BUILDING VALUE THROUGH PROGRESS (L O R U S LOGO) L O R U S THERAPEUTICS INC. SECOND QUARTER September 1, 2002 to November 30, 2002 LETTER TO SHAREHOLDERS Dear Shareholders: We are pleased to review with you the operating highlights for the second quarter of 2003. A steering group has been formed with representatives from the U.S. National Cancer Institute to determine the cancer indications and protocols of multiple Phase II clinical trials for our lead antisense drug, GTI-2040. We have been working closely with the NCI since they have agreed to conduct the clinical trials in conjunction with Lorus. Lorus received two important patents in the U.S. market. The Company was allowed a patent by the United States Patent and Trademark office (USPTO) to protect its lead anticancer drug, Virulizin(R). This patent protects the Virulizin(R) invention as it relates to immunodulating compositions, pharmaceutical agents containing these compositions, and the use of the compositions and agents for treatment purposes. Lorus was also allowed another patent by USPTO in 2000 to protect the only known production process for Virulizin(R). USPTO also granted a patent to NC381, the lead anticancer drug of a subsidiary of Lorus, NuChem Pharmaceuticals Inc.. The patent protects NC381 as an effective therapeutic agent for the treatment of lung, pancreatic, and skin cancers, and as an inhibitor of prostate tumor growth with no apparent toxicity. Lorus renewed an emergency drug program to supply Virulizin(R) for the treatment of advanced pancreatic cancer. This program enables patients who are not eligible for ongoing clinical trials to receive a supply of Virulizin(R). Approximately 30 patients in countries such as the United States, Canada, Italy, Japan, Australia and Korea have recently accessed this program. In addition to providing a service to cancer patients, Lorus will augment the Virulizin(R) database with additional safety information gathered through the program, which will be included with future regulatory filings. Mayne Pharma exercised its option to secure distribution rights for Virulizin(R) in Argentina for the treatment of malignant melanoma. The distribution agreement for Argentina will include the same terms as the exclusive seven-year distribution agreement signed between Lorus and Mayne Pharma in October 2001 for the Mexico market. Lorus will be responsible for manufacturing Virulizin(R) and will receive royalties from Virulizin(R) sales. Mayne Pharma will share in any additional clinical development and regulatory costs that the two companies agree are appropriate in Argentina. Mr. Graham Strachan was appointed to the chair of the board of directors. Mr. Strachan has been closely involved in the emergence and evolution of the biotechnology sector in Canada over the past 25 years and has been a director of Lorus since 2001. Subsequent to the quarter end, Mr. J. Kevin Buchi was appointed as a director of the Company. Mr. Buchi is senior vice president and chief financial officer of Cephalon Inc., an international biopharmaceutical company. The company acknowledges with grateful appreciation the contributions made over the years to its activities by Mr. Peter Campbell, who did not stand for re-election at the company's annual general meeting, Mr. Barry Reiter and Mr. Robert Bechard who left the Board in September and December 2002 respectively. 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, and 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, 2002. All amounts are expressed in Canadian dollars unless otherwise noted. OVERVIEW Lorus has incurred annual operating losses since inception related to the research, manufacturing, and clinical development of its proprietary compounds. The Company has not received any revenue from the sales of products to date. Three products are in the clinical trial stage of development and several potential compounds exist in preclinical studies. An agreement signed with Mayne Pharma for sales and distribution of Virulizin(R) in Mexico will provide the Company with its first product revenue. Royalty revenue from this agreement will partially offset future research and development costs, but losses will continue as Lorus further invests in its drug development programs. RESULTS OF OPERATIONS RESEARCH AND DEVELOPMENT Research and development expenses for the second quarter of fiscal 2003 increased to $3,323,000 compared to $2,093,000 for the same quarter last year. For the six months ended November 30, 2002 research and development expenses increased to $6,370,000 compared to $4,235,000 for the same period last year. Costs increased in fiscal 2003 due primarily to higher clinical trial costs for Virulizin(R) for the ongoing pivotal Phase III trial for the treatment of advanced pancreatic cancer. The antisense clinical program which includes the GTI-2040 Phase II trial in patients with renal cell carcinoma and the GTI-2501 Phase I trial in patients with solid tumors or lymphoma also contributed to the increase in the current periods. GENERAL AND ADMINISTRATIVE General and administrative expenses for the second quarter of fiscal 2003 decreased to $796,000 compared to $1,583,000 for the same quarter last year. For the six months ended November 30, 2002 general and administrative expenses decreased to $2,100,000 compared to $2,645,000 for the same period last year. The decrease in both periods was due mainly to lower use of external advisory services. For the six months ended November 30, 2002 this decrease was partially offset by higher employee related costs that occurred in the first quarter. DEPRECIATION AND AMORTIZATION Depreciation and amortization for the second quarter of fiscal 2003 decreased to $164,000 from $567,000 for the same quarter last year. For the six months ended November 30, 2002 depreciation and amortization expenses decreased to $259,000 from $1,022,000 during the same period last year. In both periods, the decrease was due mainly to the adoption of the new CICA accounting guideline for goodwill and other intangible assets whereby the Company ceased amortizing goodwill on June 1, 2002. INTEREST INCOME Interest income for the second quarter of fiscal 2003 decreased to $314,000 from $560,000 for the same quarter last year. For the six months ended November 30, 2002 interest income decreased to $684,000 from $1,163,000 for the same period last year. The decrease was due primarily to lower cash and short-term investments balances in fiscal 2003 compared to the comparable periods in fiscal 2002. NET LOSS Net loss for the second quarter ended November 30, 2002 totaled $3,969,000 ($0.03 per share) compared to a loss of $3,683,000 ($0.03 per share) for the second quarter last year. On a year-to-date basis, the loss was $8,045,000 ($0.06) for the first six months of fiscal 2003 compared to $6,739,000 ($0.05) for the comparable period last year. The increase in net loss relates primarily to greater costs for the Virulizin(R) Phase III clinical trial and the antisense clinical development programs as planned and lower interest income, partially offset by lower administrative costs from cost conservation efforts and lower goodwill amortization due to a recent accounting pronouncement effective June 1, 2002. On a comparable basis, the loss for the three months and six months ended November 30, 2001 would have been $3,321,000 ($0.02 per share) and $6,012,000 ($0.04 per share) respectively after adjustment to remove amortization of goodwill in those periods. 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, should be sufficient to finance its operations and capital needs for at least twelve months. OPERATING CASH REQUIREMENTS Lorus' cash burn (cash used in operating activities) for the second quarter of fiscal 2003 decreased to $2,700,000 for the quarter ended November 30, 2002 compared to $3,981,000 for the second quarter last year. For the six months ended November 30, 2002 the cash burn decreased to $5,187,000 from $7,025,000 for the comparable period last year. The decrease is due mainly to higher current liabilities at November 30, 2002, partially offset by higher product development costs in the three months and six months ended November 30, 2002. CASH POSITION At November 30, 2002 Lorus had cash and cash equivalents and short-term investments totaling $31.7 million compared to $37.8 million at May 31, 2002. Working capital was $27.8 million at November 30, 2002 compared to $35.6 million at May 31, 2002. /s/ 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 regarding future events. These forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from those statements. Those risks and uncertainties include, but are not limited to, changing market conditions, 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, and other risks detailed from time-to-time in the Company's ongoing quarterly filings, annual information form, annual reports and 20-F filings. We undertake no obligation to publicly update or revise any forwardlooking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forwardlooking events in this quarterly report might not occur. 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)