UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549







FORM
10-Q








(Mark
One)


x           QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934





For
the quarterly period ended June 30, 2010





OR





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





For
the transition period from____ to ____





Commission
File Number: 001-32295







ADHEREX
TECHNOLOGIES INC.


(Exact
Name of Registrant as Specified in Its Charter)





Canada
                  (State
      or Other Jurisdiction of
                  Incorporation
      or Organization
                20-0442384
                  (I.R.S.
      Employer
                  Identification
      No.)501
      Eastowne Drive, Suite 140
                  Chapel
      Hill, North Carolina
                  (Address
      of Principal Executive Offices)
                27514
                  (Zip
      Code)





Registrant's
Telephone Number, Including Area Code: (919) 636-4530


_______________




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





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





Large
      Accelerated Filer
             ̈
            
            Accelerated
      Filer
             ̈Non-Accelerated
      Filer
             ̈
            (Do
      not check if smaller reporting company)
            Smaller
      reporting company
            x





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





As of
November 1, 2010, there were 368,293,451 shares of Adherex Technologies Inc.
common stock outstanding.





TABLE
OF CONTENTS





PagePART
      I: FINANCIAL INFORMATIONItem
      1.  Financial Statements
                    3Condensed
      Consolidated Balance Sheets – June 30, 2010 and December 31,
      2009
                    3Unaudited
      Interim Condensed Consolidated Statements of Operations - Three and Six
      Months Ended June 30, 2010 and 2009
                    4Unaudited
      Interim Condensed Consolidated Statements of Cash Flows - Three and Six
      Months Ended June 30, 2010 and 2009
                    5Unaudited
      Interim Condensed Consolidated Statements of Stockholders' Equity– For the Periods
      Ended September 3, 1996 to June 30, 2010
                    6Notes
      to Unaudited Condensed Consolidated Financial Statements
                    9Item
      2.  Management's Discussion and Analysis of Financial Condition
      and Results of Operations
                    14Item
      3.  Quantitative and Qualitative Disclosures about Market
      Risk
                    19Item
      4.  Controls and Procedures
                    19PART
      II: OTHER INFORMATION
                    20Item
      1. Legal Proceedings
                    20Item
      1A.  Risk Factors
                    20Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                    21Item
      3. Defaults Upon Senior Securities
                    22Item
      4. (Removed and Reserved)
                    22Item
      5. Other Information
                    22Item
      6.  Exhibits
                    22Signatures
                    23




2





PART
1:  FINANCIAL INFORMATION


Item
1.  Financial Statements





Adherex
Technologies Inc.


(a
development stage company)


Unaudited
Interim Condensed Consolidated Balance Sheets


(U.S.
Dollars and shares in thousands, except per share amounts)





June 30,
                  2010
              
              
              December 31,
                  2009AssetsCurrent
      assets:Cash
      and cash equivalents
              
              $
              7,152
              
              
              $
              685Accounts
      receivable
              
              
              -
              
              
              
              69Prepaid
      expense
              
              
              -
              
              
              
              75Other
      current assets
              
              
              4
              
              
              
              4Total
      current assets
              
              
              7,156
              
              
              
              833Total
      assets
              
              $
              7,156
              
              
              $
              833Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable
              
              $
              295
              
              
              $
              318Accrued
      liabilities
              
              
              75
              
              
              
              70Other
      current liabilities
              
              
              -
              
              
              
              32Total
      current liabilities
              
              
              370
              
              
              
              420Other
      long-term liabilities
              
              
              -
              
              
              
              7Derivative
      warrant liability
              
              
              7,262
              
              
              
              -Total
      liabilities
              
              
              7,632
              
              
              
              427Commitments
      and contingenciesStockholders'
      equity:Common
      stock, no par value; unlimited shares authorized; 368,293 and 128,227
      shares issued and outstanding at June 30, 2010 and December 31, 2009,
      respectively
              
              
              64,929
              
              
              
              64,929Additional
      paid-in capital
              
              
              37,278
              
              
              
              35,225Deficit
      accumulated during development stage
              
              
              (103,926
              )
              
              
              (100,991
              )Accumulated
      other comprehensive income
              
              
              1,243
              
              
              
              1,243Total
      stockholders’ equity (deficiency)
              
              
              (476
              )
              
              
              406Total
      liabilities and stockholders’ equity
              
              $
              7,156
              
              
              $
              833




(The
accompanying notes are an integral part of these interim consolidated financial
statements)


3





Adherex
Technologies Inc.


(a
development stage company)


Unaudited
Interim Condensed Consolidated Statements of Operations


(U.S.
Dollars and shares in thousands, except per share amounts)




Three Months Ended
              
              
              Six Months Ended
              
              
              Cumulative
                From
                September 3,
                1996 toJune 30,
                  2010
              
              
              June 30,
                  2009
              
              
              June 30,
                  2010
              
              
              June 30,
                  2009
              
              
              June 30,
                  2010Revenue
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Operating
      expenses:Research
      and development
              
              
              146
              
              
              
              650
              
              
              
              309
              
              
              
              1,929
              
              
              
              65,199Impairment
      of Capital Assets
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              386Gain
      on Deferred lease inducements
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (497
              )Acquired
      in-process Research and Developmenet
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              13,094Unrealized
      gain (loss) on derivative
              
              
              (72
              )
              
              
              -
              
              
              
              (72
              )
              
              
              -
              
              
              
              (72
              )General
      and administrative
              
              
              2,359
              
              
              
              311
              
              
              
              2,563
              
              
              
              984
              
              
              
              27,272Total
      operating expenses
              
              
              2,577
              
              
              
              961
              
              
              
              2,943
              
              
              
              2,913
              
              
              
              105,454Loss
      from operations
              
              
              (2,
      577
              )
              
              
              (961
              )
              
              
              (2,943
              )
              
              
              (2,913
              )
              
              
              (105,526
              )Other
      income (expense):Settlement
      of Cadherin litigation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,283
              )Interest
      expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (19
              )Gain
      (loss) on impairment of asset held for sale
              
              
              -
              
              
              
              22
              
              
              
              -
              
              
              
              (318
              )
              
              
              255Interest
      income
              
              
              8
              
              
              
              1
              
              
              
              8
              
              
              
              47
              
              
              
              2,805Total
      other income (expense), net
              
              
              8
              
              
              
              23
              
              
              
              8
              
              
              
              (271
              )
              
              
              1,758Net
      loss and total comprehensive loss
              
              $
              (2,569
              )
              
              $
              (938
              )
              
              $
              (2,935
              )
              
              $
              (3,184
              )
              
              $
              (103,768
              )Basic
      and diluted net loss per common share
              
              $
              (0.01
              )
              
              $
              (0.01
              )
              
              $
              (0.01
              )
              
              $
              (0.02
              )Weighted-average
      common shares used in computing basic and diluted net loss per common
      share
              
              
              288,271
              
              
              
              128,227
              
              
              
              208,249
              
              
              
              128,227




(The
accompanying notes are an integral part of these interim condensed consolidated
financial statements)


4


Adherex
Technologies Inc.


(a
development stage company)


Unaudited
Interim Condensed Consolidated Statements of Cash Flows


(U.S.
Dollars and shares in thousands, except per share amounts)





Three Months Ended
                
                
                Six Months Ended
                
                
                Cumulative
                  From
                  September 3,June 30,
                    2010
                
                
                June 30,
                    2009
                
                
                June 30,
                    2010
                
                
                June 30,
                    2009
                
                
                1996 to
                    June 30, 2010Cash
      flows from (used in):Operating
      activities:Net
      loss
                
                $
                (2,569
                )
                
                $
                (938
                )
                
                $
                (2,935
                )
                
                $
                (3,184
                )
                
                $
                (103,768
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,404Non-cash
      Cadherin Biomedical Inc. litigation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,187Unrealized gain (loss) on warrant
      derivative
                
                
                72
                
                
                
                -
                
                
                
                72
                
                
                
                -
                
                
                
                72Amortization
      of deferred lease inducements
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (24
                )
                
                
                (412
                )Unrealized
      foreign exchange loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9Loss
      on impairment of capital assets
                
                
                -
                
                
                
                (11
                )
                
                
                -
                
                
                
                329
                
                
                
                386Non-cash
      severance
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                168Stock-based
      compensation - consultants
                
                
                -
                
                
                
                5
                
                
                
                -
                
                
                
                10
                
                
                
                722Stock-based
      compensation - employees
                
                
                2,054
                
                
                
                227
                
                
                
                2,054
                
                
                
                523
                
                
                
                9,580Acquired
      in-process research and development
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                13,094Changes
      in operating assets and liabilities
                
                
                57
                
                
                
                (790
                )
                
                
                86
                
                
                
                (1,487
                )
                
                
                (54
                )Net
      cash used in operating activities
                
                
                (386
                )
                
                
                (1,507
                )
                
                
                (723
                )
                
                
                (3,833
                )
                
                
                (77,612
                )Investing
      activities:Purchase
      of capital assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,440
                )Disposal
      of capital assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                115Proceeds
      from sale of assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                24
                
