##### Table of Contents





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, 2008

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                                                                         |  | 20-0442384                          
|(State or Other Jurisdiction of Incorporation or Organization                  |  | (I.R.S. Employer Identification No.)
|                                                                               | 
|4620 Creekstone Drive, Suite 200 Research Triangle Park Durham, North Carolina |  | 27703                               
|(Address of Principal Executive Offices)                                       |  | (Zip Code)                          

Registrants Telephone Number, Including Area Code: (919) 484-8484





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   |  | x  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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 11, 2008, there were 128,226,787 shares of Adherex Technologies Inc. common stock outstanding.









---

##### Table of Contents

TABLE OF CONTENTS



|                                                                                                                                  |  |     
|--------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                  |  | Page
|PART I: FINANCIAL INFORMATION                                                                                                     |  |     
|                                                                                                                                  | 
|Item 1. Financial Statements (unaudited)                                                                                          |  | 3   
|                                                                                                                                  | 
|Unaudited Condensed Consolidated Balance SheetsSeptember 30, 2008 and December 31, 2007                                          |  | 3   
|                                                                                                                                  | 
|Unaudited Condensed Consolidated Statements of OperationsThree and Nine Months Ended September 
30, 2008 and 2007                |  | 4   
|                                                                                                                                  | 
|Unaudited Condensed Consolidated Statements of Cash FlowsThree and Nine Months Ended September 
30, 2008 and 2007                |  | 5   
|                                                                                                                                  | 
|Unaudited Condensed Consolidated Statements of Stockholders EquityFor the Period Ended September 
3, 1996 to September 30, 2008 |  | 6   
|                                                                                                                                  | 
|Notes to Unaudited Condensed Consolidated Financial Statements                                                                    |  | 9   
|                                                                                                                                  | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations                                     |  | 16  
|                                                                                                                                  | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                                                                |  | 24  
|                                                                                                                                  | 
|Item 4. Controls and Procedures                                                                                                   |  | 25  
|                                                                                                                                  | 
|PART II: OTHER INFORMATION                                                                                                        |  | 25  
|                                                                                                                                  | 
|Item 1A. Risk Factors                                                                                                             |  | 25  
|                                                                                                                                  | 
|Item 6. Exhibits                                                                                                                  |  | 37  
|                                                                                                                                  | 
|Signatures                                                                                                                        |  | 38  



---

##### Table of Contents

PART 1: FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

Adherex Technologies Inc.

(a development stage company)

Unaudited Condensed Consolidated Balance Sheets

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



|                                                                                               |  |                   |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                               |  | September 30,2008 |         |   | December 31,2007 |  
|Assets                                                                                         |  |                   |         |   |                  |   |         |  
|Current assets:                                                                                |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                      |  | $                 | 7,882   |   |                  | $ | 16,162  |  
|Cash pledged as collateral                                                                     |  |                   | 55      |   |                  |   | 55      |  
|Accounts receivable                                                                            |  |                   | 33      |   |                  |   | 21      |  
|Investment tax credits recoverable                                                             |  |                   | 149     |   |                  |   | 164     |  
|Prepaid expense                                                                                |  |                   | 54      |   |                  |   | 130     |  
|Other current assets                                                                           |  |                   | 28      |   |                  |   | 29      |  
|                                                                                               |  |                   |         |   |                  |   |         |  
|Total current assets                                                                           |  |                   | 8,201   |   |                  |   | 16,561  |  
|                                                                                               |  |                  
|Property and equipment                                                                         |  |                   | 153     |   |                  |   | 285     |  
|Leasehold inducements                                                                          |  |                   | 304     |   |                  |   | 363     |  
|                                                                                               |  |                   |         |   |                  |   |         |  
|Total assets                                                                                   |  | $                 | 8,658   |   |                  | $ | 17,209  |  
|                                                                                               |  |                   |         |   |                  |   |         |  
|                                                                                               |  |                  
|Liabilities and Stockholders Equity                                                           |  |                   |         |   |                  |   |         |  
|                                                                                               |  |                  
|Current liabilities:                                                                           |  |                   |         |   |                  |   |         |  
|Accounts payable                                                                               |  | $                 | 990     |   |                  | $ | 532     |  
|Accrued liabilities                                                                            |  |                   | 1,914   |   |                  |   | 1,830   |  
|Other current liabilities                                                                      |  |                   |        |   |                  |   | 40      |  
|                                                                                               |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                      |  |                   | 2,904   |   |                  |   | 2,402   |  
|                                                                                               |  |                  
|Deferred lease inducement                                                                      |  |                   | 600     |   |                  |   | 659     |  
|                                                                                               |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                              |  |                   | 3,504   |   |                  |   | 3,061   |  
|                                                                                               |  |                   |         |   |                  |   |         |  
|Commitments and contingencies                                                                  |  |                   |         |   |                  |   |         |  
|                                                                                               |  |                  
|Stockholders equity:                                                                          |  |                   |         |   |                  |   |         |  
|Common stock, no par value; unlimited shares authorized; 128,227 shares issued and outstanding |  |                   | 64,929  |   |                  |   | 64,929  |  
|Additional paid-in capital                                                                     |  |                   | 34,436  |   |                  |   | 32,355  |  
|Deficit accumulated during development stage                                                   |  |                   | (95,369 | ) |                  |   | (84,379 | )
|Accumulated other comprehensive income                                                         |  |                   | 1,158   |   |                  |   | 1,243   |  
|                                                                                               |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                                     |  |                   | 5,154   |   |                  |   | 14,148  |  
|                                                                                               |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                     |  | $                 | 8,658   |   |                  | $ | 17,209  |  
|                                                                                               |  |                   |         |   |                  |   |         |  

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



3



---

##### Table of Contents

Adherex Technologies Inc.

(a development stage company)

Unaudited Condensed Consolidated Statements of Operations

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



|                                                                                                    |  |                    |         |   |                   |   |         |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -------------------------------------------------- |  | - | ----------------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                    |  | Three Months Ended |         |   | Nine Months Ended |   |         | CumulativeFromSeptember 3,1996 toSeptember 30,2008 | 
|                                                                                                    |  |                    |        
|                                                                                                    |  |                    |        
|                                                                                                    |  | September 30,2008  |         |   | September 30,2007 |   |         | September 30,2008                                  |  |   | September 30,2007 |   | 
|Revenue                                                                                             |  | $                  |        |   |                   | $ |        |                                                    |  | $ |                  |   |  | $ |        |   |  | $ |        |  
|                                                                                                    |  |                    |         |   |                  
|Operating expenses:                                                                                 |  |                    |         |   |                   |   |         |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Research and development                                                                            |  |                    | 2,821   |   |                   |   | 2,490   |                                                    |  |   | 8,768             |   |  |   | 8,293   |   |  |   | 61,179  |  
|Acquired in-process research and development                                                        |  |                    |        |   |                   |   |        |                                                    |  |   |                  |   |  |   |        |   |  |   | 13,094  |  
|General and administrative                                                                          |  |                    | 478     |   |                   |   | 966     |                                                    |  |   | 2,478             |   |  |   | 2,717   |   |  |   | 22,454  |  
|                                                                                                    |  |                    |         |   |                   |   |         |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Total operating expenses                                                                            |  |                    | 3,299   |   |                   |   | 3,456   |                                                    |  |   | 11,246            |   |  |   | 11,010  |   |  |   | 96,727  |  
|                                                                                                    |  |                    |         |   |                   |   |         |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Loss from operations                                                                                |  |                    | (3,299  | ) |                   |   | (3,456  | )                                                  |  |   | (11,246           | ) |  |   | (11,010 | ) |  |   | (96,727 | )
|                                                                                                    |  |                    |         |   |                   |   |         |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Other income (expense):                                                                             |  |                    |         |   |                   |   |         |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Settlement of Cadherin Biomedical Inc. litigation                                                   |  |                    |        |   |                   |   |        |                                                    |  |   |                  |   |  |   |        |   |  |   | (1,283  | )
|Interest expense                                                                                    |  |                    |        |   |                   |   |        |                                                    |  |   |                  |   |  |   |        |   |  |   | (19     | )
|Other income                                                                                        |  |                    |        |   |                   |   |        |                                                    |  |   |                  |   |  |   |        |   |  |   | 98      |  
|Interest income                                                                                     |  |                    | 55      |   |                   |   | 254     |                                                    |  |   | 256               |   |  |   | 661     |   |  |   | 2,720   |  
|                                                                                                    |  |                    |         |   |                   |   |         |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Total other income (expense), net                                                                   |  |                    | 55      |   |                   |   | 254     |                                                    |  |   | 256               |   |  |   | 661     |   |  |   | 1,516   |  
|                                                                                                    |  |                    |         |   |                   |   |         |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Net loss                                                                                            |  | $                  | (3,244  | ) |                   | $ | (3,202  | )                                                  |  | $ | (10,990           | ) |  | $ | (10,349 | ) |  | $ | (95,211 | )
|                                                                                                    |  |                    |         |   |                   |   |         |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Other comprehensive loss, unrealized foreign exchange loss on cash and cash equivalents, net of tax |  |                    | (85     | ) |                   |   |        |                                                    |  |   | (85               | ) |  |   |        |   |  |   |         |  
|                                                                                                    |  |                    |         |   |                   |   |         |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Comprehensive loss                                                                                  |  | $                  | (3,329  | ) |                   | $ | (3,202  | )                                                  |  | $ | (11,075           | ) |  | $ | (10,349 | ) |  |   |         |  
|                                                                                                    |  |                    |         |   |                   |   |         |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Basic and diluted net loss per common share                                                         |  | $                  | (0.03   | ) |                   | $ | (0.02   | )                                                  |  | $ | (0.09             | ) |  | $ | (0.09   | ) |  |   |         |  
|                                                                                                    |  |                    |         |   |                   |   |         |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Weighted-average common shares used in computing basic and diluted net loss per common share        |  |                    | 128,227 |   |                   |   | 128,227 |                                                    |  |   | 128,227           |   |  |   | 112,643 |   |  |   |         |  
|                                                                                                    |  |                    |         |   |                   |   |         |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  

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



4



---

##### Table of Contents

Adherex Technologies Inc.

(a development stage company)

Unaudited Condensed Consolidated Statements of Cash Flows

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



|                                                                            |  |                    |        |   |                   |   |        |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | -------------------------------------------------- |  | - | ----------------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                            |  | Three Months Ended |        |   | Nine Months Ended |   |        | CumulativeFromSeptember 3,1996 toSeptember 30,2008 | 
|                                                                            |  |                    |       
|                                                                            |  |                    |       
|                                                                            |  | September 30,2008  |        |   | September 30,2007 |   |        | September 30,2008                                  |  |   | September 30,2007 |   | 
|Cash flows from (used in):                                                  |  |                    |        |   |                   |   |        |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Operating activities:                                                       |  |                    |        |   |                   |   |        |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Net loss                                                                    |  | $                  | (3,244 | ) |                   | $ | (3,202 | )                                                  |  | $ | (10,990           | ) |  | $ | (10,349 | ) |  | $ | (95,211 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                    |        |   |                   |   |        |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Depreciation and amortization                                               |  |                    | 17     |   |                   |   | 24     |                                                    |  |   | 147               |   |  |   | 57      |   |  |   | 1,387   |  
|Non-cash Cadherin Biomedical Inc. litigation                                |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | 1,187   |  
|Unrealized foreign exchange loss                                            |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | 9       |  
|Amortization of leasehold improvements                                      |  |                    | (3     | ) |                   |   | 32     |                                                    |  |   | (7                | ) |  |   | 114     |   |  |   | 130     |  
|Non-cash severance                                                          |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | 168     |  
|Stock-based compensationemployees                                          |  |                    | 280    |   |                   |   | 385    |                                                    |  |   | 2,016             |   |  |   | 1,789   |   |  |   | 6,770   |  
|Stock-based compensationconsultants                                        |  |                    | 27     |   |                   |   | 4      |                                                    |  |   | 65                |   |  |   | 37      |   |  |   | 689     |  
|Acquired in-process research and development                                |  |                    |       |   |                   |   |       |                                                    |  |   |                   |   |  |   |        |   |  |   | 13,094  |  
|Changes in operating assets and liabilities                                 |  |                    | 505    |   |                   |   | 546    |                                                    |  |   | 582               |   |  |   | (2,792  | ) |  |   | 2,197   |  
|                                                                            |  |                    |        |   |                   |   |        |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Net cash used in operating activities                                       |  |                    | (2,418 | ) |                   |   | (2,211 | )                                                  |  |   | (8,187            | ) |  |   | (11,144 | ) |  |   | (69,580 | )
|                                                                            |  |                    |        |   |                   |   |        |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Investing activities:                                                       |  |                    |        |   |                   |   |        |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Purchase of capital assets                                                  |  |                    |       |   |                   |   | (22    | )                                                  |  |   | (15               | ) |  |   | (58     | ) |  |   | (1,440  | )
|Disposal of capital assets                                                  |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | 115     |  
|Release of restricted cash                                                  |  |                    |       |   |                   |   | (2     | )                                                  |  |   |                  |   |  |   | (2      | ) |  |   | 190     |  
|Restricted cash                                                             |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | (209    | )
|Purchase of short-term investments                                          |  |                    |       |   |                   |   | (5,069 | )                                                  |  |   |                  |   |  |   | (5,069  | ) |  |   | (22,148 | )
|Redemption of short-term investments                                        |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | 22,791  |  
|Investment in Cadherin Biomedical Inc.                                      |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | (166    | )
|Acquired intellectual property rights                                       |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | (640    | )
|                                                                            |  |                    |        |   |                   |   |        |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Net cash used in investing activities                                       |  |                    |       |   |                   |   | (5,093 | )                                                  |  |   | (15               | ) |  |   | (5,129  | ) |  |   | (1,507  | )
|                                                                            |  |                    |        |   |                   |   |        |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Financing activities:                                                       |  |                    |        |   |                   |   |        |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Conversion of long-term debt to equity                                      |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | 68      |  
|Long-term debt repayment                                                    |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | (65     | )
|Capital lease repayments                                                    |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | (8      | )
|Issuance of common stock, net of issue costs                                |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   | 23,915  |   |  |   | 76,687  |  
|Registration expense                                                        |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | (465    | )
|Proceeds from convertible note                                              |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | 3,017   |  
|Other liability repayments                                                  |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | (87     | )
|Financing expenses                                                          |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | (544    | )
|Security deposits received                                                  |  |                    | 7      |   |                   |   |       |                                                    |  |   | 7                 |   |  |   |        |   |  |   | 35      |  
|Proceeds from exercise of stock options                                     |  |                    |       |   |                   |   |       |                                                    |  |   |                  |   |  |   |        |   |  |   | 51      |  
|                                                                            |  |                    |        |   |                   |   |        |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Net cash provided in financing activities                                   |  |                    | 7      |   |                   |   |       |                                                    |  |   | 7                 |   |  |   | 23,915  |   |  |   | 78,689  |  
|                                                                            |  |                    |        |   |                   |   |        |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Effect of exchange rate on cash and cash equivalents                        |  |                    | (85    | ) |                   |   |       |                                                    |  |   | (85               | ) |  |   |        |   |  |   | 280     |  
|                                                                            |  |                    |        |   |                   |   |        |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Increase (decrease) in cash and cash equivalents                            |  |                    | (2,496 | ) |                   |   | (7,304 | )                                                  |  |   | (8,280            | ) |  |   | 7,642   |   |  |   | 7,882   |  
|Cash and cash equivalentsBeginning of period                               |  |                    | 10,378 |   |                   |   | 20,611 |                                                    |  |   | 16,162            |   |  |   | 5,665   |   |  |   |        |  
|                                                                            |  |                    |        |   |                   |   |        |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  
|Cash and cash equivalentsEnd of period                                     |  | $                  | 7,882  |   |                   | $ | 13,307 |                                                    |  | $ | 7,882             |   |  | $ | 13,307  |   |  | $ | 7,882   |  
|                                                                            |  |                    |        |   |                   |   |        |                                                    |  |   |                   |   |  |   |         |   |  |   |         |  

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



5



---

##### Table of Contents

Adherex Technologies Inc.

