market segments (cancer, CNS and sexual dysfunction) or sub-segments;
      however, to date, we have no marketed products. To achieve these goals, our
      strategy has several key components:




***Target
      Signal Transducer Molecules With Multiple Drug
      Candidates***




We
      plan
      to expand our drug candidate pipeline and introduce several new signal inhibitor
      drugs into clinical trials over the next five years. By identifying and
      characterizing the genes and proteins that control the signaling pathways and
      gene expression of cancer cells, we seek to develop DNA/RNA-based and
      small-molecule drugs to treat a broad range of diseases caused by abnormal
      expression or functions of those genes and proteins. In addition to developing
      our own signal transduction inhibitors, we will use our technology platforms
      to
      screen and identify compounds developed by other companies, either on their
      own
      or in collaboration with us, which could be effective signal transduction
      inhibitors for anti-cancer applications.




***Establish
      Partnerships With Large Pharmaceutical Companies***




We
      will
      seek to establish partnerships with large pharmaceutical companies in order
      to
      reduce drug development costs and to expand the disease treatment indications
      of
      the drug candidates and access to markets. We plan to market products for which
      we obtain regulatory approval either directly or through co-marketing
      arrangements or other licensing arrangements with large pharmaceutical
      companies. To market those drug candidates with disease treatment indications
      that are larger or geographically diverse, we expect to enter into licensing,
      distribution or partnering agreements with pharmaceutical companies that have
      large established sales organizations; however, to date, we have not entered
      into such agreements with any large pharmaceutical companies.




6
 *Index*


***Clinically
      Develop Drug Candidates as Orphan Drugs to Reduce
      Time-to-Market***




Under
      the
      Orphan Drug Act, the FDA may expedite approval of new drugs that treat diseases
      affecting less than 200,000 patients each year. This category of diseases is
      called an "orphan indication". Incentives in the Orphan Drug Act include a
      faster time-to-market of the drug (with FDA approval possible after
      Phase II trials instead of Phase III trials) and seven years of drug
      marketing exclusivity for the sponsor. In addition, the FDA sometimes provides
      orphan research grants to aid in the costs of developing an orphan drug. Once
      the drug candidate has received orphan drug approval, the sponsor may conduct
      larger, more extensive clinical trials seeking approval for other, more
      widespread diseases. We plan to develop drug candidates initially for orphan
      category cancers in order to reduce the time-to-market for these potential
      products. Our drug candidates may also be effective against non-orphan category
      cancers, providing additional market opportunities for off-label use. This
      would
      enable us to either license these drugs for further development by major
      pharmaceutical companies or conduct the necessary studies to seek FDA approval
      for additional disease treatment indications. In the future, we may develop
      drug
      candidates for other orphan category diseases to take advantage of our expertise
      with the orphan drug development process.




***In-License
      Unique Technology***




We
      seek
      to keep abreast of emerging technologies and development stage drugs. We seek
      to
      proactively review opportunities to in-license and advance compounds in oncology
      and other therapeutic areas that are strategic and have value creating potential
      to take advantage of our development know-how. For example, in
      February 2005, we licensed the intellectual property of Revaax
      Pharmaceuticals LLC ("Revaax") for development as potential drug candidates
      for
      the treatment of neurological diseases. Through licensing arrangements, we
      seek
      to strengthen our pipeline of drug candidates.




***Capitalize
      on Our Management Team's Expertise for Drug Development and Product
      Commercialization***




Commercializing
      drugs requires regulatory, clinical development, and marketing skill sets that
      our management team possesses. Our regulatory knowledge comes from team members
      who have either been regulatory reviewers at the FDA or regulatory consultants
      who have prepared and filed regulatory documents in the U.S.  and
      worldwide. Our management team also possesses clinical development experience
      in
      oncology and several other therapeutic areas. We believe that this knowledge
      and
      experience with the FDA drug approval process permits us to develop strategies
      that take advantage of the FDA's fast track policies. Where possible, our
      management will seek to use their experience to design and implement drug
      development programs that minimize the time for clinical trials, while
      maximizing success rates for approval of our drug candidates. Members of our
      management team also have prior experience in pharmaceutical product launch
      and
      marketing.




**Our
      Pipeline Drug Candidates**




Our
      anti-cancer therapeutic technology consists of both proprietary RNA/DNA-based
      signal transduction inhibitors and small molecule candidate compounds believed
      to be effective for treating a large number of human cancers. We have a number
      of drug candidates in clinical development for cancer, CNS disorders and sexual
      dysfunction. In 2006, Phase I clinical trials of Archexin in patients with
      advanced cancer was successfully completed. In 2007, we plan to initiate Phase
      II clinical trials targeting patients with renal cell cancer (Archexin), and
      plan to initiate, subject to obtaining sufficient additional financing, Phase
      II
      clinical trials targeting patients with social phobia (Serdaxin) and sexual
      dysfunction (Zoraxel). The following description of our pipeline drug candidates
      is based on clinical and pre-clinical trials and studies.




7
 *Index*


***Cancer***




Our
      unique approach to improving cancer patients’ lives is to develop potent,
      targeted therapeutics with fewer side effects than current chemotherapeutics,
      which are highly toxic.




We
      develop targeted therapeutics that directly disrupt the signals responsible
      for
      the disease progression. Through a process known as signal transduction,
      external information is transmitted from the cell surface to specific internal
      signal molecules for specific functional responses, such as cell growth or
      cell
      death. The signaling pathways are comprised of functionally diverse molecules,
      including proteins. Most, if not all, cancer disease states arise from aberrant
      cell communication. Our drug candidates target critical signal molecules in
      cell
      signaling pathways, which are believed to have a broad and highly effective
      impact on cell survival, proliferation, metastasis and angiogenesis.




Our
      signal targets (e.g. Akt and HIF-1) are over-expressed and/or over-activated
      in
      many different types of human solid tumors, giving our anticancer drugs utility
      across a wide range of cancers.




*Archexin* *:* *First-in-class* *Akt
      Inhibitor*




Our
      leading anti-cancer drug candidate, Archexin,
      inhibits cellular communication of both activated and native Akt. Akt is an
      important target in the treatment of cancer because it plays a key role in
      cancer progression by stimulating cell proliferation and cell survival, and
      promoting angiogenesis. Archexin inhibits Akt by significantly reducing
      expressions of its mRNA and subsequently its protein, resulting in disruption
      of
      signaling by both
      activated and native Akt.
      Small molecule compounds may only be able to inhibit either activated or native
      protein.




In
      October 2006, we announced the conclusion of the Phase I clinical trial of
      Archexin. The Phase I clinical trial of Archexin, which took place at Georgetown
      University's Lombardi Cancer Center beginning in September 2004 and at the
      University of Alabama at Birmingham beginning in August 2005, was primarily
      to determine the safety and tolerability of the drug in patients with advanced
      cancer. The Phase I study demonstrated that fatigue was the dose limiting
      toxicity. Unlike most anti-cancer drugs, no hematological abnormalities were
      observed. The Phase II trial, which is expected to last 1 1⁄2 to 2 years, is
      expected to begin in the second quarter of 2007 and will be a multi-center
      study
      in the U.S. and worldwide. To enhance cellular uptake and improve tumor
      targeting, we are also developing a nanotechnology-based delivery system for
      Archexin. With an outstanding profile of safety established, the goal of Phase
      II is to determine the efficacy of Archexin in patients with late stage renal
      cell carcinoma, one of the orphan indications for which we received orphan
      drug
      designation from the FDA. In addition, we plan to expand Archexin to the
      treatment of other orphan and non-orphan indications.




In
      November 2006, we announced that we had been granted a U.S. patent for
      our anti-Akt compounds, including Archexin. The patent covers the
      nucleotide sequences of the anti-sense compounds that target and inhibit the
      expression of Akt in human tissues or cells. The patent also covers the method
      of using the compounds to induce cytotoxicity in cancer cells.




8
 *Index*




*RX-5902:
      Microtubule Inhibitor and RX-0047: First-in-class HIF-1 Alpha Inhibitor*




Our
      RX-5902 and RX-0047 drug candidates are both in a pre-clinical stage of
      development and the next scheduled program for each compound is a pre-clinical
      toxicology study required prior to submission of an Investigational New Drug
      ("IND") application to the FDA. RX-5902, a piperazine analogue, is a
      microtubule inhibitor specifically acting on G 2 /M
      cell
      cycle. In pre-clinical studies, it strongly induced apoptosis and inhibited
      proliferation of various human cancer cells at nanomolar concentrations, and
      significantly reduced the growth of tumors in animal xenograft models. RX-5902
      demonstrated potent anti-proliferating effects on drug-resistant cancer cells
      and showed synergism with known anti-cancer drugs as well. RX-5902 appears
      to
      process excellent oral bioavailability and thus may be developed in both
      intravenous and oral forms. RX-5902 is expected to enter Phase I clinical trials
      in 2008. RX-0047 directly inhibits HIF-1 by reducing expressions of its mRNA
      and
      protein. HIF-1 is a major regulating mechanism of cancer cell growth, invasion,
      angiogenesis and radiation resistance. HIF is known to be over-expressed in
      a
      broad range of human cancers and is associated with increased mortality,
      metastasis and/or resistance to radiation therapy.





Preclinical
      studies demonstrated that RX-0047 inhibits proliferation of various human cancer
      cells at nanomolar concentrations and significantly reduced tumor growth and
      metastasis in animal xenograft models. Phase I clinical trials of RX-0047 are
      expected to begin in 2008.




***CNS***




CNS
      disorders are another one of our therapeutic focus areas. We have exclusive
      patent rights (five U.S. patents and multiple pending patents) on a series
      of
      compounds that affect anxiety, depression, cognition, aggression and
      neurodegenerative diseases.




Serdaxin,
      Rexahn’s leading CNS drug candidate, modulates both serotonin and dopamine
      neurotransmitters, simultaneously, making it a potent therapy for anxiety and
      depression. The active ingredient of Serdaxin has been in medical use in other
      treatments for more than two decades and its safety has been well established.





*Serdaxin*





Serdaxin
      acts on the neurotransmission systems of serotonin and dopamine, which are
      key
      controlling mechanisms of anxiety and mood disorders.




It
      has
      been recognized that Serotonin is linked to the negative affect mood factor
      leading to negative mood states such as anxiety, disgust, fear, guilt,
      hostility, irritability and loneliness. Recent findings indicate that dopamine
      is linked to the positive affect related to positive mood states such as
      happiness, pleasure, motivation, and energy mood factor. Symptoms of mood
      disorders are causally related and clinical evidence identifies low levels
      of
      dopamine in the brain of patients. The negative mood states as well as loss
      of
      the positive mood states are common to both anxiety and mood
      disorders.




Serdaxin
      modulates both serotonin and dopamine at the same time with unique mechanisms
      of
      action that is different from currently marketed anxiolytic and anti-depressant
      drugs such as benzodiazepines and SSRIs. In animal models of hamsters, mice,
      rats and monkeys, Serdaxin increased levels of serotonin and dopamine in the
      brain, exhibited potent anxiolytic activities, and induced significant active
      imaging changes in the rat brain in fMRI(functional magnetic resonance imaging)
      tests. However, Serdaxin did not disrupt learning and memory functions unlike
      current anxiolytic drugs.




We
      plan
      to initiate, subject to obtaining sufficient additional financing, Phase II
      clinical trials of Serdaxin, beginning in the second half of 2007, 
focusing on patients with social phobia, a category of anxiety.


9
 *Index*


***Sexual
      Dysfunction***




We
      also
      aim to develop therapeutics for sexual dysfunction indications.




*Zoraxel* ******




Similar
      to Serdaxin for CNS disorders, Zoraxel, our leading sexual dysfunction drug
      candidate, modulates both serotonin and dopamine neurotransmitters, which
      coordinate copulatory rate and sexual function. The active ingredient of Zoraxel
      has been in medical use in other treatments for more than two decades and its
      safety has been well established.




As
      coordinated changes in serotonin and dopamine release in different areas of
      the
      brain appears to play a critical role in controlling sexual dysfunction, Zoraxel will
      also
      be evaluated in the treatment of patients with sexual dysfunction (erectile
      dysfunction and premature ejaculation) more
      safely and effectively by enhancing dual neurotransmitters
      simultaneously. In
      rodent and monkey models of sexual dysfunction, Zoraxel was
      shown to significantly enhance sexual activities.





We
      plan
      to initiate, subject to obtaining sufficient additional financing, Phase II
      clinical trials of Zoraxel for sexual dysfunctions beginning in the second
      half
      of 2007.





**Competition**




Our
      principal drug candidates under development are expected to address unmet
      medical needs within the oncology, CNS and sexual dysfunction markets. For
      many
      of these disease treatment indications, our drug candidates will be competing
      with products and therapies either currently existing or expected to be
      developed. Competition among these products will be based, among other things,
      on product efficacy, safety, and reliability, price and patent position. An
      important factor will be the timing of market introduction of our competitive
      products. Accordingly, the relative speed with which we can bring drug
      candidates to the market is expected to be an important competitive factor.
      Our
      competitive position will also depend upon our ability to attract and retain
      qualified personnel, to obtain patent protection or otherwise develop
      proprietary products or processes, and to secure sufficient capital resources
      for the often substantial period between technological conception and commercial
      sales.




There
      are
      a number of pharmaceutical and biotechnology companies both privately and
      publicly held that are conducting research and development activities on
      technologies and products for treatment of cancers, CNS diseases and sexual
      dysfunction. We cannot assure you that our competitors will not succeed in
      developing products based on technology which is similar to ours, or other
      novel
      technologies that are more effective than any which are being developed by
      us or
      which would render our technology and products obsolete and noncompetitive
      prior
      to recovery by us of the research, development and commercialization expenses
      incurred with respect to those products.




Our
      competitors engaged in developing treatments for cancer, CNS and sexual
      dysfunction include major pharmaceutical, specialized biotechnology firms,
      and
      academic and other research institutions. Many of our competitors have
      substantially greater financial, technical and human resources than we do.
      In
      addition, many of our competitors have significantly greater experience than
      we
      do in undertaking pre-clinical testing and human clinical trials of new
      pharmaceutical products and obtaining FDA and other regulatory approvals of
      products for use in health care. Accordingly, our competitors may succeed in
      obtaining FDA approval for products more rapidly than we can.




As
      we
      expand our drug development programs to include diseases other than cancer,
      CNS
      and sexual dysfunction, we will also face competition from pharmaceutical and
      biotechnology companies conducting research and development activities on
      technologies and products for treatment of those other diseases, increasing
      both
      the number and the types of competitors we face. For many of the same reasons
      described above with respect to our competitors in the cancer, CNS and sexual
      dysfunction market, we cannot assure you that we will compete successfully
      against these additional competitors.




10
 *Index*


*Competition
      for Archexin*




Direct
      competitors for Archexin are anti-cancer therapies that treat RCC. Current
      noninvasive treatments for RCC include immunotherapy and chemotherapy.
      Immunotherapy manipulates the immune system to improve the body's natural
      defense against cancers, using cytokines such as interferon-alpha. However,
      cytokine therapy has several shortcomings, such as high cost and severe
      toxicities. Chemotherapy usually targets cells that divide quickly, including
      normal cells such as those found in the blood, hair, and the lining of the
      gastrointestinal tract. Chemotherapy can damage these healthy cells leading
      to
      serious side effects such as nausea, anemia, hair loss, fatigue, nerve pain,
      infection and even treatment-related cancers.




Nexavar,
      developed by Bayer/Onyx, and Sutent, developed by Pfizer, are the most recently
      FDA-approved drugs to treat metastatic RCC. These drugs showed only limited
      extension of PFS (Progression-Free Survival) in patients with no prior cytokine
      therapy. Both have side effects such as skin rash, diarrhea, and hypertension.




We
      believe that the efficacy and safety profile of Archexin will make it an
      excellent alternative to existing therapies for RCC and other cancer
      indications. With fatigue as Archexin’s only dose limiting toxicity, we believe
      that Archexin can be an important addition to current treatments.




*Competition
      for Serdaxin*




SSRIs
      and
      anxiolytics are most frequently used to treat anxiety. While many of these
      products help to control anxiety, they have significant drawbacks that limit
      patient compliance, such as being potentially habit-forming, causing drowsiness,
      motor impairment, slow onset of action, sexual dysfunction, insomnia, weight
      gain, and suicidal tendencies.




Major
      competitors of Serdaxin are SSRIs currently on the market ( *e.g.* ,
      Zoloft,
      Prozac and Paxil). Certain SSRIs are approved to treat depression, anxiety,
      and/or premenstrual dysphonic disorder (PMDD). The most common side effects
      of
      SSRIs include dry mouth, insomnia, sexual side effects ( *e.g.* ,
      decreased libido, delayed ejaculation), diarrhea, nausea, and
      sleepiness.




Despite
      their shortcomings, anxyliotics and SSRIs are expected to continue to dominate
      the market for anxiety therapy. However, we believe that Serdaxin may be a
      superior treatment for the following reasons:




·
            *Safety*:
                Serdaxin has established an excellent safety profile, and appears
                to avoid
                the major side effects associated with SSRIs and
                anxyliotics.




·
            *Potency*:
                Combined effects of the serotonin and dopamine appear to be
                pharmacologically superior to SSRIs and anxyliotics, potentially
                covering
                patients from both negative mood states and loss of positive mood
                states.




·
            *Patent*:
                Unlike the most SSRIs whose patents have expired or will soon expire,
                Serdaxin’s patent extends until 2024 or
                longer.




11
 *Index*


Competition
      forZoraxel




There
      is
      currently no approved drug for treating premature ejaculation, though many
      are
      under development. Two leading candidates in various stages of development
      are
      Dapoxetine, developed by ALZA and Johnson & Johnson, and PSD502, developed
      by Plethora Solutions.




Dapoxetine
      has been demonstrated to be relatively effective in treating premature
      ejaculation when administered from 30 minutes to 4 hours before sexual activity.
      However, the sponsor of the drug had withdrawn its NDA application, in part
      due
      to potential tumor formation.




PSD502
      is
      a topical mixture for treatment of premature ejaculation. Side effects observed
      in Phase II clinical trials include hypoesthesia, a partial loss of sensitivity
      to sensory stimuli. PSD502 is currently in Phase III of development by Plethora
      Solutions.




Despite
      several drugs under development ( *e.g.,* SSRIs
      with short half-lives, such as Dapoxetine)) we believe Zoraxel will provide
      superior benefits to the potential competitors for patients with sexual
      dysfunction with its excellent safety profile and CNS-based dual
      neurotransmitter mechanisms that control sexual activities.




**Government
      Regulation**




Regulation
      by governmental authorities in the United States and in other countries
      constitutes a significant consideration in our product development,
      manufacturing and marketing strategies. We expect that all of our 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.
      U.S. federal regulations control the ongoing safety, manufacture, storage,
      labeling, record keeping, and marketing of all biopharmaceutical products
      intended for therapeutic purposes. We believe that we are in compliance in
      all
      material respects with currently applicable rules and regulations.




Obtaining
      governmental approvals and maintaining ongoing compliance with federal
      regulations is expected to require the expenditure of significant financial
      and
      human resources not currently at our disposal. We plan to fulfill our short-term
      needs through consulting agreements and joint ventures with academic or
      corporate partners while building our own internal infrastructure for long-term
      corporate growth.




