INTERIM MANAGEMENT’S DISCUSSION AND ANALYSIS

For the interim period ended November 30, 2012

January 11, 2013

This interim Management’s Discussion and Analysis (“MD&A”) of Lorus Therapeutics Inc. (“Lorus”, the “Company”, “we”, “us” and similar expressions) should be read in conjunction with the Company’s unaudited condensed consolidated interim financial statements for the three and six months ended November 30, 2012 and 2011.  The November 30, 2012 interim financial statements and additional information about the Company, including the annual audited financial statements and MD&A for the year ended May 31, 2012, and the most recent Annual Information Form (“AIF”) can be found on SEDAR at www.sedar.com.”

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This management’s discussion and analysis may contain forward-looking statements within the meaning of securities laws. Such statements include, but are not limited to, statements relating to:

The forward-looking statements reflect our current views with respect to future events, are subject to risks and uncertainties, and are based upon a number of estimates and assumptions that, while considered reasonable by us, are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements, including, among others:

Should one or more of these risks or uncertainties materialize, or should the assumptions set out in the section entitled “Risk Factors” underlying those forward-looking statements prove incorrect, actual results may vary materially from those described herein. These forward-looking statements are made as of the date of this managements discussion and analysis or, in the case of documents incorporated by reference herein, as of the date of such documents, and we do not intend, and do not assume any obligation, to update these forward-looking statements, except as required by law. We cannot assure you that such statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and accordingly investors are cautioned not to put undue reliance on forward-looking statements due to the inherent uncertainty therein.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, Lorus has financed its operations and technology acquisitions primarily from equity and debt financing, proceeds from the exercise of warrants and stock options, and interest income on funds held for future investment. We plan to continue our development programs from internal and external resources as they are available.

We have not earned substantial revenues from our drug candidates and are therefore considered to be in the development stage. The continuation of our research and development activities and the commercialization of the targeted therapeutic products are dependent upon our ability to successfully finance and complete our research and development programs through a combination of equity financing and payments from strategic partners. We have no current sources of significant payments from strategic partners.

There is substantial doubt about the Company’s ability to continue as a going concern because management has forecasted that the Company's current level of cash and cash equivalents will not be sufficient to execute its current planned expenditures for the next 12 months without further financing being obtained. The Company is currently in discussion with several potential investors to provide additional funding. Management believes that it will complete one or more of these arrangements in sufficient time to continue to execute its planned expenditures without interruption. However, there can be no assurance that the capital will be available as necessary to meet these continuing expenditures, or if the capital is available, that it will be on terms acceptable to the Company. The issuance of common shares by the Company could result in significant dilution in the equity interest of existing shareholders. The Company is also considering alternatives to delay its research programs or further reduce expenditures until financing is available. There can be no assurance that the Company will be able to obtain sufficient financing to meet future operational needs. As a result, there is substantial doubt as to whether the Company will be able to continue as a going concern and realize its assets and pay its liabilities as they fall due.

The financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate.  If the going concern basis were not appropriate for these financial statements, then adjustments would be necessary in the carrying value of the assets and liabilities, the reported revenues and expenses and the balance sheet classifications used.

This MD&A is prepared as of January 11, 2013. It contains certain forward-looking statements that involve known and unknown risks and uncertainties which are beyond the control of the Company. This MD&A should be read in conjunction with the unaudited condensed consolidated interim financial statements of the Company for the three and six months ended November 30, 2012 which are incorporated by reference herein and form an integral part of this MD&A.

OVERVIEW

Lorus is a life sciences company focused on the discovery, research and development of effective anticancer therapies with a high safety profile. Lorus has worked to establish a diverse anticancer product pipeline, with products in various stages of development ranging from pre-clinical to a completed Phase II clinical trial. A growing intellectual property portfolio supports our diverse product pipeline.

We believe that the future of cancer treatment and improved patient quality of life lies in drugs that are not only effective with minimal side effects, but also approach the treatment of cancer in novel ways through drugs that offer a unique mechanism of action. Many drugs currently approved for the treatment and management of cancer are toxic with often limiting side effects, especially when used in combination. We therefore believe that a product development plan based on novel, effective drugs with minimal potential for toxicity alone or in combination will have broad applications in cancer treatment.

