CAUTIONARY STATEMENT

The discussion below contains forward-looking statements regarding our financial condition and our results of operations that are based upon our annual consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles within the United States ("U.S. GAAP") and applicable U.S. Securities and Exchange Commission ("SEC") regulations for financial information. The preparation of these financial statements also conform in all material respects with generally accepted accounting principles in Canada ("Canadian GAAP") except as described in Note 15 in our annual consolidated financial statements contained in this 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.

Overview

We are a biopharmaceutical company focused on cancer therapeutics with preclinical and clinical product candidates. Our clinical product portfolio includes:

• Eniluracil, 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 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. We have two ongoing Phase I clinical trials combining eniluracil and 5-FU which are intended to establish the safety and tolerability of our proprietary combination. We licensed eniluracil from GlaxoSmithKline, or GSK, in July 2005.

• ADH-1, an anti-cancer drug that selectively targets N-cadherin present on certain tumor cells and the established blood vessels that supply tumors. We currently have two Phase I combination clinical studies ongoing, including a study using systemic ADH-1 in combination with three different systemic chemotherapy agents, and a study combining systemic ADH-1 with regional melphalan for the treatment of melanoma. In December 2006, we completed patient enrollment in our Phase Ib/II and Phase II single-agent ADH-1 clinical studies in Europe and North America. We licensed ADH-1 from McGill University in February 2001.

• STS, 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 2006, we entered into an agreement with the International Childhood Liver Tumour Strategy Group, known as SIOPEL, a multi-disciplinary group of specialists under the umbrella of the International Society of Pediatric Oncology, for the conduct of a Phase III clinical trial using STS. On October 30, 2007, we announced that SIOPEL had launched the Phase III clinical trial and opened the study for patient enrollment in the United Kingdom. The study will involve SIOPEL centers in up to 33 countries is expected to enroll approximately 100 evaluable children with liver (hepatoblastoma) cancer being treated with cisplatin, a platinum-based chemotherapy drug used to treat various types of pediatric cancers. Under the terms of our agreement, SIOPEL will conduct and fund the clinical activity and we will provide the drug and drug distribution for the study. On March 26, 2008, we announced the activation of a 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 in a multi-centered, randomized trial 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. Eligible children will be one to eighteen years of age who are to receive cisplatin according to their disease-specific regimen and, upon enrollment onto this study, will be randomized to receive STS or not. Efficacy of STS will be determined through comparison of hearing sensitivity at follow-up relative to baseline measurements using standard audiometric techniques. The trial is expected to enroll up to 120 patients over approximately three years in up to 230 COG centers in the United States, Canada, Australia and Europe. COG will fund the clinical activities for the study and we will be responsible for providing the drug and drug distribution for the study. We licensed STS from OHSU in September 2002.

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 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 molecules are not peptides and are smaller and simpler in structure. Compared to peptides, small chemical molecules are often active after oral administration, more stable and have different potency and toxicity profiles.

• 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 continue to pursue collaborations with other pharmaceutical companies, governmental agencies, academic or corporate collaborators with respect to these and other cadherin agonist and antagonist molecules. Our drug discovery and

development efforts are 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 any revenues to date through the sale of our products and do not expect to have significant revenues until we are either able to sell our product candidates after obtaining applicable regulatory approvals or we establish collaborations that provide us with licensing fees, milestone payments, royalties, up-front payments or other revenue. As of December 31, 2007, our deficit accumulated during development stage was approximately $84.4 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 and will depend on the results of clinical trials, availability of financial resources and directions 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, 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

Fiscal 2007 versus Fiscal 2006

                                               Fiscal                  Fiscal                   Increase
In thousands of U.S. Dollars                    2007          %         2006          %        (Decrease)
Revenue                                       $      -                $      -                $         -
Operating expenses:
Research and development                         10,912       77 %       14,003       83 %          (3,091 )
General and administration                        3,278       23 %        2,883       17 %             395

Total operating expense                         (14,190 )    100 %      (16,886 )    100 %          (2,696 )

Interest expense                                     -                       (3 )                        3
Interest income                                     833                     449                        384

Total other income                                  833                     446                        387

Net loss and total comprehensive loss         $ (13,357 )             $ (16,440 )             $     (3,083 )