(a development stage company)

Unaudited Consolidated Statements of Stockholders Equity

(U.S. dollars and shares in thousands, except per share
information)



|                                                                     |  |              |   |                                            |        |                          |  |   |                                     |  |                                          |        |   |                          |   |     |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------- |  | ------------ | - | ------------------------------------------ | ------ | ------------------------ |  | - | ----------------------------------- |  | ---------------------------------------- | ------ | - | ------------------------ | - | --- |  | - | ------ | - |  | - | ------ | -
|                                                                     |  | Common Stock |   | Non-redeemablePreferred Stockof
Subsidiary |        | AdditionalPaid-inCapital |  |   | AccumulatedOtherComprehensiveIncome |  | DeficitAccumulatedDuringDevelopmentStage |        |   | TotalStockholdersEquity |  
|                                                                     |  |              |   |                                            |        |                         
|                                                                     |  |              |   |                                            |        |                         
|                                                                     |  | Number       |   |                                            | Amount |                          |  |   |                                     | 
|Balance 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                    |  |   |                                    |  |                                          |       |   |                          |   |    |  |   |       |   |  |   | 1,615  |  
|Cumulative translation adjustment                                    |  |             |   |                                            |        |                         |  |   |                                    |  |                                          |       |   |                          |   | 20  |  |   |       |   |  |   | 20     |  
|Net loss                                                             |  |             |   |                                            |        |                         |  |   |                                    |  |                                          |       |   |                          |   |    |  |   | (958   | ) |  |   | (958   | )
|                                                                     |  |              |   |                                            |        |                          |  |   |                                     |  |                                          |        |   |                          |   |     |  |   |        |   |  |   |        |  
|Balance at June 30, 1999                                             |  | 4,311        |   |                                            |        | 1,615                    |  |   |                                    |  |                                          |       |   |                          |   | 20  |  |   | (1,393 | ) |  |   | 242    |  
|Issuance of common stock                                             |  | 283          |   |                                            |        | 793                      |  |   |                                    |  |                                          |       |   |                          |   |    |  |   |       |   |  |   | 793    |  
|Issuance of equity rights                                            |  |             |   |                                            |        |                         |  |   |                                    |  |                                          | 171    |   |                          |   |    |  |   |       |   |  |   | 171    |  
|Issuance of special warrants                                         |  |             |   |                                            |        |                         |  |   |                                    |  |                                          | 255    |   |                          |   |    |  |   |       |   |  |   | 255    |  
|Settlement of advances:                                              |  |              |   |                                            |        |                          |  |   |                                     |  |                                          |        |   |                          |   |     |  |   |        |   |  |   |        |  
|Issuance of common stock                                             |  | 280          |   |                                            |        | 175                      |  |   |                                    |  |                                          |       |   |                          |   |    |  |   |       |   |  |   | 175    |  
|Cancellation of common stock                                         |  | (120         | ) |                                            |        |                         |  |   |                                    |  |                                          |       |   |                          |   |    |  |   |       |   |  |   |       |  
|Cumulative translation adjustment                                    |  |             |   |                                            |        |                         |  |   |                                    |  |                                          |       |   |                          |   | 16  |  |   |       |   |  |   | 16     |  
|Net loss                                                             |  |             |   |                                            |        |                         |  |   |                                    |  |                                          |       |   |                          |   |    |  |   | (1,605 | ) |  |   | (1,605 | )
|                                                                     |  |              |   |                                            |        |                          |  |   |                                     |  |                                          |        |   |                          |   |     |  |   |        |   |  |   |        |  
|Balance at June 30, 2000                                             |  | 4,754        |   |                                            |        | 2,583                    |  |   |                                    |  |                                          | 426    |   |                          |   | 36  |  |   | (2,998 | ) |  |   | 47     |  
|Issuance of common stock:                                            |  |              |   |                                            |        |                          |  |   |                                     |  |                                          |        |   |                          |   |     |  |   |        |   |  |   |        |  
|Initial Public Offering (IPO)                                      |  | 1,333        |   |                                            |        | 5,727                    |  |   |                                    |  |                                          |       |   |                          |   |    |  |   | (38    | ) |  |   | 5,689  |  
|Other                                                                |  | 88           |   |                                            |        | 341                      |  |   |                                    |  |                                          |       |   |                          |   |    |  |   |       |   |  |   | 341    |  
|Issuance of special warrants                                         |  |             |   |                                            |        |                         |  |   |                                    |  |                                          | 1,722  |   |                          |   |    |  |   |       |   |  |   | 1,722  |  
|Conversion of special warrants                                       |  | 547          |   |                                            |        | 1,977                    |  |   |                                    |  |                                          | (1,977 | ) |                          |   |    |  |   |       |   |  |   |       |  
|Issuance of Series A special warrants                                |  |             |   |                                            |        |                         |  |   |                                    |  |                                          | 4,335  |   |                          |   |    |  |   |       |   |  |   | 4,335  |  
|Conversion of Series A special warrants                              |  | 1,248        |   |                                            |        | 4,335                    |  |   |                                    |  |                                          | (4,335 | ) |                          |   |    |  |   |       |   |  |   |       |  
|Conversion of equity rights                                          |  | 62           |   |                                            |        | 171                      |  |   |                                    |  |                                          | (171   | ) |                          |   |    |  |   |       |   |  |   |       |  
|Cumulative translation adjustment                                    |  |             |   |                                            |        |                         |  |   |                                    |  |                                          |       |   |                          |   | 182 |  |   |       |   |  |   | 182    |  
|Net loss                                                             |  |             |   |                                            |        |                         |  |   |                                    |  |                                          |       |   |                          |   |    |  |   | (2,524 | ) |  |   | (2,524 | )
|                                                                     |  |              |   |                                            |        |                          |  |   |                                     |  |                                          |        |   |                          |   |     |  |   |        |   |  |   |        |  
|Balance at June 30, 2001                                             |  | 8,032        |   |                                            |        | 15,134                   |  |   |                                    |  |                                          |       |   |                          |   | 218 |  |   | (5,560 | ) |  |   | 9,792  |  
|Cumulative translation adjustment                                    |  |             |   |                                            |        |                         |  |   |                                    |  |                                          |       |   |                          |   | 11  |  |   |       |   |  |   | 11     |  
|Net 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 consolidated financial statements)

(continued on next page)



6



---

##### Table of Contents

Adherex Technologies Inc.

(a development stage company)

Unaudited Consolidated Statements of
Stockholders Equity (Continued)

(U.S. dollars and shares in thousands, except per share information)



|                                               |  |              |  |        |                                            |  |        |                          |  |        |                                     |  |       |                                          |  |         |                          |  |         |  
|---------------------------------------------- |  | ------------ |  | ------ | ------------------------------------------ |  | ------ | ------------------------ |  | ------ | ----------------------------------- |  | ----- | ---------------------------------------- |  | ------- | ------------------------ |  | ------- | -
|                                               |  | Common Stock |  |        | Non-redeemablePreferred Stockof
Subsidiary |  |        | AdditionalPaid-inCapital |  |        | AccumulatedOtherComprehensiveIncome |  |       | DeficitAccumulatedDuringDevelopmentStage |  |         | TotalStockholdersEquity | 
|                                               |  |              |  |        |                                            | 
|                                               |  |              |  |        |                                            | 
|                                               |  | Number       |  | Amount |                                            |  |        |                          |  |       
|Balance at June 30, 2002                       |  | 8,032        |  | 15,134 |                                            |  |       |                          |  |       |                                     |  | 229   |                                          |  | (9,292  | )                        |  | 6,071   |  
|Common stock issued for Oxiquant acquisition   |  | 8,032        |  | 11,077 |                                            |  |       |                          |  | 543    |                                     |  |      |                                          |  |        |                          |  | 11,620  |  
|Exercise of stock options                      |  | 5            |  | 4      |                                            |  |       |                          |  |       |                                     |  |      |                                          |  |        |                          |  | 4       |  
|Distribution to stockholders                   |  |             |  |       |                                            |  |       |                          |  |       |                                     |  |      |                                          |  | (158    | )                        |  | (158    | )
|Stated capital reduction                       |  |             |  | (9,489 | )                                          |  |       |                          |  | 9,489  |                                     |  |      |                                          |  |        |                          |  |        |  
|Stock options issued to consultants            |  |             |  |       |                                            |  |       |                          |  | 4      |                                     |  |      |                                          |  |        |                          |  | 4       |  
|Equity component of June convertible notes     |  |             |  |       |                                            |  |       |                          |  | 1,058  |                                     |  |      |                                          |  |        |                          |  | 1,058   |  
|Financing warrants                             |  |             |  |       |                                            |  |       |                          |  | 53     |                                     |  |      |                                          |  |        |                          |  | 53      |  
|Cumulative translation adjustment              |  |             |  |       |                                            |  |       |                          |  |       |                                     |  | (159  | )                                        |  |        |                          |  | (159    | )
|Net loss                                       |  |             |  |       |                                            |  |       |                          |  |       |                                     |  |      |                                          |  | (17,795 | )                        |  | (17,795 | )
|                                               |  |              |  |        |                                            |  |        |                          |  |        |                                     |  |       |                                          |  |         |                          |  |         |  
|Balance at June 30, 2003                       |  | 16,069       |  | 16,726 |                                            |  |       |                          |  | 11,147 |                                     |  | 70    |                                          |  | (27,245 | )                        |  | 698     |  
|Stock options issued to consultants            |  |             |  |       |                                            |  |       |                          |  | 148    |                                     |  |      |                                          |  |        |                          |  | 148     |  
|Repricing of warrants related to financing     |  |             |  |       |                                            |  |       |                          |  | 18     |                                     |  |      |                                          |  |        |                          |  | 18      |  
|Equity component of December convertible notes |  |             |  |       |                                            |  |       |                          |  | 1,983  |                                     |  |      |                                          |  |        |                          |  | 1,983   |  
|Financing warrants                             |  |             |  |       |                                            |  |       |                          |  | 54     |                                     |  |      |                                          |  |        |                          |  | 54      |  
|Conversion of June convertible notes           |  | 1,728        |  | 1,216  |                                            |  |       |                          |  | (93    | )                                   |  |      |                                          |  |        |                          |  | 1,123   |  
|Conversion of December convertible notes       |  | 1,085        |  | 569    |                                            |  |       |                          |  | (398   | )                                   |  |      |                                          |  |        |                          |  | 171     |  
|Non-redeemable preferred stock                 |  |             |  |       |                                            |  | 1,045  |                          |  |       |                                     |  |      |                                          |  |        |                          |  | 1,045   |  
|December private placement                     |  | 11,522       |  | 8,053  |                                            |  |       |                          |  | 5,777  |                                     |  |      |                                          |  |        |                          |  | 13,830  |  
|May private placement                          |  | 4,669        |  | 6,356  |                                            |  |       |                          |  | 2,118  |                                     |  |      |                                          |  |        |                          |  | 8,474   |  
|Exercise of stock options                      |  | 18           |  | 23     |                                            |  |       |                          |  |       |                                     |  |      |                                          |  |        |                          |  | 23      |  
|Amalgamation 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 | )                        |  | 20,454  |  
|Stock options issued to consultants            |  |             |  |       |                                            |  |       |                          |  | 39     |                                     |  |      |                                          |  |        |                          |  | 39      |  
|Stock options issued to employees              |  |             |  |       |                                            |  |       |                          |  | 604    |                                     |  |      |                                          |  |        |                          |  | 604     |  
|Cost related to SEC registration               |  |             |  | (493   | )                                          |  |       |                          |  |       |                                     |  |      |                                          |  |        |                          |  | (493    | )
|Acquisition of Cadherin Biomedical Inc.        |  | 644          |  | 1,252  |                                            |  |       |                          |  |       |                                     |  |      |                                          |  |        |                          |  | 1,252   |  
|Cumulative translation adjustment              |  |             |  |       |                                            |  |       |                          |  |       |                                     |  | 1,392 |                                          |  |        |                          |  | 1,392   |  
|Net 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 consolidated financial statements)

(continued on next page)



7



---

##### Table of Contents

Adherex Technologies Inc.

(a development stage company)

Unaudited Consolidated Statements of
Stockholders Equity (Continued)

(U.S. dollars and shares in thousands, except per share information)



|                                             |  |              |  |        |                                            |  |                          |  |                                     |  |       |                                          |  |         |                          |  |         |  
|-------------------------------------------- |  | ------------ |  | ------ | ------------------------------------------ |  | ------------------------ |  | ----------------------------------- |  | ----- | ---------------------------------------- |  | ------- | ------------------------ |  | ------- | -
|                                             |  | Common Stock |  |        | Non-redeemablePreferred Stockof
Subsidiary |  | AdditionalPaid-inCapital |  | AccumulatedOtherComprehensiveIncome |  |       | DeficitAccumulatedDuringDevelopmentStage |  |         | TotalStockholdersEquity | 
|                                             |  |              |  |        |                                            | 
|                                             |  |              |  |        |                                            | 
|                                             |  | Number       |  | Amount |                                            |  |                          |  |                                     | 
|Balance at December 31, 2004                 |  | 36,535       |  | 34,362 |                                            |  |                         |  | 21,760                              |  | 1,243 |                                          |  | (40,711 | )                        |  | 16,654  |  
|Financing costs                              |  |             |  | (141   | )                                          |  |                         |  |                                    |  |      |                                          |  |        |                          |  | (141    | )
|Exercise of stock options                    |  | 15           |  | 25     |                                            |  |                         |  |                                    |  |      |                                          |  |        |                          |  | 25      |  
|Stock options issued to consultants          |  |             |  |       |                                            |  |                         |  | 276                                 |  |      |                                          |  |        |                          |  | 276     |  
|July private placement                       |  | 6,079        |  | 7,060  |                                            |  |                         |  | 1,074                               |  |      |                                          |  |        |                          |  | 8,134   |  
|Net loss                                     |  |             |  |       |                                            |  |                         |  |                                    |  |      |                                          |  | (13,871 | )                        |  | (13,871 | )
|                                             |  |              |  |        |                                            |  |                          |  |                                     |  |       |                                          |  |         |                          |  |         |  
|Balance at December 31, 2005                 |  | 42,629       |  | 41,306 |                                            |  |                         |  | 23,110                              |  | 1,243 |                                          |  | (54,582 | )                        |  | 11,077  |  
|Stock options issued to consultants          |  |             |  |       |                                            |  |                         |  | 100                                 |  |      |                                          |  |        |                          |  | 100     |  
|Stock options issued to employees            |  |             |  |       |                                            |  |                         |  | 491                                 |  |      |                                          |  |        |                          |  | 491     |  
|May private placement                        |  | 7,753        |  | 5,218  |                                            |  |                         |  | 822                                 |  |      |                                          |  |        |                          |  | 6,040   |  
|Net loss                                     |  |             |  |       |                                            |  |                         |  |                                    |  |      |                                          |  | (16,440 | )                        |  | (16,440 | )
|                                             |  |              |  |        |                                            |  |                          |  |                                     |  |       |                                          |  |         |                          |  |         |  
|Balance at December 31, 2006                 |  | 50,382       |  | 46,524 |                                            |  |                         |  | 24,523                              |  | 1,243 |                                          |  | (71,022 | )                        |  | 1,268   |  
|Stock options issued to consultants          |  |             |  |       |                                            |  |                         |  | 59                                  |  |      |                                          |  |        |                          |  | 59      |  
|Stock options issued to employees            |  |             |  |       |                                            |  |                         |  | 2,263                               |  |      |                                          |  |        |                          |  | 2,263   |  
|February financing                           |  | 75,759       |  | 17,842 |                                            |  |                         |  | 5,379                               |  |      |                                          |  |        |                          |  | 23,221  |  
|Exercise of warrants                         |  | 2,086        |  | 563    |                                            |  |                         |  | 131                                 |  |      |                                          |  |        |                          |  | 694     |  
|Net loss                                     |  |             |  |       |                                            |  |                         |  |                                    |  |      |                                          |  | (13,357 | )                        |  | (13,357 | )
|                                             |  |              |  |        |                                            |  |                          |  |                                     |  |       |                                          |  |         |                          |  |         |  
|Balance at December 31, 2007                 |  | 128,227      |  | 64,929 |                                            |  |                         |  | 32,355                              |  | 1,243 |                                          |  | (84,379 | )                        |  | 14,148  |  
|Stock options issued to consultants          |  |             |  |       |                                            |  |                         |  | 19                                  |  |      |                                          |  |        |                          |  | 19      |  
|Stock options issued to employees            |  |             |  |       |                                            |  |                         |  | 1,314                               |  |      |                                          |  |        |                          |  | 1,314   |  
|Net loss for the quarter                     |  |             |  |       |                                            |  |                         |  |                                    |  |      |                                          |  | (4,304  | )                        |  | (4,304  | )
|                                             |  |              |  |        |                                            |  |                          |  |                                     |  |       |                                          |  |         |                          |  |         |  
|Balance at March 31, 2008                    |  | 128,227      |  | 64,929 |                                            |  |                         |  | 33,688                              |  | 1,243 |                                          |  | (88,683 | )                        |  | 11,177  |  
|Stock options issued to consultants          |  |             |  |       |                                            |  |                         |  | 19                                  |  |      |                                          |  |        |                          |  | 19      |  
|Stock options issued to employees            |  |             |  |       |                                            |  |                         |  | 422                                 |  |      |                                          |  |        |                          |  | 422     |  
|Net loss for the quarter                     |  |             |  |       |                                            |  |                         |  |                                    |  |      |                                          |  | (3,442  | )                        |  | (3,442  | )
|                                             |  |              |  |        |                                            |  |                          |  |                                     |  |       |                                          |  |         |                          |  |         |  
|Balance at June 30, 2008                     |  | 128,227      |  | 64,929 |                                            |  |                         |  | 34,129                              |  | 1,243 |                                          |  | (92,125 | )                        |  | 8,176   |  
|Stock options issued to consultants          |  |             |  |       |                                            |  |                         |  | 27                                  |  |      |                                          |  |        |                          |  | 27      |  
|Stock options issued to employees            |  |             |  |       |                                            |  |                         |  | 280                                 |  |      |                                          |  |        |                          |  | 280     |  
|Unrealized loss on cash and cash equivalents |  |             |  |       |                                            |  |                         |  |                                    |  | (85   | )                                        |  |        |                          |  | (85     | )
|Net loss for the quarter                     |  |             |  |       |                                            |  |                         |  |                                    |  |      |                                          |  | (3,244  | )                        |  | (3,244  | )
|                                             |  |              |  |        |                                            |  |                          |  |                                     |  |       |                                          |  |         |                          |  |         |  
|Balance at September 30, 2008                |  | 128,227      |  | 64,929 |                                            |  |                         |  | 34,436                              |  | 1,158 |                                          |  | (95,369 | )                        |  | 5,154   |  
|                                             |  |              |  |        |                                            |  |                          |  |                                     |  |       |                                          |  |         |                          |  |         |  