Lorus' strategy is to continue the development of our product pipeline using several therapeutic approaches. Each therapeutic approach is dependent on different technologies, which we believe mitigates the development risks associated with a single technology platform. We evaluate the merits of each product throughout the clinical trial process and consider commercial viability as appropriate. The most advanced anticancer drugs in our pipeline, each of which flow from different platform technologies, are small molecules, immunotherapeutics, and antisense.

Our business model is to take our product candidates through pre-clinical testing and into Phase I and Phase II clinical trials. It is our intention to partner or co-develop these drug candidates after successful completion of Phase I or II clinical trials. Lorus will give careful consideration in the selection of partners that can best advance its drug candidates into a pivotal Phase III clinical trial and, upon positive results, successfully commercialize our products on a global or regional basis. Our objective is to receive upfront and milestone payments as well as sales royalties from such partnerships, which will support continued development of our other product candidates.

Our success is dependent upon several factors, including, maintaining sufficient levels of funding through public and/or private financing, establishing the efficacy and safety of our products in clinical trials and securing strategic partnerships.

Our net loss for the three months ended November 30, 2012 was $1.6 million ($0.04 per share) compared to $1.5 million ($0.07 per share) in the same period in the prior year. The Company incurred a net loss of $2.9 million ($0.07 per share) for the six months ended November 30, 2012 compared to $2.6 million ($0.13 per share) during the same period in the prior year.

In the three month period research and development expenditures increased by $262 thousand due to the manufacture of additional quantities of LOR-253, increased clinical costs associated with the LOR-253 Phase I clinical trial as well as spending on our IL-17E program initiated in the current year. The increase in research and development expenditures is offset by a decrease in general and administrative expenses of $97 thousand due to reduced stock based compensation costs offset by higher legal costs associated with licensing activities.

In the six month period research and development expenditures increased by $330 thousand due to the manufacture of additional quantities of LOR-253, increased clinical costs associated with the LOR-253 Phase I clinical trial as well as spending on our IL-17E program initiated in the current year offset by lower stock based compensation costs. General and administrative expenses remained consistent year over year in the six months ended November 30, 2012 as increased legal costs associated with licensing activities were offset by lower stock based compensation charges.

We utilized cash of $1.3 million in our operating activities in three-month period ended November 30, 2012 compared with $813 thousand during the same period the prior year. For the six months ended November 30, 2012 we utilized cash of $2.9 million compared with $1.9 million in the same period last year. The increase in cash utilized is due to increased research and development activities as well as cash used to reduce accounts payable and accrual balances.

At November 30, 2012, we had cash and cash equivalents of $2.8 million compared to $320 thousand at May 31, 2012.

RESULTS OF OPERATIONS

Research and Development

Research and development expenses totaled $910 thousand in the three-month period ended November 30, 2012 compared to $648 thousand during the same period in the prior year and totaled $1.6 million in the six month period ended November 30, 2012 as compared to $1.2 million in the same period in the prior year. Research and development expenses consisted of the following:

Program costs by program:

The increase in research and development costs during the three months ended November 30, 2012 is primarily the result of increased activity on our LOR-253 program as the manufacturing of additional drug is underway and as the ongoing Phase I clinical trial approaches completion. In addition during the current fiscal year we initiated development on our IL-17E program and costs associated with this program will escalate in the latter half of the fiscal year as Lorus initiates the manufacturing program to support Cancer Research UK’s development. Finally, during the three months ended November 30, 2012 we have escalated our research efforts on our pre-clinical compound LOR-500.

The increase in research and development costs for the six months ended November 30, 2012 again is due to the manufacturing of additional quantities of LOR-253 and increased activity in the Phase I clinical trial which completed the dose escalation part of the Phase I study in January 2013 as well as the initiation of activities to support the IL-17E program.

General and Administrative

General and administrative expenses totaled $714 thousand in the three-month period ended November 30, 2012 compared to $811 thousand in same period in the prior year. For the six month period ended November 30, 2012, general and administrative expenses were $1.3 million compared with $1.3 million in the same period in the prior year.

Components of general and administrative expenses:

Stock based compensation expense was lower in the three and six month periods ended November 30, 2012 compared with the same periods in the prior year due to certain one time grants in the prior year and the cancellation of certain outstanding options in the comparative periods in 2011 (resulting in the acceleration of expense) which increased stock based compensation charges.

