----

|                                    |   |                                         |
|-----------------------------------------|--------|----------------------------------------------|
| Dr. Nicholas Glover                     |   | Len Vernon, CA                               |
| President & Chief Executive Officer |   | Vice President of Finance and Administration |

----

----

|                                                    |
|----------------------------------------------------|
| Chartered Accountants, Licensed Public Accountants |
|                                               |
| September 22, 2011                                 |
| Toronto, Canada                                    |

----

----

|                                                    |
|----------------------------------------------------|
| Chartered Accountants, Licensed Public Accountants |
|                                               |
| Toronto, Canada                                    |
| September 22, 2011                                 |

----

----

|                                 |   |   |         |   |   |   |
|--------------------------------------|--------|--------|--------------|--------|--------|--------|
|                                 |   | 2011   |         |   | 2010   |   |
|                                 |   |   |         |   |   |   |
| Assets                               |   |   |         |   |   |   |
|                                 |   |   |         |   |   |   |
| Current assets:                      |   |   |         |   |   |   |
| Cash and cash equivalents (note 4)   |   | $      | 32,046,630   |   |   | $      | 19,460,141 |   |
| Short-term deposits (note 4)         |   |   | 47,611,922   |   |   |   | 26,184,991 |   |
| Accounts receivable                  |   |   | 205,900      |   |   |   | 161,184 |   |
| Prepaid expenses                     |   |   | 731,676      |   |   |   | 237,962 |   |
|                                 |   |   | 80,596,128   |   |   |   | 46,044,278 |   |
|                                 |   |   |         |   |   |   |   |   |
| Property and equipment (note 5)      |   |   | 91,320       |   |   |   | 84,775 |   |
|                                 |   |   |         |   |   |   |   |   |
| Intangible assets (note 6)           |   |   | 7,137,698    |   |   |   | 11,645,714 |   |
|                                 |   |   |         |   |   |   |   |   |
|                                 |   | $      | 87,825,146   |   |   | $      | 57,774,767 |   |
|                                 |   |   |         |   |   |   |   |   |
| Liabilities and Shareholders' Equity |   |   |         |   |   |   |   |   |
|                                 |   |   |         |   |   |   |   |   |
| Current liabilities:                 |   |   |         |   |   |   |   |   |
| Accounts payable                     |   | $      | 1,718,893    |   |   | $      | 699,277 |   |
| Accrued liabilities                  |   |   | 2,532,298    |   |   |   | 2,085,824 |   |
| Deferred revenue (note 12)           |   |   | 594,072      |   |   |   | 1,523,916 |   |
|                                 |   |   | 4,845,263    |   |   |   | 4,309,017 |   |
|                                 |   |   |         |   |   |   |   |   |
| Deferred revenue (note 12)           |   |   | 1,831,722    |   |   |   | 1,650,909 |   |
|                                 |   |   |         |   |   |   |   |   |
| Shareholders' equity:                |   |   |         |   |   |   |   |   |
| Share capital (note 8)               |   |   | 263,399,692  |   |   |   | 203,498,239 |   |
| Share purchase warrants (note 9)     |   |   | 1,329,235    |   |   |   | 1,473,246 |   |
| Contributed surplus (note 10)        |   |   | 14,855,788   |   |   |   | 14,088,671 |   |
| Deficit                              |   |   | (198,436,554 | )      |   |   | (167,245,315 | ) |
|                                 |   |   | 81,148,161   |   |   |   | 51,814,841 |   |
|                                 |   |   |         |   |   |   |   |   |
| Basis of presentation (note 1)       |   |   |         |   |   |   |   |   |
| Commitments (note 14)                |   |   |         |   |   |   |   |   |
|                                 |   |   |         |   |   |   |   |   |
|                                 |   | $      | 87,825,146   |   |   | $      | 57,774,767 |   |

| /s/ Tryon M. Williams |   | Director |
|-----------------------|--------|----------|
|                  |   |     |
| /s/ David G.P. Allan  |   | Director |