The
      process by which biopharmaceutical compounds for therapeutic use are approved
      for commercialization in the United States is lengthy. Many other countries
      have
      instituted equally difficult approval processes. In the United States,
      regulations published by the FDA require that the person or entity sponsoring
      and/or conducting a clinical study for the purpose of investigating a potential
      biological drug product's safety and effectiveness submit an IND application
      to
      the FDA. These investigative studies are required for any drug product for
      which
      the product manufacturer intends to pursue licensing for marketing the product
      in interstate commerce. If the FDA does not object to the IND application,
      clinical testing of the compound may begin in humans after a 30-day review
      period. Clinical evaluations typically are performed in three
      phases.




In
      Phase I, the drug is administered to a small number of healthy human
      subjects or patients to confirm its safety and to develop detailed profiles
      of
      its pharmacological and pharmacokinetic actions ( *i.e.* ,
      absorption, metabolism, excretion, duration of therapeutic concentration and
      effects, if any).




In
      Phase II, the drug is administered to groups of patients (up to a total of
      500) to determine its efficacy against the targeted disease and the requisite
      dose and dose intervals. In a typical development program, additional animal
      toxicology studies precede this phase. Some Phase I clinical studies may
      also proceed in parallel with some Phase II studies.




12
 *Index*


In
      Phase III, the drug is administered to a larger group of patients (usually
      1000 to 3000) by practicing expert physicians in a network of participating
      clinics and hospitals. The extensive clinical testing is intended to confirm
      Phase II results and to document the nature and incidence of adverse
      reactions. Studies also are performed in patients with concomitant diseases
      and
      medications. Phase III is intended to model more closely the real world in
      which the drug will be used. Two multiclinical trials typically constitute
      Phase III evaluations. Although larger numbers of patients are evaluated in
      Phase III at more clinical study sites, many of these are done in parallel
      and therefore Phase III may not require a longer time than
      Phase II.




After
      completing the IND clinical studies, the product developer submits the safety
      and effectiveness data generated by the studies to the FDA in the form of a
      New
      Drug Application (NDA) to market the product. It is the legal
      responsibility of the FDA to review the proposed product labeling, the
      pre-clinical (animal and laboratory) data, the clinical data, as well as the
      facilities utilized and the methodologies employed in the manufacture of the
      product which have been submitted to the agency to determine whether the product
      is safe and effective for its intended use.




Even
      after initial FDA approval has been obtained, further studies may be required
      to
      provide additional data on safety or to gain approval for the use of a product
      as a treatment in clinical disease treatment indications other than those for
      which the product was initially tested. Also, the FDA may require post-marketing
      testing and surveillance programs to monitor the drug's effects. Side effects
      resulting from the use of drug products may prevent or limit the further
      marketing of the products.




For
      marketing outside the United States, we will be subject to foreign regulatory
      requirements governing human clinical trials and marketing approval for drugs.
      The requirements relating to the conduct of clinical trials, product licensing,
      pricing and reimbursement vary widely from country to country.




Certain
      drugs are eligible in the United States for designation by the FDA as "orphan"
      drugs if their use is intended to treat a disease that affects less than
      200,000 persons in the U.S. or the disease affects more than
      200,000 persons in the United States but there is no reasonable expectation
      that the cost of developing and marketing a drug will be recovered from the
      U.S. sales of such drug. In order for a sponsor to obtain orphan
      designation for a drug product, an application must be submitted for approval
      to
      the FDA's Office of Orphan Products Development. The approval of an application
      for orphan designation is based upon the information submitted by the sponsor.
      A
      drug that has obtained orphan designation is said to have "orphan status".
      Each
      designation request must stand on its own merit. Sponsors requesting designation
      of the same drug for the same disease treatment indication as a previously
      designated product must submit their own data in support of their designation
      request. The approval of an orphan designation request does not alter the
      standard regulatory requirements and process for obtaining marketing approval.
      Safety and efficacy of a compound must be established through adequate and
      well-controlled studies.




Orphan
      drugs may obtain FDA approval after successful Phase II trials, rather than
      after completion of Phase III trials, resulting in faster time-to-market for
      those drugs. If a sponsor obtains orphan drug designation for a particular
      compound and is the first to obtain FDA regulatory approval of that compound,
      then that sponsor is granted marketing exclusivity for a period of seven years.
      As a result, orphan drug designation blocks all other competitors from marketing
      the same drug for the approved use for seven years.




13
 *Index*


**Sales
      and Marketing**




We
      seek
      to market our products as a market leader or first-in-class drug in each of
      its
      therapeutic categories or subcategories. We will have two distinct marketing
      channels, depending on the relative market size and required resources. For
      orphan indication drugs targeting specialized physicians, we plan to maintain
      our own marketing campaign by building a specialty sales force. In cancer
      treatment, the oncologist is virtually the sole decision maker, with certain
      limitations by health insurance companies. The specialty sales representatives
      will regularly visit oncologists, especially those who have experience of
      treating orphan cancer such as RCC.




We
      will
      form a co-marketing partnership with a large pharmaceutical company to market
      non-orphan indication drugs like Serdaxin and Zoraxel for CNS diseases and
      sexual dysfunction, which has a much larger market segment. The number of
      potential patients and clinicians who treat such patients are many. The
      partner’s sales reps will cover broader stakeholders which will include
      physicians, patients and insurance companies. We believe that a large
      pharmaceutical partner is best equipped to manage and execute the most effective
      means of reaching the consumers and of differentiating our product from those
      already on the market.




**Research
      and Development**




Our
      research and development has focused on proprietary multi-targeting genomics
      and
      nanotechnology-based projects. Our genomics-based platform technology is aimed
      at novel targets to affect multiple signaling events in cancer cell
      proliferation and growth. We are also exploring nanomedicine-based approaches
      to
      develop a targeted drug delivery system to improve the efficacy and safety
      of
      its therapeutics. For a discussion of collaboration arrangements pursuant to
      which we obtain research and development services from universities, research
      institutions and other organizations, see "Collaboration Agreements" and
      "Certain Relationships and Related Transactions" in Item 12 of this Annual
      Report.




*Multi-Targeting
      Genomics Platform*




Cancer
      is
      a complex disease caused by multiple factors including multiple genetic changes.
      Due to the multiplicity of its causal mechanisms, cancer treatment involves
      a
      combination of drugs with different mechanisms of action. The resulting outcome
      is a severe compounded accumulation of toxicities from each drug. Our approach
      is to control multiple mechanisms of cancer cell proliferation and growth with
      a
      single agent, instead of a combination therapy, so that only toxicities, if
      there are any, from the single agent may be expressed. We have conducted
      numerous genomics-based studies and established an integrated system, named
      CAMTAS, which enabled us to discover potentially important targets that control
      multiple genes. We believe that this novel approach will lead to the discovery
      of new cancer drugs based on newly discovered targets, offering greater clinical
      benefits for cancer patients.




*Nanomedicine
      Delivery System*




We
      are
      developing unique nanomedicine delivery systems that may increase the
      availability of a drug at the disease site, minimize adverse reactions, and/or
      provide longer duration of action of a drug in the body. Currently,
      nanoliposome- and nanopolymer-based anti-cancer drugs are under development.
      To
      accelerate its efforts, we are collaborating with the Center for Nanomedicine
      of
      the University of Maryland. Recently, the Maryland Industrial Partnerships
      (MIPS) program awarded us with a two-year grant to develop nanomedicine-based
      anti-cancer drugs.




14
 *Index*


**Manufacturing**




We
      do not
      currently have the resources required for commercial manufacturing of our drug
      candidates. We currently outsource the manufacturing of drug substances and
      drug
      products for our drug candidates. We have no current plans to build internal
      manufacturing capacity for any product. Manufacturing will be accomplished
      through outsourcing or through partnerships with large pharmaceutical
      companies.




**Intellectual
      Property**




Proprietary
      protection for our drug candidates, processes and know-how is important to
      our
      business. We plan to aggressively prosecute and defend our patents and
      proprietary technology. Our policy is to file patent applications to protect
      technology, inventions, and improvements that are considered important to the
      development of our business. We also rely upon trade secrets, know-how,
      continuing technological innovation and licensing opportunities to develop
      and
      maintain our competitive position. As of March 2007, we have one U.S.
      patent issued, one allowed and three patent applications pending in cancer
      treatment. In March 2005, we licensed-in CNS-related intellectual property
      (five U.S. patents, five pending patents and multiple worldwide coverage) from
      Revaax Pharmaceuticals, LLC. The intellectual property rights acquired cover
      use
      of certain compounds for anxiety, depression, aggression, cognition, Attention
      Deficit Hyperactivity Disorder, neuroprotection and sexual dysfunction. See
      "Collaboration Arrangements" and "Certain Relationships and Related
      Transactions" in Item 12 of this Annual Report on Form 10-KSB for a
      description of the intellectual property rights we have or share in connection
      with our collaborative research and development relationships with universities,
      research institutions and other organizations.




**Collaboration
      and License Arrangements**




We
      have
      numerous collaborative research and development relationships with universities,
      research institutions and other organizations. Also see the discussion in
      "Certain Relationships and Related Transactions" in Item 12 of this Annual
      Report on Form 10-KSB. A brief description of some of these relationships is
      below:




**UPM
      Pharmaceuticals, Inc. ("UPM")** .
      On
      April 3, 2006, we entered into an agreement with UPM to develop a
      short-acting extended release formulation for Serdaxin and Zoraxel.




**Korean
      Research Institute of Bioscience and Biotechnology
      ("KRIBB")** .
      On
      April 1, 2006, we entered into a research agreement with KRIBB to evaluate
      anti-tumor activity, toxicology, pharmacokinetics and mechanisms of action
      for
      RX-5902.




**Ewha
      Womans University ("Ewha")** .
      On
      March 1, 2004, we entered into an agreement with Ewha to collaborate with
      and sponsor Ewha's research in the area of carbocyclic nucleoside, which relates
      to our anticancer drug discovery efforts. Intellectual property made or
      developed in the course of this agreement is or will be owned by us. On
      March 1, 2006, we entered into a research program with Ewha.




**Amarex,
      LLC ("Amarex")** .
      On
      January 6, 2006, we contracted with Amarex to conduct Phase II clinical
      studies of Archexin.


15
 *Index*


**Korea
      Research Institute of Chemical Technology ("KRICT").** On
      June 1, 2005, we entered into a joint research agreement with KRICT with
      respect to research regarding protein kinases in human cancer diseases. The
      research term expired in early 2006. Intellectual property made or developed
      under this agreement is jointly owned by us and KRICT.




**The
      University of Maryland ("UMD").** On
      March 15, 2005, we entered into a Maryland Industrial Partnership agreement
      with the Biotechnology Institute of UMD to collaborate with and sponsor UMD's
      research in the area of ligand screening for novel anticancer therapeutics.
      Intellectual property made or developed under this agreement is jointly owned
      by
      us and UMD.




**Revaax
      Pharmaceuticals LLC ("Revaax").** On
      February 10, 2005, we licensed on an exclusive basis, with the right to
      sublicense, all of the intellectual property of Revaax, which includes five
      patents and 14 patent applications, with respect to certain chemical structures
      that have demonstrated in pre-clinical research the potential to treat certain
      behavioral disorders, such as anxiety, depression and cognitive disorders.
      This
      agreement expires upon the expiration of the royalty term for all licensed
      products in all countries, which is no earlier than August 2020 and could
      extend to August 2024. This agreement provides for an initial license fee
      and milestone payments based on the initiation of pivotal trials for disease
      treatment indication for licensed products. Furthermore, we will pay Revaax
      a
      specified fee for each licensed product under the agreement upon receipt of
      marketing approval for the licensed product. Notwithstanding the milestone
      payment arrangement described above, we are not obligated to make any milestone
      payment with respect to milestone events for which we receive sublicense
      revenues and are obligated to pay Revaax a percentage of such sublicense
      revenues, as well royalties for sales of licensed products based on net sales
      of
      the licensed products.




**Formatech,
      Inc. ("Formatech").** On
      August 17, 2004 we entered into an agreement with Formatech to monitor and
      perform stability studies on our drug candidate, Archexin. On January 3,
      2006 and March 29, 2006, we contracted with Formatech to
      perform Archexin experiments in an effort to develop a more concentrated
      dosage form.




**Employees**




We
      currently have 15 employees, all of whom are based at our Rockville, Maryland
      office. Our employees are not covered by any collective bargaining agreement
      and
      we have never experienced a work stoppage. We believe our relationships with
      our
      employees are satisfactory.




16
 *Index*


**RISK
      FACTORS**




*You
      should carefully consider the risks described below together with the other
      information included in this Annual Report on Form 10-KSB. Our business,
      financial condition or results of operations could be adversely affected by
      any
      of these risks. If any of these risks occur, the value of our common stock
      could
      decline.*




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




To
      date,
      we have generated no product revenues. Until we receive approval from the FDA
      and other regulatory authorities for our drug candidates, we cannot sell our
      drugs and will not have product revenues. Therefore, for the foreseeable future,
      we will have to fund all of our operations and capital expenditures from the
      net
      proceeds of equity or debt offerings we may make, cash on hand, licensing fees
      and grants. Over the next year we expect to spend approximately $1 million
      on clinical development for Phase II clinical trials of Archexin. Based on
      our
      current plans and our capital resources, we believe that our cash and cash
      equivalents will be sufficient to enable us to meet our planned operating needs
      for at least the next year, including the clinical trials of Archexin. We plan
      to initiate, subject to obtaining sufficient additional financing, Phase II
      clinical trials of Serdaxin and Zoraxel beginning in the second half of 2007
      at
      an additional cost of up to approximately $3 million.




However,
      changes may occur that would consume our existing capital at a faster rate
      than
      projected, including but not limited to, the progress of our research and
      development efforts, the cost and timing of regulatory approvals and the costs
      of protecting our intellectual property rights. We may seek additional financing
      to implement and fund other drug candidate development, clinical trial and
      research and development efforts, including Phase I clinical trials for other
      new drug candidates, as well as other research and development projects, which
      together with the current operating plan for the next year, could aggregate
      up
      to $7 million through the end of 2007.




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




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




We
      have
      generated no revenues to date from product sales. Our accumulated deficit as
      of
      December 31, 2006 and 2005 was $20,690,326 and $14,204,323, respectively.
      For the years ended December 31, 2006 and 2005, we had net losses of
      $6,486,003 and $6,349,540, respectively, primarily as a result of expenses
      incurred through a combination of research and development activities related
      to
      the various technologies under our control and expenses supporting those
      activities. Even if we succeed in developing and commercializing one or more
      of
      our drug candidates, we expect to incur substantial losses for the foreseeable
      future and may never become profitable. We also expect to continue to incur
      significant operating and capital expenditures and anticipate that our expenses
      will increase substantially in the foreseeable future, based on the following
      considerations:




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




17
 *Index*


·
            efforts
                to seek regulatory approvals for our drug
                candidates;




·
            implementing
                additional internal systems and
                infrastructure;




·
            licensing
                in additional technologies to develop;
                and




·
            hiring
                additional personnel.




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




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




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




·
            conducting
                pre-clinical and clinical trials;




·
            participating
                in regulatory approval processes;




·
            formulating
                and manufacturing products; and




·
            conducting
                sales and marketing activities.




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




18
 *Index*


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




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




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




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




Our
      drug
      candidates are in an early stage of development and require extensive clinical
      testing, which are very expensive, time-consuming and difficult to design.
      In
      2007, we expect Archexin, an oncology drug candidate, to enter Phase II clinical
      trials. We plan to initiate, subject to obtaining sufficient additional
      financing, Phase II clinical trials of Serdaxin and Zoraxel, neuroscience and
      sexual dysfunction dmg candidates, beginning in the second half of
      2007.




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




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




·
            unforeseen
                safety issues;




·
            determination
                of dosing issues;




19
 *Index*


·
            lack
                of effectiveness during clinical
                trials;




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




·
            slower
                than expected rates of patient
                recruitment;




·
            inability
                to monitor patients adequately during or after treatment;




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




·
            lack
                of sufficient funding to finance the clinical
                trials.




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




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




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




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




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




·
            awareness
                of the drug's availability and
                benefits;




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




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




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




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




·
            the
                price at which we sell our
                products.




20
 *Index*


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




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




We
      depend
      upon independent investigators and collaborators, such as universities and
      medical institutions, to conduct our pre-clinical and clinical trials and
      toxicology studies. This business practice is typical for the pharmaceutical
      industry and companies like us. For example, the Phase I clinical trials of
      Archexin were conducted at the Lombardi Comprehensive Cancer Center of
      Georgetown Medical Center and the University of Alabama at Birmingham, with
      the
      assistance of Amarex, LLC, a pharmaceutical clinical research service provider
      who is responsible for creating the reports that will be submitted to the FDA.
      We also relied on TherImmune Research Corporation (now named Bridge Global
      Pharmaceutical Services, Inc.), a discovery and pre-clinical service provider,
      to summarize Archexin 's pre-clinical data. While we make every effort
      internally to oversee their work, these collaborators are not our employees
      and
      we cannot control the amount or timing of resources that they devote to our
      programs. These investigators may not assign priority to our programs or pursue
      them as diligently as we would if we were undertaking such programs ourselves.
      If outside collaborators fail to devote sufficient time and resources to our
      drug-development programs, or if their performance is substandard, the approval
      of our FDA applications, if any, and our introduction of new drugs, if any,
      may
      be delayed. The risk of completion or delay of these studies is not within
      our
      direct control and a program delay may occur due to circumstances outside our
      control. A delay in any of these programs may not necessarily have a direct
      impact on our daily operations. However, to the extent that a delay results
      in
      additional cost to us, a higher than expected expense may result. These
      collaborators may also have relationships with other commercial entities, some
      of whom may compete with us. If our collaborators assist our competitors at
      our
      expense, our competitive position would be harmed.




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




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




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




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




21
 *Index*


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




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




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




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




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




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




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




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




·
            developing
                drugs;




·
            undertaking
                pre-clinical testing and human clinical trials;




·
            obtaining
                FDA and other regulatory approvals of
                drugs;




22
 *Index*


·
            formulating
                and manufacturing drugs; and




·
            launching,
                marketing and selling drugs.




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




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




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




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




·
            if
                and when patents will issue;




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




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




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




23
 *Index*


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




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




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




·
            redesign
                our products or processes to avoid infringement;




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




·
            pay
                damages; or




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




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




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




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




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




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




24
 *Index*


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




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




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




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




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




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




To
      date,
      we have generated no revenues from product sales and only minimal revenues
      from
      a research agreement with a minority shareholder, and interest on bank account
      balances and short-term investments. Our accumulated deficit as of
      December 31, 2006 and 2005 was $20,690,326 and $14,204,323, respectively.
      For the years ended December 31, 2006 and 2005, we had net losses of
      $6,486,003 and $6,349,540, respectively, primarily as a result of expenses
      incurred through a combination of research and development activities related
      to
      the various technologies under our control and expenses supporting those
      activities. Until we receive approval from the FDA and other regulatory
      authorities for our drug candidates, we cannot sell our drugs and will not
      have
      product revenues.




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




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




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




·
            developments
                concerning intellectual property rights and regulatory
                approvals;




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




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




25
 *Index*


·
            developments
                in the biotechnology industry.




