LORUS THERAPEUTICS INC. SECOND QUARTER Sept. 1, 2003 to Nov. 30, 2003 BEING STRONG WHERE IT COUNTS L O R U S LETTER TO SHAREHOLDERS Dear Shareholder: The second fiscal quarter was marked by the steady progress in our pivotal phase III clinical trial of Virulizin(R) for treating advanced pancreatic cancer. This registration trial is now accepting or treating patients at over 100 sites globally. Lorus initiated a phase II clinical trial in hormone refractory prostrate cancer using GTI-2501, the Company's second antisense drug candidate at the Sunnybrook Regional Cancer Centre in Toronto. There are very limited treatment options available once advanced prostate cancer ceases to respond to hormonal therapies. Lorus believes that GTI-2501, an antisense drug that showed antitumor activity in a wide variety of preclinical cancer models and a good safety profile in previous human studies, has potential to benefit a difficult to treat patient population. Subsequent to the quarter end, Lorus analyzed interim data from the exploratory phase II clinical trial for GTI-2040 in combination with capecitabine for patients with advanced renal cell carcinoma. Unaudited data analysis showed that more than half of the 21 evaluable patients in this study exhibited disease stabilization, ranging up to eight months. Tumor shrinkages of index tumors compared to baseline measurements were also observed in some patients. The Company intends to further the development of GTI-2040 in a definitive Phase II/III registration trial based on the preliminary data analysis, and promising preclinical data for GTI-2040 showing positive antitumor efficacy in combination with cytokines. Design of the investigation is underway, but will likely include a pharmacokinetic and disease response analysis of GTI-2040 in combination with a first-line approved therapy versus first-line therapy alone, in previously untreated, newly diagnosed patients. In September, Lorus out-licensed its small molecule program to Cyclacel Ltd. The agreement is a worldwide exclusive license for the development and commercialization of Clotrimazole analogs. The Company recorded its first license revenue in the quarter as a result of the agreement. Additional license fees of up to $11.6 million may be earned for each drug candidate if Cyclacel achieves certain defined research and development milestones. Lorus continues to work with the U.S. National Cancer Institute (NCI) and three of the six clinical trials with GTI-2040 sponsored by the NCI have been initiated. During the second quarter Lorus' scientists continued publishing the company's scientific developments in peer reviewed journals. In October a paper entitled "Adenovirus-mediated Ribonucleotide Reductase R1 Gene Therapy of Human Colon Adenocaeinoma" was published in Clinical Cancer Research. Also in October, an article entitled "Macrophages play a critical role in the anti-tumor activity of Virulizin" was published in the International Journal of Oncology. Subsequent to the quarter end, two journal publications appeared, both addressing Lorus' small molecule program recently out-licensed to Cyclacel. In November Lorus marked "Pancreatic Cancer Awareness Month" by participating in the Pancreatic Cancer Action Network sponsored Weekend of Hope: Pancreatic Cancer Symposium in Los Angles, California. MANAGEMENT'S DISCUSSION AND ANALYSIS The following information should be read in conjunction with the unaudited consolidated financial statements and notes prepared in accordance with Canadian generally accepted accounting principles (GAAP) in this quarterly report. They should also be read in conjunction with the audited consolidated financial statements and notes, and "Management's Discussion and Analysis contained in the Company's annual report for the year ended May 31, 2003. All amounts are expressed in Canadian dollars unless otherwise noted. RESULTS OF OPERATIONS REVENUE Lorus recorded product, royalty and license revenue of $575,000 in the quarter and $604,000 for the six months ended November 30, 2003 compared to nil for the same periods last year. Included in these amounts is an initial license fee of $546,000 received from Cyclacel Ltd. in connection with the out-licensing of the Company's small molecule program. Additional license fees of up to $11.6 million may be earned for each drug candidate if Cyclacel achieves certain defined research and development milestones. It is not expected that any of these milestones will be achieved within the next twelve months. The balance of the revenue relates to product and royalty revenue from the sale of Virulizin to Mayne Pharma, the Company's Mexican distributor. The Company does not anticipate product revenue in 2004 from any of its other anticancer drugs currently under development. RESEARCH AND DEVELOPMENT Research and development expenses for the second quarter of fiscal 2004 increased to $5,586,000 compared to $3,323,000 for the same quarter last year. For the six months ended November 30, 2003, research and development expenses increased to $12,849,000 compared to $6,370,000 for the same period last year. The increase in expenditure on research and development activities relates primarily to higher clinical trial and regulatory expenditures for the continuation of the pivotal Phase III clinical trial of Virulizin(R) for the treatment of advanced pancreatic cancer