                
                
                24Release
      of restricted cash
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                190Restricted
      cash
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (209
                )Purchase
      of short-term investments
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (22,148
                )Redemption
      of short-term investments
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                22,791Investment
      in Cadherin Biomedical Inc.
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (166
                )Acquired
      intellectual property rights
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (640
                )Net
      cash used in investing activities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                24
                
                
                
                (1,483
                )Financing
      activities:Conversion
      of long-term debt to equity
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                68Long-term
      debt repayment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (65
                )Capital
      lease repayments
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (8
                )Issuance
      of units, net of issue costs
                
                
                7,190
                
                
                
                -
                
                
                
                7,190
                
                
                
                -
                
                
                
                83,877Registration
      expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (465
                )Proceeds
      from convertible note
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,017Other
      liability repayments
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (87
                )Financing
      expenses
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (544
                )Security
      deposits received
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                35Proceeds
      from exercise of stock options
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                51Net
      cash provided in financing activities
                
                
                7,190
                
                
                
                -
                
                
                
                7,190
                
                
                
                -
                
                
                
                85,879Effect
      of exchange rate on cash and cash equivalents
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                368Increase
      (decrease) in cash and cash equivalents
                
                
                6,804
                
                
                
                (1,507
                )
                
                
                6,467
                
                
                
                (3,809
                )
                
                
                7,152Cash
      and cash equivalents - Beginning of period
                
                
                348
                
                
                
                3,047
                
                
                
                685
                
                
                
                5,349
                
                
                
                -Cash
      and cash equivalents - End of period
                
                $
                7,152
                
                
                $
                1,540
                
                
                $
                7,152
                
                
                $
                1,540
                
                
                $
                7,152





(The
accompanying notes are an integral part of these interim condensed consolidated
financial statements)


5


Adherex
Technologies Inc.
 (a
development stage company)
 Unaudited
Interim Condensed Consolidated Statements of Stockholders' Equity
 (U.S.
dollars and shares in thousands, except per share
information)




Common Stock
                
                
                Non-redeemable
                  Preferred Stock
                
                
                Additional
                  Paid-in
                
                
                Accumulated
                  Other
                  Comprehensive
                
                
                Deficit
                  Accumulated
                  During
                  Development
                
                
                Total
                  Shareholders’Number
                
                
                Amount
                
                
                of Subsidiary
                
                
                Capital
                
                
                Income
                
                
                Stage
                
                
                EquityBalance
      at June 30, 1996
                
                
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Issuance
      of common stock
                
                
                1,600
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (37
                )
                
                
                (37
                )Balance
      at June 30, 1997
                
                
                1,600
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (37
                )
                
                
                (37
                )Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (398
                )
                
                
                (398
                )Balance
      at June 30, 1998
                
                
                1,600
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (435
                )
                
                
                (435
                )Exchange
      of Adherex Inc. shares for Adherex Technologies Inc.
shares
                
                
                (1,600
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Issuance
      of common stock
                
                
                4,311
                
                
                
                1,615
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,615Cumulative
      translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                20
                
                
                
                -
                
                
                
                20Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (958
                )
                
                
                (958
                )Balance
      at June 30, 1999
                
                
                4,311
                
                
                
                1,615
                
                
                
                -
                
                
                
                -
                
                
                
                20
                
                
                
                (1,393
                )
                
                
                242Issuance
      of common stock
                
                
                283
                
                
                
                793
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                793Issuance
      of equity rights
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                171
                
                
                
                -
                
                
                
                -
                
                
                
                171Issuance
      of special warrants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                255
                
                
                
                -
                
                
                
                -
                
                
                
                255Settlement
      of advances:Issuance
      of common stock
                
                
                280
                
                
                
                175
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                175Cancellation
      of common stock
                
                
                (120
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Cumulative
      translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                16
                
                
                
                -
                
                
                
                16Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,605
                )
                
                
                (1,605
                )Balance
      at June 30, 2000
                
                
                4,754
                
                
                
                2,583
                
                
                
                -
                
                
                
                426
                
                
                
                36
                
                
                
                (2,998
                )
                
                
                47Issuance
      of common stock:Initial
      Public Offering (“IPO”)
                
                
                1,333
                
                
                
                5,727
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (38
                )
                
                
                5,689Other
                
                
                88
                
                
                
                341
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                341Issuance
      of special warrants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,722
                
                
                
                -
                
                
                
                -
                
                
                
                1,722Conversion
      of special warrants
                
                
                547
                
                
                
                1,977
                
                
                
                -
                
                
                
                (1,977
                )
                
                
                -
                
                
                
                -
                
                
                
                -Issuance
      of Series A special warrants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,335
                
                
                
                -
                
                
                
                -
                
                
                
                4,335Conversion
      of Series A special warrants
                
                
                1,248
                
                
                
                4,335
                
                
                
                -
                
                
                
                (4,335
                )
                
                
                -
                
                
                
                -
                
                
                
                -Conversion
      of equity rights
                
                
                62
                
                
                
                171
                
                
                
                -
                
                
                
                (171
                )
                
                
                -
                
                
                
                -
                
                
                
                -Cumulative
      translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                182
                
                
                
                -
                
                
                
                182Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,524
                )
                
                
                (2,524
                )Balance
      at June 30, 2001
                
                
                8,032
                
                
                
                15,134
                
                
                
                -
                
                
                
                -
                
                
                
                218
                
                
                
                (5,560
                )
                
                
                9,792Cumulative
      translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                11
                
                
                
                -
                
                
                
                11Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                
                
                
                
                (3,732
                )
                
                
                (3,732
                )Balance
      at June 30, 2002
                
                
                8,032
                
                
                
                15,134
                
                
                
                -
                
                
                
                -
                
                
                
                229
                
                
                
                (9,292
                )
                
                
                6,071





(The
accompanying notes are an integral part of these interim consolidated financial
statements)


(continued
on next page)


6




Adherex
Technologies Inc.
 (a
development stage company)
 Unaudited
Interim Condensed Consolidated Statements of Stockholders' Equity
(Continued)
 (U.S.
dollars and shares in thousands, except per share
information)




Common Stock
                
                
                Non-redeemable
                  Preferred Stock
                
                
                Additional
                  Paid-in
                
                
                Accumulated
                  Other
                  Comprehensive
                
                
                Deficit
                  Accumulated
                  During
                  Development
                
                
                Total
                  Shareholders’Number
                
                
                Amount
                
                
                of Subsidiary
                
                
                Capital
                
                
                Income
                
                
                Stage
                
                
                EquityBalance
      at June 30, 2002
                
                
                8,032
                
                
                
                15,134
                
                
                
                -
                
                
                
                -
                
                
                
                229
                
                
                
                (9,292
                )
                
                
                6,071Common
      stock issued for Oxiquant acquisition
                
                
                8,032
                
                
                
                11,077
                
                
                
                -
                
                
                
                543
                
                
                
                -
                
                
                
                -
                
                
                
                11,620Exercise
      of stock options
                
                
                5
                
                
                
                4
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4Distribution
      to shareholders
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (158
                )
                
                
                (158
                )Stated
      capital reduction
                
                
                -
                
                
                
                (9,489
                )
                
                
                -
                
                
                
                9,489
                
                
                
                -
                
                
                
                -
                
                
                
                -Stock
      options issued to consultants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4
                
                
                
                -
                
                
                
                -
                
                
                
                4Equity
      component of June convertible notes
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,058
                
                
                
                -
                
                
                
                -
                
                
                
                1,058Financing
      warrants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                53
                
                
                
                -
                
                
                
                -
                
                
                
                53Cumulative
      translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (159
                )
                
                
                -
                
                
                
                (159
                )Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (17,795
                )
                
                
                (17,795
                )Balance
      at June 30, 2003
                
                
                16,069
                
                
                
                16,726
                
                
                
                -
                
                
                
                11,147
                
                
                
                70
                
                
                
                (27,245
                )
                
                
                698Stock
      options issued to consultants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                148
                
                
                
                -
                
                
                
                -
                
                
                
                148Repricing
      of warrants related to financing
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                18
                
                
                
                -
                
                
                
                -
                
                
                
                18Equity
      component of December convertible notes
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,983
                
                
                
                -
                
                
                
                -
                
                
                
                1,983Financing
      warrants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                54
                
                
                
                -
                
                
                
                -
                
                
                
                54Conversion
      of June convertible notes
                
                
                1,728
                
                
                
                1,216
                
                
                
                -
                
                
                
                (93
                )
                
                
                -
                
                
                
                -
                
                
                
                1,123Conversion
      of December convertible notes
                
                
                1,085
                
                
                
                569
                
                
                
                -
                
                
                
                (398
                )
                
                
                -
                
                
                
                -
                
                
                
                171Non-redeemable
      preferred stock
                
                
                -
                
                
                
                -
                
                
                
                1,045
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,045December
      private placement
                
                
                11,522
                
                
                
                8,053
                
                
                
                -
                
                
                
                5,777
                
                
                
                -
                
                
                
                -
                
                
                
                13,830May
      private placement
                
                
                4,669
                
                
                
                6,356
                
                
                
                -
                
                
                
                2,118
                
                
                
                -
                
                
                
                -
                
                
                
                8,474Exercise
      of stock options
                
                
                18
                
                
                
                23
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                23Amalgamation
      of 2037357 Ontario Inc.
                