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



8



---

##### Table of Contents

Adherex Technologies Inc.

(a development stage company)

Notes
to Unaudited Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)



|1. | Going Concern
|-- | -------------

These consolidated financial
statements have been prepared using generally accepted accounting principles (GAAP) in the United States (U.S.) of America that are applicable to a going concern which contemplates that Adherex Technologies Inc. will continue
in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business.

The Company is a development stage company and during the nine months ended September 30, 2008, has incurred a net loss of $10,990, has an accumulated deficit of $95,369 and has experienced negative cash flows from operations since
inception in the amount of $69,665. 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s management is considering all financial alternatives and will seek to raise additional funds for
operations from current stockholders, other potential investors, corporate partners, or other sources. This disclosure is not an offer to sell, nor a solicitation of an offer to buy the Companys securities. While the Company is striving to
achieve these plans, there is no assurance that such funding will be available or obtainable on favorable terms.

The Companys
ability to continue as a going concern is dependent on the raising of additional financial resources. If the Company is unable to obtain adequate financial resources, it could be forced to cease operations. 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. | Nature of Operations
|-- | --------------------

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 with a portfolio of product candidates under development for use in the treatment of cancer.



|3. | Significant Accounting Policies
|-- | -------------------------------

Basis of presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and
applicable Securities and Exchange Commission (SEC) regulations for interim financial information. 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 SEC in the Companys Annual Report on Form 10-K for the
year ended December 31, 2007. 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, 2007. These unaudited interim condensed consolidated financial statements have been prepared in U.S. dollars.

The
preparation of these unaudited interim condensed consolidated financial statements also conform in all material respects with generally accepted accounting principles in Canada (Canadian GAAP) except as described in Note 6 in the
unaudited interim condensed consolidated financial statements.

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 condensed consolidated financial statements include all normal and
recurring adjustments, considered necessary for the



9



---

##### Table of Contents

Adherex Technologies Inc.

(a development stage company)

Notes to Unaudited Condensed Consolidated
Financial Statements (Continued)

(U.S. dollars and shares in thousands, except per share information)



fair presentation of the Companys financial position at September 30, 2008 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
classifies its cash equivalents as available for sale. Such investments are recorded at fair value, determined based on quoted market prices, and unrealized gains and losses, which are considered to be temporary, are recorded as other
comprehensive income (loss) in a separate component of stockholders equity until realized.

The Company places its cash and cash
equivalents in high credit quality investments held by financial institutions in accordance with its investment policy designed to protect the principal investment. At September 30, 2008, the Company had $6,296 in money market investments which
typically have minimal risk. In recent months the financial markets have been volatile resulting in concerns regarding money market investments. As a result, on September 19, 2008 the U.S. Treasury announced a Temporary Guarantee Program which
insures money market investments on a temporary basis. The Companys money market manager has submitted the necessary documentation and paid the required fee to participate in the U.S. Treasurys Temporary Guarantee Program funds for the
Companys money market investments. The program will be in effect for an initial three month term and ensures that if a participating funds share value declines to below one dollar and the fund is liquidated, the U.S. Treasury would cover
any shortfall between the liquidated share price and one dollar. The Secretary of the U.S. Treasury has the option to extend the program until September 18, 2009. The Company has not experienced any loss or write down of its money market
investments for the three and nine month periods ended September 30, 2008 and 2007.

Common stock and warrants

At both September 30, 2008 and December 31, 2007, the Company had warrants outstanding to purchase common stock that were denominated in both
U.S. and Canadian dollars, which results in the Company having warrants outstanding that are denominated outside the Companys U.S. dollar functional currency.

In November 2007, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) issued EITF No. 07-5, Issue Summary No.1 Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entitys Own Stock (EITF 07-5). In June 2008, one of the conclusions reached under EITF 07-05 was a consensus-for-exposure 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 issues brought to the EITF for discussion related to how an entity should determine whether
certain instruments or embedded features are indexed to its own stock. This discussion included equity-linked financial instruments where the exercise price is denominated in a currency other than the issuers functional currency; such as the
Companys outstanding warrants to purchase common stock that are denominated in Canadian dollars. This conclusion reached under EITF 07-05 clarified the accounting treatment for these and certain other financial instruments as it related to
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 specifies that a contract that would otherwise meet the definition of a derivative under SFAS 133, issued or held
by the reporting entity that is both (a) indexed to its own stock and (b) classified in stockholders equity in its statement of financial position should not be considered a derivative financial instrument for purposes of applying
SFAS 133. As a result, the Companys outstanding warrants denominated in Canadian dollars are not considered to be indexed to its own stock and would therefore be treated as derivative financial instruments and recorded at their fair value as a
liability. EITF 07-05 will be effective for financial statements for fiscal years beginning after December 15, 2008 and earlier adoption is not permitted. Since the warrants to purchase common stock that are denominated in Canadian dollars
expire on December 19, 2008, EITF 07-5 is not expected to have a material impact on the Companys financial statements unless the Company issues further equity instruments denominated outside its functional currency.

New accounting pronouncements adopted in the year

In
September 2006, the FASB released SFAS No. 157, Fair Value Measurements (SFAS 157) which is effective for fiscal years beginning after November 15, 2007, which is the year ending December 31, 2008 for the
Company. SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. In November 2007, the FASB agreed to a one-year deferral of the effective date for
nonfinancial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis. The



10



---

##### Table of Contents

Adherex Technologies Inc.

(a development stage company)

Notes to Unaudited Condensed Consolidated
Financial Statements (Continued)

(U.S. dollars and shares in thousands, except per share information)



Company is currently assessing the deferred portion of the pronouncement. As of January 1, 2008, the Company has adopted SFAS 157 for the fair value
measurement of recurring items which has not had a material impact on the Companys financial statements.

In February 2007, the FASB,
issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilitiesincluding an amendment of FASB Statement No. 115, (SFAS 159), which is effective for fiscal years beginning after
November 15, 2007. SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value on a per instrument basis, with changes in fair value recognized in earnings each reporting period. This
will enable some companies to reduce volatility in reported earnings caused by measuring related assets and liabilities differently. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between
companies that choose different measurement attributes for similar types of assets and liabilities. The adoption of this statement did not have a material impact on the Companys financial statements.

In June 2007, the EITF, issued EITF No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities, (EITF 07-3), which provides guidance for up-front payments related to goods and services of research and development costs. EITF 07-3 is effective for fiscal years beginning after
December 15, 2007, which is the year ending December 31, 2008 for the Company. The adoption of EITF 07-3 did not have a material impact on the Companys financial statements.



|4. | Recent Accounting Pronouncements
|-- | --------------------------------

In March 2008,
the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No. 161 expands quarterly disclosure
requirements in SFAS No. 133 about an entitys derivative instruments and hedging activities. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. The Company is currently assessing the impact of SFAS
No. 161 on the disclosures in the consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting (SFAS No. 162). SFAS No. 162 indentifies the sources of accounting principles and the framework for selecting principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally accepted accounting principles in the U.S. SFAS No. 162 is effective 60 days following the SECs approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not expect the adoption of SFAS 162 to have a material impact on the Companys financial
statements.



|5. | Stockholders Equity
|-- | --------------------

Warrants to purchase common stock

At September 30, 2008, the Company had 7,567 investor warrants outstanding to purchase common stock priced in Canadian dollars
with an exercise price of CAD $2.15 that expire on December 19, 2008.

At September 30, 2008, the Company had the following
warrants outstanding to purchase common stock priced in U.S. dollars with a weighted average exercise price of $0.41 and a weighted average remaining life of 1.3 years:



|                    |  |                                       |  |                               |      |                 |                  
|------------------- |  | ------------------------------------- |  | ----------------------------- | ---- | --------------- | -----------------
|Warrant Description |  | NumberOutstanding atSeptember 30,2008 |  | Exercise PriceIn U.S. Dollars |      | Expiration Date
|Broker warrants     |  | 4,818                                 |  | $                             | 0.33 |                 | February 21, 2009
|Investor warrants   |  | 38,794                                |  | $                             | 0.40 |                 | February 21, 2010
|Investor warrants   |  | 2,326                                 |  | $                             | 0.97 |                 | May 7, 2010      
|                    |  |                                       |  |                               |      |                 |                  
|                    |  | 45,938                                |  |                               |      |                 |                  
|                    |  |                                       |  |                               |      |                 |                  



11



---

##### Table of Contents

Adherex Technologies Inc.

(a development stage company)

Notes to Unaudited Condensed Consolidated
Financial Statements (Continued)

(U.S. dollars and shares in thousands, except per share information)



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.

A maximum of 20,000 options (not including 700 options previously issued to the
Chief Executive Officer and specifically approved by the stockholders outside the plan) 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.

During the
nine month periods ended September 30, 2008 and 2007, the Company recognized total stock-based compensation expense of $2,081 and $1,826, respectively. During the three month periods ended September 30, 2008 and 2007, the Company
recognized total stock-based compensation expense of $307 and $389, respectively.

Valuation assumptions

The fair value of options granted in the nine month periods ended September 30, 2008 and 2007 were estimated using the Black-Scholes option-pricing
model, using the following weighted average assumptions:



|                        |  |                                |   |  |      |  
|----------------------- |  | ------------------------------ | - |  | ---- | -
|                        |  | Nine Months EndedSeptember 30, |  
|                        |  | 2008                           |   |  | 2007 |  
|Expected dividend       |  | 0                              | % |  | 0    | %
|Risk-free interest rate |  | 3.16                           | % |  | 4.75 | %
|Expected volatility     |  | 85.6                           | % |  | 77.1 | %
|Expected life in years  |  | 7                              |   |  | 7    |  

Stock option activity

The following is a summary of option activity for the nine month period ended September 30, 2008 for stock options denominated in Canadian dollars:



|                                  |  |                  |   |  |                               |     
|--------------------------------- |  | ---------------- | - |  | ----------------------------- | ----
|                                  |  | Number ofOptions |   |  | Weighted-averageExercisePrice
|Outstanding at December 31, 2007  |  | 2,939            |   |  | CAD$                          | 2.18
|Granted                           |  |                 |   |  |                               |    
|Exercised                         |  |                 |   |  |                               |    
|Forfeited/cancelled/expired       |  | (44              | ) |  | CAD$                          | 2.93
|                                  |  |                  |   |  |                               |     
|Outstanding at September 30, 2008 |  | 2,895            |   |  | CAD$                          | 2.16
|                                  |  |                  |   |  |                               |     

The following is a summary of option activity for the nine month period ended September 30,
2008 for stock options denominated in U.S. dollars:



|                                  |  |                  |   |  |                               |     
|--------------------------------- |  | ---------------- | - |  | ----------------------------- | ----
|                                  |  | Number ofOptions |   |  | Weighted-averageExercisePrice
|Outstanding at December 31, 2007  |  | 12,724           |   |  | $                             | 0.58
|Granted                           |  | 3,318            |   |  |                               | 0.37
|Exercised                         |  |                 |   |  |                               |    
|Forfeited/cancelled/expired       |  | (128             | ) |  |                               | 0.71
|                                  |  |                  |   |  |                               |     
|Outstanding at September 30, 2008 |  | 15,914           |   |  | $                             | 0.54
|                                  |  |                  |   |  |                               |     



12



---

##### Table of Contents

Adherex Technologies Inc.

(a development stage company)

Notes to Unaudited Condensed Consolidated
Financial Statements (Continued)

(U.S. dollars and shares in thousands, except per share information)



The weighted average fair value per share of options granted during the nine month periods ended
September 30, 2008 and 2007 was $0.29 and $0.43, respectively. There was no intrinsic value in stock options outstanding at September 30, 2008.



|6. | Canadian Generally Accepted Accounting Principles
|-- | -------------------------------------------------

The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP which conforms in all material respects to Canadian GAAP, except for the differences noted below and as more fully described
in Note 15 in the Companys annual audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2007. There are no differences in reported cash flow for the periods presented between
U.S. and Canadian GAAP.

Unaudited Interim Consolidated Balance SheetsCanadian GAAP:



|                                                 |  |                   |         |   |                  |   |         |  
|------------------------------------------------ |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                 |  | September 30,2008 |         |   | December 31,2007 |  
|Assets                                           |  |                   |         |   |                  |   |         |  
|Current assets                                   |  | $                 | 8,201   |   |                  | $ | 16,561  |  
|Property and equipment                           |  |                   | 153     |   |                  |   | 285     |  
|Leasehold inducements                            |  |                   | 304     |   |                  |   | 363     |  
|Acquired intellectual property rights (2)        |  |                   | 7,672   |   |                  |   | 9,028   |  
|                                                 |  |                   |         |   |                  |   |         |  
|Total assets                                     |  | $                 | 16,330  |   |                  | $ | 26,237  |  
|                                                 |  |                   |         |   |                  |   |         |  
|Liabilities                                      |  |                   |         |   |                  |   |         |  
|Current liabilities                              |  | $                 | 2,904   |   |                  | $ | 2,402   |  
|Deferred lease inducement                        |  |                   | 600     |   |                  |   | 659     |  
|Future income taxes (2)                          |  |                   | 2,096   |   |                  |   | 2,474   |  
|                                                 |  |                   |         |   |                  |   |         |  
|Total liabilities                                |  |                   | 5,600   |   |                  |   | 5,535   |  
|                                                 |  |                   |         |   |                  |   |         |  
|Stockholders equity                             |  |                   |         |   |                  |   |         |  
|Common stock                                     |  |                   | 64,891  |   |                  |   | 64,891  |  
|Contributed surplus                              |  |                   | 36,664  |   |                  |   | 34,583  |  
|Deficit accumulated during the development stage |  |                   | (96,590 | ) |                  |   | (84,622 | )
|Accumulated other comprehensive income           |  |                   | 5,765   |   |                  |   | 5,850   |  
|                                                 |  |                   |         |   |                  |   |         |  
|Total stockholders equity                       |  |                   | 10,730  |   |                  |   | 20,702  |  
|                                                 |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity       |  | $                 | 16,330  |   |                  | $ | 26,237  |  
|                                                 |  |                   |         |   |                  |   |         |  



13



---

##### Table of Contents

Adherex Technologies Inc.