General and administrative expenses excluding salaries were higher in both the three and six months ended November 30, 2012 compared with the prior year due primarily to increased legal fees associated with licensing activities. Salary charges in the three months ended November 30, 2012 were lower than the prior year due to a reduction in the Deferred Share Unit liability (marked to market) as well as a lower headcount. During the six month period ended November 30, 2012 salary costs were lower than the prior year due to a reduced headcount.

Finance Expense

Finance expense for the three months ended November 30, 2012 was $nil compared with $nil for the three months ended November 30, 2011. For the six months ended November 30, 2012 finance expense was $6 compared with $nil in the same period in the prior year. Finance expense incurred in the six months ended November 30, 2012 relates to interest accrued at a rate of 10% on the related party promissory notes described below and repaid in June 2012. There were no interest-bearing liabilities outstanding at November 30, 2012 or 2011.

Finance Income

Finance income totaled $11 thousand and $17 thousand in the three and six month periods ended November 30, 2012, respectively, compared to $2 thousand and $4 thousand in the same periods in the prior year. Finance income represents interest earned on our cash and cash equivalent balances and is higher in the current periods due to higher average cash and cash equivalents balance in the current year compared with the prior year periods.

Net loss for the period

For the reasons discussed above, net loss for the three months ended November 30, 2012 was $1.6 million ($0.04 per share) compared to $1.5 million ($0.07 per share) in the same period in the prior year. The Company incurred a net loss of $2.9 million ($0.07 per share) for the six months ended November 30, 2012 compared to $2.6 million ($0.13 per share) during the same period in the prior year.

PRIVATE PLACEMENT

On June 8, 2012 Lorus completed a private placement (the “Private Placement”) of 20,625,000 units at a subscription price of $0.32 per unit, each unit (“Unit”) consisting of one common share and one common share purchase warrant for gross proceeds to Lorus of $6.6 million.

Each warrant is exercisable for a period of 24 months from the date of issuance at an exercise price of $0.45 (the “Warrants”). If after one year (the “Accelerated Exercise Date”) the closing price of the common shares on the Toronto Stock Exchange equals or exceeds $0.90 for twenty consecutive days, then upon the Company sending the holders of Warrants written notice of such Accelerated Exercise Date and issuing a news release announcing such Accelerated Exercise Date, the Warrants shall only be exercisable for a period of 30 days following the date on which such written notice is sent to holders of Warrants.

Lorus paid a cash finder’s fee of $396 thousand based on 6% of the gross proceeds of the Private Placement and issued 1,237,500 finder’s warrants at an exercise price of $0.32 each. Each finder’s warrant is exercisable into Units consisting of 1,237,500 common shares and 1,237,500 Warrants.

The total costs associated with the transaction were approximately $616 thousand which included the $135 thousand which represented the estimated fair value of the finders warrants issued as part of the Private Placement. Each such finder warrant is exercisable for one Unit at a price of $0.32 per Unit for a period of 24 months following the closing of the Offering. The Company has allocated the net proceeds of the Offering to the common shares and the common share purchase warrants based on their estimated relative fair values. Based on relative fair values, $4.3 million of the net proceeds were allocated to the common shares and $1.7 million to the common share purchase warrants.

warrant exercises

During the quarter ended August 31, 2012 398,000 warrants related to the August 2011 unit offering were exercised for proceeds of $179 thousand. The carrying amount related to these warrants was $43 thousand and was transferred from warrants to share capital. There were no warrants exercised in the three months ended November 30, 2012.

SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The selected financial information provided below is derived from the Company’s unaudited quarterly financial statements for each of the last eight quarters.

Research and development expenditures in the current quarter ended November 30, 2012 increased over the prior quarters due the manufacture of additional quantities of LOR-253 and increased activity in the Phase I clinical trial. Expenditures were also higher than average during the quarter ended February 28, 2011 resulting from the initiation of the Phase I clinical trial for LOR-253 and associated activities. Expenditures were lower in the quarter ended May 31, 2012 due to income tax credits earned.