                
                800
                
                
                
                660
                
                
                
                (1,045
                )
                
                
                363
                
                
                
                -
                
                
                
                -
                
                
                
                (22
                )Cumulative
      translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (219
                )
                
                
                -
                
                
                
                (219
                )Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (6,872
                )
                
                
                (6,872
                )Balance
      at June 30, 2004
                
                
                35,891
                
                
                
                33,603
                
                
                
                -
                
                
                
                21,117
                
                
                
                (149
                )
                
                
                (34,117
                )
                
                
                20,454Stock
      options issued to consultants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                39
                
                
                
                -
                
                
                
                -
                
                
                
                39Stock
      options issued to employees
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                604
                
                
                
                -
                
                
                
                -
                
                
                
                604Cost
      related to SEC registration
                
                
                -
                
                
                
                (493
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (493
                )Acquisition
      of Cadherin Biomedical Inc.
                
                
                644
                
                
                
                1,252
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,252Cumulative
      translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,392
                
                
                
                -
                
                
                
                1,392Net
      loss – six months ended December 31, 2004
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (6,594
                )
                
                
                (6,594
                )Balance
      at December 31, 2004
                
                
                36,535
                
                
                
                34,362
                
                
                
                -
                
                
                
                21,760
                
                
                
                1,243
                
                
                
                (40,711
                )
                
                
                16,654




(The
accompanying notes are part of these interim consolidated financial
statements)


(continued
on next page)




7




Adherex
Technologies Inc.
 (a
development stage company)
 Unaudited
Interim Condensed Consolidated Statements of Stockholders' Equity
(Continued)
 (U.S.
dollars and shares in thousands, except per share
information)




Common Stock
                
                
                Non-redeemable
                  Preferred Stock
                
                
                Additional
                  Paid-in
                
                
                Accumulated
                  Other
                  Comprehensive
                
                
                Deficit
                  Accumulated
                  During
                  Development
                
                
                Total
                  Shareholders’Number
                
                
                Amount
                
                
                of Subsidiary
                
                
                Capital
                
                
                Income
                
                
                Stage
                
                
                EquityBalance
      at December 31, 2004
                
                
                36,535
                
                
                
                34,362
                
                
                
                -
                
                
                
                21,760
                
                
                
                1,243
                
                
                
                (40,711
                )
                
                
                16,654Financing
      costs
                
                
                -
                
                
                
                (141
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (141
                )Exercise
      of stock options
                
                
                15
                
                
                
                25
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                25Stock
      options issued to consultants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                276
                
                
                
                -
                
                
                
                -
                
                
                
                276July
      private placement
                
                
                6,079
                
                
                
                7,060
                
                
                
                -
                
                
                
                1,074
                
                
                
                -
                
                
                
                -
                
                
                
                8,134Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (13,871
                )
                
                
                (13,871
                )Balance
      at December 31, 2005
                
                
                42,629
                
                
                
                41,306
                
                
                
                -
                
                
                
                23,110
                
                
                
                1,243
                
                
                
                (54,582
                )
                
                
                11,077Stock
      options issued to consultants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                100
                
                
                
                -
                
                
                
                -
                
                
                
                100Stock
      options issued to employees
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                491
                
                
                
                -
                
                
                
                -
                
                
                
                491May
      private placement
                
                
                7,753
                
                
                
                5,218
                
                
                
                -
                
                
                
                822
                
                
                
                -
                
                
                
                -
                
                
                
                6,040Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (16,440
                )
                
                
                (16,440
                )Balance
      at December 31, 2006
                
                
                50,382
                
                
                
                46,524
                
                
                
                -
                
                
                
                24,523
                
                
                
                1,243
                
                
                
                (71,022
                )
                
                
                1,268Stock
      options issued to consultants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                59
                
                
                
                -
                
                
                
                -
                
                
                
                59Stock
      options issued to employees
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,263
                
                
                
                -
                
                
                
                -
                
                
                
                2,263February
      financing
                
                
                75,759
                
                
                
                17,842
                
                
                
                -
                
                
                
                5,379
                
                
                
                -
                
                
                
                -
                
                
                
                23,221Exercise
      of warrants
                
                
                2,086
                
                
                
                563
                
                
                
                -
                
                
                
                131
                
                
                
                -
                
                
                
                -
                
                
                
                694Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (13,357
                )
                
                
                (13,357
                )Balance
      at December 31, 2007
                
                
                128,227
                
                
                
                64,929
                
                
                
                -
                
                
                
                32,355
                
                
                
                1,243
                
                
                
                (84,379
                )
                
                
                14,148Stock
      options issued to consultants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                88
                
                
                
                -
                
                
                
                -
                
                
                
                88Stock
      options issued to employees
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,417
                
                
                
                -
                
                
                
                -
                
                
                
                2,417Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (13,600
                )
                
                
                (13,600
                )Balance
      at December 31, 2008
                
                
                128,227
                
                
                
                64,929
                
                
                
                -
                
                
                
                34,860
                
                
                
                1,243
                
                
                
                (97,979
                )
                
                
                3,053Stock
      options issued to consultants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                10
                
                
                
                -
                
                
                
                -
                
                
                
                10Stock
      options issued to employees
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                355
                
                
                
                -
                
                
                
                -
                
                
                
                355Net
      loss for quarter
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (3,012
                )
                
                
                (3,012
                )Balance
      at December 31, 2009
                
                
                128,227
                
                
                
                64,929
                
                
                
                -
                
                
                
                35,225
                
                
                
                1,243
                
                
                
                (100,991
                )
                
                
                406Net
      loss for quarter
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (366
                )
                
                
                (366
                )Balance
      at March 31, 2010
                
                
                128,227
                
                
                
                64,929
                
                
                
                -
                
                
                
                35,225
                
                
                
                1,243
                
                
                
                (101,357
                )
                
                
                40April
      financing
                
                
                240,066
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Stock
      options issued to employees and board
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,054
                
                
                
                -
                
                
                
                -
                
                
                
                2,054Net
      loss for quarter
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,569
                )
                
                
                (2,569
                )Balance
      at June 30, 2010
                
                
                368,293
                
                
                $
                64,929
                
                
                $
                -
                
                
                $
                37,278
                
                
                $
                1,243
                
                
                $
                (103,926
                )
                
                $
                (476
                )


8




1. Going
Concern




Adherex
Technologies Inc. (“Adherex”), together with its wholly owned subsidiaries
Oxiquant, Inc. (“Oxiquant”) and Adherex, Inc., both Delaware corporations, and
Cadherin Biomedical Inc. (“CBI”), a Canadian corporation, collectively referred
to herein as the “Company,” is a development stage biopharmaceutical company
focused on cancer therapeutics.




These
unaudited interim consolidated financial statements have been prepared using
generally accepted accounting principles (“GAAP”) in the United
States.  The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.




During
the three months ended June 30, 2010, the Company incurred a net loss of
$2,569,000.  At June 30, 2010, it had an accumulated deficit of
$103,926,000 and had experienced negative cash flows from operations since
inception in the amount of $77,612,000.  These circumstances lend
substantial doubt as to the ability of the Company to meet its obligations as
they come due and, accordingly, the use of accounting principles applicable to a
going concern may not be appropriate. The Company will need to obtain additional
funding in the future in order to finance our business strategy, operations and
growth.  If we fail to arrange for sufficient capital on a timely
basis, we may be required to curtail our business activities until we can obtain
adequate financing.




These
financial statements do not reflect the potentially material adjustments in the
carrying values of assets and liabilities, the reported expenses, and the
balance sheet classifications used, that would be necessary if the going concern
assumption were not appropriate.





2.       Significant
Accounting Policies





Basis
of presentation





The
accompanying unaudited interim consolidated financial statements have been
prepared in accordance with U.S. GAAP and are the responsibility of the
Company’s management.  These financial statements do not include all
of the information and notes required by U.S. GAAP for complete financial
statements.  Accordingly, these unaudited interim condensed
consolidated financial statements should be read in conjunction with the
Company's audited financial statements and notes filed with the Securities and
Exchange Commission (“SEC”) in the Company's Annual Report on Form 10-K for the
year ended December 31, 2009.  Except as set out below, the Company's
accounting policies are consistent with those presented in the audited financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2009.  These unaudited interim condensed consolidated
financial statements have been prepared in U.S. dollars.




9


Use
of estimates





The
preparation of financial statements in conformity with GAAP requires management
to make judgments, assumptions and estimates that affect the amounts reported in
these interim condensed consolidated financial statements.  Actual
results could differ from these estimates.  In the opinion of
management, these unaudited interim consolidated financial statements include
all normal and recurring adjustments, considered necessary for the fair
presentation of the Company’s financial position at June 30, 2010, and to state
fairly the results for the periods presented.