(a development stage company)

Notes to Unaudited Condensed Consolidated
Financial Statements (Continued)

(U.S. dollars and shares in thousands, except per share information)



Unaudited Interim Consolidated Statement of OperationsCanadian GAAP:



|                                                                                                    |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                    |  | Three Months Ended September 30, |         |   | Nine Months Ended September 30, |  
|                                                                                                    |  | 2008                             |         |   | 2007                            |   |         | 2008 |  |   | 2007    |  
|Net loss in accordance with U.S. GAAP                                                               |  | $                                | (3,244  | ) |                                 | $ | (3,202  | )    |  | $ | (10,990 | ) |  | $ | (10,349 | )
|Adjustments to reconcile to Canadian GAAP:                                                          |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|License fee paid (2)                                                                                |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   | 1,000   |  
|License fee amortization (2)                                                                        |  |                                  | (36     | ) |                                 |   | (36     | )    |  |   | (108    | ) |  |   | (84     | )
|Acquired intellectual property rights amortization (2)                                              |  |                                  | (416    | ) |                                 |   | (452    | )    |  |   | (1,248  | ) |  |   | (1,356  | )
|Future income taxesintellectual property (2)                                                       |  |                                  | 126     |   |                                 |   | 165     |      |  |   | 378     |   |  |   | 495     |  
|                                                                                                    |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Net loss in accordance with Canadian GAAP                                                           |  | $                                | (3,570  | ) |                                 | $ | (3,525  | )    |  | $ | (11,968 | ) |  | $ | (10,294 | )
|                                                                                                    |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Other comprehensive loss, unrealized foreign exchange loss on cash and cash equivalents, net of tax |  |                                  | (85     | ) |                                 |   |        |      |  |   | (85     | ) |  |   |        |  
|                                                                                                    |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive loss                                                                                  |  | $                                | (3,655  | ) |                                 | $ | (3,525  | )    |  | $ | (12,053 | ) |  | $ | (10,294 | )
|                                                                                                    |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Net loss per share of common stock in accordance with Canadian GAAP, basic and diluted              |  | $                                | (0.03   | ) |                                 | $ | (0.03   | )    |  | $ | (0.09   | ) |  | $ | (0.09   | )
|                                                                                                    |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Weighted-average number of shares of common stock outstanding, basic and diluted                    |  |                                  | 128,227 |   |                                 |   | 128,227 |      |  |   | 128,227 |   |  |   | 112,643 |  
|                                                                                                    |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  

Notes to the Interim Condensed Consolidated Financial StatementsCanadian GAAP (unaudited):



| | 1. | Summary of Significant Accounting Policies
| | -- | ------------------------------------------

Recent accounting pronouncements

Effective January 1, 2008, the Company adopted the following Canadian Institute of
Chartered Accountants (CICA) accounting pronouncements:

Financial InstrumentsDisclosures, Section 3862, describes
the required disclosures related to the significance of financial instruments on the entitys financial position and performance, and the nature and extent of risks arising from financial instruments to which the entity is exposed and how the
entity manages those risks. This section replaces the disclosure standards of Section 3861, Financial InstrumentsDisclosure and Presentation.

Financial InstrumentsPresentation, Section 3863, establishes standards for presentation of financial instruments and non-financial derivatives. It replaces the presentation standards of Section 3861,
Financial Instruments  Disclosure and Presentation.

Capital Disclosures, Section 1535, establishes the standards for disclosing
information about the entitys capital and how it is managed to enable users of financial statements to evaluate the entitys objectives, policies and procedures for managing capital.

General Standards on Financial Presentation, Section 1400, has been amended to assess and disclose an entitys ability to continue as a going
concern.



| | 2. | Acquired Intellectual Property Rights
| | -- | -------------------------------------

Under U.S.
GAAP, the cost of acquired technology is charged to expense as in-process research and development (IPRD) when incurred if the feasibility of such technology has not been established and no future alternative use exists. Canadian GAAP
requires the capitalization and amortization of the costs of acquired technology. This difference increases the net loss from operations under U.S. GAAP in the year the technology is acquired and reduces the net loss under U.S. GAAP in subsequent
periods because there is no amortization expense.



14



---

##### Table of Contents

Adherex Technologies Inc.

(a development stage company)

Notes to Unaudited Condensed Consolidated
Financial Statements (Continued)

(U.S. dollars and shares in thousands, except per share information)



Under Canadian GAAP, a future tax liability is also recorded upon acquisition of the technology to
reflect the tax effect of the difference between the carrying amount of the technology in the financial statements and the tax basis of these assets, which is nil. As the intellectual property is amortized, the future tax liability is also reduced
to reflect the change in this temporary difference between the tax and accounting values of the assets. Under U.S. GAAP, because the technology is expensed immediately as IPRD, there is no difference between the tax basis and the financial statement
carrying value of the assets and therefore no future tax liability exists.

On March 1, 2007, the Company purchased all of
GlaxoSmithKlines (GSK) remaining options to buy back eniluracil under the license agreement for a fee of $1,000. Under U.S. GAAP, the cost of the license fee paid to GSK was charged to expense as IPRD since the feasibility of such
technology has not been established and no future alternative use exists. Canadian GAAP requires the capitalization and amortization of this acquired intellectual property. The intellectual property is being amortized over the estimated useful life
of seven years on a straight-line basis.



| | 3. | Financial Instruments and Risk Management
| | -- | -----------------------------------------

Financial instruments of the Company consist of cash, cash equivalents, cash pledged as collateral, accounts receivable, accounts payable, accrued liabilities and other current liabilities. Due to the relatively short periods to maturity of
these instruments, the carrying value approximates the fair value.

The Company is exposed to foreign currency risks as it conducts certain
clinical development activities in Canada, the United Kingdom, Europe and the Pacific Rim. The Company has not elected to employ the use of derivative instruments. The Company does hold Canadian dollars which are used to pay certain Canadian dollar
denominated obligations. At September 30, 2008 the Company held cash and cash equivalents totaling $1,227 and had current liabilities totaling $422 in Canadian dollars.



| | 4. | Management of Capital
| | -- | ---------------------

The Companys capital
consists of stockholders equity. The Company estimates its future capital requirements and manages its capital based on the current economic operating environment. The Companys objective is to ensure that the Company will continue as a
going concern so that it can develop its product candidates and maximize the value to stockholders.



15



---

##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

CAUTIONARY STATEMENT

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, which have been prepared in accordance with generally accounting principles, or GAAP in the United States
(U.S.). The preparation of these financial statements also conform in all material respects with generally accepted accounting principles in Canada, or Canadian GAAP, except as described in Note 6 in the interim condensed consolidated
financial statements and as more fully described in Note 15 in our annual consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2007. 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, some 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 Quarterly Report include, but are not limited to, statements with respect to (1) our anticipated sources and
uses of cash, cash equivalents and short-term investments; (2) our anticipated commencement dates, completion dates and results of clinical trials; (3) our efforts to pursue collaborations with the government, industry groups or other
companies; (4) our anticipated progress and costs of our clinical and preclinical research and development programs; (5) our corporate and development strategies; (6) our expected results of operations; (7) our anticipated levels
of expenditures; (8) our ability to protect our intellectual property; (9) the anticipated applications and efficacy of our drug candidates; (10) our ability to attract and retain key employees; and (10) the nature and scope of
potential markets for our drug candidates. All statements, other than statements of historical fact, included in this Quarterly Report that address activities, events or developments that we expect or anticipate will or may occur in the future 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 those discussed in this Quarterly Report in Part II: Other Information-Item 1A. Risk Factors. 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 with preclinical and clinical product candidates in development. The recent volatility in the financial markets has led to an overall tightening in the credit markets and a decline in the availability of capital. As a result,
we have implemented a prioritization initiative to focus our clinical development activities on the most attractive, nearer term value-generating opportunities. Accordingly, we have begun a process of postponing or, in certain cases, terminating
some of our ongoing or previously planned clinical development programs.

Eniluracil is a dihydropyrimidine dehydrogenase, or DPD,
inhibitor that we are developing to enhance the therapeutic value and effectiveness of 5-fluorouracil, or 5-FU, one of the worlds most widely used oncology agents. 5-FU is currently used intravenously as first or second-line therapy for a
variety of cancers, including colorectal, breast, gastric, head and neck, ovarian and basal cell cancer of the skin, among others. Eniluracil allows 5-FU to be given orally and was previously under development by GlaxoSmithKline, or GSK. GSK
advanced eniluracil into a comprehensive Phase III clinical program which did not produce positive clinical results and terminated the development. We developed a hypothesis as to why the GSK Phase III trials were not successful and licensed the
compound from GSK in July 2005. We successfully completed a proof of concept study using a modified dose and schedule of eniluracil and 5-FU. Using our modified dose and schedule, we believe that eniluracil will enhance and expand the therapeutic
spectrum of activity of 5-FU, reduce the occurrence of a disabling side effect known as hand foot syndrome and allow 5-FU to be given orally.

As part of our prioritization initiative, we have closed patient enrollment in our Phase I/II trial studying eniluracil in liver cancer in Asia. We have also temporarily suspended patient enrollment in our Phase I clinical trial which was
designed to determine the maximum tolerated dose, or MTD of oral 5-FU in combination with eniluracil. To date, a



16



---

##### Table of Contents

total of 38 patients have been enrolled in this clinical trial. We have also indefinitely postponed our planned Phase II clinical trial with eniluracil in
breast cancer. We have begun funding a new investigator-initiated clinical trial where eniluracil is being studied in a topical formulation for the prevention of hand-foot syndrome induced by capecitabine or Xeloda® in cancer patients. If we
establish a partnership which provides funding for eniluracil or we obtain additional funding from other sources, we may resume the suspended clinical studies for eniluracil.

ADH-1 is a small peptide molecule that selectively targets N-cadherin, a protein present on certain tumor cells and tumor blood vessels. We have
completed single-agent Phase I and Phase II studies for ADH-1 and based on encouraging data from our preclinical combination studies, we initiated a clinical program with ADH-1 in combination with three separate chemotherapies: ADH-1 + docetaxel
(Taxotere®), ADH-1 + carboplatin (a generically available agent), and ADH-1 + capecitabine (Xeloda®). In April 2008, we completed patient enrollment in that study and are in the process of evaluating the full dataset for presentation at an
upcoming scientific forum. Our Phase I study combining systemic ADH-1 in combination with regionally-infused melphalan for the treatment of melanoma has been expanded into a Phase IIB study. To date, we have enrolled 42 patients and are expecting to
complete patient enrollment by the end of November 2008. The patients will then be followed for the required three month period to assess their responses. We have indefinitely postponed our planned Phase III clinical trial for ADH-1 in combination
with melphalan. We have funded investigator-initiated clinical trials using ADH-1 in combination with chemotherapy and other biologic therapies in lung and pancreatic cancer.

STS is a chemoprotectant that has been shown in Phase I and Phase II clinical studies conducted by investigators at Oregon Health & Science
University, or OHSU, to reduce the disabling loss of hearing in patients treated with platinum-based anti-cancer agents. In 2007, the results of a Phase III trial conducted by the Netherlands Cancer InstituteAntoni van Leeuwenhoek Hospital, or
NCI-AVL, in adults with head and neck cancer treated with cisplatin were reported demonstrating that STS was able to protect against cisplatin-induced hearing loss without any apparent affect on the anticancer treatment efficacy of cisplatin two
years after treatment. In May 2008, we completed a license agreement with the NCI-AVL for the option to the exclusive use of the data from the completed Phase III trial. The agreement also includes an exclusive license to data from a planned
long-term study intended to provide follow-up on the hearing status, disease-free status and overall survival of patients from the completed Phase III trial. Our decision to exercise the option will be based on a quality assurance audit of the data.

We continue to enroll patients in our Phase III trial with International Childhood Liver Tumour Strategy Group, known as SIOPEL which is
expected to enroll approximately 100 pediatric patients with liver (hepatoblastoma) cancer at participating SIOPEL centers in up to 33 countries. The study is comparing the level of hearing loss associated with cisplatin alone versus the combination
of cisplatin plus STS, as well as the safety, tolerability and anti-tumor activity in both arms of the study. In October 2008, we begun enrolling patients into our Phase III trial with STS to prevent hearing loss in children receiving
cisplatin-based chemotherapy in collaboration with the Childrens Oncology Group, or COG. The goal of this Phase III study is to evaluate whether STS is an effective and safe means of preventing hearing loss in children receiving
cisplatin-based chemotherapy for newly diagnosed germ cell, liver (hepatoblastoma), brain (medulloblastoma), nerve tissue (neuroblastoma) or bone (osteosarcoma) cancers. This trial will enroll up to 120 patients over approximately three years in up
to 230 COG centers in the U.S., Canada, Australia and Europe. Both SIOPEL and COG fund the clinical activities for these studies and we provide the drug and drug distribution. We indefinitely postponed our planned STS Phase III study in adult
patients with head and neck cancer to evaluate hearing loss protection during platinum-based chemotherapy and radiation therapy. If we establish a partnership which provides funding for STS or we obtain additional funding from other sources, we may
reconsider this Phase III clinical trial.

Our prioritization initiative will focus primarily on our clinical activities and preclinical
support will be limited to those activities to support the ongoing clinical programs. Our preclinical portfolio includes: (1) novel peptides and small chemical molecule successors to ADH-1; (2) peptides and small molecules targeting the
cadherin-mediated metastatic spread of some cancers; and (3) peptides that combine both angiolytic and anti-angiogenic properties. We have synthesized small chemical molecules and peptide antagonists and agonists for a wide array of cadherin
adhesion molecules, with drug candidates available to move into future clinical development, particularly in the following areas:



| |  |  | Peptide N-cadherin antagonists. We have identified novel peptide molecules that differ in structure from ADH-1 and that have extended stability in plasma.
These molecules offer the potential advantages of second generation molecules with extended plasma half-life and enhanced potency compared to ADH-1.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Small molecule N-cadherin antagonists. We have identified a series of small chemical molecules that, in our preliminary studies, have displayed potent
N-cadherin antagonism activity. Unlike ADH-1 and the other peptide N-cadherin antagonists, these next generations molecules are not peptides and are smaller and simpler in structure. Compared to peptides, small chemical molecules are often active
after oral administration, typically more stable and have different potency and toxicity profiles.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



17



---

##### Table of Contents

| |  |  | OB-cadherin. OB-cadherin is reported to be involved in the metastatic spread of certain cancers to sites distant from the original tumor. Metastatic disease
is a major determinant of both a patients survival and quality-of-life. We have developed OB-cadherin peptide and small molecule antagonists with the potential to reduce or slow down the metastatic spread of tumors, such as breast and prostate
cancers.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | VE-cadherin. Like N-cadherin, VE-cadherin is important in the structural integrity of certain tumor blood vessels. We have developed peptide VE-cadherin
antagonists that have the potential to be synergistic with our N-cadherin antagonists.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition to our current
development efforts, we will continue to pursue collaborations with other pharmaceutical companies, governmental agencies, academic or corporate collaborators with respect to these molecules. A number 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 portfolio is supported by more than 50 issued U.S. patents and more
than 50 issued and pending patents worldwide that we either own or have licensed exclusively.

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. As of September 30, 2008, our deficit accumulated during development stage was $95.4 million.

