A MESSAGE TO OUR SHAREHOLDERS This past year was highlighted by the presentation of important safety and promising efficacy data for ADH-1, the advancement of ADH-1 into Phase II trials and the from GlaxoSmithKline (GSK)

This past year was highlighted by the presentation of important safety and promising efficacy data for ADH-1,

the advancement of ADH-1 into Phase II trials and the from GlaxoSmithKline (GSK) of the potential blockbuster oncology drug, eniluracil. While 2005 has been a disappointing year with regards to our share price, the work that we have done

has laid a strong foundation for the ultimate driver of value in biotechnology - data on the safety and efficacy of the drug candidates. I would like to briefly describe some of these accomplishments in 2005 and outline how they have positioned us

for further progress in 2006.

In 2005, we made solid progress in the development of our novel, molecularly-targeted agent,

ADH-1 (ExherinTM), which is now in Phase II. The focus of our clinical development of ADH-1 has been establishing its safety profile in patients - and in this regard, our drug has performed remarkably well. We have escalated the administered dose

through a 50-fold range in the Phase I setting with no significant side effects limiting its use to date. Of course, Adherex will continue to monitor the safety of ADH-1 closely as our clinical trials progress.

Ultimately, the usefulness of our cancer drugs will be primarily determined by their ability to affect cancers where current therapies are

inadequate. The demonstration of tolerability of the drug to date enables us to now focus on the effectiveness of ADH-1 in the Phase II setting. Importantly, we have already observed evidence of anti-tumor activity with single agent ADH-1 therapy in

five patients with advanced, resistant cancers in our Phase I studies. This activity has included tumor shrinkage, repetitive and protracted normalization of tumor biomarkers and prolonged stable disease in a variety of N-cadherin positive cancers

(esophageal, adrenocortical, lung, colon and fallopian tube cancer).

This past year we performed a study on the expression

of N-cadherin in over 700 patient tumor samples to explore which cancers ADH-1 might target most effectively. These data indicate that N-cadherin is expressed in multiple tumor types and provide solid support for selecting certain cancers for

treatment with ADH-1. We have already begun to apply this data to help focus our Phase II clinical trial designs to maximize our chance of success. One goal in our Phase II program is to characterize and quantify the relationship between N-cadherin

expression and the response to ADH-1. This information would enable us to more effectively select the patients most likely to respond to our drug.

Adherex is developing eniluracil to make 5-FU, already one of the most commonly used anti-cancer drugs in the world, more effective, better tolerated and orally active. Adherex continually looks for drug candidates, which we

believe we have unique capabilities to effectively develop, to provide our shareholders a more diversified portfolio of drugs and, thereby, reduce the development risk profile for the overall company. To that end, in July 2005, we obtained from GSK

without any upfront cash payment, an exclusive license for the development of eniluracil for all disease indications. The agreement brought with it data from GSK s multiple previous clinical trials, a significant supply of eniluracil raw

material and a $3 million investment from GSK.

So what does this mean to our investors? It means that we now have another

major oncology drug in our portfolio, which has had millions of dollars invested by GSK in its development. We believe that our new development strategy presents a relatively straightforward approach. Because so much prior development work has

already been done, many of the major hurdles have already been surmounted. GSK has already demonstrated in 15 Phase I and Phase II trials that the combination of eniluracil and 5-FU had satisfactory safety and anti-cancer activity to support Phase

III development. However, when three subsequent Phase III trials failed to reach their endpoints, GSK discontinued development. Adherex has since determined through further mechanism of action studies the reasons why those trials failed -

specifically, that the 5-FU and eniluracil doses and schedules of administration used by GSK were not

A MESSAGE TO OUR SHAREHOLDERS (continued)

right. We have now demonstrated in animal models and human cell lines that with proper doses, dose ratios and schedules, eniluracil and

5-FU can be an effective combination. And, in less than six months, we have returned eniluracil back to human clinical trials with the goal of conducting Phase III registration trials as early as 2007.

To meet these timelines, we have some essential work to complete in 2006. To make sure that we design future Phase III clinical trials of

eniluracil and 5-FU correctly and to establish the data necessary for our regulatory filings, we need to do some limited Phase I and Phase II clinical studies to establish the safety of our new dose ratio as well as to properly size the Phase III

trials. But as there is already extensive clinical experience with the combination, these studies, while essential, can be quite limited in scope.

