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 September 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 140Chapel
      Hill, North Carolina
            27514(Address
      of Principal Executive Offices)
            (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 companyx





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 15, 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 – September 30, 2010 and December 31,
      2009
                          
                          3Unaudited
      Interim Condensed Consolidated Statements of Operations - Three and Nine
      Months Ended September 30, 2010 and 2009
                          
                          4Unaudited
      Interim Condensed Consolidated Statements of Cash Flows - Three and Nine
      Months Ended September 30, 2010 and 2009
                          
                          5Unaudited
      Interim Condensed Consolidated Statements of Stockholders' Equity– For the Periods
      Ended September 3, 1996 to September30, 2010
                          
                          6Notes
      to Unaudited Condensed Consolidated Financial Statements
                          
                          9Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of Operations
                          
                          15Item
      3. Quantitative and Qualitative Disclosures about Market
    Risk
                          
                          21Item
      4. Controls and Procedures
                          
                          21PART
      II: OTHER INFORMATION
                          
                          22Item
      1. Legal Proceedings
                          
                          22Item
      1A. Risk Factors
                          
                          22Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                          
                          23Item3.
      Defaults Upon Senior Securities
                          
                          23Item
      4. (Removed and Reserved)
                          
                          23Item
      5. Other Information
                          
                          23Item
      6. Exhibits
                          
                          24Signatures
                          
                          25




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)





September 30,
                  2010
              
              
              December 31,
                  2009AssetsCurrent
      assets:Cash
      and cash equivalents
              
              $
              6,602
              
              
              $
              685Accounts
      receivable
              
              
              1
              
              
              
              69Prepaid
      expense
              
              
              -
              
              
              
              75Other
      current assets
              
              
              -
              
              
              
              4Total
      current assets
              
              
              6,603
              
              
              
              833Total
      assets
              
              $
              6,603
              
              
              $
              833Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable
              
              $
              156
              
              
              $
              318Accrued
      liabilities
              
              
              150
              
              
              
              70Other
      current liabilities
              
              
              -
              
              
              
              32Total
      current liabilities
              
              
              306
              
              
              
              420Other
      long-term liabilities
              
              
              -
              
              
              
              7Derivative
      warrant liability
              
              
              4,692
              
              
              
              -Total
      liabilities
              
              
              4,998
              
              
              
              427Commitments
      and contingenciesStockholders'
      equity:Common
      stock, no par value; unlimited shares authorized; 368,293 and 128,227
      shares issued and outstanding at September 30, 2010 and December 31, 2009,
      respectively
              
              
              64,929
              
              
              
              64,929Additional
      paid-in capital
              
              
              37,664
              
              
              
              35,225Deficit
      accumulated during development stage
              
              
              (102,231
              )
              
              
              (100,991
              )Accumulated
      other comprehensive income
              
              
              1,243
              
              
              
              1,243Total
      stockholders’ equity
              
              
              1,605
              
              
              
              406Total
      liabilities and stockholders’ equity
              
              $
              6,603
              
              
              $
              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
                
                
                Nine Months Ended
                
                
                Cumulative
                  From
                  September 3,
                  1996 toSeptember
                    30,
                    2010
                
                
                September
                    30,
                    2009
                
                
                September 30,
                    2010
                
                
                September 30,
                    2009
                
                
                September
                    30,
                    2010Revenue
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Operating
      expenses:Research
      and development
                
                
                110
                
                
                
                47
                
                
                
                419
                
                
                
                1,976
                
                
                
                65,309Impairment
      of Capital Assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                386(Gain)
      on deferred lease inducements
                
                
                -
                
                
                
                (323
                )
                
                
                -
                
                
                
                (323
                )
                
                
                (497
                )Acquired
      in-process research and development
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                13,094Loss
      (gain) on impairment of asset held for sale
                
                
                -
                
                
                
                57
                
                
                
                
                
                
                
                386
                
                
                
                (204
                )General
      and administrative
                
                
                807
                
                
                
                293
                
                
                
                3,369
                
                
                
                1,276
                
                
                
                28,078Total
      operating expenses
                
                
                917
                
                
                