Cash
and cash equivalents





Cash and
cash equivalents consist of highly liquid investments with original maturities
at the date of purchase of three months or less.





The
Company places its cash and cash equivalents in investments held by financial
institutions in accordance with its investment policy designed to protect the
principal investment.  At June 30, 2010, the Company had $6,000,000 in
money market investments, which typically have minimal risk, and $1,152,000 in
cash.  The financial markets have been volatile resulting in concerns
regarding the recoverability of money market investments.  The Company
did not experience any loss or write down of its money market investments for
the six-month period ended June 30, 2010 and 2009, respectively.





3.      Recent
Accounting Pronouncements





In
January 2010, an update was made to the Fair Value Measurements and Disclosures
topic of the FASB codification that requires new disclosures for fair value
measurements and provides clarification for existing disclosure requirements.
More specifically, this update will require (a) an entity to disclose separately
the amounts of significant transfers into and out of Level 1 and 2 fair value
measurements and to describe the reasons for the transfers; and (b) information
about purchases, sales, issuances, and settlements to be presented separately on
a gross basis in the reconciliation of Level 3 fair value measurements. This
update is effective for fiscal years beginning after December 15, 2009 except
for Level 3 reconciliation disclosures which are effective for fiscal years
beginning after December 15, 2010. The Company does not expect the adoption of
the guidance to have an impact on the Company’s consolidated financial position
and results of operations.


4.      Derivative
Instruments




Effective
January 1, 2009, the Company adopted ASC Topic 815-40, "Derivatives and Hedging"
(ASC 815-40). One of the conclusions reached under ASC 815-40 was that an
equity-linked financial instrument would not be considered indexed to the
entity's own stock if the strike price is denominated in a currency other than
the issuer's functional currency.  The conclusion reached under ASC
815-40 clarified the accounting treatment for these and certain other financial
instruments.  ASC 815-40 specifies that a contract would not be
treated as a derivative if it met the following conditions: (a) indexed to the
Company's own stock; and (b) classified in shareholders' equity in the Company's
statement of financial position.  The Company's outstanding warrants
denominated in Canadian dollars are not considered to be indexed to its own
stock because the exercise price is denominated in Canadian dollars and the
Company's functional currency is United States dollars. Therefore, these
warrants have been treated as derivative financial instruments and recorded at
their fair value as a liability.  All other outstanding convertible
instruments are considered to be indexed to the Company's stock, because their
exercise price is denominated in the same currency as the Company's functional
currency, and are included in shareholders' equity.
 
 The
Company's only derivative instruments are 240,066,664 warrants, the exercise
price for which are denominated in a currency other than the Company's
functional currency, as follows:




·
              240,066,664
      warrants exercisable at CAD$0.08 that expire on April 30,
    2015


These
warrants have been recorded at their fair value at issuance and will continue to
be recorded at fair value at each subsequent balance sheet date. Any change in
value between reporting periods will be recorded as other income
(expense).  These warrants will continue to be reported as a liability
until such time as they are exercised or expire. The fair value of these
warrants is estimated using the Black-Scholes Merton option-pricing
model.


As of
June 30, 2010, the fair value of these warrants was determined to be $7,262,000;
accordingly the Company recorded an unrealized loss of $72,000 in other income
(expense) on the condensed consolidated statements of operations for both the
three and six months ended June 30, 2010, respectively, related to the change in
the fair value of those warrants. There is no cash flow impact for these
derivatives until the warrants are exercised.  If these warrants are
exercised, the Company will receive the proceeds from the exercise at the
current exchange rate at the time of exercise.
  10


5.         Stockholders'
Equity





Warrants
to purchase common stock





At June
30, 2010, the Company had the following warrants outstanding to purchase common
stock priced in Canadian dollars with a weighted average exercise price of $0.08
and a weighted average remaining life of 4.8 years:





Warrants
in thousands





Warrant Description
                  
                  Warrants
                      Outstanding at
                      June 30, 2010
                      (in thousands)
                  
                  
                  Exercise Price
                      In CAD Dollars
                  
                  Expiration DateInvestor
      warrants (1)
                  
                  
                  240,066
                  
                  
                  $
                  0.08
                  
                  April
      30, 2015





(1) On
April 30, 2010, the Company announced that it had completed a first closing of
a  non-brokered private placement (“Private Placement”) of 240,066,664
units, at a price of $0.03 per unit for net proceeds of
$7,190,000.  Each unit shall consist of one common share and one
common share purchase warrant (a “Warrant”).  Each Warrant will
entitle the holder thereof to purchase one common share of the Company at a
purchase price of CAD$0.08 per share for a period of five years from the issue
date.





Stock
option plan





The
Compensation Committee of the Board of Directors administers the Company's stock
option plan.  The Compensation Committee designates eligible
participants to be included under the plan and approves the number of options to
be granted from time to time under the plan.





On June
24, 2010, at the Company’s annual meeting, shareholders approved an amendment to
the Company’s Stock Option Plan (the “Plan Maximum Amendment”). The Plan Maximum
Amendment relates to changing the maximum number of shares of common stock
issuable under the Stock Option Plan from a fixed number of 20,000,000 to the
number of shares that represent twenty five percent (25%) of the total number of
all issued and outstanding shares of common stock from time to
time.  Under the current shares outstanding a maximum of 92,073,363
options are authorized for issuance under the plan.  The option
exercise price for all options issued under the plan is based on the fair value
of the underlying shares on the date of grant.  The stock option plan,
as amended, allows the issuance of U.S. and Canadian dollar denominated
grants.





Pursuant
to employment agreements dated May 3, 2010 between the Company and each of
Robert Andrade, Rosty Raykov and Thomas Spector (collectively Messrs. Andrade,
Raykov and Spector) and conditioned upon the approval of the amended Stock
Option Plan, the Board approved the grant to each, Messrs. Andrade, Raykov and
Spector an option to purchase up to 5.0% of Adherex’s common stock estimated by
the Company to be outstanding upon completion of the proposed rights offering
announced by the Company on April 20, 2010.





Pursuant
to Independent Director Agreements dated May 3, 2010 for each of Dr. Porter and
Messrs. Breen and Bussandri and conditioned upon the approval of the amended
Stock Option Plan, the Board approved the grant to each Dr. Porter and Messrs.
Breen and Bussandri an option to purchase up to 1.33% of Adherex’s common stock
estimated by the Company to be outstanding upon completion of the proposed
rights offering announced by the Company on April 20, 2010.





Stock
based compensation expense of $2,054,000 was recorded during the three-month
period ended June 30, 2010 as a result of above detailed agreements with Messrs.
Andrade, Raykov, Spector, Breen, Bussandri and Porter with a service inception
date of June 24, 2010 since shareholder approval was received in June
2010.





During
the three months ended June 30, 2010 and 2009, the Company recognized total
stock-based compensation expense of $2,054,000 and $232,000
respectively.  During the six-months ended June 30, 2010 and 2009, the
Company recognized total stock-based compensation expense of $2,054,000 and
$533,000, respectively.





11


Valuation
assumptions





The value
of options with a service inception date in the three and six-month period ended
June 30, 2010 and the value of options granted in the six months ended June 30,
2009 were estimated using the Black-Scholes option-pricing model, using the
following weighted average assumptions: expected dividend 0% and 0%
respectively; risk-free interest rate of 2.59% and 3.15%, respectively, expected
volatility of 97% and 85% respectively and a 7 year expected life.





Stock
option activity





The
following is a summary of option activity for the six months ended June 30, 2010
for stock options denominated in Canadian dollars:





Options in thousands
                  
                  Number of
                      Options
                      (thousands)
                  
                  
                  Weighted-
                      average
                      Exercise
                      PriceOutstanding
      at December 31, 2009
                  
                  
                  2,623
                  
                  
                  CAD$
      2.19Granted
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -Forfeited/cancelled/expired
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at June 30, 2010
                  
                  
                  2,623
                  
                  
                  CAD$
      2.19





The
following is a summary of option activity for the six months ended June 30, 2010
for stock options denominated in U.S. dollars:


Options in thousands
                
                Number of
                    Options
                    (thousands)
                
                
                Weighted-
                    average
                    Exercise
                    PriceOutstanding
      at December 31, 2009
                
                
                13,201
                
                
                $
                0.55Granted
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Forfeited/cancelled/expired
                
                
                -
                
                
                
                -Outstanding
      at June 30, 2010
                
                
                13,201
                
                
                $
                0.55





The
Company issued 67,692,821 options to employees and independent directors on
August 18, 2010.