Our operating expenses will depend on many factors, including the progress of our drug development efforts and the potential commercialization of our product candidates. 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 facilities
in the Research Triangle Park, North Carolina in support of our drug development programs.

Results of Operations

Nine months ended September 30, 2008 versus nine months ended September 30, 2007:



|                                      |  |                                   |         |   |   |     |   |                                   |   |         |   |  |     |        |  |   |      |  
|------------------------------------- |  | --------------------------------- | ------- | - | - | --- | - | --------------------------------- | - | ------- | - |  | --- | ------ |  | - | ---- | -
|In thousands of U.S. Dollars          |  | Nine MonthsEndedSeptember 30,2008 |         |   | % |     |   | Nine MonthsEndedSeptember 30,2007 |   |         | % |  |     | Change | 
|Revenue                               |  | $                                 |        |   |   |     |   |                                   | $ |        |   |  |     |        |  | $ |     |  
|                                      |  |                                   |         |   |   |     |   |                                   |   |         |   |  |     |        |  |   |      |  
|Operating expenses:                   |  |                                   |         |   |   |     |   |                                   |   |         |   |  |     |        |  |   |      |  
|Research and development              |  |                                   | 8,768   |   |   | 78  | % |                                   |   | 8,293   |   |  | 75  | %      |  |   | 475  |  
|General and administration            |  |                                   | 2,478   |   |   | 22  | % |                                   |   | 2,717   |   |  | 25  | %      |  |   | (239 | )
|                                      |  |                                   |         |   |   |     |   |                                   |   |         |   |  |     |        |  |   |      |  
|Total operating expenses              |  |                                   | 11,246  |   |   | 100 | % |                                   |   | 11,010  |   |  | 100 | %      |  |   | 236  |  
|                                      |  |                                   |         |   |   |     |   |                                   |   |         |   |  |     |        |  |   |      |  
|Loss from operations                  |  |                                   | (11,246 | ) |   |     |   |                                   |   | (11,010 | ) |  |     |        |  |   | (236 | )
|                                      |  |                                   |         |   |   |     |   |                                   |   |         |   |  |     |        |  |   |      |  
|Interest income                       |  |                                   | 256     |   |   |     |   |                                   |   | 661     |   |  |     |        |  |   | (405 | )
|                                      |  |                                   |         |   |   |     |   |                                   |   |         |   |  |     |        |  |   |      |  
|Net loss and total comprehensive loss |  | $                                 | (10,990 | ) |   |     |   |                                   | $ | (10,349 | ) |  |     |        |  | $ | (641 | )
|                                      |  |                                   |         |   |   |     |   |                                   |   |         |   |  |     |        |  |   |      |  



| |  |  | Total operating expense increased in the nine months ended September 30, 2008, as compared to the same period in 2007 primarily due to an increase in R&D
expense associated with $0.2 million in milestone expense relating to our agreement with McGill University, expense associated with our ADH-1 Phase I/II melanoma study and expense associated with our eniluracil clinical studies that were offset by
lower G&A expense in the nine months ended September 30, 2008 as compared to the prior period. The decrease in G&A expense was due to lower salary expense from reduced headcount and no bonus expense in the nine months ended
September 30, 2008, as compared to the same period in 2007. Operating expense also included non-cash stock-based compensation
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18



---

##### Table of Contents

| | expense of $2.1 million in the nine months ended September 30, 2008, as compared to $1.8 million for the same period in 2007.
| | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in interest income in the nine months ended September 30, 2008, as compared to the same period in 2007, is due to less cash on hand due to funding
our operations during the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007. In addition, interest rates were lower in the nine months ended September 30, 2008, as compared to the same period
in 2007.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Three months ended September 30, 2008 versus three months ended September 30, 2007:



|                                      |  |                                    |        |   |   |     |   |                                    |   |        |   |  |     |        |  |   |      |  
|------------------------------------- |  | ---------------------------------- | ------ | - | - | --- | - | ---------------------------------- | - | ------ | - |  | --- | ------ |  | - | ---- | -
|In thousands of U.S. Dollars          |  | Three MonthsEndedSeptember 30,2008 |        |   | % |     |   | Three MonthsEndedSeptember 30,2007 |   |        | % |  |     | Change | 
|Revenue                               |  | $                                  |       |   |   |     |   |                                    | $ |       |   |  |     |        |  | $ |     |  
|                                      |  |                                    |        |   |   |     |   |                                    |   |        |   |  |     |        |  |   |      |  
|Operating expenses:                   |  |                                    |        |   |   |     |   |                                    |   |        |   |  |     |        |  |   |      |  
|Research and development              |  |                                    | 2,821  |   |   | 86  | % |                                    |   | 2,490  |   |  | 72  | %      |  |   | 331  |  
|General and administration            |  |                                    | 478    |   |   | 14  | % |                                    |   | 966    |   |  | 28  | %      |  |   | (488 | )
|                                      |  |                                    |        |   |   |     |   |                                    |   |        |   |  |     |        |  |   |      |  
|Total operating expenses              |  |                                    | 3,299  |   |   | 100 | % |                                    |   | 3,456  |   |  | 100 | %      |  |   | (157 | )
|                                      |  |                                    |        |   |   |     |   |                                    |   |        |   |  |     |        |  |   |      |  
|Loss from operations                  |  |                                    | (3,299 | ) |   |     |   |                                    |   | (3,456 | ) |  |     |        |  |   | 157  |  
|                                      |  |                                    |        |   |   |     |   |                                    |   |        |   |  |     |        |  |   |      |  
|Interest income                       |  |                                    | 55     |   |   |     |   |                                    |   | 254    |   |  |     |        |  |   | (199 | )
|                                      |  |                                    |        |   |   |     |   |                                    |   |        |   |  |     |        |  |   |      |  
|Net loss and total comprehensive loss |  | $                                  | (3,244 | ) |   |     |   |                                    | $ | (3,202 | ) |  |     |        |  | $ | (42  | )
|                                      |  |                                    |        |   |   |     |   |                                    |   |        |   |  |     |        |  |   |      |  



| |  |  | Total operating expenses decreased in the three months ended September 30, 2008, as compared to the same period in 2007, primarily due to lower G&A expense
that were offset by higher R&D expense in the three months ended September 30, 2008, as compared to the prior period. The decrease in G&A expense was due to lower salary expense from reduced headcount and no bonus expense in the three
months ended September 30, 2008, as compared to the same period in 2007. Operating expense also included non-cash stock-based compensation expense of $0.3 million in the three months ended September 30, 2008, as compared to $0.4 million
for the same period in 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in interest income in the three months ended September 30, 2008, as compared to the same period in 2007 is due to less cash on hand due to funding
our operations during the three months ended September 30, 2008 as compared the three months ended September 30, 2007. In addition, interest rates were lower in the three months ended September 30, 2008 as compared to the same period
in 2007.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Quarterly Information

The following table presents selected consolidated financial data for each of the last eight quarters through September 30, 2008, as prepared under U.S. GAAP (U.S. dollars in thousands, except per share
information):



|                   |  |                        |        |   |                                           |   |       |  
|------------------ |  | ---------------------- | ------ | - | ----------------------------------------- | - | ----- | -
|Period             |  | Net Loss forthe Period |        |   | Basic and DilutedNet Loss perCommon
Share |  
|December 31, 2006  |  | $                      | (4,761 | ) |                                           | $ | (0.09 | )
|March 31, 2007     |  | $                      | (3,968 | ) |                                           | $ | (0.05 | )
|June 30, 2007      |  | $                      | (3,179 | ) |                                           | $ | (0.03 | )
|September 30, 2007 |  | $                      | (3,202 | ) |                                           | $ | (0.02 | )
|December 31, 2007  |  | $                      | (3,008 | ) |                                           | $ | (0.02 | )
|March 31, 2008     |  | $                      | (4,304 | ) |                                           | $ | (0.03 | )
|June 30, 2008      |  | $                      | (3,442 | ) |                                           | $ | (0.03 | )
|September 30, 2008 |  | $                      | (3,244 | ) |                                           | $ | (0.03 | )



19



---

##### Table of Contents

Liquidity and Capital Resources



|                                                 |  |                   |         |   |                  |   |         |  
|------------------------------------------------ |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|In thousands of U.S. dollars                     |  | September 30,2008 |         |   | December 31,2007 |  
|Selected Asset and Liability Data:               |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                        |  | $                 | 7,882   |   |                  | $ | 16,162  |  
|Working capital                                  |  |                   | 5,297   |   |                  |   | 14,159  |  
|                                                 |  |                  
|Selected Stockholders Equity Data:              |  |                   |         |   |                  |   |         |  
|Common stock                                     |  | $                 | 64,929  |   |                  | $ | 64,929  |  
|Deficit accumulated during the development stage |  |                   | (95,369 | ) |                  |   | (84,379 | )
|Total stockholders equity                       |  |                   | 5,154   |   |                  |   | 14,148  |  

We have financed our operations since inception on September 3, 1996 through the sale of
equity and debt securities and have raised gross proceeds totaling approximately $86.0 million through September 30, 2008. We have incurred net losses and negative cash flow from operations each year, and we had an accumulated deficit of $95.4
million as of September 30, 2008. 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, royalties, milestone payments or other revenue.

The net cash used in operating activities totaled $8.3 million for the nine months ended September 30, 2008, as compared to $11.1 million in the
same period during 2007. The decrease is primarily due to the $1.0 million payment to GSK in March 2007 and increased cash payments to vendors during the first quarter of 2007 from our improved liquidity as a result of our February 2007 equity
offering. At September 30, 2008 our working capital decreased by approximately $8.9 million as compared to December 31, 2007 due to the funding of general corporate operations.

We believe that our current cash and cash equivalents of $7.9 million will be sufficient to satisfy our anticipated capital requirements to September 30, 2009. Our prioritization initiative is designed to focus
on clinical programs that we believe represent the most attractive, nearer term value-generating opportunities and to conserve our existing financial resources. Our projections of further capital requirements are subject to substantial uncertainty.
Our working capital requirements may fluctuate in future periods depending upon numerous factors, including: results of our research and development activities; progress or lack of progress in our preclinical studies or clinical trials; our drug
substance requirements to support clinical programs; our ability to enter into collaborations that provide us with funding, up-front payments, milestone or other payments; our ability to obtain additional financial resources; change in the focus,
direction, or costs of our research and development programs; the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing our patent claims; competitive and technological advances; the potential need to develop,
acquire or license new technologies and products; our business development activities; new regulatory requirements implemented by regulatory authorities; the timing and outcome of any regulatory review process; and commercialization activities, if
any.

To finance our operations beyond September 30, 2009, 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. We are actively considering all
strategic alternatives to raise additional funds for our development programs and operations, including a particular focus on partnerships or other strategic business collaborations. While we are striving to achieve these plans and are engaged in
discussions with third parties regarding collaborations, funding via collaborations might not be available or obtainable on favorable terms. In the interim, the current initiative to better align our development priorities with the financial
resources we have available should allow us to extend our cash reserves and achieve some near term value-enhancing milestones. Particularly given current market condition, there can be no assurance that we will be able to raise the necessary capital
or that such funding will be available on favorable terms or at all. As a result, substantial doubt exists that we will be able to finance our operations beyond September 30, 2009.



20



---

##### Table of Contents

Outstanding Share Information

The outstanding share data for our company as of September 30, 2008 (in thousands):



|              |  |                  
|------------- |  | -----------------
|              |  | September 30,2008
|Common shares |  | 128,227          
|Warrants      |  | 53,505           
|Stock options |  | 18,809           
|              |  |                  
|Total         |  | 200,541          
|              |  |                  

Financial Instruments

At September 30, 2008, we held cash and cash equivalents of $7.9 million, which consisted primarily of highly liquid money market funds.

We invest 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, 2008, we had $6.3 million in money market investments which typically have minimal risk. In recent months however, the financial markets have been volatile resulting in concerns regarding
money market investments. As a result, on September 19, 2008 the U.S. Treasury announced a Temporary Guarantee Program which insures money market investments on a temporary basis. Our money market manager has submitted the necessary
documentation and paid the required fee to participate in the U.S. Treasurys Temporary Guarantee Program for money market funds for our money market investments. The program will be in effect for an initial three month term and ensures that if
a participating funds share value declines to below one dollar and the fund is liquidated, the U.S. Treasury would cover any shortfall between the liquidated share price and one dollar. The Secretary of the U.S. Treasury has the option to
extend the program until September 18, 2009. We have not experienced any loss or write down of our money market investments for the three and nine month periods ended September 30, 2008 and 2007.

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 trade or
speculative nature.

We classify investments with original maturities at the date of purchase greater than three months which mature at or
less than twelve months as current. We carry investments at their fair value with unrealized gains and losses included in other comprehensive income (loss); however we have not held any instruments that were classified as short term investments
during the periods presented in this Quarterly Report.

Off-Balance Sheet Arrangements

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

Contractual Obligations and Commitments

Since our inception, inflation has not had a material effect
on our operations. We had no material commitments for capital expenses as of September 30, 2008.



21



---

##### Table of Contents

The following table represents our contractual obligations and commitments at September 30, 2008 (in
thousands of U.S. dollars):



|                                                                         |  |                 |       |          |   |          |  |                  |    |       |   |   |  |   |      
|------------------------------------------------------------------------ |  | --------------- | ----- | -------- | - | -------- |  | ---------------- | -- | ----- | - | - |  | - | -----
|                                                                         |  | Less than1 year |       | 1-3years |   | 4-5years |  | More than 5years |    | Total
|Englert Lease (1)                                                        |  | $               | 104   |          | $ | 107      |  | $                |   |       | $ |  |  | $ | 211  
|Maplewood Lease (2)                                                      |  |                 | 369   |          |   | 1,141    |  |                  |   |       |   |  |  |   | 1,510
|Drug purchase commitments (3)                                            |  |                 | 228   |          |   | 180      |  |                  | 31 |       |   |  |  |   | 439  
|McGill License (4)                                                       |  |                 | 604   |          |   | 935      |  |                  |   |       |   |  |  |   | 1,539
|OHSU License (5)                                                         |  |                 |      |          |   |         |  |                  |   |       |   |  |  |   |     
|GSK License (6)                                                          |  |                 |      |          |   |         |  |                  |   |       |   |  |  |   |     
|Netherlands Cancer InstituteAntoni van Leeuwenhoek Hospital License (7) |  |                 | 225   |          |   |         |  |                  |   |       |   |  |  |   | 225  
|                                                                         |  |                 |       |          |   |          |  |                  |    |       |   |   |  |   |      
|Total                                                                    |  | $               | 1,530 |          | $ | 2,363    |  | $                | 31 |       | $ |  |  | $ | 3,924
|                                                                         |  |                 |       |          |   |          |  |                  |    |       |   |   |  |   |      



|(1) | In April 2004, we entered into a lease for facilities in Durham, North Carolina. Amounts shown assume the maximum amounts due under the lease. In July 2008, we entered into an
agreement with another company to sublease this facility.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | In August 2005, we entered into a lease for new office and laboratory facilities in Durham, North Carolina. Amounts shown assume the maximum amounts due under the lease.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(4) | Amounts shown in the table represent the maximum amounts for additional mutually agreed upon research support. Royalty payments, which are contingent on sales, are not included.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Under the license agreement with OHSU for STS, we are required to pay specified amounts in the event that we complete certain Adherex-initiated clinical trials. For example, upon
the successful completion of the Phase III clinical trial with SIOPEL or COG, we may become responsible for a payment to OHSU of up to $0.5 million. In addition, under the license agreement upon the first commercial sale of STS we may become
responsible for another payment to OHSU of up to $0.3 million. Royalty payments, which are contingent on sales, are not included.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Royalty and milestone payments that we may be required to pay, which are contingent on sales or progress of clinical trials, are not included. Under the terms of the Development and
License Agreement with GSK, if we file a New Drug Application, or NDA, with the Food and Drug Administration, or the FDA, we may be required to pay a development milestone of $5.0 million to GSK. Depending upon whether the NDA is approved by the FDA
and whether eniluracil becomes a commercial success, we may be required to pay up to an additional $70.0 million in development and sales milestones for the initial approved indication, plus double-digit royalties based on annual net sales. We may
also be required to pay up to $15.0 million to GSK for each FDA-approved indication.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | In May 2008, we completed a license agreement with the Netherlands Cancer Institute - Antoni van Leeuwenhoek Hospital for an option to exclusive use of data from a completed Phase
III trial with STS to prevent hearing loss in adults with head and neck cancer. The payment amounts shown in the table above are contingent upon a quality assurance audit of the data from the study. Once the quality assurance audit is completed, we
will assess the benefit of the data and determine if we want to exercise our option to obtain exclusive use of the data.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Research and
Development

Our research and development efforts have been focused on the development of cancer therapeutics and our cadherin
technology platform and currently include ADH-1, eniluracil, STS and various cadherin-based preclinical programs.