We expect that 2006 will be a pivotal year for Adherex. For eniluracil, we plan to continue with the aggressive development program that we outlined at the beginning of the year, with focused and relatively expeditious

clinical trials intended to provide optimal dosing and safety data. For ADH-1, while single agent studies will continue, moving into combination trials in 2006 is a very important step forward as nearly every contemporary cancer therapy uses some

type of drug combination. For this reason, we intend to begin combination trials, on our own and through collaborations, to evaluate ADH-1 in combination with other cancer therapies. With the knowledge garnered from our earlier and ongoing trials,

we now have the information necessary to determine which tumor types and which drug combinations make the most sense for clinical exploration. Finally, we will continue our efforts this year to build a more sustainable portfolio by moving some of

our other compounds closer to the clinic. As one example, some of our orally active, small molecule N-cadherin antagonists have been shown to be up to 200 times more potent than ADH-1 in our preclinical studies. Building on our clinical experience

with ADH-1, we expect to move our lead small molecule candidate into a clinical development program by early 2007.

have we not done well? To begin with, STS reviews continue at the Children s Oncology Group but we remain committed to the product, working with COG, and most importantly, to the opportunity that it represents for children with cancer. We

continue to lag behind in relative value to that of many of our peers with comparable products in development. We have laid the foundation for market knowledge and acceptance through meeting and sharing the Adherex opportunity with numerous

investment funds and analysts. Ultimately, we believe our value will be driven by clinical data, and we anticipate that 2006 will be a robust year in that regard.

In summary, this will be another important and active year for us. We have a deep biotechnology platform based on molecules (cadherins) that have been shown to be fundamental in cancer s ability

to invade and metastasize. We have a relatively straightforward development strategy to make an already widely-used drug, 5-FU, even better. And we have Phase III trials for some of these products on the foreseeable horizon. With advanced clinical

programs and a strong pipeline, we believe Adherex has the fundamentals necessary for success.

With your support, we will

continue our efforts to build value for you, our shareholders - and to one day bring important new medicines to cancer patients and their families.

William P. Peters, MD, PhD, MBA

DEVELOPING INNOVATIVE CANCER MEDICINES

2005 Management s Discussion & Analysis and Financials

Management s Discussion and Analysis

For the Fiscal Year Ended December 31, 2005

management s discussion and analysis ( MD&A ) should be read in conjunction with our December 31, 2005 audited consolidated financial statements and the related notes, which are prepared in accordance with Canadian Generally

Accepted Accounting Principles ( GAAP ). All references to years, unless otherwise noted, refer to our twelve-month fiscal year, which prior to July 1, 2004, ended on June 30.

The year ended December 31, 2005 ( fiscal 2005 ) represents the first full

year since we changed our fiscal year end to December 31 from June 30. The six-month period ended December 31, 2004 was our transition year and covered the period July 1, 2004 through December 31, 2004 ( six-month

fiscal transition 2004 ). For ease of reading of MD&A, we refer throughout to the periods reported as follows:

Functional and Reporting Currency

Effective January 1, 2005, the Company determined that its

functional currency had changed from the Canadian dollar ( CAD ) to the United States ( U.S. ) dollar because the majority of its transactions are denominated in U.S. dollars as the result of increasing activities undertaken in

the U.S. Concurrent with this change in functional currency, the Company adopted the U.S. dollar as its reporting currency. The change was effected for prior periods as follows: assets and liabilities were translated into U.S. dollars at the

prevailing exchange rates at each balance sheet date; revenues and expenses were translated at the average exchange rates prevailing during each reporting period and equity transactions were translated at the prevailing historical exchange rates at

each transaction date. Adjustments resulting from the translations are included in the cumulative translation adjustments in shareholders equity and total $5,850 at December 31, 2004 and 2005. Unless otherwise stated all amounts are in

On July 20, 2005, we announced that our Board of Directors had approved a share

consolidation of our common stock at a ratio of one-for-five. The share consolidation had previously been approved by our shareholders at the Annual and Special Meeting held on April 29, 2005. The share consolidation became effective at the

close of business on July 29, 2005 and reduced the number of shares of common stock then outstanding from approximately 213 million to approximately 43 million. The share consolidation equally affected all of our common

shares, stock options and warrants outstanding at the effective date. The number of shares of our common stock, stock options and warrants issued and outstanding and the basic and diluted weighted-average shares outstanding, as well as per share

data and per stock option data, have been retroactively adjusted for all periods presented to reflect the one-for-five share consolidation.