• Research and development expenses were lower in fiscal 2007 as compared to 2006, primarily due to lower drug manufacturing and clinical trial expense and a reduction in staff. In fiscal 2006, we incurred more drug manufacturing expense to source clinical studies, including the single-agent Phase Ib/II and Phase II studies for ADH-1 which completed enrollment in December 2006. During fiscal 2007, we transitioned the clinical trials of ADH-1 from single-agent clinical trials to combination studies with other chemotherapies, as is often customary in the development of drugs for the treatment of cancer. The combination studies with ADH-1 were less expensive compared to the single-agent ADH-1 studies. During fiscal 2007, we reduced our permanent preclinical and clinical personnel and adopted the use of external contractors for certain functions, thereby decreasing compensation expense. While we had a reduction in expenses for ADH-1 in fiscal 2007, we increased development expenses during fiscal 2007 due to the clinical advancement of eniluracil. In addition, on March 1, 2007, we purchased all of GlaxoSmithKline's, or GSK, remaining options to buy back eniluracil for a fee of $1.0 million, which is included in research and development expense. As a result, we have assumed full direction and control over the future development of eniluracil. We are required to pay GSK development and sales milestone payments and sales royalties. Specifically, if we file a New Drug Application, or NDA, with the Food and Drug Administration, or FDA, we will be obligated to pay GSK development milestones of $5.0 million. Depending upon the commercial success of eniluracil, we may also be required to pay GSK up to $70.0 million in additional development and sales milestones, plus double-digit royalties based on our annual net sales. If we pursue other indications, we may be required to pay up to an additional $15.0 million to GSK for each indication approved by the FDA.

• General and administrative expenses increased in fiscal 2007 as compared to fiscal 2006 primarily due to stock-based compensation expense. During fiscal 2007, we granted 11.1 million stock options as compared to 0.4 million in fiscal 2006 thereby increasing our fiscal 2007 stock-based compensation expense.

• Interest expense for fiscal 2006 relates to the financing of certain leasehold improvements which were not present in fiscal 2007.

• Interest income increased in fiscal 2007 due to the earnings on additional cash from our February 2007 financing, which resulted in net proceeds of $23.2 million.

Fiscal 2006 versus Fiscal 2005

                                           Fiscal                  Fiscal                   Increase
In thousands of U.S. Dollars                2006          %         2005          %        (Decrease)
Revenue                                   $      -                $      -                $         -
Operating expenses:
Research and development                     14,003       83 %       11,678       82 %           2,325
General and administration                    2,883       17 %        2,543       18 %             340

Total operating expense                     (16,886 )    100 %      (14,221 )    100 %           2,665

Interest expense                                 (3 )                   (11 )                       (8 )
Interest income                                 449                     361                         88

Total other income                              446                     350                         96

Net loss and total comprehensive loss     $ (16,440 )             $ (13,871 )             $     (2,569 )

• Research and development expenses increased in fiscal 2006 as compared to 2005, primarily due to clinical trial expense in fiscal 2006 as compared to fiscal 2005. Fiscal 2006 included a full year of development of eniluracil as compared to only six months during fiscal 2005. In addition, we incurred more clinical trial expense in fiscal 2006 due to the advancement of our single-agent ADH-1 Phase Ib/II and Phase II studies. Increases in R&D expense in fiscal 2006 were offset by lower stock-based compensation expense in fiscal 2006 as compared to fiscal 2005.

• General and administrative increases in fiscal 2006 as compared to fiscal 2005 primarily relate to the adoption of Statement of Financial Accounting Standards, or SFAS No. 123 (revised 2004), Share-Based Payment", or SFAS123(R), on January 1, 2006. As a result of the adoption of SFAS123(R) in fiscal 2006, no stock-based compensation was recorded in fiscal 2005.

• Interest expense for fiscal 2006 and 2005 relate to the financing of certain leasehold improvements which was terminated in fiscal 2006.

• Interest income increased in fiscal 2006 due to the additional cash from our May 2006 offering and slightly higher interest rates achieved in fiscal 2006.

Quarterly Information

The following table presents selected consolidated financial data for each of
the last eight quarters through December 31, 2007, as prepared under U.S. GAAP
(dollars in thousands, except per share information):



                                                        Basic and Diluted
                                 Net Loss for the         Net Loss per
           Period                     Period              Common Share
           December 31, 2005    $           (4,149 )   $             (0.10 )
           March 31, 2006       $           (3,177 )   $             (0.07 )
           June 30, 2006        $           (3,854 )   $             (0.08 )
           September 30, 2006   $           (4,648 )   $             (0.09 )
           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 )

Liquidity and Capital Resources

                                                 December 31,        December 31,        December 31,
In thousands, except share data                      2007                2006                2005
Selected Asset and Liability Data:
Cash and cash equivalents                       $       16,217      $        5,718      $       13,144
Working capital                                         14,159               1,200              10,735