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




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




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




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




These
      factors may result in lower prices for our common stock than might otherwise
      be
      obtained and could also result in a larger spread between the bid and asked
      prices for our common stock. Currently, there are approximately 500 holders
      of
      record of our common stock.




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




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




26
 *Index*


**Item2.**
            **Description
                of Property.**




We
      lease
      approximately 8,030 square feet of laboratory and office space in Rockville,
      Maryland. The facility is equipped with the requisite laboratory services
      required to conduct our business and we believe that our existing facilities
      are
      adequate to meet our needs for the foreseeable future. Our lease expires on
      June 30, 2009. We do not own any real property.




**Item3.**
            **Legal
                Proceedings**.




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




**Item 4.**
            **Submission
                of Matters to a Vote of Security
                Holders.**




None.




27
 *Index*


**PART
      II**




**Item5.**
            **Market
                for Common Equity and Related Stockholder
                Matters.**




As
      of
      March 30, 2007, we are authorized to issue two classes of capital stock,
      which are common stock and preferred stock. Our total authorized shares of
      common stock and preferred stock are 500,000,000 shares, par value
      $0.0001 per share, and 100,000,000 shares, par value $0.0001, respectively.
      As of March 30, 2007, we have 50,308,132 shares of common stock outstanding
      and approximately 500 stockholders of record of common stock. As of
      March 30, 2007, no shares of preferred stock are outstanding.




Our
      common stock is traded on the Over the Counter Bulletin Board (the "OTC-BB")
      under the ticker symbol "RXHN." Prior to May 13, 2005, the Company common
      stock was traded on the OTC-BB under the ticker symbol "CPRD" since
      November 2004. The quarterly reported high and low bid and asked prices for
      our common stock are shown below for the eight fiscal quarters ended
      December 31, 2006. The prices presented are bid and ask prices, which
      represent prices between broker-dealers and do not include retail mark-ups
      and
      mark-downs or any commission to the broker-dealer. The prices may not
      necessarily reflect actual transactions.




**Period**
            
            **High**
            
            **Low**2005First
                Quarter1
            
            $
            0.15
            
            $
            0.02Second
                Quarter1,2
            
            $
            4.00
            
            $
            0.30Third
                Quarter
            
            $
            4.60
            
            $
            2.50Fourth
                Quarter
            
            $
            3.25
            
            $
            1.502006First
                Quarter
            
            $
            2.50
            
            $
            1.11Second
                Quarter
            
            $
            2.00
            
            $
            1.15Third
                Quarter
            
            $
            5.00
            
            $
            1.50Fourth
                Quarter
            
            $
            3.05
            
            $
            1.01


________________________


1
            Reflects
                adjustments made in accordance with a 1-for-100 reverse stock split
                in
                May 2005.


2
            The
                merger of Corporate Road Show.Com and Rexahn, Corp was completed
                on
                May 13, 2005.




***Dividends***




We
      have
      not paid any cash dividends on common stock and do not expect to do so in the
      foreseeable future. We anticipate that any earnings generated from future
      operations will be used to finance our operations. No restrictions exist upon
      our ability to pay dividends.


28
 *Index*


**Item 6.**
            **Management's
                Discussion and Analysis or Plan of
                Operation**




*You
      should read the following discussion and analysis of our results of operations,
      financial condition and liquidity in conjunction with our financial statements
      and the related notes, which are included in this* *Annual
      Report on Form 10-KSB. Some of the information contained in this discussion
      and analysis or set forth elsewhere in this Annual Report on Form 10-KSB,
      including information with respect to our plans and strategies for our business,
      statements regarding the industry outlook, our expectations regarding the future
      performance of our business, and the other non-historical statements contained
      herein are forward-looking statements. See "Cautionary Statement Regarding
      Forward-Looking Statements". You should also review the "Risk Factors" section
      under this Item 1 of this Annual Report for a discussion of important
      factors that could cause actual results to differ materially from the results
      described herein or implied by such forward-looking statements.*




**Overview**




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




Our
      efforts and resources have been focused primarily on acquiring and developing
      our pharmaceutical technologies, raising capital and recruiting personnel.
      We
      are a development stage company and have no product sales to date and we will
      not receive any product sales until we receive approval from the 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.




**Critical
      Accounting Policies**




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




29
 *Index*




**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.




**Stock-Based
      Compensation**




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




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




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




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




30
 *Index*


Our
      results include non-cash compensation expense as a result of stock option
      grants. For stock-based awards prior to January 1, 2006, we accounted for
      stock-based employee compensation arrangements in accordance with the provisions
      of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and comply
      with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
      Compensation" ("SFAS No. 123"). Compensation expense for options granted to
      employees represents the difference between the fair market value of our common
      stock and the exercise price of the options at the date of grant. This amount
      is
      being recorded over the respective vesting periods of the individual stock
      options. We expect to record additional non-cash compensation expense in the
      future, which may be significant. Compensation for options granted to
      non-employees has been determined in accordance with SFAS No. 123 and EITF
      96-18, "Accounting for Equity Instruments that are Issued to Other Than
      Employees for Acquiring, or in Conjunction with Selling, Goods or Services,"
      as
      the fair value of the equity instruments issued.




On
      August 5, 2003, the Company established a stock option plan. Under the
      plan, we issued options to employees and non-employees during fiscal 2004 and
      incurred a compensation expense of $230,770. During fiscal 2005, we incurred
      a
      compensation expense of $436,748 for options issued to employees and
      non-employees.




The
      plan
      grants stock options to key employees, directors and consultants of the Company.
      For grants prior to September 12, 2005 and grants to employees of the
      Company after September 12, 2005, the vesting period is 30% after the first
      year, an additional 30% after the second year and the remaining 40% after the
      third year. For grants to non-employee directors and consultants of the Company
      after September 12, 2005, the vesting period is 100% after the first year,
      subject to the fulfillment of certain conditions in the individual stock option
      grant agreements, or 100% upon the occurrence of certain events specified in
      the
      individual stock option grant agreements, subject to the fulfillment of certain
      conditions in the individual stock option grant agreements.




The
      exercise prices of the options granted to employees were below the fair market
      value of the common stock on the date of the grant. In December 2005,
      employees holding stock options that were not vested as of December 31,
      2004 and stock options that were granted on or after January 1, 2005 agreed
      to amend the exercise prices of those options from $0.24 per share to
      $0.80 per share, the fair market value of the common stock (as determined
      by the board of directors), in order to comply with the requirements of Internal
      Revenue Code Section 409A. The repricing of the options issued to employees
      was accounted as a cancellation of existing options and issuance of new options.
      The effective date of this repricing was January 1, 2005. The amendment was
      accounted for prospectively and resulted in a reversal of stock option
      compensation expense of $306,896 related to employee options recorded in the
      period from January 1, 2005 to September 30, 2005. There was no impact
      on the Company's results of operations for the year ended December 31,
      2004. Using the intrinsic value method, the total compensation cost for the
      year
      ended December 31, 2005 amounted to $0 (2004-$658,000) and is being
      amortized over the vesting period.




The
      options issued to certain non-employees accounted under the fair value method
      were similarly repriced as of January 1, 2005. As a result, Stock
      Compensation expense of $158,531 recorded in the period from January 1,
      2005 to September 30, 2005, related to non-employee options was reversed.
      The stock compensation expense related to non-employees during 2005 was
      $ 436,748 ,
      after
      accounting for the repricing adjustment.




31
 *Index*


See
      Note
      8 to the Financial Statements in Item 7 of this Annual Report for further
      information on our stock option compensation expense.




**Recently
      Issued Accounting Standards**




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




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




On
      September 15, 2006, the FASB issued SFAS No. 157, "Fair Value
      Measurements". SFAS No. 157 provides enhanced guidance for using fair value
      to
      measure assets and liabilities. The standard applies whenever other standards
      require (or permit) assets or liabilities to be measured at fair value. The
      standard does not expand the use of fair value in any new circumstances. SFAS
      No. 157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years.
      Earlier application is encouraged, provided that the reporting entity has not
      yet issued financial statements for that fiscal year, including financial
      statements for an interim period within that fiscal year. The Company will
      adopt
      this pronouncement effective periods beginning January 1, 2008. The Company
      is currently evaluating the impact of adopting SFAS No. 157 on its financial
      statements.




In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities", which permits entities to measure
      many financial instruments and certain other items at fair value that are not
      currently required to be measured at fair value. An entity would report
      unrealized gains and losses on items for which the fair value option has been
      elected in earnings at each subsequent reporting date. The objective is to
      improve financial reporting by providing entities with the opportunity to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions. The decision about whether to elect the fair value option is applied
      instrument by instrument, with a few exceptions; the decision is irrevocable;
      and it is applied only to entire instruments and not to portions of instruments.
      SFAS No. 159 requires disclosures that facilitate comparisons (a) between
      entities that choose different measurement attributes for similar assets and
      liabilities and (b) between assets and liabilities in the financial statements
      of an entity that selects different measurement attributes for similar assets
      and liabilities. SFAS No. 159 is effective for financial statements issued
      for
      fiscal years beginning after November 15, 2007. Early adoption is permitted
      as
      of the beginning of a fiscal year provided the entity also elects to apply
      the
      provisions of SFAS No. 157. Upon implementation, an entity shall report the
      effect of the first remeasurement to fair value as a cumulative-effect
      adjustment to the opening balance of retained earnings. Since the provisions
      of
      SFAS No. 159 are applied prospectively, any potential impact will depend on
      the
      instruments selected for fair value measurement at the time of implementation.
      The Company is currently evaluating the impact, if any, adoption of SFAS No.
      159
      will have on its financial statements.




32
 *Index*


**Results
      of Operations**




***Comparison
      of the Year Ended December 31, 2006 and the Year Ended December 31,
      2005***




***Total
      Revenues***




During
      2003 we entered into a collaborative research agreement with Rexgene Biotech
      Co., Ltd. ("Rexgene"), a minority shareholder. Rexgene is engaged in the
      development of pharmaceutical products in Asia and has agreed to assist us
      with
      the research, development and clinical trials necessary for registration of
      our
      Archexin drug candidate in Asia. This agreement provides Rexgene with exclusive
      rights to license, sublicense, make, have made, use, sell and import Archexin
      in
      Asia. A one-time contribution to the joint development and research of Archexin
      of $1,500,000 was paid to us in 2003 in accordance with the agreement. The
      amount of revenue from this contribution is being recognized as income over
      the
      term of this agreement which terminates at the later of 20 years or the term
      of
      the patent on the licensed product. We use 20 years as the basis for revenue
      recognition and accordingly $75,000 was included in revenues in each fiscal
      year
      beginning with 2003 and the remaining $1,200,000 is reflected as deferred
      revenue on the balance sheet as of December 31, 2006. We adopted SAB No.
      104, "Revenue Recognition - Nonrefundable Upfront Fees" with respect to the
      accounting for this transaction. These fees are to be used in the cooperative
      funding of the costs of development of Archexin.




***General
      and Administrative Expenses***




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




General
      and administrative expenses increased $249,750, or 8.9%, from $2,801,743 in
      fiscal 2005 to $3,051,493 in fiscal 2006. The increase was due primarily to
      an
      increase in professional fees and expenses incurred related to preparing for
      compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and
      professional fees related to the Company's proposed transaction with Future
      Systems, Inc in early 2006. Higher general and administrative expenses during
      fiscal 2006 were also attributable to the higher stock compensation expense
      resulting from the adoption of SFAS No. 123R, effective January 1,
      2006.




***Research
      and Development Expenses***




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




Research
      and development expenses increased $1,608,857, or 93.7%, from $1,716,566 in
      fiscal 2005 to $3,325,423 in fiscal 2006. The increase was due primarily to
      the
      fact that several of our drug candidates are continuing to undergo clinical
      trials and we have taken preliminary steps to prepare other drug candidates
      for
      clinical trials. We expect that research and development expenses will continue
      to increase as our other drug candidates move into the clinical trials phases
      of
      development. Higher research and development expenses during fiscal 2006 were
      also attributable to the higher stock compensation expense resulting from the
      adoption of SFAS No. 123R, effective January 1, 2006 and an increase in the
      number of outstanding shares subject to options during fiscal 2006 compared
      to
      fiscal 2005.




33
 *Index*


***Patent
      Fees***




Our
      patent fees increased $112,549, or 63%, from $178,625 in fiscal 2005 to $291,174
      in fiscal 2006. The increase was due primarily to an increase in the number
      of
      patent filings made during fiscal 2006 compared to fiscal 2005.




***Depreciation
      and Amortization***




Depreciation
      expense increased $28,110, or 29.2%, from $96,400 in fiscal 2005 to $124,510
      in
      fiscal 2006. The increase was due primarily to the purchase of new laboratory
      equipment.




***Interest
      Expense***




Our
      interest expense decreased $97,165, or 49.3%, from $196,816 in fiscal 2005
      to
      $99,651 in fiscal 2006. The decrease was due primarily to conversion of
      $3,850,000 principal amount of the Company's convertible notes into common
      stock
      in May 2006.




***Interest
      Income***




In
      fiscal
      2006, we recorded $331,248 of interest income from the investment of our cash
      and cash equivalents and other short-term investments, compared to $190,610
      recorded in fiscal 2005. The increase of $140,638, or 73.8%, was primarily
      due
      to higher cash and cash equivalent balances and higher interest rates during
      fiscal 2006.




***Research
      and Development Projects***




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




We
      have
      allocated direct and indirect costs to each program based on certain assumptions
      and our review of the status of each program, payroll-related expenses and
      other
      overhead costs based on estimated usage by each program. Each of our lead drug
      candidates is in various stages of completion as described below. As we expand
      our clinical studies, we will enter into additional development agreements.
      Significant additional expenditures will be required if we complete our clinical
      trials, start new trials, apply for regulatory approvals, continue development
      of our technologies, expand our operations and bring our products to market.
      The
      eventual total cost of each clinical trial is dependent on a number of
      uncertainties such as trial design, the length of the trial, the number of
      clinical sites and the number of patients. The process of obtaining and
      maintaining regulatory approvals for new therapeutic products is lengthy,
      expensive and uncertain. Because the successful development of our most advanced
      drug candidates, Archexin, Serdaxin and Zoraxel, is uncertain, and because
      RX-0047 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.




34
 *Index*


*Archexin*




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




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




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




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




*RX-0047
      and RX-5902*




RX-0047
      and RX-5902 are both in a pre-clinical stage of development and the next
      scheduled program for each compound is a pre-clinical toxicology study required
      prior to submission of an Investigational New Drug ("IND") application to
      the FDA. Through December 31, 2006, the costs incurred for development of
      these compounds to date have been approximately $800,000 for RX-0047, and
      $300,000 for RX-5902. The estimated cost to complete pre-clinical toxicology
      and
      Phase I clinical trials is estimated to be approximately $1,500,000 per
      compound for a total of $3,000,000. These compounds may be entered into these
      Phase I clinical trials in 2008.




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




35
 *Index*


*Serdaxin
      and Zoraxel*




Serdaxin
      and Zoraxel are scheduled to enter Phase II trials in 2007, subject to obtaining
      sufficient additional financing. We currently estimate that these studies will
      require approximately $4,000,000 and $3,000,000, respectively.




**Liquidity
      and Capital** ****** **Resources**




Cash
      used
      in operating activities was $5,843,198 in fiscal 2006 compared to $4,131,450
      in
      fiscal 2005. Fiscal 2006 operating cash flows reflect our loss from continuing
      operations of $6,486,003, offset by net non-cash charges of $ 1,083,406 and a
      net decrease in cash components of working capital of $440,661 .
      Non-cash charges consist of depreciation and amortization of $124,510, stock
      option compensation expense of $1,033,956 and amortization of deferred revenue
      of $75,000. The decrease in working capital primarily consists of a
      $12,249 decrease
      in accounts payable and accrued expenses and an increase of $428,412 to
      prepaid and other assets. Fiscal 2005 operating cash flows reflect our loss
      from
      continuing operations of $6,349,540, offset by net non-cash charges of
      $2,105,025 and a net increase in cash components of working capital of $113,065.
      Non-cash charges consisted of $1,625,000 representing the beneficial conversion
      feature of our convertible notes, compensatory stock expense of $21,877,
      depreciation of $96,400 and stock option compensation expense of $436,748.
      The
      increase in working capital primarily consisted of the beneficial conversion
      feature charge of $1,625,000, a $205,978 increase in stock option compensation
      expenses and a $43,611 increase in depreciation, offset by a decrease in
      accounts payable of $37,843.




Cash
      used
      in investing activities of $52,952 in fiscal 2006 reflects capital expenditures
      of $52,952 for the purchase of equipment. Cash used in investing activities
      of
      $7,915,750 in fiscal 2005 consisted of purchases of short-term investments
      of
      $7,821,667, in addition to capital expenditures of $94,083 for the purchase
      of
      equipment.




Cash
      used
      in financing activities of $186,415 in fiscal 2006 consists of principal
      payments on long-term debt of $172,813 and the purchase of treasury stock in
      the
      amount of $28,410, offset by proceeds of $14,808 from the issuance of common
      stock upon the exercise of stock options. Cash provided by financing activities
      of $13,326,179 in fiscal 2005 consisted of proceeds of $8,359,582 from the
      issuance of common stock and $5,150,000 from proceeds of long-term debt, offset
      by principal payments on long-term debt of $183,403.




For
      the
      years ended December 31, 2006 and 2005, we experienced net losses of $6,486,003 and
      $6,349,540, respectively. Our accumulated deficit as of December 31, 2006
      and 2005 were $20,690,326 and $14,204,323, respectively.




We
      have
      financed our operations since inception primarily through equity and convertible
      debt financings and interest income from investments of cash and cash
      equivalents. During fiscal 2006, we had a net decrease in cash and cash
      equivalents of $6,082,565. This decrease primarily resulted from the cash used
      in operating activities of $5,843,198, investing activities of $52,952 and
      financing activites of $186,415.




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




36
 *Index*


***Contractual
      Obligations***




In
      April 2004, we entered into a clinical development agreement with
      Georgetown University with an effective period from April 5, 2004 through
      April 5, 2006. The total estimated cost of the program is $223,126, based
      on the fees, enrollment and completion of 20 patients and is payable based
      on
      the progress of the treatment over the effective period of the agreement. We
      expect to make payments under the agreement in 2007.




On
      August 17, 2004, we entered into an agreement with Formatech, Inc. to
      monitor and perform stability studies on our drug candidate, Archexin. The
      total
      cost of these services is $46,700. For the years ended December 31, 2006
      and 2005, we paid $5,200 and $10,400, respectively, towards the cost of these
      studies. A payment of $8,200 is due during 2007.




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




Minimum
      future rental payments under this lease are as follows:




For
                the years ended December 312007
            
            $
            216,1702008
            
            
            222,6552009
            
            
            112,972**$**
            **551,797**







On
      January 3, 2006 and March 29, 2006, we contracted with Formatech to
      perform Archexin experiments in an effort to develop a more concentrated
      dosage form. The cost of the project was $57,000, the total cost of which was
      paid in the year ended December 31, 2006. In addition, on January 6,
      2006, we entered into a drug packaging agreement with Formatech for Phase II
      clinical trials of Archexin. In accordance with the agreement, the estimated
      cost of the project is $128,250 plus pass through expenses (e.g., outsourced
      testing), of which 138,540 was paid during the year ended December 31,
      2006.