12


6.         Fair
Value Measurements





The
Company has adopted Fair Value Measurements and Disclosure Topic of the
FASB.  This Topic applies to certain assets and liabilities that are
being measured and reported on a fair value basis.  The Fair Value
Measurements Topic defines fair value, establishes a framework for measuring
fair value in accordance with GAAP, and expands disclosure about fair value
measurements.  This Topic enables the reader of the financial
statements to assess the inputs used to develop those measurements by
establishing a hierarchy for ranking the quality and reliability of the
information used to determine fair values. The Topic requires that financial
assets and liabilities carried at fair value be classified and disclosed in one
of the following three categories:





Level 1:
Quoted market prices in active markets for identical assets or
liabilities.


Level 2:
Observable market based inputs or unobservable inputs that are corroborated by
market data.


Level 3:
Unobservable inputs that are not corroborated by market data.





Assets/Liabilities
Measured at Fair Value on a Recurring Basis





Fair Value Measurement at June 30, 2010Quoted Price
                          
                          
                          Significantin Active Markets
                          
                          
                          Other
                          
                          
                          Significantfor Identical
                          
                          
                          Observable
                          
                          
                          UnobservableInstruments
                          
                          
                          Inputs
                          
                          
                          InputsLevel 1
                          
                          
                          Level 2
                          
                          
                          Level 3
                          
                          
                          TotalAssetsCash
      equivalents
                          
                          $
                          6,000,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          6,000,000LiabilitiesDerivative
      warrant liability
                          
                          
                          -
                          
                          
                          $
                          7,262,000
                          
                          
                          
                          -
                          
                          
                          $
                          7,262,000




The
Company's financial instruments include cash and cash equivalents, accounts
receivable, accounts payable and derivative warrant instruments. Due to the
short-term maturity of  accounts receivable and accounts payable, the
carrying value of these instruments is a reasonable estimate of their fair
value.  Derivative warrant liability instrument is carried at fair
value and calculated using Black-Scholes option pricing model using the
following weighted average assumptions; expected dividend 0%; risk-free interest
rate of 1.79%; expected volatility of 109% and a 5 year expected
life.




7.  Commitments





Since our
inception, inflation has not had a material impact on our
operations.  We had no material commitments for capital expenses as of
June 30, 2010. The following table represents our contractual obligations
and commitments at June 30, 2010 (in thousands of U.S. dollars):





Less than 1 year
                
                
                1-3
                    years
                
                
                3-5
                    years
                
                
                More than 5
                    years
                
                
                TotalEastowne
      Lease (1)
                
                
                12
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                12Drug
      purchase commitments (2)
                
                50
                
                
                25
                
                
                
                -
                
                
                
                -
                
                
                75Total
                
                $
                62
                
                
                $
                25
                
                
                $
                -
                
                
                $
                -
                
                
                $
                87





(1)
            In
      December 2009, we entered into a lease for new office facilities in Chapel
      Hill, North Carolina.  Amounts shown assume the maximum amounts
      due under the lease.


(2)
            Commitments
      to our third party manufacturing vendors that supply drug substance
      primarily for our clinical
studies.


13





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





CAUTIONARY STATEMENT ABOUT
FORWARD-LOOKING STATEMENTS





The
discussion below contains forward-looking statements regarding our financial
condition and our results of operations that are based upon our unaudited
interim condensed consolidated financial statements, that have been prepared in
accordance with generally accounting principles, or GAAP, in the United States
and have been prepared by and are the responsibility of
management.  The preparation of these financial statements requires
our management to make estimates and judgments that affect the reported amounts
of assets, liabilities, income and expenses, and related disclosure of
contingent assets and liabilities.  We evaluate our estimates on an
ongoing basis.  Our estimates are based on historical experience and
on various other assumptions that we believe to be reasonable.





We
operate in a highly competitive environment that involves significant risks and
uncertainties, many of which are beyond our control.  Our actual
results, performance or achievements may be materially different from any
results, performance or achievements expressed or implied by such
forward-looking statements.  Words such as “may,” “will,” “expect,”
“might”, “believe,” “anticipate,” “intend,” “could,” “estimate,” “project,”
“plan,” and other similar words are one way to identify such forward-looking
statements.  Forward-looking statements in this report include, but
are not limited to, statements with respect to our anticipated sources and uses
of cash and cash equivalents; our anticipated commencement dates, completion
dates and results of clinical trials; our efforts to pursue collaborations with
the government, industry groups or other companies; our anticipated progress and
costs of our clinical and preclinical research and development programs; our
corporate and development strategies; our expected results of operations; our
anticipated levels of expenditures; our ability to protect our intellectual
property; the anticipated applications and efficacy of our drug candidates; our
ability to attract and retain key employees; and the nature and scope of
potential markets for our drug candidates.  All statements, other than
statements of historical fact, included in this report are forward-looking
statements.  We include forward-looking statements because we believe
it is important to communicate our expectations to our
investors.  However, all forward-looking statements are based on
management’s current expectations of future events and are subject to a number
of risks and uncertainties, including our need to raise money in the very near
term and others as discussed in this report.  Although we believe the
expectations reflected in the forward-looking statements are based upon
reasonable assumptions, we can give no assurance that our expectations will be
attained, and we caution you not to place undue reliance on such
statements.





Overview




We are a
biopharmaceutical company focused on cancer therapeutics.  We have the
following products: (1) eniluracil, an oral dihydropyrimidine
dehydrogenase, or DPD, inhibitor, which may improve the tolerability and
effectiveness of 5-fluorouracil, or 5-FU, one of the most widely used oncology
drugs in the world; (2) STS, a chemoprotectant being developed to reduce or
prevent hearing loss that may result from treatment with platinum-based
chemotherapy drugs; and (3)  ADH-1, a peptide molecule that
selectively targets N-cadherin, a protein present on the blood vessels of solid
tumors.





On July
7, 2009, we announced that we intended to primarily focus our remaining
financial resources on the development of eniluracil.  We intend to
primarily focus our resources on the development of a redesigned study combining
oral eniluracil, 5-FU, and leucovorin targeting anti-cancer
indications.  After a careful evaluation of the data from the prior
GlaxoSmithKline studies and data from our own and other studies using
eniluracil, we believe we can begin patient enrollment in a Phase II study with
eniluracil, 5-FU and leucovorin within the next six months.





Additionally,
throughout the remainder of 2009, we conducted a strategic review of ADH-1 and
STS.  Our evaluation of ADH-1 resulted in the termination of our
license agreement with McGill University and return of ADH-1 composition of
matter patents and licenses to McGill University.  We continue to hold
various ADH-1 method of use and small molecule patents.  We are also
supporting an investigator-led Phase I study that will combine ADH-1 with
gemcitabine.  With regards to STS, we continue patient enrollment of
our Phase III studies for both the International Childhood Liver Tumour Strategy
Group, known as SIOPEL, and the Children's Oncology Group.





On April
30, 2010, we completed a $7,190,000 private placement, net of issue costs, which
will allow for our planned clinical development of eniluracil as well as the
support of our remaining programs.  We currently have four employees
and the members of our Board of Directors have agreed to continue to serve for
the benefit of the shareholders without further cash compensation.





14


We intend
to arrange a Phase II study that treats patients with eniluracil, 5-FU and
leucovorin.  Our prior eniluracil studies have shown that the dose of
eniluracil was too low and consequently provided inadequate inactivation of DPD,
the enzyme responsible for the rapid breakdown of 5-FU in the body.  We
plan to increase the dose of eniluracil and also include leucovorin in our
planned clinical trial.  Leucovorin enhances the anticancer activity of
5-FU and has been shown to be well tolerated in patients treated with eniluracil
and 5FU.  We believe Leucovorin is uniquely appropriate to eniluracil
regimens because eniluracil greatly reduces the variability of 5-FU dosing, and
thereby makes leucovorin safer to use.  We have chosen metastatic breast
cancer, or MBC, as the disease target for our planned Phase II
trial.  The trial will compare eniluracil/5-FU/leucovorin to Xeloda®,
which is indicated as monotherapy for MBC.  In addition,
eniluracil/5-FU has been shown to be active against MBC.  Previous
studies used eniluracil in a ten to one ratio to 5-FU.  Because such high
ratios of eniluracil to 5-FU were found to decrease the antitumor activity in
laboratory animals, our planned study will separate the dose of eniluracil and
5-FU to ensure that DPD is adequately inactivated and the levels of eniluracil
are very low when 5-FU is administered.   We expect to commence these
studies within the next six months.





Patient
enrollment is continuing in the Phase III trials of STS conducted by the
International Childhood Liver Tumour Strategy Group, known as SIOPEL and the
Children's Oncology Group.  Each of these trials is managed by SIOPEL
and the Children’s Oncology Group, respectively, and each group is responsible
for the costs of the trial.  We continue to hold STS patents and our
responsibility in the testing is limited to providing the drug, drug
distribution and pharmacovigilance, or safety monitoring, for the
study.  The SIOPEL trial is expected to enroll approximately 100
pediatric patients with liver (hepatoblastoma) cancer at participating SIOPEL
centers worldwide and the Children's Oncology Group study is expected to enroll
up to 120 pediatric patients worldwide in five different disease indications. We have
terminated our license agreement with McGill University related to
ADH-1.  However, we continue to hold certain “method of use” patents
for ADH-1.  We have given a supply of ADH-1 to researchers at the
University of Nebraska so that they may explore the use of ADH-1 in combination
with gemcitabine for patients with pancreatic cancer.  We have no
further obligation to support this research, and the University of Nebraska has
no obligation to do further work.