                74
                
                
                
                3,788
                
                
                
                3,315
                
                
                
                106,166Loss
      from operations
                
                
                (917
                )
                
                
                (74
                )
                
                
                (3,788
                )
                
                
                (3,315
                )
                
                
                (106,166
                )Other
      income (expense):Settlement
      of Cadherin litigation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,283
                )Interest
      expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (19
                )Unrealized
      gain on derivative
                
                
                2,570
                
                
                
                -
                
                
                
                2,498
                
                
                
                -
                
                
                
                2,498Other
      income
                
                
                28
                
                
                
                39
                
                
                
                29
                
                
                
                50
                
                
                
                79Interest
      income
                
                
                13
                
                
                
                -
                
                
                
                21
                
                
                
                46
                
                
                
                2,818Total
      other income (expense), net
                
                
                2,611
                
                
                
                39
                
                
                
                2,548
                
                
                
                96
                
                
                
                4,093Net
      Income/(loss) and total comprehensive income/(loss)
                
                $
                1,694
                
                
                $
                (35
                )
                
                $
                (1,240
                )
                
                $
                (3,219
                )
                
                $
                (102,073
                )Basic
      and diluted net income (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
                
                
                368,293
                
                
                
                128,227
                
                
                
                261,597
                
                
                
                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
                    
                    
                    Nine Months Ended
                    
                    
                    Cumulative
                      From
                      September 3,September 30,
                        2010
                    
                    
                    September 30,
                        2009
                    
                    
                    September 30,
                        2010
                    
                    
                    September 30,
                        2009
                    
                    
                    1996 to
                        September 30,
                        2010Cash
      flows from (used in):Operating
      activities:Net
      income (loss)
                    
                    $
                    1,694
                    
                    
                    $
                    (35
                    )
                    
                    $
                    (1,240
                    )
                    
                    $
                    (3,219
                    )
                    
                    $
                    (102,073
                    )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 on warrant derivative
                    
                    
                    (2,570
                    )
                    
                    
                    -
                    
                    
                    
                    (2,498
                    )
                    
                    
                    -
                    
                    
                    
                    (2,498
                    )Amortization
      of deferred lease inducements
                    
                    
                    -
                    
                    
                    
                    (323
                    )
                    
                    
                    -
                    
                    
                    
                    (347
                    )
                    
                    
                    (412
                    )Unrealized
      foreign exchange loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9Loss
      on impairment of capital assets
                    
                    
                    -
                    
                    
                    
                    57
                    
                    
                    
                    -
                    
                    
                    
                    386
                    
                    
                    
                    386Non-cash
      severance
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    168Stock-based
      compensation - consultants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    10
                    
                    
                    
                    722Stock-based
      compensation - employees
                    
                    
                    386
                    
                    
                    
                    9
                    
                    
                    
                    2,439
                    
                    
                    
                    532
                    
                    
                    
                    9,966Acquired
      in-process research and development
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    13,094Changes
      in operating assets and liabilities
                    
                    
                    (60
                    )
                    
                    
                    (382
                    )
                    
                    
                    26
                    
                    
                    
                    (1,867
                    )
                    
                    
                    (115
                    )Net
      cash used in operating activities
                    
                    
                    (550
                    )
                    
                    
                    (672
                    )
                    
                    
                    (1,273
                    )
                    
                    
                    (4,505
                    )
                    
                    
                    (78,162
                    )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 provided by (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
                    
                    
                    
                    -
                    
                    
                    
                    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 by financing activities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,190
                    
                    
                    
                    -
                    
                    
                    
                    85,879Effect
      of exchange rate on cash and cash equivalents
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    368Increase
      (decrease) in cash and cash equivalents
                    
                    
                    (550
                    )
                    
                    
                    (672
                    )
                    
                    
                    5,917
                    
                    
                    
                    (4,481
                    )
                    
                    
                    6,602Cash
      and cash equivalents - Beginning of period
                    
                    
                    7,152
                    
                    
                    
                    1,540
                    
                    
                    
                    685
                    
                    
                    
                    5,349
                    
                    
                    