On
      January 6, 2006, we contracted with Amarex, LLC to conduct Phase II
      clinical studies. In accordance with the agreement, the estimated contract
      duration is 24 months for a total cost of $596,244 plus pass through
      expenses. The service costs are payable in 24 monthly payments of $18,633
      plus an initiation fee of $149,061 due upon signing. We paid $361,973 towards
      the cost of the study in the year ended December 31, 2006.




On
      March 1, 2006, we entered into a research program with Ewha Woman's
      University. The effective period of the agreement was from March 1, 2006 to
      February 28, 2007. In accordance with the agreement, the cost of the
      research program was $40,000 and was paid upon full execution of the agreement.
      The Company paid $40,000 in connection with the agreement during the year ended
      December 31, 2006.




37
 *Index*




On
      April 1, 2006, we entered into research agreement with Korean Research
      Institute of Bioscience and Biotechnology to evaluate antitumor activity,
      toxicology, pharmacokinetics and mechanisms of action for RX-5902. In accordance
      with the agreement, the estimated contract duration is twelve months for a
      cost
      of $120,000, which was paid during the year ended December 31,
      2006.


On
      April 3, 2006, we contracted with UPM Pharmaceuticals, Inc. to develop
      several release formulation for Serdaxin and Zoraxel. In accordance with the
      agreement, the estimated contract duration was seven months for an estimated
      cost of $443,975, of which $112,124 was paid during the year ended
      December 31, 2006. The service costs were payable based upon a payment
      schedule related to certain milestones.




On
      April
      19, 2006, we executed definitive agreements with Future Systems, Inc. ("FSI"),
      a
      Korean stock exchange (KOSDAQ) listed information technology company based
      in
      Seoul, Korea. Pursuant to the agreements, we would transfer to FSI exclusive
      rights and a non-exclusive license to develop, manufacture, and sell products
      based on Rexahn’s RX-0201, RX-0047 and RX-10100 drug candidates in certain
      territories for approximately $35.8 million, and simultaneously, FSI would
      issue
      and sell 4,326,854 shares of its common stock to us, representing approximately
      28% of FSI’s outstanding shares, after giving effect to the subscription. The
      investment, of approximately $35.8 million, would have made us the largest
      single stockholder of FSI. In addition, we entered into an agreement with FSI
      and Core F.G. Co., Ltd., the general partner of Triplewin Corporate
      Restructuring Partnership, the then-current majority shareholder of FSI, with
      respect to the management of FSI in connection with redirecting FSI’s business
      focus to the biopharmaceutical industry. Completion of the transactions was
      subject to customary closing conditions, including approval by FSI
      shareholders.  On June 8, 2006, we terminated the agreements entered into
      with FSI and Core F.G. Co., Ltd., including a share subscription agreement,
      an
      intellectual property assignment and license agreement and a management
      agreement, providing for, among other things, the assignment and license by
      us
      to FSI of certain intellectual property rights for our drug candidates in
      specified markets and the acquisition by us of an ownership interest in FSI.
      The
      termination followed a vote on the proposed transactions that was not approved
      by the FSI shareholders at a meeting in Seoul, Korea on June 7,
      2006.




***Current
      and Future Financing Needs***




We
      have
      incurred negative cash flow from operations since we started our business.
      We
      have spent, and expect to continue to spend, substantial amounts in connection
      with implementing our business strategy, including our planned product
      development efforts, our clinical trials, and our research and development
      efforts. Based on our current plans and our capital resources, we believe that
      our cash and cash equivalents will be sufficient to enable us to meet our
      minimum planned operating needs for at least the next 12 months, which
      would entail focusing our resources on Phase II clinical trials of Archexin. Over
      the
      next 12 months we expect to spend a minimum of approximately $1.0 million
      on clinical development for Phase II clinical trials of Archexin (including
      our
      commitments described under "Contractual Commitments" of this Item 6),
      $2.6 million on general corporate expenses, and approximately $216,000 on
      facilities rent. We plan to initiate, subject to obtaining sufficient
      additional financing, Phase II clinical trials of Serdaxin and Zoraxel beginning
      in the second half of 2007 at an additional cost of up to approximately $3
      million. We may seek additional financing to implement and fund other drug
      candidate development, clinical trial and research and development efforts
      to
      the maximum extent of our operating plan, including in-vivo animal and
      pre-clinical studies and Phase I clinical trials for RX-5902, Phase II clinical
      trials for new product candidates, as well as other research and development
      projects, which together with the minimum operating plan for the next
      12 months, could aggregate up to $7 million through the end of
      2007.




38
 *Index*


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




·
            the
                progress of our product development
                activities;




·
            the
                number and scope of our product development
                programs;




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




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




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




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




·
            the
                costs and timing of regulatory
                approvals.




**Impact
      of Inflation**




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




**Off-Balance
      Sheet Arrangements**




We
      do not
      have any off-balance sheet arrangements.




39
 *Index*


**Item7.**
            **Financial
                Statements******




**REXAHN
      PHARMACEUTICALS, INC.**


(A
      D evelopment
      Stage Company)


Balance
      Sheets




**December
                31,**
              **2006**
            
            December
                31,
              2005**ASSETS****Current
                Assets:**Cash
                and cash equivalents
            
            **$**
            **4,034,060**
            
            $
            10,116,625Prepaid
                expenses and other
            
            
            **483,186**
            
            
            54,774**Total
                Current Assets**
            
            
            **4,517,246**
            
            
            10,171,399**Equipment,
                Net**(note
                3)
            
            
            **149,993**
            
            
            203,632**Intangible
                Assets, Net**(note
                4)
            
            
            **321,971**
            
            
            339,890**Total
                Assets**
            
            **$**
            **4,989,210**
            
            $
            10,714,921**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                Liabilities:**Accounts
                payable and accrued expenses
            
            **$**
            **575,363**
            
            $
            587,612Licensing
                fee payable (note 4)
            
            
            **-**
            
            
            172,813**Total
                Current Liabilities**
            
            
            **575,363**
            
            
            760,425**Long-Term
                Convertible Debt**(note
                5)
            
            
            **-**
            
            
            3,850,000**Deferred
                Revenue**(note
                6)
            
            
            **1,200,000**
            
            
            1,275,000**Total
                Liabilities**
            
            
            **1,775,363**
            
            
            5,885,425**Commitment
                and Contingencies**(note
                10)**Stockholders'
                Equity**(note
                7):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, 50,322,337
                issued
                (2005- 46,410,632) and 50,308,132 outstanding (2005- 46,410,632)
            
            
            **5,032**
            
            
            4,641Treasury
                stock, 14,205 (2005 - 0) shares, at cost
            
            
            **(28,410**
            **)**
            
            -Additional
                paid-in capital
            
            
            **23,927,551**
            
            
            19,029,178Accumulated
                deficit during the development stage
            
            
            **(20,690,326**
            **)**
            
            (14,204,323
            )**Total
                Stockholders' Equity**
            
            
            **3,213,847**
            
            
            4,829,496**Total
                Liabilities and Stockholders' Equity**
            
            **$**
            **4,989,210**
            
            $
            10,714,921





See
      the
      notes accompanying the financial statements.




40
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      D evelopment
      Stage Company)


Statements
      of Operations




Cumulative
                from March 19, 2001 (Inception) to
            
            Years
                Ended
              December
                31,December
                31, 2006
            
            **2006**
            
            2005**Revenues:**Research
            
            $
            300,000
            
            **$**
            **75,000**
            
            $
            75,000**Expenses:**General
                and administrative
            
            
            9,610,582
            
            
            **3,051,493**
            
            
            2,801,743Research
                and development
            
            
            9,275,043
            
            
            **3,325,423**
            
            
            1,716,566Patent
                fees
            
            
            518,860
            
            
            **291,174**
            
            
            178,625Depreciation
                and amortization
            
            
            382,391
            
            
            **124,510**
            
            
            96,400**Total
                Expenses**
            
            
            19,786,876
            
            
            **6,792,600**
            
            
            4,793,334**Loss
                from Operations**
            
            
            (19,486,876
            )
            
            **(6,717,600**
            **)**
            
            (4,718,334
            )**Other
                (Income) Expense**Interest
                income
            
            
            (722,697
            )
            
            (331,248
            )
            
            (190,610
            )Interest
                expense
            
            
            301,147
            
            
            99,651
            
            
            196,816Beneficial
                conversion feature
            
            
            1,625,000
            
            
            -
            
            
            1,625,0001,203,450
            
            
            (231,597
            )
            
            1,631,206**Net
                Loss**
            
            $
            (20,690,326
            )
            **$**
            **(6,486,003**
            **)**
            $
            (6,349,540
            )Loss
                per weighted average number of shares outstanding, basic and
                diluted
            
            
            
            
            **$**
            **(0.13**
            **)**
            $
            (0.15
            )Weighted
                average number of shares outstanding, basic and diluted
            
            
            
            
            
            **48,865,988**
            
            
            41,976,959




See
        the
        notes accompanying the financial statements.


41
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      D evelopment
      Stage Company)


Statements
      of Changes in Stockholders' Equity (Deficit)


Period
      from March 19, 2001 (Inception) to December 31, 2006


**Accumulated****Deficit****During**
                  
                  **Total****Common
                      Stock**
                  
                  **Treasury
                      Stock**
                  
                  **Additional**
                  
                  **the**
                  
                  **Stockholders’****Number**
                  
                  
                  
                  **Number**
                  
                  
                  
                  **Paid
                      in**
                  
                  **Development**
                  
                  **Equity****of
                      shares**
                  
                  **Amount**
                  
                  **of
                      shares**
                  
                  **Amount**
                  
                  **Capital**
                  
                  **Stage**
                  
                  **(Deficit)****Opening
                      balance, March 19, 2001**
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  -
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -Common
                      shares issued
                  
                  
                  7,126,666
                  
                  
                  71,266
                  
                  
                  -
                  
                  
                  -
                  
                  
                  4,448,702
                  
                  
                  -
                  
                  
                  4,519,968Net
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (625,109
                  )
                  
                  (625,109
                  )Balance,
                      December 31, 2001
                  
                  
                  7,126,666
                  
                  
                  71,266
                  
                  
                  -
                  
                  
                  -
                  
                  
                  4,448,702
                  
                  
                  (625,109
                  )
                  
                  3,894,859Net
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (1,181,157
                  )
                  
                  (1,181,157
                  )Balance,
                      December 31, 2002
                  
                  
                  7,126,666
                  
                  
                  71,266
                  
                  
                  -
                  
                  
                  -
                  
                  
                  4,448,702
                  
                  
                  (1,806,266
                  )
                  
                  2,713,702Common
                      shares issued
                  
                  
                  500,000
                  
                  
                  5,000
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,995,000
                  
                  
                  -
                  
                  
                  2,000,000Stock
                      option compensation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  538,074
                  
                  
                  -
                  
                  
                  538,074Net
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (2,775,075
                  )
                  
                  (2,775,075
                  )Balance,
                      December 31, 2003
                  
                  
                  7,626,666
                  
                  
                  76,266
                  
                  
                  -
                  
                  
                  -
                  
                  
                  6,981,776
                  
                  
                  (4,581,341
                  )
                  
                  2,476,701Common
                      shares issued
                  
                  
                  1,500
                  
                  
                  15
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,785
                  
                  
                  -
                  
                  
                  1,800Stock
                      option compensation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  230,770
                  
                  
                  -
                  
                  
                  230,770Net
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (3,273,442
                  )
                  
                  (3,273,442
                  )Balance,
                      December 31, 2004
                  
                  
                  7,628,166
                  
                  $
                  76,281
                  
                  
                  -
                  
                  $
                  -
                  
                  $
                  7,214,331
                  
                  $
                  (7,854,783
                  )
                  $
                  (564,171
                  )




See
        the
        notes accompanying the financial statements.


42
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Statements
      of Changes in Stockholders' Equity (Deficit)


Period
      from March 19, 2001 (Inception) to December 31, 2006


**Accumulated****Deficit****During**
                  
                  **Total****Common
                      Stock**
                  
                  **Treasury
                      Stock**
                  
                  **Additional**
                  
                  **the**
                  
                  **Stockholders’****Number**
                  
                  
                  
                  **Number**
                  
                  
                  
                  **Paid
                      in**
                  
                  **Development**
                  
                  **Equity****of
                      shares**
                  
                  **Amount**
                  
                  **of
                      shares**
                  
                  **Amount**
                  
                  **Capital**
                  
                  **Stage**
                  
                  **(Deficit)**Balance,
                      December 31, 2004
                  
                  
                  7,628,166
                  
                  $
                  76,281
                  
                  
                  -
                  
                  $
                  -
                  
                  $
                  7,214,331
                  
                  $
                  (7,854,783
                  )
                  $
                  (564,171
                  )Stock
                      split (5 for 1)
                  
                  
                  30,512,664
                  
                  
                  (72,467
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  72,467
                  
                  
                  -
                  
                  
                  -Common
                      shares issued in connection with merger
                  
                  
                  3,397,802
                  
                  
                  340
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (340
                  )
                  
                  -
                  
                  
                  -Common
                      stock issued for cash
                  
                  
                  4,175,000
                  
                  
                  417
                  
                  
                  -
                  
                  
                  -
                  
                  
                  8,349,565
                  
                  
                  -
                  
                  
                  8,349,982Common
                      shares issued on conversion of convertible debt
                  
                  
                  650,000
                  
                  
                  65
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,299,935
                  
                  
                  -
                  
                  
                  1,300,000Exercise
                      of stock options
                  
                  
                  40,000
                  
                  
                  4
                  
                  
                  -
                  
                  
                  -
                  
                  
                  9,596
                  
                  
                  -
                  
                  
                  9,600Common
                      shares issued in exchange for services
                  
                  
                  7,000
                  
                  
                  1
                  
                  
                  -
                  
                  
                  -
                  
                  
                  21,876
                  
                  
                  -
                  
                  
                  21,877Beneficial
                      conversion feature
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,625,000
                  
                  
                  -
                  
                  
                  1,625,000Stock
                      option compensation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  436,748
                  
                  
                  -
                  
                  
                  436,748Net
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (6,349,540
                  )
                  
                  (6,349,540
                  )Balance,
                      December 31, 2005
                  
                  
                  46,410,632
                  
                  
                  4,641
                  
                  
                  -
                  
                  
                  -
                  
                  
                  19,029,178
                  
                  
                  (14,204,323
                  )
                  
                  4,829,496Exercise
                      of stock options
                  
                  
                  61,705
                  
                  
                  6
                  
                  
                  -
                  
                  
                  -
                  
                  
                  14,802
                  
                  
                  -
                  
                  
                  14,808Common
                      shares issued on conversion of convertible debt
                  
                  
                  3,850,000
                  
                  
                  385
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3,849,615
                  
                  
                  -
                  
                  
                  3,850,000Purchase
                      of treasury stock
                  
                  
                  -
                  
                  
                  -
                  
                  
                  14,205
                  
                  
                  (28,410
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (28,410
                  )Stock
                      option compensation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,033,956
                  
                  
                  -
                  
                  
                  1,033,956Net
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (6,486,003
                  )
                  
                  (6,486,003
                  )Balance,
                      December 31, 2006
                  
                  
                  50,322,337
                  
                  $
                  5,032
                  
                  
                  14,205
                  
                  $
                  (28,410
                  )
                  $
                  23,927,551
                  
                  $
                  (20,690,326
                  )
                  $
                  3,213,847


See
      the
      notes accompanying the financial statements.


43
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Statements
      of Cash Flows


Cumulative
                  from March 19, 2001 (Inception) to
              
              Years
                  Ended
                December
                  31,December
                  31, 2006
              
              **2006**
              
              2005**Cash
                  Flows from Operating Activities:**Net
                  loss
              
              $
              (20,690,326
              )
              **$**
              **(6,486,003**
              **)**
              $
              (6,349,540
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Beneficial
                  conversion feature
              
              
              1,625,000
              
              
              **-**
              
              
              1,625,000Compensatory
                  stock
              
              
              21,877
              
              
              **-**
              
              
              21,877Depreciation
                  and amortization
              
              
              382,391
              
              
              **124,510**
              
              
              96,400Stock
                  option compensation expense
              
              
              2,239,548
              
              
              **1,033,956**
              
              
              436,748Amortization
                  of deferred revenue
              
              
              (300,000
              )
              
              **(75,000**
              **)**
              
              (75,000
              )Changes
                  in assets and liabilities:Prepaid
                  expenses and other
              
              
              (483,186
              )
              
              **(428,412**
              **)**
              
              (38,579
              )Accounts
                  payable and accrued expenses
              
              
              575,363
              
              
              **(12,249**
              **)**
              
              151,644**Net
                  Cash Used in Operating Activities**
              
              
              (16,629,333
              )
              
              **(5,843,198**
              **)**
              
              (4,131,450
              )**Cash
                  Flows from Investing Activities:**Purchase
                  of equipment
              
              
              (498,139
              )
              
              **(52,952**
              **)**
              
              (94,083
              )**Net
                  Cash Used in Investing Activities**
              
              
              (498,139
              )
              
              **(52,952**
              **)**
              
              (94,083
              )**Cash
                  Flows from Financing Activities:**Issuance
                  of common stock
              
              
              14,896,158
              
              
              **14,808**
              
              
              8,359,582Proceeds
                  from long-term debt
              
              
              5,150,000
              
              
              **-**
              
              
              5,150,000Proceeds
                  from research contribution
              
              
              1,500,000
              
              
              **-**
              
              
              **-**Payment
                  of licensing fees
              
              
              (356,216
              )
              
              **(172,813**
              **)**
              
              (183,403
              )Purchase
                  of treasury stock
              
              
              (28,410
              )
              
              **(28,410**
              **)**
              
              -**Net
                  Cash Provided by (Used in) Financing Activities**
              
              
              21,161,532
              
              
              **(186,415**
              **)**
              
              13,326,179**Net
                  Increase (Decrease) in Cash and Cash Equivalents**
              
              
              4,034,060
              
              
              **(6,082,565**
              **)**
              
              9,100,646**Cash
                  and Cash Equivalents - beginning of period**
              
              
              -
              
              
              **10,116,625**
              
              
              1,015,979**Cash
                  and Cash Equivalents - end of period**
              
              $
              4,034,060
              
              **$**
              **4,034,060**
              
              $
              10,116,625**Supplemental
                  Cash Flow Information**Interest
                  paid
              
              $
              292,912
              
              **$**
              **280,535**
              
              $
              4,316




Non-cash
      investing and financing activities:




In
      February 2005, the Company entered into a licensing agreement in exchange for
      debt of $356,216.




In
      December 2005, the Company’s convertible notes of $1.3 million were converted
      into 650,000 shares of the Company’s common stock.




In
      May
      2006, the Company’s convertible notes of $3.85 million were converted into 3.85
      million shares of the Company’s common stock.


44
 *Index*


**REXAHN
        PHARMACEUTICALS, INC.**
 (A
        Development Stage Company)
 Notes
        to
        Financial Statements
 December
        31, 2006 and 2005






**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.




**Reverse
      Merger Acquisition**




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




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




As
      part
      of the Acquisition Merger, the Company assumed the convertible notes further
      described in note 5 and the conversion price was adjusted to reflect the merger
      exchange ratio.