at over 100 worldwide sites, increased manufacturing and compliance activities for Virulizin(R), and the upfront supply of GTI-2040 drug for the U.S. NCI sponsored phase II clinical trial programs. GENERAL AND ADMINISTRATIVE General and administrative expenses for the second quarter of fiscal 2004 increased to $1,176,000 compared to $796,000 for the same quarter last year. For the six months ended November 30, 2003, general and administrative expenses increased to $2,407,000 compared to $2,100,000. The increase is attributable mainly to higher professional service costs incurred to comply with higher capital market regulation requirements and other corporate initiatives. DEPRECIATION AND AMORTIZATION Depreciation and amortization for the second quarter of fiscal 2004 decreased to $99,000 compared to $164,000 for the same quarter last year. For the six months ended November 30, 2003, depreciation and amortization was $198,000 compared to $259,000 for the same period last year. These decreases were due mainly to lower deferred stock based compensation amortization in current year. INTEREST INCOME Interest income for the quarter ended November 30, 2003 was $314,000, comparable with the same quarter last year. For the six months period, interest income was $707,000 in fiscal 2004 compared to $684,000 for the same period last year. NET LOSS Net loss for the second quarter this year totaled $5,998,000 ($0.03 per share) compared to a loss of $3,969,000 ($0.03 per share) for the same quarter last year. On a year-to-date basis, the loss was $14,169,000 ($0.08 per share) compared to $8,045,000 ($0.06 per share) for the comparable period last year. The increase in net loss relates primarily to the continuation of the expanded Virulizin(R) Phase III clinical trial, increased manufacturing and compliance activities and drug supply for the U.S. NCI sponsored GTI-2040 phase II clinical trial programs. The Company has incurred annual operating losses since inception related to the research, manufacturing, and clinical development of its proprietary compounds. Losses will continue as Lorus further invests in its drug development programs. LIQUIDITY AND CAPITAL RESOURCES Since inception, Lorus has financed its operations and technology acquisitions primarily from equity financing, the exercise of warrants and stock options, and interest income on funds held for future investment. The Company believes that its available cash, cash equivalents and short-term investments, and the interest earned thereon, will be sufficient to finance its operations and capital needs for more than twelve months. OPERATING CASH REQUIREMENTS Lorus' cash used in operating activities for the second quarter of fiscal 2004 increased to $6,417,000 compared to $2,700,000 for the same quarter last year. The increase in the quarter can be attributed to higher clinical trial and development costs compared to the same period last year and a decrease in current liability balance during the current fiscal quarter compared to the same quarter last year. For the six-month period ended November 30, 2003, cash used in operations increased to $12,306,000 compared to $5,187,000 for the same period last year. The increase in the six-month is due mainly to higher clinical trial and product development costs. CASH POSITION At November 30, 2003 Lorus had cash and cash equivalents and short-term investments totaling $42.6 million compared to $25.1 million at May 31, 2003. Working capital was $37.5 million at November 30, 2003 compared to $20.9 million at May 31, 2003. RISKS AND UNCERTAINTIES Economic, sector and company specific risks are the same as those identified in the "Management Discussion and Analysis" contained in the Company's 2003 Annual Report. /s/ DR. JIM A. WRIGHT - --------------------------------- DR. JIM A. WRIGHT Chief Executive Officer Forward Looking Statements Except for historical information, this quarterly report contains forward-looking statements, which reflect the Company's current expectation and assumptions, and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. These forward-looking statements involve risks and uncertainties, including, but not limited to, changing market conditions, the Company's ability to obtain patent protection and protect its intellectual property rights, commercialization limitations imposed by intellectual property rights owned or controlled by third parties, intellectual property liability rights and liability claims asserted against the Company, the successful and timely completion of clinical studies, the establishment of corporate alliances, the impact of competitive products and pricing, new product development, uncertainties related to the regulatory approval process, product development delays, the Company's ability to attract and retain business partners and key personnel, future levels of government funding, the Company's ability to obtain the capital required for research, operations and marketing and other risks detailed from time-to-time in the Company's ongoing quarterly filings, annual information form, annual reports and 40-F filings. We undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise. For more information: GRACE TSE Lorus Therapeutics Inc. T 416 798 1200 ext. 380 F 416 798 2200 E ir@lorusthera.com www.lorusthera.com CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT (unaudited)