                    -Cash
      and cash equivalents - End of period
                    
                    $
                    6,602
                    
                    
                    $
                    868
                    
                    
                    $
                    6,602
                    
                    
                    $
                    868
                    
                    
                    $
                    6,602





(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
                  )Stock
      options issued to employees and board
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  386
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  386Net
      income for quarter
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,694
                  
                  
                  
                  1,694Balance
      at September 30, 2010
                  
                  
                  368,293
                  
                  
                  $
                  64,929
                  
                  
                  $
                  -
                  
                  
                  $
                  37,664
                  
                  
                  $
                  1,243
                  
                  
                  $
                  (102,231
                  )
                  
                  $
                  1,605


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 September 30, 2010, the Company earned net income of $1.7
million and during the nine months ended September 30, 2010, the Company
incurred a net loss of $1.2 million. At September 30, 2010, it had an
accumulated deficit of $102.2 million and had experienced negative cash flows
from operations since inception in the amount of $78.2 million. 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 through the issuance of equity, debt or
collaboration. 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 September 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 September 30, 2010, the Company had $5.9 million in
money market investments, which typically have minimal risk, and $0.7 million 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 nine-month
periods ended September 30, 2010 and 2009, respectively.





3.      Accounting
Change




The
Company reclassified the unrealized gain on derivative to other income (expense)
in the interim condensed consolidated statements of operations; the amount was
previously reported as an operating expense. This reclassification has no effect
on previously reported net income/loss for the three and six month period ended
June 30, 2010 or on basic and diluted net income/loss per common share for the
previously reported three and six month period ended June 30,
2010.





4.      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.


5.      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.


10


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 option-pricing model.
  As of
September 30, 2010, the fair value of these warrants was determined to be $4.7
million. The fair value as at June30, 2010 was $7.2 million. Accordingly the
Company recorded an unrealized gain of $2.6 million and $2.5 million on the
condensed consolidated statements of operations for both the three and nine
months ended September 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.




6.      Stockholders'
Equity





Warrants
to purchase common stock





At
September 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
                    September 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 $7.2 million. 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.


11


During
the three months ended September 30, 2010 and 2009, the Company recognized total
stock-based compensation expense of $0.4 million and $0.01 million respectively.
During the nine-months ended September 30, 2010 and 2009, the Company recognized
total stock-based compensation expense of $2.4 million and $0.5 million,
respectively. These amounts have been included in the general and administrative
expenses for the respective periods.





Valuation
assumptions





The value
of options granted in the nine-month periods ended September 30, 2010 and
September 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 2.06% and 3.00%, respectively, expected
volatility of 99% and 85% respectively and a 7 year expected life.





Stock
option activity





The
following is a summary of option activity for the nine months ended September
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
                                
                                
                                67,692
                                
                                
                                CAD$
                                0.045Exercised
                                
                                
                                -
                                
                                
                                -Forfeited/cancelled/expired
                                
                                
                                -
                                
                                
                                -Outstanding
      at September 30, 2010
                                
                                
                                70,315
                                
                                
                                CAD$
                                .13





The
following is a summary of option activity for the nine months ended September
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 September 30, 2010
                    
                    
                    13,201
                    
                    
                    $
                    0.55




12


7.         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 September 30, 2010Quoted Price
                                
                                
                                Significantin Active Markets
                                
                                
                                Other
                                
                                
                                Significantfor Identical
                                
                                
                                Observable
                                
                                
                                UnobservableInstruments
                                
                                
                                Inputs
                                
                                
                                InputsLevel 1
                                
                                
                                Level 2
                                
                                
                                Level 3
                                
                                
                                TotalAssetsCash
      equivalents
                                
                                $
                                5,936,000
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                $
                                5,936,000LiabilitiesDerivative
      warrant liability
                                
                                
                                -
                                
                                
                                $
                                4,692,000
                                
                                
                                
                                -
                                
                                
                                $
                                4,692,000





The
Company's financial instruments include 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 1.27%; expected
volatility of 115% and a 4.6 year expected life.