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


45
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005






**1.**
            **Operations
                and Organization**(cont’d)




**Merger
      of Subsidiary**




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




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




a)
            Cash
                and Cash Equivalents




Cash
      and
      cash equivalents include cash on hand and short-term investments with remaining
      maturities of three months or less at acquisition.




b)
            Equipment




Equipment
      is stated at cost less accumulated depreciation. Depreciation, based on the
      estimated useful lives of the assets, is provided as follows:







Life
            
            Depreciation
                MethodFurniture
                and fixtures
            
            
            7
                years
            
            double
              declining balanceOffice
                equipment
            
            
            5
                years
            
            double
              declining balanceLab
                equipment
            
            
            5-7
                years
            
            double
              declining balanceComputer
                equipment
            
            
            5
                years
            
            straight
              lineLeasehold
                improvements
            
            
            3
                years
            
            straight
              lineCylinders
                and designs
            
            
            3
                years
            
            straight
              line




c)
            Research
                and Development




Research
      and development costs are expensed as incurred. Research and development
      expenses consist primarily of salaries and related personnel costs, as well
      as
      stock compensation related to these 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.


46
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005






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




d)
            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.




e)
            Fair
                Value of Financial Instruments




The
      carrying amounts reported in the accompanying financial statements for current
      assets and current liabilities approximate fair value because of the short-term
      maturity of these financial instruments.




f)
            Income
                Taxes




The
      Company accounts for income taxes pursuant to Statement of Financial Accounting
      Standards ("SFAS") No. 109, "Accounting for Income Taxes". Deferred tax assets
      and liabilities are recorded for differences between the financial statement
      and
      tax basis of the assets and liabilities that will result in taxable or
      deductible amounts in the future based on enacted tax laws and rates. Valuation
      allowances are established when necessary to reduce deferred tax assets to
      the
      amount expected to be realized. Income tax expense is recorded for the amount
      of
      income tax payable or refundable for the period, increased or decreased by
      the
      change in deferred tax assets and liabilities during the
      period.


47
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005






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




g)
            Earnings
                or Loss Per Share




The
      Company accounts for earnings per share pursuant to SFAS No. 128, "Earnings
      per
      Share", which requires disclosure on the financial statements of "basic" and
      "diluted" earnings (loss) per share. Basic earnings (loss) per share is computed
      by dividing net income (loss) by the weighted average number of common shares
      outstanding for the year. Diluted earnings (loss) per share is computed by
      dividing net income (loss) by the weighted average number of common shares
      outstanding plus potentially dilutive securities outstanding for each year.
      Potentially dilutive securities include stock options and warrants and shares
      of
      common stock issuable upon conversion of the Company's convertible
      notes.




The
      following potentially dilutive securities have been excluded from the diluted
      net earnings (loss) per share calculations for the years ended December 31,
      2006
      and 2005 because their effect would have been antidilutive:




December
                31,**2006**
            
            2005Shares
                subject to options
            
            
            **6,123,295**
            
            
            5,770,000Shares
                potentially issued upon conversion of convertible debt
            
            
            **-**
            
            
            3,850,000Total
            
            
            **6,123,295**
            
            
            9,620,000




h)
            Stock-Based
                Compensation




Effective
      January 1, 2006, the Company adopted SFAS No. 123(R) (Revised 2004),
“Share-Based Payment” (“SFAS No. 123R”), which requires the measurement and
      recognition of compensation expense for all stock-based awards made to employees
      and directors based on the estimated grant date fair value of those awards.
      SFAS
      No. 123R also requires forfeitures to be estimated at the time of grant and
      revised, if necessary, in subsequent periods if actual forfeitures differ from
      those estimates.  The
      fair
      value of stock options is calculated using the Black-Scholes option-pricing
      model.




48
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005






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




h)
            Stock-Based
                Compensation (cont’d)




Prior
      to
      January 1, 2006, the Company used the intrinsic value method to account for
      stock-based compensation in accordance with Accounting Principles Board ("APB")
      Opinion No. 25, "Accounting for Stock Issued to Employees" (“APB No.25”), and,
      as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
      No. 123"), provided pro forma disclosures of net income and earnings per common
      share as if the fair value methods had been applied in measuring compensation
      expense. Under the intrinsic value method, compensation cost for employee stock
      awards was recognized as the excess, if any, of the deemed fair value for
      financial reporting purposes of the Company's common stock on the date of grant
      over the amount an employee must pay to acquire the stock. Compensation cost
      was
      amortized over the vesting period. The
      Company accounted for forfeitures as they occurred.




The
      Company adopted SFAS No.123R using the modified prospective transition method,
      which requires the recognition of compensation expense for awards granted after
      January 1, 2006 that are expected to vest and for unvested awards granted
      prior to adoption of SFAS No. 123R that are expected to vest. The compensation
      expense related to the awards granted prior to adoption SFAS No. 123R is based
      on the grant date fair value estimated in accordance with SFAS No. 123 and
      the
      stock based compensation expense for awards granted on or after January 1,
      2006
      is based on the grant date fair value estimated in accordance with SFAS No.
      123R. The value of the portion of the award that is ultimately expected to
      vest
      is recognized as expense over the requisite service period. Prior period results
      have not been adjusted to reflect the adoption of SFAS No.123R.




For
      n on-employee
      stock-based compensation, the Company uses the fair value method in accordance
      with SFAS No. 123 and Emerging Issues Task Force (“EITF”) 96-18, "Accounting for
      Equity Instruments That Are Issued to Other Than Employees for Acquiring or
      in
      Conjunction with Selling, Goods or Services" (“EITF 96-18”).




i)
            Impairment
                of Long-Lived Assets




In
      accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
      Long-Lived Assets", long-lived assets to be held and used are analyzed for
      impairment whenever events or changes in circumstances indicate that the related
      carrying amounts may not be recoverable. The Company evaluates at each balance
      sheet date whether events and circumstances have occurred that indicate possible
      impairment. If there are indications of impairment, the Company uses future
      undiscounted cash flows of the related asset or asset grouping over the
      remaining life in measuring whether the assets are recoverable. In the event
      such cash flows are not expected to be sufficient to recover the recorded asset
      values, the assets are written down to their estimated fair value. Long-lived
      assets to be disposed of are reported at the lower of the carrying amount or
      the
      fair value of the asset less costs of selling.


49
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005






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




j)
            Concentration
                of Credit Risk




SFAS
      No.
      105, "Disclosure of Information About Financial Instruments with Off-Balance
      Sheet Risk and Financial Instruments with Concentration of Credit Risk",
      requires disclosure of any significant off-balance sheet risk and credit risk
      concentration. The Company does not have significant off-balance sheet risk
      or
      credit concentration. The Company maintains cash and short-term investments
      with
      major financial institutions. From time to time the Company has funds on deposit
      with commercial banks that exceed federally insured limits. Management does
      not
      consider this to be a significant credit risk as these banks and financial
      institutions are well-known.




k)
            Recent
                Accounting Pronouncements Affecting the
                Company




In
      July
      2006, FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
      Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in
      income taxes recognized in an enterprise’s financial statements in accordance
      with SFAS No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a
      recognition threshold and measurement attributable for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosures and
      transitions. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. The Company does not expect the adoption of FIN 48 to
      have a material effect on its financial statements.




In
      September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No.
      157 provides enhanced guidance for using fair value to measure assets and
      liabilities. SFAS No. 157 applies whenever other standards require (or permit)
      assets or liabilities to be measured at fair value. SFAS No. 157 does not expand
      the use of fair value in any new circumstances. SFAS No. 157 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. Earlier application is
      encouraged, provided that the reporting entity has not yet issued financial
      statements for that fiscal year, including financial statements for an interim
      period within that fiscal year.  The Company will adopt SFAS No. 157
      effective for periods beginning January 1, 2008.   The Company is
      currently evaluating the impact, if any, adoption of SFAS No. 157 will have
      on
      our financial statements.


50
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005






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




k)
            Recent
                Accounting Pronouncements Affecting the
                Company(cont’d)




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




In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities", which permits entities to measure
      many financial instruments and certain other items at fair value that are not
      currently required to be measured at fair value. An entity would report
      unrealized gains and losses on items for which the fair value option has been
      elected in earnings at each subsequent reporting date. The objective is to
      improve financial reporting by providing entities with the opportunity to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions. The decision about whether to elect the fair value option is applied
      instrument by instrument, with a few exceptions; the decision is irrevocable;
      and it is applied only to entire instruments and not to portions of instruments.
      SFAS No. 159 requires disclosures that facilitate comparisons (a) between
      entities that choose different measurement attributes for similar assets and
      liabilities and (b) between assets and liabilities in the financial statements
      of an entity that selects different measurement attributes for similar assets
      and liabilities. SFAS No. 159 is effective for financial statements issued
      for
      fiscal years beginning after November 15, 2007. Early adoption is permitted
      as
      of the beginning of a fiscal year provided the entity also elects to apply
      the
      provisions of SFAS No. 157. Upon implementation, an entity shall report the
      effect of the first remeasurement to fair value as a cumulative-effect
      adjustment to the opening balance of retained earnings. Since the provisions
      of
      SFAS No. 159 are applied prospectively, any potential impact will depend on
      the
      instruments selected for fair value measurement at the time of implementation.
      The Company is currently evaluating the impact, if any, adoption of SFAS No.
      159
      will have on its financial statements.




51
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005




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




m)
            Comparative
                information




Certain
      amounts for fiscal 2005, as well as cumulativeamounts from March 19, 2001 to December 31, 2006, have been
      reclassified to conform with the current year's financial statement
      presentation.




**3.**
            **Equipment,
                Net**




**December
                31,**
            
            December
                31,**2006**
            
            2005Furniture
                and fixtures
            
            **$**
            **31,713**
            
            $
            31,713Office
                equipment
            
            
            **43,648**
            
            
            43,648Lab
                equipment
            
            
            **416,093**
            
            
            363,140Computer
                equipment
            
            
            **5,066**
            
            
            5,066Cylinders
                and designs
            
            
            **2,000**
            
            
            2,000**498,520**
            
            
            445,567Less:
                Accumulated depreciation
            
            
            **348,526**
            
            
            241,935Net
                carrying amount
            
            **$**
            **149,993**
            
            $
            203,632




Depreciation
      expense was $106,591 and $80,074 for 2006 and 2005, respectively.




**4.**
            **Intangible
                Assets, Net**




On
      February 10, 2005, the Company entered into a licensing agreement with Revaax
      Pharmaceuticals LLC ("Revaax"), whereby the Company received an exclusive,
      worldwide, royalty bearing license, with the right to sub-license, of Revaax's
      licensed technology and products. The agreement calls for an initial licensing
      fee of $375,000 to be payable to Revaax in eight quarterly installments ending
      on November 10, 2006. Accordingly, the Revaax license has been measured at
      fair
      value at the date the licensing agreement was entered into. The fair value
      of
      the 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 the
      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%. As at December 31, 2006 the outstanding balance was paid.
      Amortization expense was $17,919 and $16,326 for 2006 and 2005, respectively.
      The Company tested the asset for impairment and found none.


52
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005




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




On
      February 28, 2005, the Company issued, in a transaction exempt from registration
      under the Securities Act of 1933, as amended, $3,850,000 aggregate principal
      amount of 6% convertible notes due on February 28, 2008. The notes were
      subject to conversion into shares of common stock of the Company, at the
      holder's option, at any time from and after the earlier of (i) the date of
      the
      first anniversary of the closing of the Acquisition Merger (May 13, 2006) or
      (ii) May 26, 2006 to the maturity date, February 28, 2008. The notes would
      be
      automatically converted upon (i) the closing of the sale of all or substantially
      all of the assets of the Company or any merger, consolidation or other business
      combination or (ii) the maturity date. The conversion price was equal to the
      lesser of $1.00 per share (as adjusted in the Acquisition Merger) and a floating
      price determined by the average of three lowest current market prices of Company
      common stock during the 40 calendar day period immediately preceding conversion.
      On May 13, 2006, owners of the convertible notes exercised their rights to
      convert the entire principal amount of the notes into 3,850,000 shares of the
      Company’s common stock at a conversion price of $1.00 per share.




On
      August
      8, 2005, the Company completed a private placement of $1.3 million aggregate
      principal amount of convertible notes. The holders of these notes were entitled
      any time after September 19, 2005 until August 8, 2008, or upon the occurrence
      and continuance of any of the events of default, to convert the principal amount
      of any convertible notes or portions thereof into common stock at a conversion
      price of $2.00 per share. The Company evaluated this transaction and determined
      that based on the market price of the Company's common stock on August 8,
      2005 of $4.50 per share, there was an associated deferred beneficial
      conversion feature of $2.50 per share, or a total of $1,625,000, and
      recorded such amount as interest to be recognized over the term of the note.
      On
      December 2, 2005, the note holders exercised their rights to convert the entire
      principal amount of the notes into an aggregate of 650,000 shares of the
      Company's common stock. Upon conversion, the deferred beneficial conversion
      feature of $1,625,000 was recorded as an increase in net loss and an increase
      in
      the value of additional paid in capital.




53
 *Index*


**REXAHN
        PHARMACEUTICALS, INC.**
 (A
        Development Stage Company)
 Notes
        to
        Financial Statements
 December
        31, 2006 and 2005


**6.**
            **Deferred
                Revenue**




In
      2003,
      the Company entered into a collaborative research agreement with Rexgene Biotech
      Co., Ltd. ("Rexgene"), a minority shareholder. Rexgene is engaged in the
      development of pharmaceutical products in Asia and has agreed to assist the
      Company with the research, development and clinical trials necessary for
      registration of the Company's drug candidate, RX-0201, in Asia. This agreement
      provides Rexgene with exclusive rights to license, sublicense, make, 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 $ 75,000
      was included in revenues for each of the years ended December 31, 2006 and
      2005.
      The remaining $1,200,000 at December 31, 2006 (2005-$1,275,000) is reflected
      as
      deferred revenue on the balance sheet. The Company adopted SAB No. 104, "Revenue
      Recognition Nonrefundable Up-front Fees" with respect to the accounting for
      this
      transaction. These fees are being used in the cooperative funding of the costs
      of development of RX-0201. Royalties of 3% of net sales of licensed products
      will become payable to the Company on a quarterly basis once commercial sales
      of
      RX-0201 begin. The product is still under development and commercial sales
      are
      not expected to begin until at least 2009.


54
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005




**7.**
            **Common
                Stock**




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




The
      following transactions occurred during fiscal years 2001 through
      2006:




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.


55
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005




**7.**
            **Common
                Stock**(cont’d)




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 as disclosed in Note 1, in the
                Acquisition Merger, (i) each share of the issued and outstanding
                common
                stock of Rexahn (other than dissenting shares) was converted into
                the
                right to receive five shares of Rexahn Pharmaceuticals common stock;
                (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 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.




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.




56
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005




**7.**
            **Common
                Stock**(cont’d)




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 (See note
                5).




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.




**8.**
            **Stock-Based
                Compensation**




On
      August
      5, 2003, the Company established a stock option plan. Under the plan, the
      Company grants stock options to key employees, directors and consultants of
      the
      Company. For all grants prior to September 12, 2005 and grants to employees
      of
      the Company after September 12, 2005, the vesting period is 30% on the first
      anniversary of the grant date, an additional 30% on the second anniversary
      and
      the remaining 40% on the third anniversary. For grants to non-employee directors
      and consultants of the Company after September 12, 2005, the vesting period
      is
      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, subject to
      the
      fulfillment of certain conditions in the individual stock option grant
      agreements. Options authorized for issuance under the plan total 17,000,000
      after giving effect to an amendment to the Company's Stock Option Plan approved
      at the Annual Meeting of the Stockholders of the Company on June 2, 2006 and
      as
      of December 31, 2006, 10,876,705 **** options
      are available for issuance (2005- 1,182,500).


57
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005




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




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




**Accounting
      for Employee Awards**




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




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




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




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


58
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005




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




As
      a
      result of the adoption of SFAS No. 123R, the Company's results of operations
      for
      the year ended December 31, 2006 include share-based employee compensation
      expense totaling $656,169. Such amounts have been included in the Statements
      of
      Operations in general and administrative and research and development expenses.
      No income tax benefit has been recognized in the Statements of Operations for
      share-based compensation arrangements as the Company has provided for a 100%
      valuation allowance on its net deferred tax assets. No stock option compensation
      expense was recorded under APB No. 25 in the Statements of Operations for the
      year ended December 31, 2005.




Employee
      stock option compensation expense in 2006 is the estimated fair value of options
      granted amortized on a straight-line basis over the requisite service period
      for
      the entire portion of the award. The Company has not adjusted the expense by
      estimated forfeitures, as required by SFAS No. 123R for employee options, since
      the forfeiture rate based upon historical data was determined to be
      immaterial.




**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 $377,787 for the year
      ended December 31, 2006 and $436,748 for the year ended December 31, 2005.
      Such
      amounts have been included in the Statements of Operations in general and
      administrative and research and development expenses.




The
      weighted average estimated fair value of stock options granted in the year
      ended
      December 31, 2006 and 2005 was $0.83 and $0.77, respectively. The fair value
      of
      options at the date of grant was estimated using the Black-Scholes option
      pricing model. During 2006, the Company took into consideration guidance under
      SFAS No. 123R and SAB No. 107 when reviewing and updating assumptions. The
      expected volatility is based upon historical volatility of the Company's stock
      and other contributing factors. The expected term is based upon the contract
      life with non-employees.




59
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005




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




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




**2006**
            
            2005Black-Scholes
                weighted average assumptions:Expected
                dividend yield
            
            
            **0**
            
            
            0Expected
                volatility
            
            
            **100**
            **%**
            
            100
            %Risk
                free interest rate
            
            
            **4.70%-5.00**
            **%**
            
            4.54
            %Expected
                term (in years)
            
            
            **1-5
                years**
            
            
            5
                years




**Pro
      Forma Information under SFAS No. 123 for Periods Prior to Adoption of SFAS
      No.
      123R**




The
      following table illustrates the pro forma effect on net loss and loss per share
      as if the fair value recognition provisions of SFAS No. 123 had been applied
      to
      all outstanding and unvested awards in the year ended December 31, 2005.




Year
                Ended December 31, 2005Net
                loss, as reported
            
            $
            (6,349,540
            )Add,
                Stock-based employee compensation recorded under APB No. 25 intrinsic
                share method included in reported net loss
            
            
            -Deduct,
                Stock-based employee compensation expense determined under fair
                value-based method for all employee awards (no tax effect)
            
            
            (638,918
            )Pro
                forma net loss
            
            $
            (6,988,458
            )Net
                loss per share:Basic
                and diluted-as reported
            
            $
            (0.15
            )Basic
                and diluted-pro forma
            
            $
            (0.17
            )


60
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005




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




The
      following table represents all of the Company's stock options granted, exercised
      and cancelled during the year ended December 31, 2006 and 2005.