Selected Asset and Liability Data:
Common stock                                    $       64,929      $       46,524      $       41,306
Accumulated deficit                                    (84,379 )           (71,022 )           (54,582 )
Shareholders' equity                                    14,148               1,268              11,077

Selected Cash Flow Data:
Net cash used in operating activities           $      (13,303 )    $      (13,475 )    $      (12,261 )
Net cash provided from financing activities             23,875               6,054               7,959

Number of shares of common stock outstanding           128,227              50,382              42,629

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 December 31, 2007. We have incurred net losses and negative cash flow from operations each year, and we had an accumulated deficit of approximately $84.4 million as of December 31, 2007. 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 licensing fees, royalties, milestone payments or up-front payments.

On February 21, 2007, we completed the sale of equity securities for gross proceeds of $25.0 million. We issued 75.8 million units at a price of $0.33 per unit providing net proceeds of $23.2 million after deducting broker fees and other offering expenses. Each unit sold consisted of one common share and one-half of a common share purchase warrant. This financing included an aggregate of 75.8 million shares of common stock, 37.9 million investor warrants and 6.6 million broker warrants to acquire additional shares of our common stock. Each whole investor warrant entitles the holder to acquire one additional share of our common stock at an exercise price of $0.40 per share for a period of three years. Each whole broker warrant entitles the holder to acquire one unit (the same as the units sold to investors) at an exercise price of $0.33 per unit for a period of two years. During fiscal 2007, we issued 2.1 million shares of common stock pursuant to the exercise of warrants resulting in additional proceeds of approximately $0.7 million.

The net cash flow used in operating activities for the fiscal years 2007 and 2006 were relatively consistent with an average monthly cash burn of $1.1 million for each year. During fiscal 2007, we paid GSK a license fee of $1.0 million to purchase all of GSK's remaining buy-back options for eniluracil under our development and license agreement with GSK. In addition, we had increased cash payments to vendors during the first half of fiscal 2007 from our improved liquidity as a result of our $25.0 million offering completed in February 2007.

At December 31, 2007, our working capital increased by approximately $13.0 million primarily due to the February 2007 financing. This increase was partially offset by our payments to fund R&D activities and general corporate operations.

We believe that our current cash and cash equivalents of $16.2 million will be sufficient to satisfy our anticipated capital requirements through June 30, 2009. In February 2008, we revised our clinical development strategy and implemented a plan which has allowed us to extend our existing financial resources by delaying certain clinical trial and drug manufacturing commitments. The revisions primarily relate to planned combination studies with ADH-1 and future planned orders for the manufacturing of ADH-1. We do not anticipate these revisions to have a significant impact on our overall development plan. 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; unfavorable toxicology in our clinical programs, 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; establishment of marketing and sales capabilities; 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 June 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. 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.

Financial Instruments

At December 31, 2007, we held cash and cash equivalents of $16.2 million, which consisted primarily of highly liquid money market funds.

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 the fair value with unrealized gains and losses included in accumulated other comprehensive income.

Off-Balance Sheet Arrangements

Since our inception, we have not had any material off-balance sheet arrangements.

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 December 31, 2007.

The following table represents our contractual obligations and commitments at
December 31, 2007 (in thousands of U.S. dollars):



                                                                1-3       4-5       More than 5
                                         Less than 1 year      years     years         years         Total
Englert Lease (1)                       $              102    $   185    $   -     $          -     $   287
Maplewood Lease (2)                                    361        755       663               -       1,779
Drug purchase commitments (3)                          436        184        29               -         649
McGill License (4)                                     506      1,332        -                -       1,838
OHSU License (5)                                        -          -         -                -          -
GSK (6)                                                 -          -         -                -          -

Total                                   $            1,405    $ 2,456    $  692    $          -     $ 4,553

(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. This facility has now been subleased to another company that is responsible for payments through March 31, 2008; however, in the event of their default or their decision to not extend the lease beyond March 31, 2008, Adherex would become responsible for the obligation. Adherex is contractually obligated under the lease until August 31, 2010.

(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. We received lease and capital inducements to enter into the lease, including a 50 percent discount for the first 24 months of the 84-month lease term and capital inducements with a fair market value of $0.5 million.

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

(4) Research obligations are shown in the table. 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 completion of the Phase III clinical trial with SIOPEL, which began recruiting patients in October 2007, we may become responsible for a payment to OHSU of up to $0.5 million.

(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 an NDA with the FDA, we will 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.

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.

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