Our
current prioritization initiative focuses primarily on our clinical activities
with eniluracil, as well as logistical and product support of ongoing clinical
programs.  In addition to our current development efforts with
eniluracil, we continue to pursue collaborations with other pharmaceutical and
biotechnology companies, governmental agencies, academic or other corporate
collaborators with respect to these molecules.  Some of these
preclinical molecules are currently being tested under agreements with third
parties that may help to advance these products into future clinical
development, either by us or under investigator-initiated studies.





Our
common stock trades on the Pink Sheets in the United States.  Our
common stock also trades on the Toronto Stock Exchange.  The Toronto
Stock Exchange has continued listing standards, including minimum market
capitalization and other requirements, that we might not meet in the future,
particularly if the price of our common stock does not increase or we are unable
to raise capital to continue our operations.  On April 22, 2010, the
Toronto Stock Exchange issued an official delisting review of our common
stock.  On August 17, 2010, we were notified of the results of the
review and it was determined that we satisfied the listing
requirements.





We have
financed our operations since our inception on September 3, 1996 through the
sale of equity and debt securities. We have not received and do not expect to
have significant revenues from our product candidates until we are either able
to sell our product candidates after obtaining applicable regulatory approvals
or we establish collaborations that provide us with up-front payments, licensing
fees, milestone payments, royalties or other revenue.  We experienced
net losses of
approximately$2,935,000 for the six months ended June 30, 2010 and $3,184,000forthe six months ended June 30,
2009.As of June 30,
2010, our deficit accumulated during development stage was approximately
$103,926,000.





As a
result of our limited financial resources we have postponed or terminated many
of our previously planned or ongoing clinical development
programs.  We continue to pursue various strategic alternatives,
including collaborations with other pharmaceutical and biotechnology
companies.  However, if a strategic transaction or other source of
further financial resources cannot be secured in the future, we might cease our
operations.  As a result, our filed Form 10-K for the year ended
December 31, 2009 included a notation related to the uncertainty of our ability
to continue as a going concern.  Our projections of our capital
requirements are subject to substantial uncertainty.  More
capital than we had anticipated may be thereafter required.  To
finance our continuing operations we will need to raise substantial additional
funds through either the sale of additional equity, the issuance of debt, the
establishment of collaborations that provide us with funding, the out-license or
sale of certain aspects of our intellectual property portfolio or from
other sources.  Given current economic conditions, we might not be
able to raise the necessary capital or such funding may not be available on
acceptable terms.  If we cannot obtain adequate funding in the future,
we might be required to further delay, scale back or eliminate certain research
and development studies, consider business combinations or even shut down some,
or all, of our operations.





15


Our
operating expenses will depend on many factors, including the progress of our
drug development efforts and the implementation of further cost reduction
measures.  Our research and development expenses, which include
expenses associated with our clinical trials, drug manufacturing to support
clinical programs, salaries for research and development personnel, stock-based
compensation, consulting fees, sponsored research costs, toxicology studies,
license fees, milestone payments, and other fees and costs related to the
development of product candidates, will depend on the availability of financial
resources, the results of our clinical trials and any directives from regulatory
agencies, which are difficult to predict.  Our general and
administration expenses include expenses associated with the compensation of
employees, stock-based compensation, professional fees, consulting fees,
insurance and other administrative matters associated with our corporate office
in Chapel Hill, North Carolina in support of our drug development
programs.




Results
of Operations




Our
results of operations for the three months ended June 30, 2010 compared to
the three months ended June 30, 2009 were as follows:




InthousandsofU.S.Dollars
                  
                  Three Months
                      Ended
                      June 30,
                      2010
                  
                  
                  Three Months
                      Ended
                      June 30,
                      2009
                  
                  
                  ChangeRevenue
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Operating
      expenses:Research
      and development
                  
                  
                  146
                  
                  
                  
                  650
                  
                  
                  
                  (504
                  )Unrealized
      gain/(loss) on derivative
                  
                  
                  (72
                  )
                  
                  
                  -
                  
                  
                  
                  (72
                  )General
      and administration
                  
                  
                  2,359
                  
                  
                  
                  311
                  
                  
                  
                  2,048Total
      operating expenses
                  
                  
                  2,577
                  
                  
                  
                  961
                  
                  
                  
                  1,616Loss
      from operations
                  
                  
                  (2,577
                  )
                  
                  
                  (961
                  )
                  
                  
                  (1,616
                  )Gain
      (Loss) on impairment of assets held for sale and leasehold
      inducements
                  
                  
                  -
                  
                  
                  
                  (22
                  )
                  
                  
                  (22
                  )Interest
      income
                  
                  
                  8
                  
                  
                  
                  1
                  
                  
                  
                  7Net
      loss and total comprehensive loss
                  
                  $
                  (2,569
                  )
                  
                  $
                  (938
                  )
                  
                  $
                  1,
      631





Our total
operating expenses increased by $1,616,000, or 168%, to $2,577,000 in the three
months ended June 30, 2010, as compared to $961,000 in the same period in 2009,
primarily due to recorded stock based compensation of $2,054,000 as compared to
$232,000 in the same period in 2009. Our decrease in our overall clinical
development studies and reduction in our employee headcount effective April
2009, partially offset the increase in stock based
compensation.   We recorded a $72,000 unrealized gain on
derivative warrant liability for the three months ended June 30, 2010 as
compared to nil in the same period in 2009.





Interest
income was $8,000 for the three months ended June 30, 2010 and was $1,000 for
the three months ended June 30, 2009.  The increase of $7,000 was due
to an increase in cash on hand due to our recently completed funding during the
three months ended June 30, 2010.





16


Our
results of operations for the six months ended June 30, 2010 versus six months
ended June 30, 2009 were as follows:




InthousandsofU.S.Dollars
                  
                  Six Months
                      Ended
                      June 30,
                      2010
                  
                  
                  Six Months
                      Ended
                      June 30,
                      2009
                  
                  
                  ChangeRevenue
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Operating
      expenses:Research
      and development
                  
                  
                  309
                  
                  
                  
                  1,929
                  
                  
                  
                  (1,620
                  )Unrealized
      gain/ (loss) on derivative
                  
                  
                  (72
                  )
                  
                  
                  -
                  
                  
                  
                  (72
                  )General
      and administration
                  
                  
                  2,563
                  
                  
                  
                  984
                  
                  
                  
                  1,579Total
      operating expenses
                  
                  
                  2,943
                  
                  
                  
                  2,913
                  
                  
                  
                  31Loss
      from operations
                  
                  
                  (2,943
                  )
                  
                  
                  (2,913
                  )
                  
                  
                  31Loss
      on impairment of assets held forsale
      and leasehold inducements
                  
                  
                  -
                  
                  
                  
                  (318
                  )
                  
                  
                  (318
                  )Interest
      income
                  
                  
                  8
                  
                  
                  
                  47
                  
                  
                  
                  (39
                  )Net
      loss and total comprehensive loss
                  
                  $
                  (2,935
                  )
                  
                  $
                  (3,184
                  )
                  
                  $
                  249





Total
operating expenses were $2,913,000 for the six months ended June 30, 2009 and
$2,943,000 for the six months ended June 30, 2010.  The increase of
$31,000, or 1%, was primarily due to a  decrease in our overall
clinical development studies and reductions in our employee headcount effective
April 2009, which were offset by the stock based compensation of $2,054,000 for
the six months ended June 30, 2010 as compared to $523,000 in the same period in
2009.





Quarterly
Information




The
following table presents selected consolidated financial data for each of the
last eight quarters through June 30, 2010, as prepared under U.S. GAAP (U.S.
dollars in thousands, except per share information):




Period
                  
                  Net Gain (Loss)
                      for the Period
                  
                  
                  Basic and Diluted
                      Net Income (Loss)
                      per Common ShareSeptember
      30, 2008
                  
                  $
                  (3,244
                  )
                  
                  $
                  (0.03
                  )December
      31, 2008
                  
                  $
                  (2,610
                  )
                  
                  $
                  (0.02
                  )March
      31, 2009
                  
                  $
                  (2,246
                  )
                  
                  $
                  (0.02
                  )June
      30, 2009
                  
                  $
                  (938
                  )
                  
                  $
                  (0.01
                  )September
      30, 2009
                  
                  $
                  (35
                  )
                  
                  $
                  (0.00
                  )December
      31, 2009
                  
                  $
                  30
                  
                  
                  $
                  0.00March
      31, 2010
                  
                  $
                  (366
                  )
                  
                  $
                  (0.00
                  )June
      30, 2010
                  
                  $
                  (2,569
                  )
                  
                  $
                  (0.01
                  )





Liquidity
and Capital Resources




In thousands of U.S. dollars
                    
                    June 30,
                    
                    
                    December31,2010
                    
                    
                    2009Selected
      Asset and Liability Data:Cash
      and cash equivalents
                    
                    $
                    7,152
                    
                    
                    $
                    685Other
      current assets
                    
                    
                    4
                    
                    
                    
                    148Current
      liabilities
                    
                    
                    370
                    
                    
                    
                    420Long
      term liabilities
                    
                    
                    7,262
                    
                    
                    
                    7Working
      capital[Current Assets – Current Liabilities]
                    
                    
                    6,786
                    
                    
                    
                    413Selected
      Equity:Common
      stock
                    
                    $
                    64,929
                    
                    
                    $
                    64,929Accumulated
      deficit
                    
                    
                    (103,926
                    )
                    
                    
                    (100,991
                    )Shareholders’
      equity
                    
                    
                    (476)
                    
                    
                    
                    406





Cash and
cash equivalents were $685,000 at December 31, 2009 and $7,152,000 at June 30,
2010.  The increase of $6,467,000, or 944%, was attributed to the
closing of our funding transaction for net proceeds of $7,190,000.