**2006**
            
            2005**Shares
                Subject to Options**
            
            **Weighted
                Avg. Option Prices**
            
            **Shares
                Subject to Options**
            
            **Weighted
                Avg. Option Prices**Outstanding
                at January 1
            
            
            5,770,000
            
            $
            0.84
            
            
            2,775,000
            
            $
            0.24Cancelled
                due to repricing
            
            
            -
            
            
            -
            
            
            (927,500
            )
            
            0.24Granted
                due to repricing
            
            
            -
            
            
            -
            
            
            927,500
            
            
            0.80Granted
            
            
            1,165,000
            
            
            1.31
            
            
            3,810,000
            
            
            1.01Exercised
            
            
            (61,705
            )
            
            0.24
            
            
            (40,000
            )
            
            0.24Cancelled
            
            
            (750,000
            )
            
            0.80
            
            
            (775,000
            )
            
            0.24Outstanding
                at December 31
            
            
            6,123,295
            
            $
            0.94
            
            
            5,770,000
            
            $
            0.84


61
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005




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




**Shares
                Subject to Options**
            
            **Weighted
                Avg. Option Prices**
            
            **Weighted
                Average Remaining Contractual Term**
            
            **Aggregated
                Intrinsic Value****Outstanding
                at December 31, 2006**
            
            
            **6,123,295**
            
            **$**
            **0.94**
            
            
            **8.0
                years**
            
            **$**
            **-****Exercisable
                at December 31, 2006**
            
            
            **3,035,628**
            
            **$**
            **0.85**
            
            
            **7.6
                years**
            
            **$**
            **-**





**Shares
                Subject to Options**
            
            **Weighted
                Avg. Option Prices**
            
            **Weighted
                Average Remaining Contractual Term**
            
            **Aggregated
                Intrinsic Value**Outstanding
                at December 31, 2005
            
            
            5,770,000
            
            $
            0.84
            
            
            8.7
                years
            
            $
            6,693,200Exercisable
                at December 31, 2005
            
            
            1,677,708
            
            $
            0.54
            
            
            7.9
                years
            
            $
            2,449,454




A
      total
      of 61,705 and 40,000 options were exercised during the year ended December
      31,
      2006 and 2005, respectively. The intrinsic value of the options exercised was
      $78,288 and $70,400 in 2006 and 2005, respectively.




As
      of
      December 31, 2006, there was $2,242,525 (2005- $2,933,431) of total unrecognized
      compensation cost, net of estimated forfeitures, related to all unvested stock
      options, which is expected to be recognized over a weighted average vesting
      period of 1.8 years (2005- 2.2 years).




62
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005




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




The
      components of deferred income taxes are as follows:





**2006**
            
            2005Deferred
                income tax assets:Net
                operating loss carryforwards
            
            **$**
            **7,918,491**
            
            $
            5,397,643Valuation
                allowance
            
            
            **(7,918,491**
            **)**
            $
            (5,397,643
            )Deferred
                income taxes
            
            **$**
            **-**
            
            $
            -




The
      Company has tax losses available to be applied against future years income.
      Due
      to the losses incurred in the current year and expected future operating
      results, management determined that it is more likely than not that the deferred
      tax asset resulting from the tax losses available for carryforward and stock
      option compensation expense will not be realized through the reduction of future
      income tax payments. Accordingly a 100% valuation allowance has been recorded
      for deferred income tax assets.




As
      of
      December 31, 2006 and 2005, the Company had approximately $20,838,000 and
      $14,204,000, respectively, of federal and state net operating loss carryforwards
      available to offset future taxable income; such carryforwards expire in various
      years through 2024.




**10.**
            **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 December 31, 2006,
                the
                total value of these agreements was approximately $1,800,000
                (2005-$1,900,000) and the Company had made payments totaling $1,150,000
                under the terms of the agreements as at December 31, 2006
                (2005-$1,000,000). All of these agreements may be terminated by either
                party upon appropriate notice as stipulated in the respective
                agreements.




63
 *Index*


**REXAHN
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


Notes
      to
      Financial Statements


December
      31, 2006 and 2005




**10.**
            **Commitments
                and Contingencies**(cont’d)




b)
            On
                April 19, 2006, the Company executed definitive agreements with Future
                Systems, Inc. ("FSI"), a Korean stock exchange (KOSDAQ) listed information
                technology company based in Seoul, Korea. Pursuant to the agreements,
                the
                Company would transfer to FSI exclusive rights and a non-exclusive
                license
                to develop, manufacture, and sell products based on Rexahn’s RX-0201,
                RX-0047 and RX-10100 drug candidates in certain territories for
                approximately $35.8 million, and simultaneously, FSI would issue
                and sell
                4,326,854 shares of its common stock to the Company, representing
                approximately 28% of FSI’s outstanding shares, after giving effect to the
                subscription. The investment, of approximately $35.8 million, would
                have
                made the Company the largest single stockholder of FSI. In addition,
                the
                Company entered into an agreement with FSI and Core F.G. Co., Ltd.,
                the
                general partner of Triplewin Corporate Restructuring Partnership,
                the
                then-current majority shareholder of FSI, with respect to the management
                of FSI in connection with redirecting FSI’s business focus to the
                biopharmaceutical industry. Completion of the transactions was subject
                to
                customary closing conditions, including approval by FSI
                shareholders.  On June 8, 2006, the Company terminated the agreements
                entered into with FSI and Core F.G. Co., Ltd., including a share
                subscription agreement, an intellectual property assignment and license
                agreement and a management agreement, providing for, among other
                things,
                the assignment and license by the Company to FSI of certain intellectual
                property rights for the Company's drug candidates in specified markets
                and
                the acquisition by the Company of an ownership interest in FSI. The
                termination followed a vote on the proposed transactions that was
                not
                approved by the FSI shareholders at a meeting in Seoul, Korea on
                June 7,
                2006.




c)
              On
                  September 12, 2005, the Company and three of its key executives
                  entered
                  into employment agreements. Two of the three agreements expire
                  on
                  September 12, 2007 and result in an annual commitment of $360,000.
                  One
                  agreement expires on September 12, 2010 and results in an annual
                  commitment of $350,000.




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




Minimum
      future rental payments under this lease are as follows:




For
                the years ended December 312007
            
            $
            216,1702008
            
            
            222,6552009
            
            
            112,972$
            551,797




e)
              Regulation
                  by governmental authorities in the United States and other countries
                  constitutes a significant consideration in our product development,
                  manufacturing and marketing strategies. The Company expects that
                  all of
                  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.


64
 *Index*




**Report
        of Independent Registered Public Accounting Firm**
 
 Board
        of
        Directors and Stockholders of
 Rexahn
        Pharmaceuticals, Inc.
 Rockville,
        Maryland
  We
        have
        audited the accompanying balance sheets of Rexahn Pharmaceuticals, Inc. (a
        development stage company) as of December 31, 2006 and 2005 and the related
        statements of operations, stockholders' equity (deficit) and cash flows for
        the
        years ended December 31, 2006 and 2005 and the cumulative period from inception
        (March 19, 2001) to December 31, 2006. These financial statements are the
        responsibility of the Company's management. Our responsibility is to express
        an
        opinion on these financial statements based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. The Company is not
        required to have, nor were we engaged to perform, an audit of its internal
        control over financial reporting. Our audits included consideration of internal
        control over financial reporting as a basis for designing audit procedures
        that
        are appropriate in the circumstances, but not for the purpose of expressing
        an
        opinion on the effectiveness of the Company's internal control over financial
        reporting. Accordingly, we express no such opinion. An audit includes examining,
        on a test basis, evidence supporting the amounts and disclosures in the
        financial statements, assessing the accounting principles used and significant
        estimates made by management, as well as evaluating the overall financial
        statement presentation. We believe that our audits provides a reasonable
        basis
        for our opinion.
  In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Rexahn Pharmaceuticals, Inc.
        at
        December 31, 2006 and 2005 and the results of its operations and its cash
        flows
        for the years then ended and the cumulative period from inception (March
        19,
        2001) to December 31, 2006, in conformity with accounting principles generally
        accepted in the United States of America.
  
 /s/
                  Lazar Levine & Felix LLPLazar
                  Levine & Felix LLP
 
 New
        York,
        New York
 March
        30,
        2007




65




**Item 8.**
            **Changes
                In and Disagreements With Accountants on Accounting and Financial
                Disclosure**




Not
      applicable.




**Item 8A.**
            **Controls
                and Procedures**




Based
      on
      their most recent evaluation, which was completed as of the end of the period,
      December, 2006, covered by this Annual Report on Form 10-KSB, the Company's
      Chief Executive Officer and Chief Financial Officer believe the Company's
      disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
      and 15d-14) are effective to ensure that information required to be disclosed
      by
      the Company in this report is 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. During the last fiscal quarter to which this report relates, there
      were no changes in the Company's internal controls or other factors that could
      significantly affect these controls subsequent to the date of their evaluation
      and there were no corrective actions with regard to significant deficiencies
      and
      material weaknesses.




**Item 8B.**
            **Other
                Information**




None.




66
 *Index*


**PART
      III**




**Item 9.**
              **Directors,
                  Executive Officers, Promoters and Control Persons; Compliance With
                  Section 16(a) of the Exchange
                  Act**


The
      following table sets forth the names, ages and positions of our directors and
      executive officers:




**Name**
            **Age**
            **Position**Dr.
                Chang H. Ahn
            55
            Chairman
                of the Board, Chief Executive Officer and DirectorDr.
                Young-Soon Park
            60
            DirectorCharles
                Beever
            54
            DirectorKwang
                Soo Cheong
            45
            DirectorY.
                Michele Kang
            47
            DirectorDavid
                McIntosh
            48
            DirectorTae
                Heum Jeong
            36
            Chief
                Financial Officer, Secretary and
                Director




***Chang
      H. Ahn*** **.** Dr. Ahn
      has served as Chairman of the Board, Chief Executive Officer and a Director
      since May 2005. Dr. Ahn served as Chairman and Chief Executive Officer
      of Rexahn, Corp from its incorporation in March 2001 to May 2005. From
      1988 to 2001, Dr. Ahn held dual positions as both Expert Regulatory
      Pharmacologist and Lab Head at the FDA's Center for Drug Evaluation and
      Research. Prior to joining the FDA in 1988, Dr. Ahn carried out cancer
      research at the National Cancer Institute, as well as at Emory University's
      School of Medicine. In 2003 and 2004, Dr. Ahn organized and chaired the
      U.S.-Korea Bio Business and Partnership Forum, for which Maryland State and
      Montgomery County are partners. He also served as president of the Society
      of
      Biomedical Research from 2000 to 2003. Dr. Ahn holds a Ph.D. in
      pharmacology from Ohio State University. He also holds two B.S. degrees in
      pharmacy from Creighton University and Seoul National University. Dr. Ahn and
      Inok Ahn are husband and wife.




***Young-Soon
      Park*** **.** Dr. Park
      has served as a director since May 2005. Dr. Park served as a director of
      Rexahn, Corp from March 2001 to May 2005. She is the founder of Onnuri
      Health Group and has served as its Chief Executive Officer and Chairman of
      the
      Board of Directors since 1992. She is also the Chairman of the Board of
      Directors of Onnuri Pharmacy Welfare Association since 1997. She had served
      as
      the Chief Executive Officer and Chairman of Rexgene Biotech from 2000 until
      2002. Dr. Park received a B.A. in pharmacy from Pusan University and a
      Ph.D. in pharmacy from Wonkwang University.




***Charles
      Beever*** .
      Mr.
      Beever has served as a director since May 2006. He has been a partner and
      Vice President of Booz Allen & Hamilton, Inc. since October 1993, and
      served as staff member and Engagement Manager at Booz Allen Hamilton from
      January 1984 to October 2003. Prior to joining Booz Allen Hamilton,
      Mr. Beever served as Plant Production Manager from October 1981 to
      January 1984, Industrial Engineering Manager from June 1979 to
      October 1981 and Production Supervisor from July 1978 to
      June 1979 at McGraw-Edison Company. Mr. Beever holds a B.A. in Economics
      from Haverford College, where he was elected to Phi Beta Kappa, and an M.B.A.
      from the Harvard Graduate School of Business Administration.




***Kwang
      Soo Cheong*** . 
      Dr. Cheong has served as a director since May 2006.  He is a faculty
      member at the Department of Finance of the Johns Hopkins University Carey
      Business School (Assistant Professor: 2001-2005 & Associate Professor: 2006
      to date).  Dr. Cheong was an Assistant Professor of Economics at the
      University of Hawaii from 1994 to 2001, and he was a lecturer at the Department
      of Economics of Stanford University from 1993 to 1994.  During the summer
      of 1995, Dr. Cheong was a Visiting Fellow in the Taxation and Welfare Division
      at the Korea Development Institute in Korea.  Dr. Cheong holds a B.A. in
      Economics and an M.A. in Economics from Seoul National University, and a Ph.D.
      in Economics from Stanford University.


67
 *Index*


***Y.
      Michele Kang*** .
      Ms.
      Kan g has
      served as a director since May 2006. She has been Vice President and
      General Manager of Northrop Grumman Information Technology's Health Solutions
      division since 2003; Vice President and Deputy General Manager, Global
      Information Technology of Northrop Grumman Mission Systems from 2001 to 2003;
      and Vice President, e-Business of Northrop Grumman Mission Systems from 2000
      to
      2001. She is a member of the eHealth Initiative Leadership Council and a member
      of the steering committee of Connecting for Health. Prior to joining Northrop
      Grumman, Ms. Kang was a partner in the Strategic Advisory Services group of
      Ernst & Young LLP. Ms. Kang received a B.A. in Economics from the University
      of Chicago and a Master's degree in Public and Private Management from the
      Yale
      School of Management.




***David
      McIntosh.*** Mr. McIntosh
      has served as a director since May 2005. Mr. McIntosh served as a director
      of Rexahn, Corp from March 2004 to May 2005. He has been a partner at
      Mayer, Brown, Rowe & Maw LLP (law firm) since 2001. Mr. McIntosh was a
      member of the United States House of Representatives, representing the 2nd
      District of Indiana from 1995 to 2001. From 1993 to 1994, he was a director
      of
      the Hudson Institute Competitiveness Center. He served on President Bush's
      Council on Competitiveness as Executive Director from 1989 to 1993. He also
      served as the Special Assistant to President Reagan for Domestic Affairs from
      1987 to 1989 and was the Special Assistant to the Attorney General of the United
      States from 1986 to 1987. Mr. McIntosh received a B.A. from Yale College
      and a J.D. from the University of Chicago Law School.




***Tae
      Heum Jeong*** **.** Mr.
      Jeong has served as Chief Financial Officer and Secretary since May 2005
      and as a director since June 2005. Mr. Jeong served as Chief Financial
      Officer of Rexahn, Corp from December 2002 to May 2005. From 1997 to
      November 2002, Mr. Jeong served as a senior investment manager at
      Hyundai Venture Investment Corporation, a venture capital firm where he managed
      the biotech investment team. He was also a committee member of the Industrial
      Development Fund of Korea's Ministry of Commerce, Industry and Energy from
      2000
      to 2002. Mr. Jeong holds a B.S. in chemistry and an M.S. specializing in
      bio-medicinal chemistry, from Pohang University of Science and Technology
      (POSTECH).




**Board
      Composition**




Our
      board
      of directors is currently composed of seven members, of whom four have been
      determined by the board to be "independent directors", as defined by the rules
      of the Nasdaq Stock Market, as applicable and as may be modified or
      supplemented.




**Board
      Committees**




Our
      board
      of directors has the authority to appoint committees to perform certain
      management and administration functions. In connection with the election of
      the
      new directors, the Board of Directors also established three committees of
      the
      Board and named the following directors to serve on those committees:




***Audit
      Committee***




The
      Audit
      Committee, among other things:




·
            appoints
                or replaces and oversee our independent auditors and approves all
                audit
                engagement fees and terms;




·
            preapproves
                all audit (including audit-related) services, internal control-related
                services and permitted non-audit services (including fees and terms
                thereof) to be performed for us by our independent
                auditors;




68
 *Index*




·
            reviews
                and discusses with our management and independent auditors significant
                issues regarding accounting and auditing principles and practices
                and
                financial statement presentations;




·
            reviews
                and approves our procedures for the receipt, retention and treatment
                of
                complaints regarding accounting, internal accounting controls or
                auditing
                matters and the confidential, anonymous submission by our employees
                of
                concerns regarding accounting or auditing matters; and




·
            reviews
                and oversees our compliance with legal and regulatory
                requirements.




Kwang
      Soo
      Cheong, Charles Beever, and Y. Michele Kang serve as members of our Audit
      Committee. Dr. Cheong serves as Chair of the Audit Committee and as the Audit
      Committee's audit committee expert. Each of the members meets the criteria
      for
      independence required by the Nasdaq Stock Market and Rule 10A-3 under the
      Exchange Act.




***Nominating
      and Corporate Governance Committee***




The
      Nominating and Corporate Governance Committee, among other things:




·
            reviews,
                evaluates and seeks out candidates qualified to become Board
                members;




·
            reviews
                committee structure and recommends directors for appointment to
                committees;




·
            develops,
                reevaluates (not less frequently than every three years) and recommends
                the selection criteria for Board and committee
                membership;




·
            establishes
                procedures to oversee evaluation of our Board, its committees, individual
                directors and management; and




·
            develops
                and recommends guidelines on corporate
                governance.




Y.
      Michele Kang, David McIntosh and Young Soon Park serve as members of our
      Nominating and Corporate Governance Committee. Ms. Kang serves as Chair of
      the
      Nominating and Corporate Governance Committee. Each of the members meets the
      criteria for independence required by the Nasdaq Stock Market.




The
      Committee reviews, evaluates and seeks out candidates qualified to become Board
      members, consistent with criteria approved by the Board, who may be submitted
      by
      Directors, officers, employees, shareholders and others for recommendation
      to
      the Board of Directors. In fulfilling this responsibility, the Committee shall
      also consult with the Board of Directors and the chief executive officer
      concerning director candidates. While we do not have in place formal procedures
      by which shareholders may recommend director candidates to the Committee,
      shareholders may communicate with the members of the Board of Directors,
      including the Committee by writing to the Secretary of the Company at our
      headquarters address. In addition, our amended By-Laws establish a procedure
      with regard to shareholder proposals for the annual meeting of shareholders,
      including nominations of persons for election to the board of
      directors.




***Compensation
      Committee***




The
      Compensation Committee, among other things:




·
            fixes
                salaries of executive officers and reviews salary plans for other
                executives in senior management
                positions;




69
 *Index*


·
            reviews
                and makes recommendations with respect to the compensation and benefits
                for non-employee directors, including through equity-based
                plans;




·
            evaluates
                the performance of our CEO and other senior executives and assists
                the
                Board in developing and evaluating potential candidates for executive
                positions; and




·
            administers
                our incentive compensation, deferred compensation and equity-based
                plans
                pursuant to the terms of the respective
                plans.




David
      McIntosh, Charles Beever, and Kwang Soo Cheong serve as members of our
      Compensation Committee. Mr. McIntosh serves as Chairman of the Compensation
      Committee. Each of the members meets the criteria for independence required
      by
      the Nasdaq Stock Market.




**Code
      of Ethics**




We
      have
      not adopted a code of ethics that applies to our principal executive officer,
      principal financial officer, principal accounting officer or controller, or
      persons performing similar functions. We are in the process of reviewing a
      code
      of ethics with our attorneys and the independent board members and will adopt
      one upon completion of discussions.




**Section 16
      Reports**




We
      believe that during fiscal 2006, our executive officers and directors and more
      than 10% beneficial owners timely filed all forms required to be filed under
      Section 16(a) of the Exchange Act.




