LORUS THERAPEUTICS INC. FIRST QUARTER June 1, 2003 to August 31, 2003 BEING STRONG WHERE IT COUNTS LETTER TO SHAREHOLDERS Dear Shareholder: We are very pleased to review with you the operating highlights of the first quarter of fiscal 2004. Lorus completed a successful unit offering in June that provided Lorus with approximately net $30 million in new capital. With this financing, Lorus had cash and cash equivalents and short-term investments of $49.0 million on August 31, 2003 compared to $25.1 million at May 31, 2003. We expanded the Virulizin(R) Phase III clinical trial in patients with advanced pancreatic cancer to over 100 global sites covering Europe and South America in addition to North America and Latin America. This expansion will assist Lorus to meet key milestones in the clinical trials. In addition, this expansion strategically benefits Lorus' future commercial interests as global trials optimize awareness of Virulizin(R) among oncologists worldwide well before any commercial launch. Nuchem Pharmaceuticals Inc. (Nuchem), a subsidiary of Lorus, entered into a worldwide exclusive out-licensing agreement with Cyclacel Limited of the UK for NC381 and a library of clotrimazole analogs. Under the agreement, Cyclacel will be responsible for all future drug development costs. Lorus will receive upfront fees of U.S. $0.4 million, milestone payments of up to approximately U.S. $11.6 million assuming all future milestones are achieved and a royalty line on future sale for NC381. Similar milestone and royalty payments will be received for each of any other compounds developed from the library. This transaction allows Lorus to focus its resources on the development of its advanced clinical programs and other preclinical technologies, as well as continues the development of NC381 and the library of clotrimazole analogs by a company with world-class expertise in cell cycle arrest mechanisms. During the first quarter of fiscal 2004 and subsequently, the United States National Cancer Institute (NCI) started three of the six clinical trials with GTI-2040 that are the subject of a clinical development agreement with Lorus. The first trial is a Phase II clinical trial for patients with acute myeloid leukemia (AML) in combination with cytarabine. The trial is being conducted at the Ohio State University Medical Center. The second trial is for patients with metastatic breast cancer in combination with capecitabine (Xeloda, Roche), and the third clinical trial launched is for patients with non-small cell lung cancer at the Princess Margaret Hospital in Toronto. In this trial GTI-2040 will be used in combination with docetaxel. Patent applications are important to establishing and maintaining a competitive position with respects to Lorus' products and technology. Lorus continued to build its patent portfolio of issued and allowed patents with the allowance of three new patents on three different platform technologies. In June Lorus was allowed a patent in Europe protecting the Company's intellectual property for its lead immunotherapeutic anticancer drug,Virulizin(R). In July Lorus was allowed a patent by the Canadian patent office protecting the intellectual property around a novel anticancer technology called "U-sense" technology. In August Lorus' subsidiary NuChem was allowed a patent by the European patent office protecting the Company's intellectual property interests with regard to certain molecules that inhibit cancer progression characterized by abnormal vascularization. During the quarter, Lorus' scientists continued to publish scientific data in peer-reviewed journals, further validating the scientific significance of Lorus' products and technology. In June, results of GTI-2040's anti-tumor activity were published in a well-known journal, Cancer Research. Also, Lorus presented the Phase I clinical study results of GTI-2040 at the American Society of Clinical Oncology (ASCO) meeting. An abstract and presentation on the mechanism of action of Virulizin(R) was also accepted for this meeting. Subsequent to the quarter end, the company published results in Clinical Cancer Research of studies aimed at developing an anticancer gene therapy based on over-expression of a novel tumor suppressor gene in colon cancer cells 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, 2003. All amounts are expressed in Canadian dollars unless otherwise noted. RESULTS OF OPERATIONS REVENUE Lorus recorded revenue of $29,000 from the sale of Virulizin(R), in Mexico in the quarter. 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 quarter ended August 31, 2003 increased to $7,263,000 compared to $3,047,000 for the same quarter last year. Cost increases in fiscal 2004 primarily relate to higher clinical trial costs for the expansion of the pivotal Phase III clinical trial of Virulizin(R) for the treatment of advanced pancreatic cancer to over 100 worldwide sites, the upfront supplying of GTI-2040 drug to the U.S. NCI for the NCI sponsored Phase II clinical trial programs, and the expanded GTI-2040 Phase II clinical trial in patients with renal cell carcinoma. GENERAL AND ADMINISTRATIVE General and administrative expenses for the first quarter of fiscal 2004 decreased marginally to $1,231,000 compared to $1,304,000 for the same quarter last year. DEPRECIATION AND AMORTIZATION Depreciation and amortization for the first quarter of fiscal 2004 was $99,000, comparable with $95,000 for the same quarter last year. INTEREST INCOME Interest income for the quarter ended August 31, 2003 increased to $393,000 from $370,000 for the same quarter last year. The increase can be attributed primarily to higher cash and short-term investment balance partially offset by lower market interest rates in fiscal 2004. NET LOSS Net loss for the quarter ended August 31, 2003 totaled $8,171,000 ($0.05 per share) compared to a loss of $4,076,000 ($0.03 per share) for the same quarter last year. The increase in net loss relates primarily to the expanded Virulizin(R) Phase III clinical trial, the drug supply for the U.S. NCI sponsored GTI-2040 Phase II clinical trial programs and the expanded GTI-2040 Phase II clinical trial in patients with advanced renal cell carcinoma, partially offset by lower administrative costs. 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, should be sufficient to finance its operations and capital needs for at least twelve months. OPERATING CASH REQUIREMENTS Lorus' cash used in operating activities for the first quarter of fiscal 2004 increased to $5,889,000 compared to $2,487,000 for the same quarter last year. The increase in the quarter is due mainly to higher clinical trial and product development costs in the quarter partially offset by higher current and accrued liabilities at August 31, 2003. CASH POSITION At August 31, 2003 Lorus had cash and cash equivalents and short-term investments totaling $49.0 million compared to $25.1 million at May 31, 2003. Working capital was $43.0 million at August 31, 2003 compared to $20.9 million at May 31, 2003. /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 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 20-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)