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. Research and development issues are reviewed internally by our executive management and supporting scientific staff. Major development issues are presented to the members of our
Scientific and Clinical Advisory Board for discussion and review. We have limited financial resources and may have to discontinue the development of some on-going programs. In addition, we are pursuing relationships with clinical institutions to
conduct investigator initiated clinical



22



---

##### Table of Contents

studies. Such investigator initiated clinical studies might provide us valuable additional data with respect to our product candidates.

Research and development expenses totaled $8.8 million and $8.3 million for the nine months ended September 30, 2008 and 2007, respectively.

Our product candidates are in various stages of development and still require significant, time-consuming and costly research and
development, testing and regulatory approvals. We will require significant additional resources to complete the development of our product candidates. We currently have limited financial resources and if we are unable to secure additional funding,
we may have to delay or discontinue the development of some of our on-going programs. In developing our product candidates, we are also subject to the risks of failure that are inherent in the development of products based on innovative
technologies. Our product candidates might be ineffective or toxic, or may 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.

Except as set out below 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, 2007.

New accounting pronouncements adopted in the year

In
September 2006, the Financial Accounting Standards, or FASB, released SFAS No. 157, Fair Value Measurements (SFAS 157) which is effective for fiscal years beginning after November 15, 2007, which for us is the
year ending December 31, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. In November 2007, the FASB agreed to a one-year deferral of the
effective date for nonfinancial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis. We are currently assessing the deferred portion of the pronouncement. As of January 1, 2008, we adopted SFAS 157 for
the fair value measurement of recurring items which has not had a material impact on our financial statements.

In February 2007, the FASB,
issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilitiesincluding an amendment of FASB Statement No. 115, (SFAS 159), which is effective for fiscal years beginning after
November 15, 2007, which for us is the year ending December 31, 2008. SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value on a per instrument basis, with changes in fair
value recognized in earnings each reporting period. This will enable some companies to reduce volatility in reported earnings caused by measuring related assets and liabilities differently. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The adoption of this statement did not have a material impact on our financial statements.

In June 2007, the EITF, issued EITF No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in
Future Research and Development Activities, (EITF 07-3), which provides guidance for up-front payments related to goods and services of research and development costs. EITF 07-3 is effective for fiscal years beginning after
December 15, 2007, which for us is the year ending December 31, 2008. The adoption of EITF 07-3 did not have a material impact on our financial statements.



23



---

##### Table of Contents

Common Stock and Warrants

Common stock is recorded as the net proceeds received on issuance after deducting all share issuance costs and the value of investor warrants. Warrants are recorded at fair value and are deducted from the proceeds of
common stock and recorded on the consolidated statements of stockholders equity as additional paid-in capital.

At September 30,
2008, we had warrants to purchase common stock that were denominated in both U.S. and Canadian dollars, which results in our having warrants outstanding that are denominated outside its U.S. dollar functional currency.

In November 2007, the FASB, Emerging Issues Task Force, or EITF, issued EITF No. 07-5, Issue Summary No.1 Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entitys Own Stock (EITF 07-5). In June 2008, one of the conclusions reached under EITF 07-05 was a consensus-for-exposure 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 issues brought to the EITF for discussion related to how an entity should determine whether
certain instruments or embedded features are indexed to its own stock. This discussion included equity-linked financial instruments where the exercise price is denominated in a currency other than the issuers functional currency; such as our
outstanding warrants to purchase common stock that are denominated in Canadian dollars. This conclusion reached under EITF 07-05 clarified the accounting treatment for these and certain other financial instruments as it related to FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 specifies that a contract that would otherwise meet the definition of a derivative under SFAS 133, issued or held by the
reporting entity that is both (a) indexed to its own stock and (b) classified in stockholders equity in its statement of financial position should not be considered a derivative financial instrument for purposes of applying SFAS 133.
As a result, our outstanding warrants denominated in Canadian dollars are not considered to be indexed to our stock and would therefore be treated as derivative financial instruments and recorded at their fair value as a liability. EITF 07-05 will
be effective for financial statements for fiscal years beginning after December 15, 2008 and earlier adoption is not permitted. Since the warrants to purchase common stock that are denominated in Canadian dollars expire on December 19,
2008, EITF 07-5 is not expected to have an effect on our financial statements unless we issue further equity instruments denominated outside our functional currency.

Recent Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, Disclosures
About Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 or SFAS No. 161. SFAS No. 161 expands quarterly disclosure requirements in SFAS No. 133 about an entitys derivative
instruments and hedging activities. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. We are currently assessing the impact of SFAS No. 161 on our financial statements.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting, or SFAS No. 162. SFAS No. 162
indentifies the sources of accounting principles and the framework for selecting principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS No. 162 is
effective 90 days following the SECs approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not
expect the adoption of SFAS 162 to have a material impact on our financial statements.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

Money Market Investments

We are subject to increased risk associated with our cash, cash equivalents and investment
portfolio due to the recent bank and financial institution failures in the U.S. We maintain an investment portfolio consisting of U.S. or Canadian obligations and bank securities and money market investments in compliance with our investment policy.
We do not hold any mortgaged-backed investments in our investment portfolio. 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



24



---

##### Table of Contents

concentrations of securities by issuer and maximum-weighted average time to maturity of twelve months. This policy applies to all of our financial resources.

At September 30, 2008, we had $6.3 million in money market investments which typically have minimal risk. In recent months the
financial markets have been volatile resulting in concerns regarding money market investments. As a result, on September 19, 2008 the U.S. Treasury announced a Temporary Guarantee Program which insures money market investments on a temporary
basis. Our money market manager has submitted the necessary documentation and paid the required fee to participate in the U.S. Treasurys Temporary Guarantee Program for our money market investments. The program will be in effect for an initial
three month term and ensures that if a participating fund share value declines to below one dollar and the fund is liquidated, the U.S. Treasury would cover any shortfall between the liquidated share price and one dollar. The Secretary of the U.S.
Treasury has the option to extend the program until September 18, 2009. To date, we have not experienced any loss or write down of any of our money market investments.

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. Our risk associated with fluctuating interest rates on our investments is minimal and not significant to the results of operations. We currently do not use interest rate derivative instruments to manage exposure to interest
rate changes. As the main purpose is research and development, we have chosen to avoid investments of a trade or speculative nature.

Foreign Currency
Exposure

We are subject to foreign currency risks as we conduct certain clinical development activities in Canada, the United Kingdom,
Europe and the Pacific Rim. To date, we have not employed the use of derivative instruments; however, we do hold Canadian dollars which we use to pay certain clinical development activities conducted in Canada and research, license obligations
payable to McGill and other corporate obligations. We monitor our commitments in Euros, British pounds, and Pacific Rim currencies and may utilize derivatives in the future to minimize our foreign currency risks. At September 30, 2008 we held
cash and cash equivalents totaling $1,227 and had current liabilities totaling $441 in Canadian dollars.



|Item 4. | Controls and Procedures
|------- | -----------------------

Our management,
with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended or the Exchange Act) as of September 30, 2008. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures are
effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods.

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in
connection with the evaluation of our internal control over financial reporting that occurred during the three month period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

PART II: OTHER INFORMATION



|Item 1A. | Risk Factors.
|-------- | -------------

An investment in our common
stock involves a significant risk of loss. You should carefully read this entire report and should give particular attention to the following risk factors. You should recognize that other significant risks may arise in the future, which we cannot
reasonably foresee at this time. Also, the risks that we now foresee might affect us to a greater or different degree than currently expected. There are a number of important factors that could cause our actual results to differ materially from
those expressed or implied by any of our forward-looking statements in this report. These factors include, without limitation, the risk factors listed below and other factors presented throughout this report and any other documents filed by us with
the SEC and the Ontario Securities Commission or the OSC.



25



---

##### Table of Contents

Risks Related to Our Business

We will need to raise substantial additional funds in the future to continue our operations.

We believe that our
current cash and cash equivalents will be sufficient to satisfy our anticipated capital requirements to September 30, 2009. Our projections of our capital requirements through September 30, 2009 and beyond are subject to
substantial uncertainty. Our current and future working capital requirements may change depending upon numerous factors, including: our ability to enter into collaborations that provide us with funding, up-front payments, milestones or
other payments, results of our research and development activities; progress or lack of progress in our preclinical studies or clinical trials; our drug substance requirements to support clinical programs; changes in the focus, direction, or costs
of our research and development programs; the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing our patent claims; competitive and technological advances; the potential need to develop, acquire or license new
technologies and products; our business development activities; new regulatory requirements implemented by regulatory authorities; the timing and outcome of any regulatory review process; and our commercialization activities, if any. Any such change
could mean additional capital may be required earlier than September 30, 2009 or more capital than we had anticipated thereafter may be required. To finance our operations beyond September 30, 2009, or earlier if necessary, 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. We might not be able to raise the necessary capital or such funding may not be available on favorable terms or at all. If we cannot obtain adequate funding we might be required to delay, scale back or eliminate
certain research and development studies, consider business combinations or shut down some, or all of our operations.

We have a history of significant
losses and have had no revenues to date through the sale of our products. If we do not generate significant revenues, we will not achieve profitability.

To date, we have been engaged primarily in research and development activities. We have had no revenues to date through the sale of our products, and we do not expect to have significant revenues until we are able to
either 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 have incurred significant
operating losses every year since our inception on September 3, 1996. We have experienced net losses of approximately $11.0 million for the nine months ended September 30, 2008, $13.4 million for the fiscal year ended December 31,
2007, $16.4 million for the fiscal year ended December 31, 2006 and $13.9 million for the fiscal year ended December 31, 2005. As of September 30, 2008, we had an accumulated deficit of $95.4 million. We anticipate incurring
substantial additional losses over the next several years due to the need to spend substantial amounts on our current clinical trials, anticipated research and development activities, and general and administrative expenses, among other factors. We
have not commercially introduced any product and our product candidates are in varying stages of development and testing. Our ability to attain profitability will depend upon our ability to develop products that are safe, effective and commercially
viable, to obtain regulatory approval for the manufacture and sale of our product candidates and to license or otherwise market our product candidates successfully. Any revenues generated from such products, assuming they are successfully developed,
marketed and sold, may not be realized for a number of years. We may never achieve or sustain profitability on an ongoing basis.

If we do not maintain
current or enter into new collaborations with other companies, we might not successfully develop our product candidates or generate sufficient revenues to expand our business.

We currently rely on scientific and research and development collaboration arrangements with academic institutions and other third party collaborators,
including without limitation our Development and License Agreement for eniluracil with GSK, a general collaboration agreement with McGill University for ADH-1 and other related compounds, and an exclusive worldwide license from OHSU for STS.

The agreements with McGill and OHSU are terminable by either party in the event of an uncured breach by the other party. We may also
terminate our agreement with McGill and OHSU at any time upon prior written notice of specified durations to the licensor. Termination of any of our collaborative arrangements could materially adversely affect our business. In addition, our
collaborators might not perform as agreed in the future.

In addition to the collaborative arrangements above, we have received approval
from the Drug Development Group of the U.S. National Cancer Institutes Division of Cancer Treatment and Diagnosis, or NCI, for Level III collaboration for the clinical development of our lead biotechnology compound, ADH-1. The NCI has no
obligation to sponsor future clinical trials of ADH-1 or perform any preclinical work for us and may terminate the collaboration at any time, as may we. To date, the NCI has not commenced any clinical studies using ADH-1. The success of our business
strategy will be dependent on our ability to maintain current and enter into new collaborations with other industry participants that advance the development and clinical testing of, regulatory approval for and



26



---

##### Table of Contents

commercialization of our product candidates, as well as collaborations that provide us with funding, such as up-front payments, licensing fees, milestone
payments, royalties or otherwise. We may not be successful in maintaining current collaborations or establishing any future collaborations and any collaborations we have or may establish may not lead to the successful development of our product
candidates.

Since we conduct a significant portion of our research and development through collaborations, our success may depend
significantly on the performance of such collaborators, as well as any future collaborators. Collaborators might not commit sufficient resources to the research and development or commercialization of our product candidates. Economic or
technological advantages of products being developed by others, or other factors could lead our collaborators to pursue other product candidates or technologies in preference to those being developed in collaboration with us. The commercial
potential of, development stage of and projected resources required to develop our drug candidates will affect our ability to maintain current collaborations or establish new collaborators. There is a risk of dispute with respect to ownership of
technology developed under any collaboration. Our management of any collaboration will require significant time and effort as well as an effective allocation of resources. We may not be able to simultaneously manage a large number of collaborations.

Our product candidates are still in development. Due to the long, expensive and unpredictable drug development process, we might not ever successfully
develop and commercialize any of our product candidates.

In order to achieve profitable operations, we, alone or in collaboration with
others, must successfully develop, manufacture, introduce and market our product candidates. The time necessary to achieve market success for any individual product is long and uncertain. Our product candidates and research programs are in various
stages of clinical development and require significant, time-consuming and costly research, testing and regulatory clearances. In developing our product candidates, we are subject to risks of failure that are inherent in the development of
therapeutic products based on innovative technologies. For example, our product candidates might be ineffective, as eniluracil was shown to be in earlier clinical trials conducted by GSK, or may be overly toxic, or otherwise might fail to receive
the necessary regulatory clearances. The results of preclinical and initial clinical trials are not necessarily predictive of future results. Our product candidates might not be economical to manufacture or market or might not achieve market
acceptance. In addition, third parties might hold proprietary rights that preclude us from marketing our product candidates or others might market equivalent or superior products.

We must conduct human clinical trials to assess our product candidates. If these trials are delayed or are unsuccessful, our development costs will significantly increase and our business prospects may suffer.

Before obtaining regulatory approvals for the commercial sale of our product candidates, we must demonstrate, through preclinical studies
with animals and clinical trials with humans, that our product candidates are safe and effective for use in each target indication. To date, we have performed only limited clinical trials, and we have only done so with some of our product
candidates. Much of our testing has been conducted on animals or on human cells in the laboratory, and the benefits of treatment seen in animals may not ultimately be obtained in human clinical trials. As a result, we will need to perform
significant additional research and development and extensive preclinical and clinical testing prior to any application for commercial use. We may suffer significant setbacks in clinical trials, and the trials may demonstrate our product candidates
to be unsafe or ineffective. We may also encounter problems in our clinical trials that will cause us to delay, suspend or terminate those clinical trials, which would increase our development costs and harm our financial results and commercial
prospects. Identifying and qualifying patients to participate in clinical trials of our potential products is critically important to our success. The timing of our clinical trials depends on the speed at which we can recruit patients to participate
in testing our product candidates. We have experienced delays in some of our clinical trials, including a significant delay in the activation of our STS Phase III study with COG and the ongoing Phase I clinical trial of eniluracil in combination
with oral 5-FU, and we may experience significant delays in the future. If patients are unwilling to participate in our trials because of competitive clinical trials for similar patient populations, perceived risk or any other reason, the timeline
for recruiting patients, conducting trials and obtaining regulatory approval of potential products will be delayed. Other factors that may result in significant delays include obtaining regulatory or ethics review board approvals for proposed
trials, reaching agreement on acceptable terms with prospective clinical trial sites, and obtaining sufficient quantities of drug for use in the clinical trials. Such delays could result in the termination of the clinical trials altogether.

Regulatory approval of our product candidates is time-consuming, expensive and uncertain, and could result in unexpectedly high expenses and delay our
ability to sell our products.