Other
current assets totaled $148,000 at December 31, 2009 and $4,000 at June 30,
2010.  The reduction of $144,000, or 97%, was attributed to a
reduction in accounts receivable, consisting of corporate and health insurance
credits.





17


Current
liabilities decreased $50,000, or 12%, from $420,000 at December 31, 2009 to
$370,000 at June 30, 2010.  The reduction was due to the payment of
outstanding accounts payable and accrued liabilities following the closing of
our funding transaction.  Long term liabilities increased $7,255,000
from $7,000 at December 31, 2009 to $7,262,000 at June 30, 2010.  The
increase was as a result of the accounting of the warrants issued in the private
placement as a derivative liability.





At June
30, 2010, our working capital increased by approximately $6,373,000, from
$413,000 at December 31, 2009 to $6,786,000 at June 30, 2010.  The
increase was due to the financing completed in April 2010, which was offset by
research and development activities and general corporate operations for the six
month period.





Since our
inception on September 3, 1996, we have financed our operations through the sale
of equity and debt securities and have raised gross proceeds totaling
approximately $93,000,000 through June 30, 2010.  We have incurred net
losses and negative cash flow from operations each year, and we had an
accumulated deficit of approximately $103,926,000 at June 30,
2010.  We have not generated any revenues to date through the sale of
products.  We do not expect to have significant revenues or income,
other than interest income, until we are able to sell our product candidates
after obtaining applicable regulatory approvals or we establish collaborations
that provide us with up-front payments, licensing fees, milestone
payments, royalties or other payments.




Net cash
used in operating activities for the six months ended June 30, 2010 was
approximately $723,000, as compared to $3,833,000 during the same period in
2009.  This decrease is due to a decrease in our overall clinical
activities and lower headcount during the six months ended June 30, 2010, as
compared to the same period in 2009.




Outstanding
Share Information





The
outstanding share data for our company as of June 30, 2010 (in
thousands):





June 30,
                    2010Common
      shares
                
                
                368,293Warrants
                
                
                240,066Stock
      options
                
                
                15,823Total
                
                
                624,182





Financial
Instruments





We invest
excess cash and cash equivalents in high credit quality investments held by
financial institutions in accordance with our investment policy designed to
protect the principal investment.  At June 30, 2010, we had $7,152,000
in cash and cash equivalents.  We have not experienced any loss or
write down of our money market investments for each of the six months ended June
30, 2010 and 2009.





Our
investment policy is to manage investments to achieve, in the order of
importance, the financial objectives of preservation of principal, liquidity and
return on investment.  Investments may be made in U.S. or Canadian
obligations and bank securities, commercial paper of U.S. or Canadian industrial
companies, utilities, financial institutions and consumer loan companies, and
securities of foreign banks provided the obligations are guaranteed or carry
ratings appropriate to the policy.  Securities must have a minimum Dun
& Bradstreet rating of A for bonds or R1 low for commercial
paper.  The policy also provides for investment limits on
concentrations of securities by issuer and maximum-weighted average time to
maturity of twelve months.  This policy applies to all of our
financial resources.


The
policy risks are primarily the opportunity cost of the conservative nature of
the allowable investments.  As our main purpose is research and
development, we have chosen to avoid investments of a trading or speculative
nature.





Off-Balance
Sheet Arrangements





Since our
inception, we have not had any material off-balance sheet
arrangements.  In addition, we do not engage in trading activities
involving non-exchange trade contracts.  As such, we are not
materially exposed to any financing, liquidity, market or credit risk that could
arise if we had engaged in such activities.





Contractual
Obligations and Commitments





Since our
inception, inflation has not had a material impact on our
operations.  We had no material commitments for capital expenses as of
June 30, 2010. The following table represents our contractual obligations
and commitments at June 30, 2010 (in thousands of U.S. dollars):




18


Less than 1 year
              
              
              1-3
                  years
              
              
              3-5
                  years
              
              
              More than 5
                  years
              
              
              TotalEastowne
      Lease (1)
              
              
              12
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              12Drug
      purchase commitments (2)
              
              50
              
              
              25
              
              
              
              -
              
              
              
              -
              
              
              75Total
              
              $
              62
              
              
              $
              25
              
              
              $
              -
              
              
              $
              -
              
              
              $
              87





(1)
            In
      December 2009, we entered into a lease for new office facilities in Chapel
      Hill, North Carolina.  Amounts shown assume the maximum amounts
      due under the lease.


(2)
            Commitments
      to our third party manufacturing vendors that supply drug substance
      primarily for our clinical studies.





Research
and Development





Research
and development expenses totaled $146,000 for the three months ended June 30,
2010 and $650,000 for the three months ended June 30, 2009. Our research
and development efforts have been focused on the development of eniluracil,
and support expenses for STS..





We have
established relationships with contract research organizations, universities and
other institutions, which we utilize to perform many of the day-to-day
activities associated with our drug development.  Where possible, we
have sought to include leading scientific investigators and advisors to enhance
our internal capabilities.





Our
product candidates are in various stages of development and still require
significant, time-consuming and costly research and development, testing and
regulatory clearances.  In developing our product candidates, we are
subject to risks of failure that are inherent in the development of products
based on innovative technologies.  For example, it is possible that
any or all of these products will be ineffective or toxic, or will otherwise
fail to receive the necessary regulatory clearances. There is a risk that our
product candidates will be uneconomical to manufacture or market or will not
achieve market acceptance. There is also a risk that third parties may hold
proprietary rights that preclude us from marketing our product candidates or
that others will market a superior or equivalent product.  As a result
of these factors, we are unable to accurately estimate the nature, timing and
future costs necessary to complete the development of these product candidates.
In addition, we are unable to reasonably estimate the period when material net
cash inflows could commence from the sale, licensing or commercialization of
such product candidates, if ever.





Critical
Accounting Policies and Estimates





The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenue and expense
during the reporting period.  These estimates are based on assumptions
and judgments that may be affected by commercial, economic and other
factors.  Actual results could differ from these
estimates.





Our
accounting policies are consistent with those presented in our annual
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2009.





Item
3.  Quantitative and Qualitative Disclosures about Market
Risk





As a
small reporting company, we are not required to provide the information required
by this item.





Item 4. Controls and
Procedures




(a) Evaluation of
Disclosure Controls and Procedures . We maintain “disclosure controls and
procedures,” as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, or the Exchange Act, that are designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met. Our disclosure
controls and procedures have been designed to meet reasonable assurance
standards. Additionally, in designing disclosure controls and procedures, our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and procedures. The
design of any disclosure controls and procedures also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.Under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, we have evaluated the effectiveness of our disclosure controls and
procedures as required by Exchange Act Rule 13a-15(b) as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer have identified two material weaknesses in
our internal control over financial reporting:




19


Our
management has identified a control deficiency because we lack sufficient staff
to segregate accounting duties.  We believe the control deficiency
results primarily because we have one person performing all accounting and
financial reporting duties.  As a result, we do not maintain adequate
segregation of duties within our critical financial reporting applications, the
related modules and financial reporting processes.  This control
deficient could result in a misstatement of balance sheet and income statement
accounts in our interim or annual financial statements that would not be
detected.  Accordingly, management has determined that this control
deficiency constitutes a material weakness.





Our
management has also identified another control deficiency that it believes
constitutes a material weakness in our control over financial
reporting.  We did not maintain sufficient personnel with an
appropriate level of technical accounting knowledge, experience, and training in
the application of U.S. GAAP commensurate with our complexity and our financial
accounting and reporting requirements.  This control deficiency could
result in a misstatement of the financial statements including disclosure that
would not be prevented or detected on a timely basis.  We have not,
therefore, timely prepared our consolidated financial statements and filed our
periodic reports with the SEC. While we strive to ensure we have appropriate
accounting personnel as well as an appropriate segregation of duties as much as
practicable, we currently have insufficient financial resources to justify
additional staff.   The Company continues to seek solutions to
improve internal control over financial reporting. As a result, these
significant internal control deficiencies are not expected to be remediated
until we secure additional financial resources.