8.
Commitments





We had no
material commitments for capital expenses as of September 30, 2010. The
following table represents our contractual obligations and commitments at
September 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)
              
              
              6
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6OCT
      Clinical Service Agreement(2)
              
              
              171
              
              
              
              342
              
              
              
              -
              
              
              
              -
              
              
              
              513Drug
      purchase commitments (3)
              
              60
              
              
              25
              
              
              
              -
              
              
              
              -
              
              
              85Total
              
              $
              237
              
              
              $
              367
              
              
              $
              -
              
              
              $
              -
              
              
              $
              604





(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)
            Under
      the service agreement with OCT Group LLC entered in August 2010, we are
      required to make several payments over the course of our planned Phase II
      clinical trial in Russia. The payments will be made upon the fulfillment
      of several milestones during the planned clinical trial including:
      regulatory approval of trial, enrollment of patients and the completion of
      therapy of patients.


13


(3)
              Commitments
      to our third party manufacturing vendors that supply drug substance
      primarily for our clinical
studies.





9.      Subsequent
Events





On
November 12, 2010, Adherex filed a registration statement with the Securities
and Exchange Commission (the "SEC") in connection with a proposed rights
offering to existing shareholders. As announced in April 2010, the Company
intends to offer existing shareholders the opportunity to subscribe for up to
425,000,000 rights at CAD$0.03 per unit, with gross proceeds of up to CAD$12.75
million upon the issuance of all of the common stock underlying such rights (and
additional gross proceeds of up to CAD$34.0 million upon the exercise of all of
the warrants underlying such rights at an exercise price of CAD$0.08 per
warrant). The Company intends to use the proceeds of the rights offering to
further develop eniluracil (including to conduct and monitor the Phase II
clinical trial of eniluracil in combination with 5-FU and leucovorin), and for
other general corporate purposes. A registration statement relating to these
securities has been filed with the SEC but has not yet been declared
effective. Accordingly, the rights (and underlying common stock and
warrants) may not be sold nor may offers be accepted prior to the time the
registration statement becomes effective. The rights will be issued to all
shareholders as of a record date which has yet to be determined. We will provide
notice of the record date at such time as it is determined


14





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 $7.2 million 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.


15





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 have contracted with OCT
Group LLC in August 2010 to assist in the monitoring and organization of the
study in the Russian Federation. 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$1.2 million for the nine months ended September 30, 2010 and $3.2 millionforthe nine months ended
September30, 2009.As of September
30, 2010, our deficit accumulated during development stage was approximately
$102.2 million.





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.


16





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 September 30,
2010 compared to the three months ended September 30, 2009 were as
follows:




InthousandsofU.S.Dollars
                    
                    Three Months
                        Ended
                        September 30,
                        2010
                    
                    
                    Three Months
                        Ended
                        September 30,
                        2009
                    
                    
                    ChangeRevenue
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Operating
      expenses:Research
      and development
                    
                    
                    110
                    
                    
                    
                    47
                    
                    
                    
                    63Gain
      on deferred lease inducements
                    
                    
                    -
                    
                    
                    
                    (323
                    )
                    
                    
                    323Loss
      on impairment of assets held for sale
                    
                    
                    -
                    
                    
                    
                    57
                    
                    
                    
                    (57
                    )General
      and administration
                    
                    
                    807
                    
                    
                    
                    293
                    
                    
                    
                    514Total
      operating expenses (income)
                    
                    
                    917
                    
                    
                    
                    74
                    
                    
                    
                    843Loss
      from operations
                    
                    
                    (917
                    )
                    
                    
                    (74
                    )
                    
                    
                    (843
                    )Unrealized
      gain on derivative
                    
                    
                    2,570
                    
                    
                    
                    -
                    
                    
                    
                    2,570Other
      income
                    
                    
                    28
                    
                    
                    
                    39
                    
                    
                    
                    (11
                    )Interest
      income
                    
                    
                    13
                    
                    
                    
                    -
                    
                    
                    
                    13Net
      Income/(loss) and total comprehensive loss
                    
                    $
                    1,694
                    
                    
                    $
                    (35
                    )
                    
                    $
                    1,729





Our total
operating expenses increased by $0.8 million to a loss from operations of $0.9
million in the three months ended September 30, 2010, as compared to a loss of
$0.07 million in the same period in 2009, primarily due to an increase in our
overall clinical development study expenses and an increase in stock based
compensation for the three months ended September 30, 2010 as compared to the
same period in 2009.   We recorded $0.4 million in stock based
compensation for the three months ended September 30, 2010 as compared to $0.009
million in the same period in 2009. The Company recorded an unrealized gain on
derivative of $2.6 million in the three months ended September 30, 2010 as
compared to nil in the same period in 2009.