Development, manufacture and marketing of our products are subject to extensive regulation by
governmental authorities in the United States and other countries. This regulation could require us to incur significant unexpected expenses or delay or limit our ability to sell our product candidates, including eniluracil, ADH-1 and STS, our
product candidates that are farthest along in development and the regulatory process.



27



---

##### Table of Contents

Our clinical studies might be delayed or halted, or additional studies might be required, for various
reasons, including:



| |  |  | the drug is not shown to be effective;
| | - |  | --------------------------------------



| |  |  | patients experience severe side effects during treatment;
| | - |  | ---------------------------------------------------------



| |  |  | appropriate patients do not enroll in the studies at the rate expected;
| | - |  | -----------------------------------------------------------------------



| |  |  | drug supplies are not sufficient to treat the patients in the studies; or
| | - |  | -------------------------------------------------------------------------



| |  |  | we decide to modify the drug during testing.
| | - |  | --------------------------------------------

If regulatory approval of any product is granted, it will be limited to those indications for which the product has been shown to be safe and effective, as demonstrated to the FDAs satisfaction through clinical studies. Furthermore,
approval might entail ongoing requirements for post-marketing studies. Even if regulatory approval is obtained, labeling and promotional activities are subject to continual scrutiny by the FDA and state regulatory agencies and, in some
circumstances, the Federal Trade Commission. FDA enforcement policy prohibits the marketing of approved products for unapproved, or off-label, uses. These regulations and the FDAs interpretation of them might impair our ability to effectively
market our products.

We and our third-party manufacturers are also required to comply with the applicable FDA current Good Manufacturing
Practices, or GMP, regulations, which include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. Further, manufacturing facilities must be approved by the FDA before
they can be used to manufacture our products, and they are subject to additional FDA inspection. If we fail to comply with any of the FDAs continuing regulations, we could be subject to reputational harm and sanctions, including:



| |  |  | delays, warning letters and fines;
| | - |  | ----------------------------------



| |  |  | product recalls or seizures and injunctions on sales;
| | - |  | -----------------------------------------------------



| |  |  | refusal of the FDA to review pending applications;
| | - |  | --------------------------------------------------



| |  |  | total or partial suspension of production;
| | - |  | ------------------------------------------



| |  |  | withdrawals of previously approved marketing applications; and
| | - |  | --------------------------------------------------------------



| |  |  | civil penalties and criminal prosecutions.
| | - |  | ------------------------------------------

In addition, identification of side effects after a drug is on the market or the occurrence of manufacturing problems could cause subsequent withdrawal of approval, reformulation of the drug, additional testing or changes in labeling of the
product.

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
developing STS in Phase III trials in collaboration with SIOPEL and COG. SIOPEL and COG 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 COG trial and subsequent accrual of patients into the COG 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.

As we expand
the size of our organization, we may experience difficulties in effectively managing our growth, which could adversely impact our business.

Any future growth will strain our management, human, operational, financial and other resources. As of September 30, 2008, we had 18 full-time employees. We also use contractors as needed, primarily within clinical development, with
approximately five full time equivalents at September 30, 2008. In order to manage any future growth effectively, we will have to implement and improve operational, financial, manufacturing and management



28



---

##### Table of Contents

information systems and expand, train, manage and motivate our employees. To the extent that we are unable to manage our growth effectively, we may not be
able to successfully accomplish our business objectives.

We may expand our business through new acquisitions that could disrupt our business, harm our
financial condition and dilute current stockholders ownership interests in our company.

Our business strategy includes expanding
our products and capabilities, and we may seek mergers or acquisitions to do so. Mergers and acquisitions involve numerous risks, including:



| |  |  | substantial cash expenditures;
| | - |  | ------------------------------



| |  |  | potentially dilutive issuance of equity securities;
| | - |  | ---------------------------------------------------



| |  |  | incurrence of debt and contingent liabilities, some of which may be difficult or impossible to identify at the time of acquisition;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in assimilating the operations of the merged or acquired companies;
| | - |  | --------------------------------------------------------------------------------



| |  |  | diverting our managements attention away from other business concerns;
| | - |  | -----------------------------------------------------------------------



| |  |  | risks of entering markets in which we have limited or no direct experience; and
| | - |  | -------------------------------------------------------------------------------



| |  |  | the potential loss of our key employees or key employees of the acquired companies.
| | - |  | -----------------------------------------------------------------------------------

We cannot assure you that any merger or acquisition will result in short-term or long-term benefits to us. We may incorrectly judge the value or worth of
an acquired company or business. In addition, our future success would depend in part on our ability to assimilate the companies and their personnel effectively. We might not be able to make the combination of our business with that of acquired
businesses or companies work or be successful. Furthermore, the development or expansion of our business or any acquired business or companies may require a substantial capital investment by us. We may not have the necessary funds or they might not
be available to us on acceptable terms or at all. We may also seek to raise the necessary funds by selling shares of our stock, which could dilute current stockholders ownership interest in our company.

If we lose our key personnel or are unable to attract and retain personnel, we may be unable to effectively manage our business and successfully develop our product
candidates.

Our success depends upon certain key personnel, in particular Dr. William P. Peters, our Chief Executive Officer
and Chairman of the Board, the loss of whose services might significantly delay or prevent the achievement of our scientific or business objectives. Although we have an employment agreement with Dr. Peters and with each of our other key
personnel, we cannot be certain that any individual will continue in such capacity for any particular period of time. The loss of any key personnel, or the inability to hire and retain qualified employees, could negatively affect our ability to
manage our business. We do not currently carry key person life insurance.

If our licenses to proprietary technology owned by others are terminated or
expire, we may suffer increased development costs and delays, and we may not be able to successfully develop our product candidates.

The development of our drug candidates and the manufacture and sale of any products that we develop will involve the use of processes, products and information, some of the rights to which are owned by others. A number of our product
candidates are licensed under agreements with GSK, McGill and OHSU. Although we have obtained licenses or rights with regard to the use of certain processes, products and information, the licenses or rights could be terminated or expire during
critical periods and we may not be able to obtain, on favorable terms or at all, licenses or other rights that may be required. Some of these licenses provide for limited periods of exclusivity that may be extended only with the consent of the
licensor, which may not be granted.

If we are unable to adequately protect our patents and licenses related to our product candidates, or we infringe
upon the intellectual property rights of others, we may not be able to successfully develop and commercialize our product candidates.

The value of our technology will depend in part upon our ability, and those of our collaborators, to obtain patent protection or licenses to patents, maintain trade secret protection and operate without infringing on the rights of third
parties. Although we have successfully pursued patent applications in the past, it is possible that:



| |  |  | some or all of our pending patent applications, or those we have licensed, may not be allowed;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | proprietary products or processes that we develop in the future may not be patentable;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | any issued patents that we own or license may not provide us with any competitive advantages or may be successfully challenged by third parties; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the patents of others may have an adverse effect on our ability to do business.
| | - |  | -------------------------------------------------------------------------------



29



---

##### Table of Contents

It is not possible for us to be certain that we are the original and first creator of inventions
encompassed by our pending patent applications or that we were the first to file patent applications for any such inventions. Further, any of our patents, once issued, may be declared by a court to be invalid or unenforceable.

ADH-1 is currently protected under issued composition of matter patents in the United States that we exclusively licensed from McGill that expire in
2017. Eniluracil is currently protected under issued composition of matter and method patents that we exclusively licensed from GSK that expire in 2014 and 2015 (in combination with 5-FU). STS is currently protected by method of use
patents that we exclusively licensed from OHSU that expire in Europe in 2021 and are currently pending in the United States. None of the above expiry dates take into consideration additional pending patent applications for ADH-1 and eniluracil
that, if issued, could provide additional patent protection nor possible patent term extensions or periods of data exclusivity that may be available upon marketing approval in the various countries worldwide. In addition, periods of marketing
exclusivity for ADH-1 and STS may also be possible in the United States under orphan drug status. We obtained Orphan Drug Designation in the United States for the use of STS in the prevention of platinum-induced ototoxicity in pediatric
patients in 2004 and for the use of ADH-1 in conjunction with melphalan for the treatment of Stage IIb/c, III, and IV malignant melanoma in 2008, and as a result, if approved, will have seven years of exclusivity in the United States from the
approval date.

We may be required to obtain licenses under patents or other proprietary rights of third parties but the extent to which we
may wish or need to do so is unknown. Any such licenses may not be available on terms acceptable to us or at all. If such licenses are obtained, it is likely they would be royalty bearing, which would reduce our income. If licenses cannot be
obtained on an economical basis, we could suffer delays in market introduction of planned products or their introduction could be prevented, in some cases after the expenditure of substantial funds. If we do not obtain such licenses, we would have
to design around patents of third parties, potentially causing increased costs and delays in product development and introduction or precluding us from developing, manufacturing or selling our planned products, or our ability to develop, manufacture
or sell products requiring such licenses could be foreclosed.

Litigation may also be necessary to enforce or defend patents issued or
licensed to us or our collaborators or to determine the scope and validity of a third partys proprietary rights. We could incur substantial costs if litigation is required to defend ourselves in patent suits brought by third parties, if we
participate in patent suits brought against or initiated by our collaborators, or if we initiate such suits. We might not prevail in any such action. An adverse outcome in litigation or an interference to determine priority or other proceeding in a
court or patent office could subject us to significant liabilities, require disputed rights to be licensed from other parties or require us or our collaborators to cease using certain technology or products. Any of these events would likely have a
material adverse effect on our business, financial condition and results of operations.

Much of our technological know-how that is not
patentable may constitute trade secrets. Our confidentiality agreements might not provide for meaningful protection of our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure of information. In
addition, others may independently develop or obtain similar technology and may be able to market competing products and obtain regulatory approval through a showing of equivalency to our product that has obtained regulatory approvals, without being
required to undertake the same lengthy and expensive clinical studies that we would have already completed.

The vulnerability to off-label use or sale
of our product candidates that are covered only by method of use patents may cause downward pricing pressure on these product candidates if they are ever commercialized and may make it more difficult for us to enter into collaboration or
partnering arrangements for the development of these product candidates.

Some of our product candidates, including STS, are currently
only covered by method of use patents, which cover the use of certain compounds to treat specific conditions, and not by composition of matter patents, which would cover the chemical composition of the compound. Method of use
patents provides less protection than composition of matter patents because of the possibility of off-label competition if other companies develop or market the compound for other uses. If another company markets a drug that we expect to market
under the protection of a method of use patent, physicians may prescribe the other companys drug for use in the indication for which we obtain approval and have a patent, even if the other companys drug is not approved for such an
indication. Off-label use and sales could limit our sales and exert pricing pressure on any products we develop covered only by method of use patents. Also, it may be more difficult to find a collaborator to license or support the development of our
product candidates that are only covered by method of use patents.

If our third party manufacturers breach or terminate their agreements with us, or if
we are unable to secure arrangements with third party manufacturers on acceptable terms as needed in the future, we may suffer significant delays and additional costs.



30



---

##### Table of Contents

We have no experience manufacturing products and do not currently have the resources to manufacture any
products that we may develop. We currently have agreements with contract manufacturers for clinical supplies of ADH-1, STS, eniluracil and 5-FU, including drug substance providers and drug product suppliers, but they might not perform as agreed in
the future or may terminate our agreement with them before the end of the required term. Significant additional time and expense would be required to effect a transition to a new contract manufacturer.

We plan to continue to rely on contract manufacturers for the foreseeable future to produce quantities of products and substances necessary for research
and development, preclinical trials, human clinical trials and product commercialization, and to perform their obligations in a timely manner and in accordance with applicable government regulations. If we develop any products with commercial
potential, we will need to develop the facilities to independently manufacture such products or secure arrangements with third parties to manufacture them. We may not be able to independently develop manufacturing capabilities or obtain favorable
terms for the manufacture of our products. While we intend to contract for the commercial manufacture of our product candidates, we may not be able to identify and qualify contractors or obtain favorable contracting terms. We or our contract
manufacturers may also fail to meet required manufacturing standards, which could result in delays or failures in product delivery, increased costs, injury or death to patients, product recalls or withdrawals and other problems that could
significantly hurt our business. We intend to maintain a second source for back-up commercial manufacturing, wherever feasible. However, if a replacement to our future internal or contract manufacturers were required, the ability to establish
second-sourcing or find a replacement manufacturer may be difficult due to the lead times generally required to manufacture drugs and the need for FDA compliance inspections and approvals of any replacement manufacturer, all of which factors could
result in production delays and additional commercialization costs. Such lead times would vary based on the situation, but might be twelve months or longer.

We lack the resources necessary to effectively market our product candidates, and we may need to rely on third parties over whom we have little or no control and who may not perform as expected.

We do not have the necessary resources to market our product candidates. If we develop any products with commercial potential, we will either have to
develop a marketing capability, including a sales force, which is difficult and expensive to implement successfully, or attempt to enter into a collaboration, merger, joint venture, license or other arrangement with third parties to provide a
substantial portion of the financial and other resources needed to market such products. We may not be able to do so on acceptable terms, if at all. If we rely extensively on third parties to market our products, the commercial success of such
products may be largely outside of our control.

We conduct our business internationally and are subject to laws and regulations of several countries
which may affect our ability to access regulatory agencies and may affect the enforceability and value of our licenses.

We have
conducted clinical trials in the United States, Canada, Europe and the Pacific Rim and intend to, or may, conduct future clinical trials in these and other jurisdictions. There can be no assurance that any sovereign government will not establish
laws or regulations that will be deleterious to our interests. There is no assurance that we, as a Canadian corporation, will continue to have access to the regulatory agencies in any jurisdiction where we might want to conduct clinical trials or
obtain regulatory approval, and we might not be able to enforce our license or patent rights in foreign jurisdictions. Foreign exchange controls may have a material adverse effect on our business and financial condition, since such controls may
limit our ability to flow funds into or out of a particular country to meet obligations under licenses, clinical trial agreements or other collaborations.

Our cash invested in money market fund might be subject to loss.

There has been significant deterioration and instability in
the financial markets. Even though we believe we take a conservative approach to investing our funds, the volatility of the current financial markets exposes us to increased investment risk, including the risks that the value and liquidity of our
money market investments could deteriorate significantly and the issuers of the investments we hold could be subject to credit rating downgrades. This might result in significant losses in our money market investments that could adversely impact our
financial condition and financial statements. Our investment manager of our money market funds has submitted the necessary documentation and paid the required fee to participate in the U.S. Treasurys Temporary Guarantee Program funds for our
money market investments. The program will be in effect for an initial three month term and ensures that if a participating funds share value declines to below one dollar and the fund is liquidated, the U.S. Treasury would cover any shortfall
between the liquidated share price and one dollar. The Secretary of the U.S. Treasury has the option to extend the program until September 18, 2009. If we must rely on the U.S. Treasury to recover future potential losses in our money market
funds, we might experience lengthy delays in accessing our funds which might have an adverse impact on our operations.



31



---

##### Table of Contents

Risks Related to Our Industry

If we are unable to obtain applicable U.S. and/or foreign regulatory approvals, we will be unable to develop and commercialize our drug candidates.

The preclinical studies and clinical trials of our product candidates, as well as the manufacturing, labeling, sale and distribution, export or import, marketing, advertising and promotion of our product candidates
are subject to various regulatory frameworks in the United States, Canada and other countries. Any products that we develop must receive all relevant regulatory approvals and clearances before any marketing, sale or distribution. The regulatory
process, which includes extensive preclinical studies and clinical testing to establish product safety and efficacy, can take many years and cost substantial amounts of money. As a result of the length of time, many challenges and costs associated
with the drug development process, the historical rate of failures for drug candidates is extremely high. For example, prior development of our compound eniluracil by GSK was not successful. Varying interpretations of the data obtained from studies
and tests could delay, limit or prevent regulatory approval or clearance. Changes in regulatory policy could also cause delays or affect regulatory approval. Any regulatory delays may increase our development costs and negatively impact our
competitiveness and prospects. It is possible that we may not be able to obtain regulatory approval of any of our drug candidates or approvals may take longer and cost more to obtain than expected.