The increased general and administrative costs in the quarter ended November 30, 2011 is due stock option grants and cancellations during the quarter which resulted in higher than normal options expense. Increased expense in the quarter February 28, 2011 was due to one time stock option expense related to a large tranche of options granted in that period with partially immediate vesting. Increased spending in the three months ended November 30, 2012 is due to increase legal costs associated with licensing activities.

Cash used in operating activities fluctuates significantly due primarily to timing of payments and increases and decreases in the accounts payables and accrued liabilities balances. The lower use of cash in the quarter ended May 31, 2012 was due to delaying payments which resulted in an increase in accounts payable and accrued liabilities balances as the Company waited for the private placement to close. A subsequent use of cash can be seen in the quarter ended August 31, 2012 as these balances were reduced.

Cash Position and Outlook

At November 30, 2012, we had cash and cash equivalents of $2.8 million compared to $320 thousand at May 31, 2012. The Company invests in highly rated and liquid debt instruments. Investment decisions are made in accordance with an established investment policy administered by senior management and overseen by the board of directors. Working capital (representing primarily cash, cash equivalents and other current assets less current liabilities) at November 30, 2012 was $1.6 million (May 31, 2012 – negative $2.1 million).

As discussed above, management has forecasted that the Company’s current level of cash and cash equivalents will not be sufficient to execute its current planned expenditures for the next twelve months without further investment. The Company is currently investigating various alternatives to obtain sufficient capital to continue its operations and has implemented a series of strategies to reduce research, development and overhead expenditures until such time as it can obtain additional capital to fund its operations.

If we are able to secure additional financing, we intend to use these resources to fund our existing drug development programs and develop new programs from our portfolio of preclinical research technologies. The amounts actually expended for research and drug development activities and the timing of such expenditures will depend on many factors, including the ability of the Company to raise additional capital, the progress of the Company's research and drug development programs, the results of preclinical and clinical trials, the timing of regulatory submissions and approvals, the impact of any internally developed, licensed or acquired technologies, our ability to find suitable partnership agreements to assist financially with future development, the impact from technological advances, determinations as to the commercial potential of the Company's compounds and the timing and development status of competitive products.

We do not expect to generate positive cash flow from operations in the next several years due to additional research and development costs, including costs related to drug discovery, preclinical testing, clinical trials, manufacturing costs and operating expenses associated with supporting these activities. Negative cash flow will continue until such time, if ever, that we receive regulatory approval to commercialize any of our products under development and/or royalty or milestone revenue from any such products exceeds expenses.

Until one of our drug candidates receives regulatory approval and is successfully licensed or commercialized, Lorus will continue to incur operating losses. The magnitude of these operating losses will be largely affected by the timing and scope of future research and development, clinical trials and the Company’s ability to raise additional working capital and/or establish effective partnerships to share the costs of development and clinical trials.

Contractual Obligations and Off-Balance Sheet Financing

The Company has entered into various contracts with service providers with respect to the LOR-253 phase I clinical trial. These contracts could result in future payment commitments of approximately $1.4 million. Of this amount, $576 thousand has been paid and $157 thousand has been accrued at November 30, 2012 (May 31, 201 - $439 thousand paid and $70 thousand accrued). The payments are based on estimated services performed and final amounts maybe higher or lower based on actual services performed.

On November 27, 2012 the Company announced it had entered into a collaboration agreement with Cancer Research UK for the future development of immunotherapy IL-17E. Under this collaboration agreement Lorus has committed to provide sufficient quantity of the drug IL-17E, for no cash consideration, to be used by Cancer Research UK in pre-clinical toxicology studies and should those studies be successful, a Phase I clinical trial. It is expected that this will result in costs of approximately $4 million over a two year period. The Company has not yet entered into any contracts related to the drug manufacturing.

Capital Risk Management

The Company’s objectives when managing capital are to:

The capital structure of the Company consists of cash and cash equivalents and equity comprised of share capital, share purchase warrants, stock options, contributed surplus and deficit. The Company manages its capital structure and makes adjustments to it in light of economic conditions. The Company, upon approval from its Board of Directors, will balance its overall capital structure through new share issuances, acquiring or disposing of assets, adjusting the amount of cash balances or by undertaking other activities as deemed appropriate under the specific circumstances.

The Company is not subject to externally imposed capital requirements.