(b) Changes in
Internal Controls. There were no changes in our internal control over
financial reporting that occurred during the fiscal quarter ended June 30, 2010
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.





PART II: OTHER
INFORMATION





Item
1. Legal Proceedings





On
occasion, we may be involved in legal matters arising in the ordinary course of
business. While our management believes that such matters are currently
insignificant, matters arising in the ordinary course of business for which we
are or could become involved in litigation may have a material adverse effect on
our business, financial condition or results of operations.





Item 1A.Risk
Factors.





The risk
factors set forth in our Form 10-K for the fiscal year December 31,
2009  include a risk relating to our ability to raise substantial
additional funds in the very near future to continue our operations. On April
30, 2010, we closed a $7,190,000 private placement.  Our disclosure of
the need to raise additional capital to continue operations beyond the second
quarter of 2010 is no longer applicable.





Additional
Risks Related to our Business





We
do not presently have the financial or human resources to complete Phase III
trials for our lead product candidates.




We do not
presently have the financial or human resources internally to complete Phase III
trials for any of our lead product candidates.  We are currently
designing and enrolling patients in a Phase II trial for
eniluracil.  If these trials are successful, and if we decide to
continue to develop eniluracil, we will need additional funding, or we will need
to enlist a partner to conduct future trials.





We are
currently developing STS in Phase III trials in collaboration with the
International Childhood Liver Tumour Strategy Group, known as SIOPEL and the
Children's Oncology Group.  It is possible SIOPEL and the Children's
Oncology Group may not conduct or complete the clinical trials with STS as
currently planned.  Such collaborators might not commit sufficient
resources to the development of our product candidates, which may lead to
significant delays.  We have already experienced significant delays in
the activation of the Children's Oncology Group trial and subsequent accrual of
patients into the Children's Oncology Group and SIOPEL clinical
trials.  We may not be able to independently develop or conduct such
trials ourselves.





20


We
continue to seek a licensing or funding partner for the further development of
one or all of our product candidates.  If a partner for one or all of
these technologies is not found, we may not be able to further advance these
products.  If a partner is found, the financial terms that they
propose may not be acceptable to us.





There
is no assurance that we will successfully develop a commercially viable
product.




Since our
formation in September 1996, we have engaged in research and development
programs.  We have generated no revenue from product sales, we do not
have any products currently available for sale, and none are expected to be
commercially available for sale until we have completed additional clinical
trials, if at all.  There can be no assurance that the research we
fund and manage will lead to commercially viable products. Our intention is
to commence a Phase II study for eniluracil and STS is currently in a Phase III
study.  Our products must still undergo substantial additional
regulatory review prior to commercialization.





We
anticipate the need for additional capital in the future and if we cannot raise
additional capital, we will not be able to fulfill our business
plan.





We need
to obtain additional funding in the future in order to finance our business
strategy, operations and growth.  We may not be able to obtain
additional financing in sufficient amounts or on acceptable terms when
needed.  If we fail to arrange for sufficient capital on a timely
basis, we may be required to curtail our business activities until we can obtain
adequate financing.  Debt financing must be repaid regardless of
whether or not we generate profits or cash flows from our business
activities.  Equity financing may result in dilution to existing
stockholders and may involve securities that have rights, preferences, or
privileges that are senior to our common stock or other
securities.  If we cannot raise sufficient capital when necessary, we
will likely have to curtail operations and you may lose part or all of your
investment.




We
may be unable to effectively deploy the proceeds from our April 30, 2010
financing for the development of eniluracil.




In
April 2010, we announced the closing of a private placement for proceeds of
$7,190,000.  This financing requires effective management and
deployment of our current employees and consultants.  Any inability on
our part to manage effectively the deployment of this capital could limit our
ability to successfully develop eniluracil.





Additional
Risks Related to our Common Stock





Our
common stock is deemed to be a “penny stock,” which may make it more difficult
for investors to sell their shares due to suitability requirements.





Our
common stock is subject to Rule 15g-1 through 15g-9 under the Exchange Act,
which imposes certain sales practice requirements on broker-dealers which sell
our common stock to persons other than established customers and “accredited
investors” who are generally individuals with a net worth in excess of
$1,000,000 or annual incomes exceeding $200,000, or $300,000, together with
their spouses. For transactions covered by this rule, a broker-dealer must make
a special suitability determination for the purchaser and have received the
purchaser’s written consent to the transaction prior to the sale. This rule
adversely affects the ability of broker-dealers to sell our common stock and the
ability of our stockholders to sell their shares of common stock.





Additionally,
our common stock is subject to the SEC regulations for “penny stock.” Penny
stock includes any equity security that is not listed on a national exchange and
has a market price of less than $5.00 per share, subject to certain exceptions.
The regulations require that prior to any non-exempt buy/sell transaction in a
penny stock, a disclosure schedule set forth by the SEC relating to the penny
stock market must be delivered to the purchaser of such penny stock. This
disclosure must include the amount of commissions payable to both the
broker-dealer and the registered representative and current price quotations for
the common stock. The regulations also require that monthly statements be sent
to holders of penny stock that disclose recent price information for the penny
stock and information on the limited market for penny stocks. These requirements
adversely affect the market liquidity of our common stock.





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





On April
20, 2010, we entered into agreements with our largest shareholder, Southpoint
Capital Advisors LP and certain other investors for a private
placement.  Participating investors purchased 240,067,000 Units at a
price of CAD$0.03 per Unit, for proceeds of $7,190,000.  Each Unit
consisted of one share of our common stock, and one warrant to purchase one
share of common stock at a purchase price of CAD$0.08 per share for a period of
five years from the issue date.





21


Item
3. Default Upon Senior Securities





We did
not default upon any senior securities during the quarter ended June 30,
2010.





Item
4. Removed and Reserved





Item 5. Other Information





None.





Item 6.  Exhibits




Exhibit
                    No.
                  
                  Description1.1
                  
                  Underwriting
      and Agency Agreement dated January 19, 2007 between Adherex Technologies
      Inc. and Versant Partners Inc. (included as Exhibit 1.1 to Form 8-K of
      Adherex, filed February 22, 2007 and incorporated herein by
      reference).3.1
                  
                  Articles
      of Amalgamation dated June 29, 2004 (included as Exhibit 1.7 to the Form
      20-F Registration Statement, No. 001-32295, of Adherex, filed September
      17, 2004 and incorporated herein by reference).3.2
                  
                  By-law
      No. 2 of the Company, as amended on November 2, 2004 (included as Exhibit
      1.9 to the Form 20-F/A Registration Statement, No. 001-32295 of Adherex,
      filed November 5, 2004 and incorporated herein by
    reference).4.1
                  
                  Registration
      Rights Agreement, dated as of December 19, 2003, by and between Adherex
      Technologies Inc. and HBM BioVentures (Cayman) Ltd. (included as Exhibit
      4.9 to the Form 20-F Registration Statement, No. 001-32295 of Adherex,
      filed September 17, 2004 and incorporated herein by
      reference).4.2
                  
                  Warrant
      Indenture dated February 21, 2007 between Adherex Technologies Inc. and
      Computershare Trust Company of Canada (included as Exhibit 4.45 to Form
      8-K of Adherex, filed February 22, 2007 and incorporated herein by
      reference).4.3
                  
                  Form
      of common stock Warrant dated February 21, 2007 (included as Exhibit 4.43
      to Form 8-K of Adherex, filed February 22, 2007, an incorporated herein by
      reference).4.4
                  
                  Form
      of Underwriter’s Warrant dated February 21, 2007 (included as Exhibit 4.44
      to Form 8-K of Adherex, filed February 22, 2007 and incorporated herein by
      reference).4.5
                  
                  Form
      of Warrant (included as Exhibit 99.3 to the Form 8-K of Adherex, filed on
      May 4, 2010 and incorporated herein by reference).10.1
                  
                  Lease
      Termination of Englert Lease between Adherex Technologies, Inc. and
      Realmark-Commercial, LLC, dated April 1, 2010. (filed
      herewith).31.1
                  
                  Certification
      of Chief Executive Officer of the Company in accordance with Section 302
      of the Sarbanes Oxley Act of 2002 (filed herewith).31.2
                  
                  Certification
      of Chief Financial Officer of the Company in accordance with Section 302
      of the Sarbanes Oxley Act of 2002 (filed herewith).32.1
                  
                  Certification
      of Chief Executive Officer and Chief Financial Officer of the Company in
      accordance with Section 906 of the Sarbanes Oxley Act of 2002 (filed
      herewith).


22


SIGNATURES




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





Adherex
      Technologies Inc.Date:
      November 1, 2010
              
              By:
              
              /s/
      Rostislav RaykovRostislav
      RaykovChief
      Executive Officer(principal
      executive officer)Date:
      November 1, 2010
              
              By:
              
              /s/
      Robert AndradeRobert
      AndradeChief
      Financial Officer(principal
      financial and chief accounting
officer)





23