Forward-Looking Statements

The following discussion contains forward-looking statements regarding our financial condition and the results of operations that involve significant risks and

uncertainties, some of which are outside of our control. We are

subject to risks associated with the biopharmaceutical industry, including risks inherent in research and development, preclinical testing, manufacture of

drug substance to support clinical studies, toxicology studies, clinical studies of our compounds, uncertainty of regulatory agencies, enforcement and protection of our patent portfolio, the need for future capital, potential competitors, the

ability to attract and maintain collaborative partners, dependence on key personnel, and the ability to successfully market our drug compounds. Our actual results might differ materially from those expressed or implied in these forward-looking

statements. For further information regarding such risks, please refer to our public filings available at www.sedar.com and www.sec.gov.

2005 Key Company Accomplishments

We are a biopharmaceutical

company focused on cancer therapeutics, with a preclinical and clinical portfolio. The following product candidates are in clinical development:

also have a preclinical program which includes (i) backup peptides and small chemical molecule successors to ADH-1, (ii) molecules targeted to inhibiting the metastatic spread of some cancers and (iii) peptides that combine both

angiolytic and antiangiogenic properties. We have synthesized peptide antagonists and agonists for a wide array of cadherin adhesion molecules, which will facilitate our efforts to select other drug candidates to move into clinical development,

particularly in the following three areas:

In addition to our own development efforts, we intend to continue to pursue collaborations with other pharmaceutical companies, government

entities 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 40 issued U.S. patents and more than 50 pending patents worldwide

that we either own or have exclusively licensed.

We have not received any

revenues to date through the sale of products and do not expect to have significant revenues until we either are able to sell our product candidates after obtaining applicable regulatory approvals or we establish collaborations that provide us with

funding, such as licensing fees, milestone payments, royalties, upfront payments or otherwise. As of December 31, 2005, our deficit accumulated during development stage was $52.4 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. Research and development ( R&D ) expenses, which include expenses associated with clinical development activities, manufacturing of drug substance,

employee compensation, research contracts, toxicology studies, and internal and outsourced laboratory activities, will be dependent on the results of our drug development efforts. General and administration ( G&A ) expenses include

expenses associated with headcount and facilities, recruitment of staff, insurance and other administrative matters associated with our facilities in the Research Triangle Park, N.C. ( RTP ) in support of our drug development programs. The

amortization of acquired intellectual property rights relates to the intellectual property acquired

through our acquisition of Oxiquant, Inc. ( Oxiquant ) in November 2002 and the loss on impairment of mesna, resulting from the lack of current

plans to advance mesna to the next stage of development. Settlement of Cadherin Biomedical Inc. ( CBI ) litigation expense refers to our acquisition of CBI to reacquire the non-cancer intellectual property rights relating to our cadherin

technology and to settle the lawsuit between CBI and Adherex.

timelines and expenses are variable and collaborative arrangement milestone payments occur only when the relevant milestone is achieved. Management may in some cases be able to control the timing of expenses by accelerating or decelerating

preclinical and clinical activities. Accordingly, we believe that period-to-period comparisons are not necessarily meaningful and should not be relied upon as a measure of future financial performance. Our actual results may differ materially from

the expectations of investors and market analysts. In such an event, the prevailing market price of our common stock may be materially adversely affected. Due to the differing lengths of reporting financial periods in the MD&A, results in this

period are not directly comparable. Accordingly, percentage and amount of changes in these results in these periods are not meaningful. Where applicable, useful comparisons may be possible through annualizing the six-month fiscal transition 2004

period by multiplying those results by two. This method, however, does not reflect actual results for the extrapolated periods.

GlaxoSmithKline Relationship

On July 14, 2005, we entered into a development and license agreement with GSK. The agreement included the in-license by Adherex of GSK s oncology product,