While the Company’s overall strategy with respect to capital risk management remains unchanged from the year ended May 31, 2012, the Company has forecasted that its current capital resources are not sufficient to carry out its research and development plans and operations for the next twelve months and continues to investigate various alternatives to obtain sufficient capital to continue its operations.

RISK FACTORS

Before making an investment decision with respect to our common shares, you should carefully consider the following risk factors, in addition to the other information included or incorporated by reference into this report. The risks set out below are not the only risks we face. If any of the following risks should be realized, our business, financial condition, prospects or results of operations would likely suffer. In that case, the trading price of our common shares could decline and you may lose all or part of the money you paid to buy our common shares.

Please refer to our MD&A for the year ended May 31, 2012 for a complete discussion of risks and uncertainties.

Financial instruments

The Company has classified its financial instruments as follows:

At November 30, 2012, there are no significant differences between the carrying values of these amounts and their estimated market values due to their short-term nature.

Financial risk management

The Company has exposure to credit risk, liquidity risk and market risk. The Company's Board of Directors has the overall responsibility for the oversight of these risks and reviews the Company's policies on an ongoing basis to ensure that these risks are appropriately managed.

(i) Credit risk

Credit risk is the risk of financial loss to the Company if a customer, partner or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's cash and cash equivalents. The carrying amount of the financial assets represents the maximum credit exposure.

The Company manages credit risk for its cash and cash equivalents by maintaining minimum standards of R1-low or A-low investments and the Company invests only in highly rated Canadian corporations with debt securities that are traded on active markets and are capable of prompt liquidation.

(ii) Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. To the extent that the Company does not believe it has sufficient liquidity to meet its current obligations, the Board considers securing additional funds through equity, debt or partnering transactions. The Company manages its liquidity risk by continuously monitoring forecasts and actual cash flows. Refer to note 2(b) for further discussion on the Company's ability to continue as a going concern.

(iii) Market risk

Market risk is the risk that changes in market prices, such as interest rates, foreign exchange rates and equity prices will affect the Company's income or the value of its financial instruments.

The Company is subject to interest rate risk on its cash and cash equivalents. The Company does not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change in market interest rates relative to interest rates on the investments, owing to the relative short-term nature of the investments. The Company does not have any material interest bearing liabilities subject to interest rate fluctuations.

Financial instruments potentially exposing the Company to foreign exchange risk consist principally of accounts payable and accrued liabilities. The Company holds minimal amounts of U.S. dollar denominated cash, purchasing on an as needed basis to cover U.S. dollar denominated payments. At November 30, 2012, U.S. dollar denominated accounts payable and accrued liabilities amounted to $168 thousand (May 31, 2012 - $148 thousand). Assuming all other variables remain constant, a 10% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an increase or decrease in loss for the year and comprehensive loss of $17 thousand (May 31, 2012 - $15 thousand). The Company does not have any forward exchange contracts to hedge this risk.

The Company has issued deferred share units. The Company has determined that these units represent a cash liability as it is expected that they will be settled in cash. The value of these units is tied to the share price of the Company and as such is subject to significant variation as the Company’s stock price is highly volatile. As at November 30, 2012 the Company had issued 780,000 (May 31, 2012 – 780,000) deferred share units and at November 30, 2012 that represents a cash liability of $312 thousand (May 31, 2012 - $304 thousand). Assuming all other variables remain constant, a 10% depreciation or appreciation of the Company’s share price would result in an increase or decrease in loss for the year and comprehensive loss of $31 thousand (May 31, 2012 - $30 thousand).

The Company does not invest in equity instruments of other corporations.

Evaluation of DISCLOSURE CONTROLS AND INTERNAL CONTROLS

There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended November 30, 2012 that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

UPDATED SHARE INFORMATION

As at January 11, 2013, the Company had issued and outstanding 42.3 million common shares and common share purchase warrants convertible into 27.1 million common shares and an additional 1.4 million shares issuable upon exercise of warrants underlying the broker warrants. In addition, the Company had issued and outstanding 3.4 million stock options to purchase an equal number of common shares and 780 thousand DSU’s which may be redeemed for common shares of the Company.

ADDITIONAL INFORMATION

Additional information relating to Lorus, including Lorus' 2012 annual information form and other disclosure documents, is available on SEDAR at www.sedar.com.