Interest
income was $0.01 million for the three months ended September 30, 2010 and was
nil for the three months ended September 30, 2009.  The increase of
$0.01 million was due to an increase in cash on hand due to our recently
completed funding during the three months ended September 30, 2010.





Our
results of operations for the nine months ended September30, 2010 versus nine
months ended September 30, 2009 were as follows:


17




InthousandsofU.S.Dollars
                    
                    Nine Months
                        Ended
                        September 30,
                        2010
                    
                    
                    Nine Months
                        Ended
                        September 30,
                        2009
                    
                    
                    ChangeRevenue
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Operating
      expenses:Research
      and development
                    
                    
                    419
                    
                    
                    
                    1,976
                    
                    
                    
                    (1,557
                    )(Gain)
      on deferred lease inducements
                    
                    
                    -
                    
                    
                    
                    (323
                    )
                    
                    
                    323Loss
      on impairment of assets held for sale
                    
                    
                    -
                    
                    
                    
                    386
                    
                    
                    
                    386General
      and administration
                    
                    
                    3,369
                    
                    
                    
                    1,276
                    
                    
                    
                    2,093Total
      operating expenses
                    
                    
                    3,788
                    
                    
                    
                    3,315
                    
                    
                    
                    473Loss
      from operations
                    
                    
                    (3,788
                    )
                    
                    
                    (3,315
                    )
                    
                    
                    (473
                    )Gain
      on derivative
                    
                    
                    2,498
                    
                    
                    
                    -
                    
                    
                    
                    2,498Other
      Income
                    
                    
                    29
                    
                    
                    
                    50
                    
                    
                    
                    (21
                    )Interest
      income
                    
                    
                    21
                    
                    
                    
                    46
                    
                    
                    
                    (25
                    )Net
      loss and total comprehensive loss
                    
                    $
                    (1,240
                    )
                    
                    $
                    (3,219
                    )
                    
                    $
                    1,979





Total
operating expenses were $3.3 million for the nine months ended September 30,
2009 and $3.8 million for the nine months ended September 30,
2010.  The increase of $0.5 million, or 14%, was primarily due to the
increase in stock based compensation which was partially offset by
a  decrease in our overall clinical development studies and reductions
in our employee headcount effective April 2009 .  The Company
recorded, stock based compensation of $2.4 million for the nine months ended
September 30, 2010 as compared to $0.5 million in the same period in
2009.





Quarterly
Information




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




Period
                  
                  Net Income
                      (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
                  )September
      30, 2010
                  
                  $
                  1,694
                  
                  
                  $
                  0.01





Liquidity
and Capital Resources




In thousands of U.S. dollars
                  
                  September 30,
                  
                  
                  December 31,2010
                  
                  
                  2009Selected
      Asset and Liability Data:Cash
      and cash equivalents
                  
                  $
                  6,602
                  
                  
                  $
                  685Other
      current assets
                  
                  
                  1
                  
                  
                  
                  148Current
      liabilities
                  
                  
                  306
                  
                  
                  
                  420Long
      term liabilities
                  
                  
                  4,692
                  
                  
                  
                  7Working
      capital[Current Assets – Current Liabilities]
                  
                  
                  6,297
                  
                  
                  
                  413Selected
      Equity:Common
      stock
                  
                  $
                  64,929
                  
                  
                  $
                  64,929Accumulated
      deficit
                  
                  
                  (102,231
                  )
                  
                  
                  (100,991
                  )Stockholders’
      equity
                  
                  
                  1,605
                  
                  
                  
                  406




18


Cash and
cash equivalents were $0.7 million at December 31, 2009 and $6.6 million at
September 30, 2010.  The increase of $5.9 million, or 842%, was
attributed to the closing of our funding transaction for net proceeds of $7.2
million.