**Item 10.**
              **Executive
                  Compensation**


**Executive
      Compensation**




The
      following table sets forth the annual and long-term compensation, from all
      sources, of the Chief Executive Officer of the Company and the other executive
      officers of the Company for the fiscal year ended December 31, 2006. The
      compensation described in this table does not include medical, group life
      insurance or other benefits which are available generally to all of our salaried
      employees.




70
 *Index*


**Summary
      Compensation Table**




**Name
                  and Principal Position(s)**
              
              **Year**
              
              **Salary
                  ($)**
              
              **Bonus
                  ($)**
              
              **Stock
                  Awards ($)**
              
              **Option
                  Awards ($)**
              
              **Non-Equity
                  Incentive Plan Compensation ($)**
              
              **Non-Qualified
                  Deferred Compensation Earnings ($)**
              
              **All
                  Other Compensation ($)**
              
              **Total
                  ($)**Chang
                  H. Ahn
              
              
              2006
              
              $
              330,769
              
              
              -
              
              
              -
              
              $
              183,000
              
              
              -
              
              
              -
              
              
              -
              
              $
              513,769Chairman
                  of the Board and Chief Executive OfficerTae
                  Heum Jeong
              
              
              2006
              
              $
              148,829
              
              
              -
              
              
              -
              
              $
              91,500
              
              
              -
              
              
              -
              
              
              -
              
              $
              240,329Chief
                  Financial OfficerGeorge
                  F. Steinfels1
              
              
              2006
              
              $
              125,273
              
              
              -
              
              
              -
              
              $
              91,500
              
              
              -
              
              
              -
              
              
              -
              
              $
              216,773Former
                  Chief Business Officer and Senior Vice President, Clinical
                  Development





1
            Dr.
                Steinfels resigned from all his positions with the Company in
                September 2006.




**Outstanding
      Equity Awards at Fiscal Year-End**




Shown
      below is information with respect to (i) the unexercised options to
      purchase Rexahn Pharmaceuticals common stock derived from options to purchase
      Rexahn common stock granted to the named executive officers in fiscal year
      2006
      and prior years and held by them at December 31, 2006, after giving effect
      to the Merger exchange ratio of five shares of Rexahn Pharmaceuticals common
      stock for each share of Rexahn common stock, (ii) common stock that has not
      vested and (iii) equity incentive plans awards for each named executive
      officer outstanding as of the fiscal year ended December 31,
      2006.




71
 *Index*




**Option
                Awards**
            
            **Stock
                Awards****Name**
            
            **Number
                of Securities Underlying Unexer-cised Options
                (#) Exer-cisable**1****
            
            **Number
                of Securities Underlying Unexer-cised Options
                (#) Unexer-cisable**
            
            **Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options (#)**
            
            **Option
                Exercise Price ($)**
            
            **Option
                Expiration Date**
            
            **Number
                of Shares or Units of Stock That Have Not Vested
                (#)**
            
            **Market
                Value of Shares or Units of Stock That Have Not Vested
                ($)**
            
            **Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or Other
                Rights
                That Have Not Vested (#)**
            
            **Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That Have Not Vested ($)**Chang
                H. Ahn
            
            
            600,000
            
            
            400,000
            
            
            -
            
            
            0.80
            
            
            1/20/2015
            
            
            -
            
            
            -
            
            
            -
            
            
            -Tae
                Heum Jeong
            
            
            150,000
            
            
            -
            
            
            -
            
            
            0.24
            
            
            8/5/2013
            
            
            -
            
            
            -
            
            
            -
            
            
            -100,000
            
            
            -
            
            
            -
            
            
            0.80
            
            
            8/5/2013300,000
            
            
            200,000
            
            
            -
            
            
            0.80
            
            
            1/20/2015George
                F. Steinfels2
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -







1
            Represents
                option awards under the Company's Stock Option Plan which vest 30%,
                30%
                and 40% on the first, second and third anniversaries of the date
                of
                grant.





2
            Dr.
                Steinfels resigned from all his positions with the Company in
                September 2006.




**Stock
      Option Plan**




In
      July 2003 the board of directors adopted, and in August 2003 our
      stockholders approved, the Rexahn stock option plan. In connection with the
      Merger, we assumed the plan and converted all outstanding options to purchase
      Rexahn common stock into options to purchase Rexahn Pharmaceuticals common
      stock. The number of shares subject to the converted options was multiplied
      by
      five and the exercise price per share was divided by five.




The
      plan
      permits grants to be made from time to time as non-qualified stock options
      or
      incentive stock options.




*Administration.* The
      stock
      option plan is administered by the board of directors. In the alternative,
      the
      board may appoint a stock option committee to administer the plan on behalf
      of
      the board. The plan is currently administered by our board of directors. In
      order to meet the requirements of the rules under Section 16 of the
      Securities Exchange Act of 1934, as amended (the "Exchange Act"), all future
      grants under the plan will be made by a committee whose members are
      "non-employee directors" as defined for purposes of Section 16 of the
      Exchange Act and outside directors within the meaning of Section 162(m) of
      the Internal Revenue Code of 1986, as amended.




72
 *Index*


*Participation.* The
      persons to whom grants are made under the plan will be selected from time to
      time by the stock option committee in its sole discretion from among our
      employees, officers, directors and consultants.




*Shares
      Subject to Stock Option Plan.* The
      plan
      authorizes the issuance or delivery of an aggregate of 6,992,500 shares of
      common stock. Shares of common stock subject to the unexercised, undistributed
      or unearned portion of any terminated or forfeited grant under the plan will
      be
      available for further awards.




*Stock
      Options.* The
      plan
      authorizes grants of stock options, which may be either incentive stock options
      eligible for special tax treatment or non-qualified stock options. Incentive
      stock options may be granted only to our employees.




Under
      the
      provisions of the plan authorizing the grant of stock options:




·
            the
                option price will be determined by the stock option committee; provided,
                however, that the option price for an incentive stock option may
                not be
                less than 100% of the fair market value of the shares of our common
                stock
                on the date of grant (110% for grants to an optionee owning more
                than 10%
                of our total combined voting power);




·
            the
                term during which each stock option may be exercised will be determined
                by
                the stock option committee; provided, however, that incentive stock
                options generally may not be exercised more than ten years from the
                date
                of grant (five years for grants to an optionee owning more than 10%
                of our
                total combined voting power); and




·
            at
                the time of exercise of a stock option the option price must be paid
                in
                full in cash or in shares of our common stock or in a combination
                of cash
                and shares of our common stock or by such other means as the stock
                option
                committee may determine.




All
      grants made under the plan will be evidenced by a letter to the optionee,
      together with the terms and conditions applicable to the grants, as determined
      by the stock option committee consistent with the terms of the plan. These
      terms
      and conditions will include, among other things, a provision describing the
      treatment of grants in the event of certain triggering events, such as a sale
      of
      a majority of the outstanding shares of our common stock, a merger or
      consolidation in which we are not the surviving company, and termination of
      an
      optionee's employment, including terms relating to the vesting, time for
      exercise, forfeiture or cancellation of a grant under such circumstances.




Under
      the
      plan, stock options may not be granted after August 5, 2013.




*Tax
      Matters.* The
      following is a brief summary of the material federal income tax consequences
      of
      benefits under the plan under present law and regulations:




(a)
            *Incentive
                Stock Options.*The
                grant of an incentive stock option will not result in any immediate
                tax
                consequences to us or the optionee. An optionee will not realize
                taxable
                income, and we will not be entitled to any deduction, upon the timely
                exercise of an incentive stock option, but the excess of the fair
                market
                value of the shares of our common stock acquired over the option
                exercise
                price will be includable in the optionee's "alternative minimum taxable
                income" for purposes of the alternative minimum tax. If the optionee
                does
                not dispose of the shares of our common stock acquired within one
                year
                after their receipt, and within two years after the option was granted,
                gain or loss realized on the subsequent disposition of the shares
                of our
                common stock will be treated as long-term capital gain or loss. Capital
                losses of individuals are deductible only against capital gains and
                a
                limited amount of ordinary income. In the event of an earlier disposition,
                the optionee will realize ordinary income in an amount equal to the
                lesser
                of (i) the excess of the fair market value of the shares of our
                common stock on the date of exercise over the option exercise price
                or
                (ii) if the disposition is a taxable sale or exchange, the amount of
                any gain realized. Upon such a disqualifying disposition, we will
                be
                entitled to a deduction in the same amount as the optionee realizes
                such
                ordinary income.




73
 *Index*


(b)
            *Non-qualified
                Stock Options.*In
                general, the grant of a non-qualified stock option will not result
                in any
                immediate tax consequences to us or the optionee. Upon the exercise
                of a
                non-qualified stock option, generally the optionee will realize ordinary
                income and we will be entitled to a deduction, in each case, in an
                amount
                equal to the excess of the fair market value of the shares of our
                common
                stock acquired at the time of exercise over the option exercise price.




*Amendment,
      Suspension or Termination of Stock Option Plan* .
      Our
      board of directors may at any time amend, suspend or discontinue the plan and
      the stock option committee may at any time alter or amend awards and award
      agreements made thereunder to the extent permitted by law, provided that no
      such
      alteration or amendment will be effective without the approval of our
      stockholders to the extent that such approval is necessary to comply with any
      tax or regulatory requirement applicable to the plan and no such alteration
      and
      amendment will impair the rights of any recipient of grants without such
      recipient's consent. In the event of any change in or affecting the outstanding
      shares of our common stock by reason of a stock dividend, stock split,
      combination of shares or other similar event, our board of directors will make
      such amendments to the plan and outstanding grants and award agreements, and
      make such adjustments and take such actions as it deems appropriate and
      equitable. In the event of any proposed change in control (as defined by the
      plan), the stock option committee will take such action as it deems appropriate
      and equitable to effectuate the purposes of the plan and to protect the
      optionees, including, but not limited to, accelerating or changing the exercise
      dates of stock options, payment of appropriate consideration for the
      cancellation and surrender of stock options or if equity securities of any
      other
      corporation will be exchanged for outstanding shares of our common stock,
      providing for stock options to become options with respect to such other equity
      securities. For purposes of the plan, a change in control means the sale,
      exchange or disposition of substantially all of our assets or any merger, share
      exchange, consolidation or other reorganization or business combination in
      which
      we are not the surviving corporation or in which our stockholders become
      entitled to receive cash, securities of our company other than voting common
      stock or securities of another issuer.




**Employment
      Agreements**




*Chang
      H. Ahn.* Dr.
      Ahn's
      employment agreement dated September 12, 2005 provides that Dr. Ahn
      will serve as Chief Executive Officer ("CEO") of the Company until
      September 12, 2010, unless Dr. Ahn's employment is sooner terminated as
      further described below. If Dr. Ahn's employment continues beyond
      September 12, 2010, such employment will become "at-will," unless his
      employment agreement is expressly extended.




Dr. Ahn
      will be paid an annual base salary of $350,000, subject to periodic review
      and
      potential increase at the Board's sole discretion. During his employment, Dr.
      Ahn will be eligible to receive an annual cash bonus, as determined by the
      Board
      in its sole discretion, not exceeding 75% of his annual base salary. In order
      to
      receive such cash bonus, Dr. Ahn must be actively employed by the Company on
      the
      date on which such cash bonus is scheduled to be paid to him. Dr. Ahn will
      also
      be eligible to receive options to purchase shares of the Company's stock, to
      be
      awarded in the Board's sole discretion under the Company's Stock Option Plan
      (the "Stock Option Plan"). In addition, Dr. Ahn will be eligible for additional
      bonus in the form of cash and/or stock that may be awarded in the Board's sole
      discretion.




If
      Dr.
      Ahn suffers a "Disability" (as defined in his employment agreement), the Board,
      in its sole discretion, may terminate the employment agreement immediately
      upon
      written notice to Dr. Ahn. The Board may terminate Dr. Ahn's employment with
      or
      without "Cause" (as defined in his employment agreement) or Dr. Ahn may
      voluntarily terminate his employment, in each case, upon 30 days' written
      notice.




74
 *Index*


If
      the
      Company terminates Dr. Ahn's employment without Cause (other than following
      a
      "Change of Control" (as defined in his employment agreement)), the Company
      will
      pay to Dr. Ahn (1) his then current base salary through the termination
      date, (2) any accrued but unused vacation days as of the termination date,
      (3) a pro-rata portion of Dr. Ahn's bonus for fiscal year in which the
      termination occurs, assuming a bonus of 75% of his then current base salary,
      (4) an amount equaling 6 months of his then current base salary, and
      (5) continued coverage under the Company's health insurance plan for
      18 months. If Dr. Ahn's employment is terminated by the Board without Cause
      within the one-year period immediately following a Change of Control, the
      Company will pay to Dr. Ahn the termination compensation and benefits subject
      to
      the conditions as described in clauses (1), (2), (3) and (5) of
      the first sentence of this paragraph. In addition, the Company will pay to
      Dr.
      Ahn an amount equaling his then current base salary for the greater of the
      remainder of the term of his employment under the employment agreement or a
      period of one year. The payments and benefits to Dr. Ahn described in this
      paragraph are subject to reimbursement by Dr. Ahn and reduction by any
      compensation or benefits actually earned or received by Dr. Ahn as an employee
      of or consultant to any other entity during the period for which Dr. Ahn
      continues to receive salary payments post-termination, the requirement that
      Dr.
      Ahn, in good faith, seek other employment in a comparable position and otherwise
      mitigate the Company's obligations and Dr. Ahn's execution of a customary
      release in a form satisfactory to the Company.




*Tae
      Heum Jeong* .
      Mr.
      Jeong's employment agreement dated September 12, 2005 provides that
      Mr. Jeong will serve as Chief Financial Officer of the Company until
      September 12, 2007, unless Mr. Jeong's employment is sooner terminated as
      further described below. If Mr. Jeong's employment continues beyond
      September 12, 2007, such employment will become "at-will," unless his
      employment agreement is expressly extended.




Mr.
      Jeong
      will be paid an annual base salary of $160,000, subject to periodic review
      and
      potential increase at the Board's sole discretion. During his employment, Mr.
      Jeong will be eligible to receive an annual cash bonus, as determined by the
      CEO
      in his sole discretion, in an amount not exceeding 50% of his annual base
      salary. In order to receive such cash bonus, Mr. Jeong must be actively employed
      by the Company on the date on which such cash bonus is scheduled to be paid
      to
      him. Mr. Jeong will also be eligible to receive options to purchase shares
      of
      the Company's stock, to be awarded in the Board's sole discretion under the
      Stock Option Plan. In addition, Mr. Jeong will be eligible for additional bonus
      in the form of cash and/or stock that may be awarded in the Board's sole
      discretion.




The
      circumstances under which Mr. Jeong's employment agreement may terminate and
      the
      related terms and conditions of any payments and benefits payable to Mr. Jeong
      as a result of the termination are substantially similar to Dr. Ahn's employment
      agreement, except that if the Company terminates Mr. Jeong's employment without
      Cause (other than following a Change of Control), the Company will pay to Mr.
      Jeong a pro-rata portion of Mr. Jeong's bonus for fiscal year in which the
      termination occurs, assuming a bonus of 50% of his then current salary.




Mr.
      Jeong
      is restricted from soliciting employees or customers of the Company during
      and
      for 12 months after the employment period.




*George
      Steinfels* .
      Dr.
      Steinfels' employment agreement dated September 12, 2005 provided that
      Dr. Steinfels serve as Chief Business Officer of the Company until
      September 12, 2007, unless Dr. Steinfels' employment is sooner terminated
      as further described below. If Dr. Steinfels' employment continued beyond
      September 12, 2007, such employment would become "at will," unless his
      employment agreement was expressly extended. On September 1, 2006, George
      Steinfels resigned from his positions with the Company.





Dr.
      Steinfels was paid an annual base salary of $200,000, which was subject to
      periodic review and potential increase at the Board's sole discretion. During
      his employment, Dr. Steinfels was eligible to receive an annual cash bonus,
      as
      determined by the CEO in his sole discretion, in an amount not exceeding 50%
      of
      his annual base salary. In order to receive such cash bonus, Dr. Steinfels
      must
      have been actively employed by the Company on the date on which such cash bonus
      was scheduled to be paid to him. Dr. Steinfels, during his employment, was
      also
      eligible to receive options to purchase shares of the Company's stock, to be
      awarded in the Board's sole discretion under the Stock Option Plan. In addition,
      Dr. Steinfels was eligible for additional bonus in the form of cash and/or
      stock
      that may have been awarded in the Board's sole discretion.




75
 *Index*


The
      circumstances under which Dr. Steinfels employment agreement may terminate
      and
      the related terms and conditions of any payments and benefits payable to Dr.
      Steinfels as a result of the termination were substantially similar to Mr.
      Jeong's employment agreement. Dr. Steinfels resigned from all his positions
      with
      the Company in September 2006 and no additional amounts were paid in
      connection with the termination of his employment agreement.




Dr.
      Steinfels is restricted from soliciting employees or customers of the Company
      during and for 12 months after the employment period.




To
      the
      extent that any amounts payable to Dr. Ahn, or Mr. Jeong described above
      constitute an amount payable under a "nonqualified deferred compensation plan,"
      as defined in Section 409A, following a "separation from service," as
      defined in Section 409A, such payment will not be made until the date that
      is six months following the executive's "separation from service," but only
      if
      the executive is then deemed to be a "specified employee" under
      Section 409A.




To
      the
      extent that any amounts payable to Dr. Ahn, Mr. Jeong or Dr. Steinfels described
      above constitute an amount payable under a "nonqualified deferred compensation
      plan," as defined in Section 409A, following a "separation from service,"
      as defined in Section 409A, such payment will not be made until the date
      that is six months following the executive's "separation from service," but
      only
      if the executive is then deemed to be a "specified employee" under
      Section 409A.




**Director
      Compensation**




The
      table
      below sets forth information concerning the compensation of the directors of
      the
      Company for the fiscal year ended December 31, 2006.




**Director
      Compensation**




**Name**
            
            **Fees
                Earned Or Paid In Cash ($)**
            
            **Stock
                Awards ($)**
            
            **Option
                Awards ($) (1)**
            
            **Non-Equity
                Incentive Plan Compensation ($)**
            
            **Non-qualified
                Deferred Compensation Earnings**
            
            **All
                Other Compensation ($)**
            
            **Total
                ($)**Young-Soon
                Park
            
            $
            1,000
            
            
            -
            
            $
            39,754
            
            
            -
            
            
            -
            
            
            -
            
            $
            40,754Charles
                Beever
            
            $
            3,000
            
            
            -
            
            $
            4,545
            
            
            -
            
            
            -
            
            
            -
            
            $
            7,545Kwang
                Soo Cheong
            
            $
            3,000
            
            
            -
            
            $
            4,545
            
            
            -
            
            
            -
            
            
            -
            
            $
            7,545Y. Michele
                Kang
            
            $
            2,000
            
            
            -
            
            $
            4,545
            
            
            -
            
            
            -
            
            
            -
            
            $
            6,545David
                McIntosh
            
            $
            4,000
            
            
            -
            
            $
            36,556
            
            
            -
            
            
            -
            
            
            -
            
            $
            40,556






(1)
              **Director
                  Name**
              ****
              **Aggregate
                  Number of**
                **Option
                  Awards**
                **at
                  Fiscal Year End**
              ****
              **Option Exercise**
                **Price
                  ($)**
              
              **Option
                  Expiration Date**Young-Soon
                  Park
              
              
              220,000
              
              $
              3.00
              
              9/12/201520,000
              
              $
              1.20
              
              5/1/2016Charles
                  Beever
              
              
              20,000
              
              $
              1.20
              
              5/1/2016Kwang
                  Soo Cheong
              
              
              20,000
              
              $
              1.20
              
              5/1/2016Y.
                  Michele Kang
              
              
              20,000
              
              $
              1.20
              
              5/1/2016David
                  McIntosh
              
              
              125,000
              
              $
              0.80
              
              4/20/201420,000
              
              $
              3.00
              
              9/12/201520,000
              
              $
              1.20
              
              5/1/2016




Our
      non-employee director compensation policy is as
      follows:




76
 *Index*




(a)
            each
                of the non-employee directors of the Company will receive 20,000
                options
                to purchase shares of the common stock of the Company for each year
                he or
                she serves on the Board; and




(b)
            each
                of the non-employee directors of the Company will receive an additional
                board meeting fee of $1,000 for each meeting he or she participates
                in.