Regulatory approvals, if granted, may entail limitations on the uses for which any products we develop may be marketed, limiting the potential sales for
any such products. The granting of product approvals can be withdrawn at any time, and manufacturers of approved products are subject to regular reviews, including for compliance with GMP. Failure to comply with any applicable regulatory
requirement, which may change from time to time, can result in warning letters, fines, sanctions, penalties, recalling or seizing products, suspension of production, or even criminal prosecution.

Future sales of our product candidates may suffer if they fail to achieve market acceptance.

Even if our product candidates are successfully developed and achieve appropriate regulatory approval, they may not enjoy commercial acceptance or
success. Product candidates may compete with a number of new and traditional drugs and therapies developed by major pharmaceutical and biotechnology companies. Market acceptance is dependent on product candidates demonstrating clinical efficacy and
safety, as well as demonstrating advantages over alternative treatment methods. In addition, market acceptance is influenced by government reimbursement policies and the ability of third parties to pay for such products. Physicians, patients, the
medical community or patients may not accept or utilize any products we may develop.

We face a strong competitive environment. Other companies may
develop or commercialize more effective or cheaper products, which may reduce or eliminate the demand for our product candidates.

The
biotechnology and pharmaceutical industry, and in particular the field of cancer therapeutics where we are focused, is very competitive. Many companies and research organizations are engaged in the research, development and testing of new cancer
therapies or means of increasing the effectiveness of existing therapies, including, among many others, Abbott Laboratories, Amgen, Antisoma, Adventrix, AstraZeneca, Bayer, Bristol-Myers Squibb, EntreMed, Genentech, Johnson & Johnson,
Merck & Co., NeoPharm, Novartis, Onyx, OSI Pharmaceuticals, OXiGENE, Peregrine Pharmaceuticals, Pfizer, Roche, Sanofi-Aventis, and Taiho. Many of these companies have marketed drugs or are developing targeted cancer therapeutics which,
depending upon the mechanism of action of such agents could thus be competitors.

Many of our existing or potential competitors have
substantially greater financial, technical and human resources than we do and may be better equipped to develop, manufacture and market products. In addition, many of these competitors have extensive experience with preclinical testing and human
clinical trials and in obtaining regulatory approvals. Also, some of the smaller companies that compete with us have formed collaborative relationships with large, established companies to support the research, development, clinical trials and
commercialization of any products that they may develop.Academic institutions, government agencies and other public and private research organizations may also conduct research, seek patent protection and establish collaborative arrangements
for research, clinical development and marketing of products similar to those we seek to develop. These companies and institutions compete with us in recruiting and retaining qualified scientific and management personnel as well as in acquiring
technologies complementary to our projects.

We are likely to face competition in the areas of product efficacy and safety, ease of use and
adaptability, as well as pricing, product acceptance, regulatory approvals and intellectual property. Competitors could develop more effective, safer and more affordable products than we do, and they may obtain patent protection or product
commercialization before we do or even render our product candidates obsolete. The existence of competitive



32



---

##### Table of Contents

products, including products or treatments of which we are not aware, or products or treatments that may be developed in the future, may adversely affect the
marketability of any products that we develop.

We may face product liability claims that could require us to defend costly lawsuits or incur
substantial liabilities that could adversely impact our financial condition, receipt of regulatory approvals for our product candidates and our results of operation.

The use of our product candidates in clinical trials and for commercial applications, if any, may expose us to liability claims in the event that such product candidates cause injury or death or result in other
adverse effects. These claims could be made by health care institutions, contract laboratories, and subjects participating in our clinical studies, patients or others using our product candidates. In addition to liability claims, certain serious
adverse events could require interruption, delay and/or discontinuation of a clinical trial and potentially prevent further development of the product candidate. We carry clinical trial insurance with a policy limit of $5.0 million, but the coverage
may not be sufficient to protect us from legal expenses and liabilities we might incur. Litigation is very expensive, even if we are successful. In addition, our existing coverage may not be adequate if we further develop products, and future
coverage may not be available in sufficient amounts or at reasonable cost. Adverse liability claims may also harm our ability to obtain or maintain regulatory approvals.

We use hazardous material and chemicals in our research and development, and our failure to comply with laws related to hazardous materials could materially harm us.

Our research and development processes involve the controlled use of hazardous materials, such as flammable organic solvents, corrosive acids and
corrosive bases. Accordingly, we are subject to federal, state, local and foreign laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. While we believe that our safety
procedures for handling and disposing of such materials will comply with the standards prescribed by applicable federal, state, local or foreign regulations, the risk of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our resources and may not be covered by our general liability insurance. We currently do not carry insurance
specifically for hazardous materials claims. We may be required to incur significant costs to comply with environmental laws and regulations, which may change from time to time.

Efforts to reduce product pricing and health care reimbursement and changes to government policies could negatively affect the commercialization of our product candidates.

If any of our product candidates achieve regulatory approval, we may be materially adversely affected by the continuing efforts of governmental and
third-party payors to contain or reduce health care costs. For example, if we succeed in bringing one or more products to market, such products may not be considered cost-effective and the availability of consumer reimbursement may not exist or be
sufficient to allow the sale of such products on a competitive basis. The constraints on pricing and availability of competitive products may further limit our pricing and reimbursement policies as well as adversely impact market acceptance and
commercialization for the products.

In some foreign markets, the pricing or profitability of healthcare products is subject to government
control. In recent years, federal, state, provincial and local officials and legislators have proposed or are proposing a variety of price-based reforms to the healthcare systems in the United States, Canada and elsewhere. Some proposals include
measures that would limit or eliminate payments from third-party payors to the consumer for certain medical procedures and treatments or allow government control of pharmaceutical pricing. The adoption of any such proposals or reforms could
adversely affect the commercial viability of our product candidates.

Any significant changes in the healthcare system in the United
States, Canada or abroad would likely have a substantial impact on the manner in which we conduct business and could have a material adverse effect on our ability to raise capital and the viability of product commercialization.

New accounting or regulatory pronouncements may impact our future financial position and results of operations.

There may be new accounting or regulatory pronouncements or rulings, which could have an impact on our future financial position and results of
operations. Changing laws, regulations and standards relating to corporate governance and public disclosures can create uncertainty and such uncertainty may lead to increased expenses and exposure to liabilities.



33



---

##### Table of Contents

Risks Related to Owning Our Common Shares

The market price of our common shares is highly volatile and could cause the value of your investment to significantly decline.

Historically, the market price of our common shares has been highly volatile and the market for our common shares has from time to time experienced significant price and volume fluctuations, some of which are
unrelated to our operating performance. From November 12, 2004 to November 11, 2008, the trading price of our stock fluctuated from a high closing price of CAD$2.09 per share to a low closing price of CAD$0.07 per share on the TSX, and
from a high closing price of $1.71 per share to a low closing price of $0.07 per share on the NYSE Alternext US (formerly, the American Stock Exchange). Historically, our common shares have had a low trading volume, and may continue to have a low
trading volume in the future. This low volume may contribute to the volatility of the market price of our common shares. It is likely that the market price of our common shares will continue to fluctuate significantly in the future.

The market price of our stock may be significantly affected by many factors, including without limitation:



| |  |  | economic and other external factors generally or stock market trends in the pharmaceutical or biotechnology industries specifically;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | announcements of licensing agreements, joint ventures, collaborations or other strategic alliances that involve our products or those of our competitors;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | innovations related to our or our competitors products;
| | - |  | --------------------------------------------------------



| |  |  | actual or potential clinical trial results related to our or our competitors products;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | our financial results or those of our competitors;
| | - |  | --------------------------------------------------



| |  |  | reports of securities analysts regarding us or our competitors;
| | - |  | ---------------------------------------------------------------



| |  |  | developments or disputes concerning our licensed or owned patents or those of our competitors;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | developments with respect to the efficacy or safety or our products or those of our competitors; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | health care reforms and reimbursement policy changes nationally and internationally.
| | - |  | ------------------------------------------------------------------------------------

We may be unable to maintain the listing of our common stock on the NYSE Alternext US (formerly, the American Stock Exchange) and the Toronto Stock Exchange and that
would make it more difficult for stockholders to dispose of their common stock.

Our common stock is listed on the NYSE Alternext US, or
ASE, and the Toronto Stock Exchange, or TSX. We cannot guarantee that it will always be listed. Both exchanges have rules for continued listing, 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 additional capital to continue operations.

Delisting from either or both exchanges would make it more difficult for stockholders to dispose of their common stock and more difficult to obtain accurate quotations on our common stock. This could have an adverse effect on the price of
our common stock. There can be no assurances that a market maker will make a market in our common stock on the OTC Bulletin Board or any other stock quotation system after delisting. Furthermore, securities quoted on the OTC Bulletin Board generally
have significantly less liquidity than securities traded on a national securities exchange, not only in the number of shares that can be bought and sold, but also through delays in the timing of transactions and lower market prices than might
otherwise be obtained. As a result, you might find it difficult to resell shares at prices quoted in the market or at all. Furthermore, because of the limited market and generally low volume of trading in our common stock, our common stock is more
likely to be affected by broad market fluctuations, general market conditions, fluctuations in our operating results, changes in the markets perception of our business, and announcements made by us, our competitors or parties with whom we have
business relationships. Our ability to issue additional securities for financing or other purposes, or to otherwise arrange for any financing we may need in the future, may also be materially and adversely affected by the fact that our securities
are not traded on a national securities exchange.

There are a large number of our common shares underlying outstanding warrants and options, and
reserved for issuance under our stock option plan, that may be sold in the market, which could depress the market price of our stock and result in substantial dilution to the holders of our common shares.



34



---

##### Table of Contents

Sale or issuance of a substantial number of our common shares in the future could cause the market price
of our common stock to decline. It may also impair our ability to obtain additional financing. As of September 30, 2008, we had outstanding warrants to purchase approximately 7.6 million of our common shares at an exercise price of
CAD$2.15 per share, and outstanding warrants to purchase approximately 45.9 million of our common shares at exercise prices ranging from $0.33 to $0.97. In addition, as of September 30, 2008, there were approximately 18.8 million
common shares issuable upon the exercise of stock options granted by us of which approximately 2.9 million were denominated in Canadian dollars and had a weighted average exercise price of CAD$2.16 per common share and approximately
15.9 million were denominated in U.S. dollars and had a weighted average exercise price of $0.54 per common share. We may also issue further warrants as part of any future financings as well as the additional 1.7 million options to acquire
our common shares currently remaining available for issuance under our stock option plan.

We are a passive foreign investment company under U.S. tax
law, which has adverse tax consequences for our U.S. stockholders.

As further described in Item 5. Market for the
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  Material United States Federal and Canadian Income Tax Consequences in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2007, we have determined that we are currently a Passive Foreign Investment Company, or PFIC, under U.S. tax law and likely will continue to be a PFIC at least until we develop a source of significant operating revenues. As a
result, there may be adverse tax consequences to U.S. holders of our common shares. A U.S. holder whose holding period for our shares includes a period during which we are classified as a PFIC generally may be required to treat certain excess
distributions with respect to our shares and gains realized on the disposition of our shares as ordinary income earned ratably over the holders holding period and may be subject to a special tax and interest charge on amounts treated as earned
in the periods in which we are a PFIC. In addition, the holders shares may not receive a stepped-up basis upon a transfer at death. These PFIC tax rules may not apply if a U.S. holder makes an election for the first taxable year of
the holders holding period to be taxed currently on the holders pro rata share of our ordinary earnings and net capital gain for any year we are a PFIC. Alternatively, a U.S. holder may avoid the special tax and interest charge on excess
distributions and gains by making an election to mark the shares to market annually during any period in which we are a PFIC and our shares are treated as marketable shares. If a mark-to-market election is made, amounts included in or deducted from
income pursuant to the election and actual gains and losses realized upon disposition generally may be treated as ordinary gains or losses. Whether or not an applicable election is made, if we are classified as a PFIC for the taxable year in which a
dividend is paid, or for the preceding taxable year, a dividend paid to a non-corporate U.S. holder may not qualify for the reduced long-term capital gains rates. These tax issues could make our stock less attractive to U.S. investors and therefore
negatively affect our stock price and the ability to sell our shares.

We are no longer a foreign private issuer and may incur additional expenses
associated with compliance with the U.S. securities laws applicable to U.S. domestic issuers.

Beginning in 2007, we have had to comply
with the provisions of U.S. securities laws applicable to U.S. domestic issuers including, without limitation, the U.S. proxy solicitation rules, Regulation FD and the Section 16 short swing profit rules. As a result, we must now report on the
forms required of U.S. companies, such as Forms 10-K, 10-Q and 8-K, rather than the forms we have filed with the SEC in the past as a foreign private issuer, such as Forms 20-F and 6-K. Compliance with these additional securities laws may result in
increased expenses. In addition, we are now subject to additional restrictions on offers and sales of securities outside of the United States, including in Canada. To the extent that we were to offer or sell our securities outside of the United
States in the future, we will have to comply with the generally more restrictive Regulation S requirements that apply to U.S. companies.

We have not
paid any dividends since incorporation and do not anticipate declaring any dividends in the foreseeable future. As a result, you will not be able to recoup your investment through the payment of dividends on your common shares and the lack of a
dividend payable on our common shares might depress the value of your investment.

We will use all available funds to finance the
development of our product candidates and operation of our business. Our directors will determine if and when dividends should be declared and paid in the future based on our financial position at the relevant time, but since we have no present
plans to pay dividends, you should not expect receipt of dividends either for your cash needs or to enhance the value of your common shares.

There is
no public market for our outstanding warrants.

We have not and do not intend to list any of our outstanding warrants on any securities
exchange or to arrange for any quotation system to quote them. We cannot assure you that there will be a liquid trading market for our warrants or that a trading market for our warrants will develop.



35



---

##### Table of Contents

Our existing principal stockholders hold a substantial number of our common shares and may be able to exercise
influence in matters requiring approval of stockholders.

As of September 30, 2008, our current 5% stockholders beneficially own
approximately 60% of our common shares. In particular, Southpoint Capital Advisors LP owns or exercises control over 41.5 million common shares, representing approximately 32% of the issued and outstanding common shares and 42% beneficially
owned (assuming full exercise of the 20.8 million warrants issued to Southpoint Capital but no other outstanding warrants or options). In addition, Mr. Robert Butts, Co-Founder and Portfolio Manager of Southpoint Capital Advisors LP,
serves as a member of our Board of Directors. Southpoint Capital, our other 5% stockholders, and other insiders, acting alone or together, might be able to influence the outcomes of matters that require the approval of our stockholders, including
but not limited to the election and removal of directors, an acquisition or merger with another company, certain equity transactions, a sale of substantially all of our assets, or amendments to our incorporating documents. These
stockholders might make decisions that are adverse to your interests. The concentration of ownership could have the effect of delaying, preventing or deterring a change of control of our company, which could adversely affect the market price of our
common shares or deprive our other stockholders of an opportunity to receive a premium for their common shares as part of a sale of our company.



36



---

##### Table of Contents

|Item 6. | Exhibits
|------- | --------



|            |  |                                                                                                                                                      |  |                  |  |       |  |               |  |              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- |  | ----- |  | ------------- |  | -------------
|Exhibit No. |  | Description of Exhibit                                                                                                                               |  | RegistrantsForm |  | Dated |  | ExhibitNumber |  | FiledHerewith
|31.1        |  | Certification of Chief Executive Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002                             |  |                  |  |       |  |               |  | X            
|            |  |                                                                                                                                                      |  |                  | 
|31.2        |  | Certification of Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002                             |  |                  |  |       |  |               |  | X            
|            |  |                                                                                                                                                      |  |                  | 
|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 |  |                  |  |       |  |               |  | X            



37



---

##### Table of Contents

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 12, 2008 |  | By:                       |  | /s/ William P. Peters                             
|                        |  |                           |  | William P. Peters                                 
|                        |  |                           |  | Chairman & Chief Executive Officer                
|                        |  |                           |  | (principal executive officer)                     
|                        |  |                          
|Date: November 12, 2008 |  | By:                       |  | /s/ James A. Klein, Jr.                           
|                        |  |                           |  | James A. Klein, Jr.                               
|                        |  |                           |  | Chief Financial Officer                           
|                        |  |                           |  | (principal financial and chief accounting officer)



38