Other
current assets totaled $0.1 million at December 31, 2009 and $0.01 million at
September 30, 2010.  The reduction of $0.1 million, or 99%, was
attributed to a reduction in accounts receivable and prepaid expense, consisting
of corporate and health insurance credits.





Current
liabilities decreased $0.1 million, or 27%, from $0.4 million at December 31,
2009 to $0.3 million at September 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 $4.7 million, from $0.007 million at December 31, 2009 to $4.7 million
at September 30, 2010.  The increase was as a result of the accounting
of the warrants issued in the private placement as a derivative
liability.





At
September 30, 2010, our working capital increased by approximately $5.9 million,
from $0.4 million at December 31, 2009 to $6.3 million at September 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 nine 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 $87.0 million through September 30, 2010.  We have
incurred net losses and negative cash flow from operations each year, and we had
an accumulated deficit of approximately $102.2 million at September
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 nine months ended September 30, 2010 was
approximately $1.3 million, as compared to $4.5 million during the same
period in 2009.  This decrease is due to a decrease in our overall
clinical activities and lower headcount during the nine months ended September
30, 2010, as compared to the same period in 2009.




Outstanding
Share Information





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





September 30,
                    2010Common
      shares
                
                
                368,293Warrants
                
                
                240,066Stock
      options
                
                
                83,516Total
                
                
                691,875





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 September 30, 2010, we had $6.6
million in cash and cash equivalents.  We have not experienced any
loss or write down of our money market investments for each of the nine months
ended September 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.


19





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





We had no
material commitments for capital expenses as of September 30, 2010. The
following table represents our contractual obligations and commitments at
September 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)
                  
                  
                  6
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  6OCT
      Clinical Service Agreement(2)
                  
                  
                  171
                  
                  
                  342
                  
                  
                  -
                  
                  
                  -
                  
                  
                  513Drug
      purchase commitments (3)
                  
                  
                  60
                  
                  
                  25
                  
                  
                  -
                  
                  
                  -
                  
                  
                  85Total
                  
                  $
                  237
                  
                  $
                  367
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  604





(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)
            Under
      the service agreement with OCT Group LLC entered in August 2010, we are
      required to make several payments over the course of our planned Phase II
      clinical trial in Russia.  The payments will be made upon the
      fulfillment of several milestones during the planned clinical trial
      including: regulatory approval of trial, enrollment of patients and the
      completion of therapy of patients.


(3)
              Commitments
      to our third party manufacturing vendors that supply drug substance
      primarily for our clinical
studies.


20





Research
and Development





Research
and development expenses totaled $0.1 million for the three months ended
September 30, 2010 and $0.05 million for the three months ended September 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:


21


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
deficiency 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 September 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.





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.





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.


22





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
$7.2 million.  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 August
18, 2010, the Company issued 67.7 million stock options to certain employees and
directors of the Company. The options were issued in a private placement exempt
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"). The options were issued pursuant to employment agreements and Independent
Director Agreements and were issued in Canadian dollar denominated grants at an
exercise price of $0.045 per share and are exercisable for a period of 7 years
from the grant date. The issuance of the options were subject to the approval of
the Company's amended Stock Option Plan by the shareholders of the Company. The
shareholders of the Company approved the Company's amended Stock Option Plan on
June 24, 2010, at the Company's annual meeting.




Item
3. Default Upon Senior Securities





None.





Item
4. Removed and Reserved





Item 5. Other Information





None.


23





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
                    
                    Master
      Service Agreement with OCT Group LLC dated August 18, 2010 (filed
      herewith).99.1
                    
                    Press
      Release for Quarter Ended September 30, 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).




24


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 15, 2010
              By:
              /s/
      Rostislav RaykovRostislav
      RaykovChief
      Executive Officer(principal
      executive officer)Date:
      November 15, 2010
              By:
              /s/
      Robert AndradeRobert
      AndradeChief
      Financial Officer(principal
      financial and chief accounting
officer)




25