On
      May 1,
      2006, each of our directors received 20,000 options to purchase shares of common
      stock with an exercise price of $1.20 per share, the fair market value on the
      date of grant. The options fully vest on May 1, 2007.




**Item 11.**
            **Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters**




**Securities
      Authorized for Issuance Under Equity Compensation Plans**




The
      following table provides information, as of December 31, 2006, about shares
      of our common stock that may be issued upon the exercise of options, warrants
      and rights granted to employees, consultants or directors under all of our
      existing equity compensation plans.




**Number
                of securities to be issued upon exercise of outstanding options,
                warrants****and rights**
            
            **Weighted
                average exercise price of outstanding options,****warrants
                and rights**
            
            **Number
                of securities remaining available for future issuance under equity****compensation
                plans****Equity
                compensation plans approved by stockholders**
            
            
            **6,123,295**
            
            **$**
            **0.94**
            
            
            **10,876,705****Equity
                compensation plans not approved by stockholders**
            
            
            ──
            
            
            ──
            
            
            ──**Total**
            
            
            **6,123,295**
            
            **$**
            **0.94**
            
            
            **10,876,705**




**Security
      Ownership of Certain Beneficial Owners**




The
      table
      below sets forth the beneficial ownership of common stock as of
      December 31, 2006 by the following individuals or entities:




·
            each
                person, or group of affiliated persons, known to us to own beneficially
                own 5% or more of the outstanding common
                stock;




·
            each
                director;




·
            each
                executive officer; and




·
            all
                of the directors and executive officers as a
                group.




77
 *Index*


Beneficial
      ownership is determined in accordance with the rules of the Commission. Except
      as indicated by footnote and subject to community property laws where
      applicable, each person or entity named in the table has sole voting and
      investment power with respect to all shares of common stock shown as
      beneficially owned by him, her or it. In computing the number of shares
      beneficially owned by a person and the percentage ownership of that person,
      shares of common stock that will be subject to options held by that person
      that
      are exercisable as of March 30, 2007, or will become exercisable within
      60 days thereafter are deemed outstanding, while such shares are not deemed
      outstanding for purposes of computing percentage ownership of any other
      person.


**Shares
                  of Rexahn Pharmaceuticals Common Stock Beneficially
                  Owned****Name
                  of Beneficial Owner**
              
              **Number
                  of Shares**
              
              **Percentage****Directors
                  and Executive Officers:**Chang
                  H. Ahn*
              
              14,900,000(1)
              
              29.62%Charles
                  Beever*(2)
              
              20,000
              
              Less
                  than 1%Kwang
                  Soo Cheong*(2)
              
              20,000
              
              Less
                  than 1%Tae
                  Heum Jeong*
              
              1,050,000(3)
              
              2.09%Y.
                  Michele Kang*(2)
              
              20,000
              
              Less
                  than 1%David
                  McIntosh*
              
              165,000(4)
              
              Less
                  than 1%Young-Soon
                  Park*
              
              3,365,000(5)
              
              6.69%All
                  executive officers and directors as a group (7 persons)
              
              19,540,000
              
              38.84%**Holders
                  of more than 5% of shares:**Rexgene
                  Biotech Co., Ltd.**
              
              4,791,670(6)
              
              9.52%Chong
                  Kun Dang Pharmaceutical Corp.***
              
              3,000,000(6)(7)
              
              5.96%KT&G
                  Corporation****
              
              2,500,000(6)
              
              4.97%







*
            c/o
                Rexahn Pharmaceuticals, Inc., 9620 Medical Center Drive, Rockville,
                MD
                20850.




**
            9F
                Wooyoung Venture Bldg. 1330-13, Seocho-dong, Seocho-gu, Seoul 137-070,
                Korea.




***
            368,3-ga,
                Chungjeong-ro , Seodaemun-gu, Seoul 120-756,
                Korea.




****
            100
                Pyongchon-dong, Daedeog-gu, Daejeon 306-130,
                Korea.




(1)
            Includes
                Dr. Ahn’s options to purchase 600,000 shares of common stock that are
                currently exercisable or exercisable within 60 days of May 1, 2007,
                500,000 shares held by Dr. Ahn’s wife, Inok Ahn, and Mrs. Ahn’s options to
                purchase 300,000 shares of common stock that are currently exercisable
                or
                exercisable within 60 days of March 30,
                2007.




(2)
            Charles
                Beever, Kwang Soo Cheong and Y. Michele Kang became directors on
                May 1,
                2006.




(3)
            Includes
                Mr. Jeong’s options to purchase 550,000 shares of common stock that are
                currently exercisable or exercisable within 60 days of March 30,
                2007.




(4)
            Includes
                Mr. McIntosh’s options to purchase 165,000 shares common stock that
                are currently exercisable or exercisable within 60 days of March
                30,
                2007.




(5)
            Includes
                Dr. Park's options to purchase 240,000 shares common stock that are
                currently exercisable or exercisable within 60 days of March 30,
                2007.




(6)
            The
                boards of directors of each of Rexgene, Chong Kun Dang and KT&G, each
                a Korean corporation, have sole voting and sole investment power
                as to the
                shares owned by their respective
                corporations.




78
 *Index*


(7)
            Includes
                750,000 shares of common stock held by Kyungbo Pharm, a subsidiary
                of
                Chong Kun Dang. Excludes 2,000,000 shares of common stock held by
                Jang-Han
                Rhee, Chief Executive Officer of Chong Kun Dang and a former director
                of
                Rexahn.




**Item 12.**
            **Certain
                Relationships and Related Transactions; and Director
                Independence**




**Related
      Transactions**




On
      February 6, 2003, Rexahn entered into a research collaboration agreement
      with Rexgene Biotech Co., Ltd. ("Rexgene"), the holder of approximately 10.32%
      of outstanding common stock. Dr. Young-Soon Park, holder of approximately
      19.93% of outstanding common stock and a director, served as the Chairman of
      Rexgene Biotech until 2003.




Under
      the
      agreement we and Rexgene agreed to jointly develop and implement a research
      and
      development plan (including conducting clinical and animal trials in various
      countries and exchanging data derived from such trials) in order to register
      Archexin, one of our drug candidates, for sale and use in Asian countries.
      We
      contributed a license to technology relating to Archexin, and Rexgene
      contributed $1,500,000 as initial contributions under the agreement. In
      addition, Rexgene agreed to conduct clinical trials in Asian countries at its
      own expense, and we agreed to conduct clinical and animal trials in the United
      States and in non-Asian countries at our own expense. We and Rexgene also agreed
      to share data, improvements, developments, discoveries and inventions resulting
      from the agreement. Under the agreement, Rexgene also received an exclusive
      license from us to exploit any results from the research development in Asian
      countries, and we received an exclusive license to exploit any results from
      the
      research and development everywhere in non-Asian countries. Pursuant to the
      terms of the agreement, Rexgene also agreed to pay us 3% of the profits derived
      from the sale of Archexin in Asian countries. The agreement, if not earlier
      terminated by either us or Rexgene, will terminate on the expiration of the
      patents resulting from the agreement, or if no such patents are granted, 20
      years from February 6, 2003.




On
      September 3, 2003, we entered into a joint research and development
      agreement with Chong Kun Dang Pharmaceutical Corp. ("CKD"), the holder of
      approximately 6.96% of outstanding common stock.




Under
      the
      agreement, we and CKD agreed to cooperate in the research and development of
      a
      variety of new pharmaceutical compounds for human use in their own capacities.
      Each of CKD and us has performed and will continue to perform research,
      development and other obligations under the agreement at its own expense. CKD
      and Rexahn equally own all information, data, discoveries and all other results,
      either patentable or non-patentable, made or developed in connection with or
      arising out of the agreement. All profits derived from or in connection with
      the
      agreement will be allocated to CKD and us in proportion to relative
      contributions based on certain ratios, which vary depending upon a particular
      research and development phase during which the profits are earned. The
      agreement, if not earlier terminated by either us or CKD, will last until the
      expiration of any intellectual property rights pertaining to information, data,
      discoveries and all other results made or developed in connection with or
      arising out of the agreement.




**Director
      Independence**




Charles
      Beever, Kwang Soo Cheong, Y. Michele Kang and David McIntosh, serve as
      independent directors under the applicable listing standards of the Nasdaq
      Stock
      Market, as may be modified or supplemented. John Holaday, a former director,
      served as an independent directors during 2006 under the applicable listing
      standards of the Nasdaq Stock Market.




79
 *Index*




**Item 13.**
            **Exhibits******




Exhibit Number
            Exhibit Description3.1.
            Amended
                and Restated Certificate of Incorporation, filed as Appendix G to the
                Company's Definitive Proxy Statement on Schedule 14A (File No.
                000-50590) dated April 29, 2004, is incorporated herein by
                reference.3.2.
            Amended
                and Restated Bylaws, filed as Appendix H to the Company's Definitive
                Proxy Statement on Schedule 14A (File No. 000-50590) dated
                April 29, 2004, is incorporated herein by
                reference.4.1.
            Specimen
                Certificate for the Company's Common Stock, par value $.0001 per
                share, filed as Exhibit 4.3 to the Company's Registration Statement
                on Form S-8 (File No. 333-129294 ) dated October 28, 2005, is
                incorporated herein by reference.*10.1.1.
            Rexahn
                Pharmaceuticals, Inc. Stock Option Plan, as amended, filed as
                Exhibit 4.4 to the Company's Registration Statement on Form S-8
                (File No. 333-129294 ) dated October 28, 2005, is incorporated herein
                by reference.*10.1.2.
            Form
                of Stock Option Grant Agreement for Employees, filed as Exhibit 4.5.1
                to the Company's Registration Statement on Form S-8 (File No.
                333-129294 ) dated October 28, 2005, is incorporated herein by
                reference.*10.1.3.
            Form
                of Stock Option Grant Agreement for Non-Employee Directors and
                Consultants, filed as Exhibit 4.5.2 to the Company's Registration
                Statement on Form S-8 (File No. 333-129294 ) dated October 28,
                2005, is incorporated herein by reference.*10.2.
            Employment
                Agreement, dated September 12, 2005, by and between Rexahn
                Pharmaceuticals, Inc. and C. H. Ahn, filed as Exhibit 10.1 to the
                Company's Current Report on Form 8-K filed on September 12,
                2005, is incorporated herein by reference.*10.3.
            Employment
                Agreement, dated September 12, 2005, by and between Rexahn
                Pharmaceuticals, Inc. and T. H. Jeong, filed as Exhibit 10.2 to the
                Company's Current Report on Form 8-K filed on September 12,
                2005, is incorporated herein by reference.*10.4
            Employment
                Agreement, dated September 12, 2005, by and between Rexahn
                Pharmaceuticals, Inc. and G. Steinfels, filed as Exhibit 10.1 to the
                Company's Current Report on Form 8-K filed on September 12,
                2005, is incorporated herein by reference.10.5.
            Research
                Collaboration Agreement dated February 6, 2003 by and between Rexahn
                Pharmaceuticals, Inc. and Rexgene Biotech Co., Ltd, filed as Exhibit
                10.5
                to the Company's Annual Report on Form 10-KSB the fiscal year ended
                December 31, 2005, is incorporated herein by reference.10.6.
            Revaax
                License Agreement, dated February 8, 2005, by and between Rexahn
                Pharmaceuticals, Inc. and Revaax Pharmaceuticals LLC, filed as Exhibit
                10.6 to the Company's Annual Report on Form 10-KSB for the fisal year
                ended December 31, 2005, is incorporated herein by
                reference.23.
            Consent
                of Lazar, Levine & Felix, LLP, independent registered public
                accounting firm.24.
            Power
                of Attorney.31.1.
            Certification
                of Chief Executive Officer of Periodic Report Pursuant to Pursuant
                to
                Rule 13a-15(e) or Rule 15d-15(e).31.2.
            Certification
                of Chief Financial Officer of Periodic Report Pursuant to Pursuant
                to
                Rule 13a-15(e) or
                Rule 15d-15(e).






80




32.1.
            Certification
                of Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C.
                Section 1350.32.2.
            Certification
                of Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
                Section 1350.


_______________________




*
            Management
                contract or compensation plan or arrangement.




**Item 14.**
            **Principal
                Accountant Fees and
                Services**




The
      following table presents fees for professional audit services rendered by Lazar
      Levine & Felix LLP for the audits of the Company's annual financial
      statements for the years ended December 31, 2006 and 2005,
      respectively.




**2006**
            
            **2005**Audit
                Fees
            
            $
            77,500
            1
            $
            61,000Audit-Related
                Fees
            
            
            —
            
            
            —Tax
                Fees
            
            
            —
            
            
            —All
                Other Fees
            
            
            —
            
            
            —




1
            Audit
                Fees relate to the audit of the Company's financial statements and
                reviews
                of certain financial statements included in the Company's quarterly
                reports on Form 10-QSB. The amount shown represents the maximum fees
                for
                such services.




Our
      Audit
      Committee reviews all audit fees at least annually.




81
 *Index*


**SIGNATURES**




In
      accordance with the requirements of Section **** 13
      or 15(d) of the Securities Exchange Act of 1934, the issuer has duly caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly authorized
      on this 2nd day of April, 2007.




REXAHN
                PHARMACEUTICALS, INC.By:
            /s/
                Chang H. AhnChang
                H. AhnChairman
                and Chief Executive Officer







In
      accordance with the requirement of the Securities Exchange Act of 1934, this
      report has been signed on the 2nd day of April, 2007 by the following
      persons on behalf of the issuer and in the capacities indicated:




Name
            
            TitleChang
                H. Ahn*
            
            Chairman
                and Chief Executive OfficerChang
                H. AhnTae
                Heum Jeong*
            
            Chief
                Financial Officer, Secretary and DirectorTae
                Heum JeongYoung-Soon
                Park*
            
            DirectorYoung-Soon
                ParkDavid
                McIntosh*
            
            DirectorDavid
                McIntoshCharles
                Beever*
            
            DirectorCharles
                BeeverKwang
                Soo Cheong*
            
            DirectorKwang
                Soo CheongY.
                Michele Kang*
            
            DirectorY.
                Michele Kang







*
                By:
            /s/  Tae
                Heum JeongTae
                Heum Jeong, Attorney-in-Fact**




**
      By
      authority of the power of attorney filed as Exhibit 24 hereto.




82
 *Index*


**EXHIBIT INDEX**




Exhibit Number
            Exhibit Description
            Page3.1.
            Amended
                and Restated Certificate of Incorporation, filed as Appendix G to the
                Company's Definitive Proxy Statement on Schedule 14A (File No.
                000-50590) dated April 29, 2004, is incorporated herein by
                reference.3.2.
            Amended
                and Restated Bylaws, filed as Appendix H to the Company's Definitive
                Proxy Statement on Schedule 14A (File No. 000-50590) dated
                April 29, 2004, is incorporated herein by reference.4.1.
            Specimen
                Certificate for the Company's Common Stock, par value $.0001 per
                share, filed as Exhibit 4.3 to the Company's Registration Statement
                on Form S-8 (File No. 333-129294 ) dated October 28, 2005, is
                incorporated herein by reference.*10.1.1.
            Rexahn
                Pharmaceuticals, Inc. Stock Option Plan, as amended, filed as
                Exhibit 4.4 to the Company's Registration Statement on Form S-8
                (File No. 333-129294 ) dated October 28, 2005, is incorporated herein
                by reference.*10.1.2.
            Form
                of Stock Option Grant Agreement for Employees, filed as Exhibit 4.5.1
                to the Company's Registration Statement on Form S-8 (File No.
                333-129294 ) dated October 28, 2005, is incorporated herein by
                reference.*10.1.3.
            Form
                of Stock Option Grant Agreement for Non-Employee Directors and
                Consultants, filed as Exhibit 4.5.2 to the Company's Registration
                Statement on Form S-8 (File No. 333-129294 ) dated October 28,
                2005, is incorporated herein by reference.*10.2.
            Employment
                Agreement, dated September 12, 2005, by and between Rexahn
                Pharmaceuticals, Inc. and C. H. Ahn, filed as Exhibit 10.1 to the
                Company's Current Report on Form 8-K filed on September 12,
                2005, is incorporated herein by reference.*10.3.
            Employment
                Agreement, dated September 12, 2005, by and between Rexahn
                Pharmaceuticals, Inc. and T. H. Jeong, filed as Exhibit 10.2 to the
                Company's Current Report on Form 8-K filed on September 12,
                2005, is incorporated herein by reference.*10.4
            Employment
                Agreement, dated September 12, 2005, by and between Rexahn
                Pharmaceuticals, Inc. and G. Steinfels, filed as Exhibit 10.1 to the
                Company's Current Report on Form 8-K filed on September 12,
                2005, is incorporated herein by reference.10.5.
            Research
                Collaboration Agreement dated February 6, 2003 by and between Rexahn
                Pharmaceuticals, Inc. and Rexgene Biotech Co., Ltd, filed as Exhibit
                10.5
                to the Company's Annual Report on Form 10-KSB the fiscal year ended
                December 31, 2005, is incorporated herein by
                reference.10.6.
            Revaax
                License Agreement, dated February 8, 2005, by and between Rexahn
                Pharmaceuticals, Inc. and Revaax Pharmaceuticals LLC, filed as
                Exhibit 10.6 to the Company's Annual Report on Form 10-KSB for the
                fiscal
                year ended December 31, 2005, is incorporated herein by
                reference.23.
            Consent
                of Lazar, Levine & Felix, LLP, independent registered public
                accounting firm.




*Index*




Exhibit Number
            Exhibit Description
            Page24.
            Power
                of Attorney.31.1.
            Certification
                of Chief Executive Officer of Periodic Report Pursuant to Pursuant
                to
                Rule 13a-15(e) or Rule 15d-15(e).31.2.
            Certification
                of Chief Financial Officer of Periodic Report Pursuant to Pursuant
                to
                Rule 13a-15(e) or Rule 15d-15(e).32.1.
            Certification
                of Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C.
                Section 1350.32.2.
            Certification
                of Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
                Section 1350.


_______________________




*
            Management
                contract or compensation plan or arrangement.