----

----

|                                                 |   | Years ended June 30, |         |
|------------------------------------------------------|--------|----------------------|--------------|
|                                                 |   | 2011                 |         |   | 2010 |   |   | 2009 |   |
|                                                 |   |                 |         |   |   |   |   |   |   |
| Out-licensing revenue (note 12)                      |   | $                    | 1,033,239    |   |   | $ | 2,610,560 |   |   | $ | 4,543,280 |   |
| Interest income                                      |   |                 | 469,191      |   |   |   | 84,391 |   |   |   | 1,070,264 |   |
|                                                 |   |                 | 1,502,430    |   |   |   | 2,694,951 |   |   |   | 5,613,544 |   |
|                                                 |   |                 |         |   |   |   |   |   |   |   |   |   |
| Expenses:                                            |   |                 |         |   |   |   |   |   |   |   |   |   |
| Licensing and product development                    |   |                 | 23,249,053   |   |   |   | 16,974,790 |   |   |   | 14,172,845 |   |
| General and administrative                           |   |                 | 8,341,885    |   |   |   | 6,898,209 |   |   |   | 4,839,870 |   |
|                                                 |   |                 | 31,590,938   |   |   |   | 23,872,999 |   |   |   | 19,012,715 |   |
|                                                 |   |                 |         |   |   |   |   |   |   |   |   |   |
| Loss before the undernoted                           |   |                 | (30,088,508  | ) |   |   | (21,178,048 | ) |   |   | (13,399,171 | ) |
|                                                 |   |                 |         |   |   |   |   |   |   |   |   |   |
| Gain (loss) on foreign exchange                      |   |                 | (1,407,760   | ) |   |   | 194,036 |   |   |   | 67,075 |   |
| Gain (loss) on short-term deposits                   |   |                 | 11,123       |   |   |   | (9,352 | ) |   |   | (40,200 | ) |
| Gain on disposal of property and equipment           |   |                 | 13,394       |   |   |   | – |   |   |   | – |   |
| Other income                                         |   |                 | 280,512      |   |   |   | – |   |   |   | 307,140 |   |
|                                                 |   |                 |         |   |   |   |   |   |   |   |   |   |
| Loss before income taxes                             |   |                 | (31,191,239  | ) |   |   | (20,993,364 | ) |   |   | (13,065,156 | ) |
|                                                 |   |                 |         |   |   |   |   |   |   |   |   |   |
| Current income taxes (note 15)                       |   |                 | –      |   |   |   | – |   |   |   | 4,310 |   |
|                                                 |   |                 |         |   |   |   |   |   |   |   |   |   |
| Loss and comprehensive loss for the year             |   |                 | (31,191,239  | ) |   |   | (20,993,364 | ) |   |   | (13,069,466 | ) |
|                                                 |   |                 |         |   |   |   |   |   |   |   |   |   |
| Deficit, beginning of year                           |   |                 | (167,245,315 | ) |   |   | (146,251,951 | ) |   |   | (133,182,485 | ) |
|                                                 |   |                 |         |   |   |   |   |   |   |   |   |   |
| Deficit, end of year                                 |   | $                    | (198,436,554 | ) |   | $ | (167,245,315 | ) |   | $ | (146,251,951 | ) |
|                                                 |   |                 |         |   |   |   |   |   |   |   |   |   |
| Basic and diluted loss per common share              |   | $                    | (0.32        | ) |   | $ | (0.33 | ) |   | $ | (0.23 | ) |
|                                                 |   |                 |         |   |   |   |   |   |   |   |   |   |
| Weighted average number of common shares outstanding |   |                 | 97,764,811   |   |   |   | 63,607,316 |   |   |   | 55,835,356 |   |

----

----

|                                                                 |   | Years ended June 30, |        |
|----------------------------------------------------------------------|--------|----------------------|-------------|
|                                                                 |   | 2011                 |        |   | 2010 |   |   | 2009 |   |
| Cash provided by (used in):                                          |   |                 |        |   |   |   |   |   |   |
|                                                                 |   |                 |        |   |   |   |   |   |   |
| Operating activities:                                                |   |                 |        |   |   |   |   |   |   |
| Loss for the year                                                    |   | $                    | (31,191,239 | ) |   | $ | (20,993,364 | ) |   | $ | (13,069,466 | ) |
| Items not involving cash:                                            |   |                 |        |   |   |   |   |   |   |   |   |   |
| Amortization of property and equipment                          |   |                 | 78,533      |   |   |   | 63,837 |   |   |   | 91,896 |   |
| Amortization of intangible assets                                    |   |                 | 4,508,016   |   |   |   | 2,938,891 |   |   |   | 1,060,541 |   |
| Impairment of intangible assets                                      |   |                 | –     |   |   |   | 1,944,317 |   |   |   | – |   |
| Gain on disposal of property and equipment                      |   |                 | (13,394     | ) |   |   | – |   |   |   | – |   |
| Unrealized loss (gain) on short-term deposits                   |   |                 | (11,123     | ) |   |   | 9,352 |   |   |   | 41,912 |   |
| Stock-based compensation                                             |   |                 | 1,565,395   |   |   |   | 983,242 |   |   |   | 760,760 |   |
| Change in non-cash operating working capital:                   |   |                 |        |   |   |   |   |   |   |   |   |   |
| Accounts receivable and prepaid expenses                        |   |                 | (538,430    | ) |   |   | 705,474 |   |   |   | (138,930 | ) |
| Accounts payable, accrued liabilities and deferred revenue      |   |                 | 717,059     |   |   |   | (2,395,174 | ) |   |   | (4,694,597 | ) |
|                                                                 |   |                 | (24,885,183 | ) |   |   | (16,743,425 | ) |   |   | (15,947,884 | ) |
|                                                                 |   |                 |        |   |   |   |   |   |   |   |   |   |
| Financing activities:                                                |   |                 |        |   |   |   |   |   |   |   |   |   |
| Issuance of common shares on exercise of options                |   |                 | 1,167,311   |   |   |   | 89,139 |   |   |   | – |   |
| Issue of common shares on exercise of warrants                  |   |                 | 1,082,218   |   |   |   | – |   |   |   | – |   |
| Net proceeds from issuance of shares and warrants               |   |                 | 56,709,635  |   |   |   | 19,389,596 |   |   |   | – |   |
|                                                                 |   |                 | 58,959,164  |   |   |   | 19,478,735 |   |   |   | – |   |
| Investing activities:                                                |   |                 |        |   |   |   |   |   |   |   |   |   |
| Short-term deposits, net                                             |   |                 | (21,415,808 | ) |   |   | 13,518,699 |   |   |   | 15,226,783 |   |
| Additions to property and equipment                                  |   |                 | (71,684     | ) |   |   | (41,163 | ) |   |   | (60,372 | ) |
|                                                                 |   |                 | (21,487,492 | ) |   |   | 13,477,536 |   |   |   | 15,166,411 |   |
| Increase (decrease) in cash and cash equivalents                |   |                 | 12,586,489  |   |   |   | 16,212,846 |   |   |   | (781,473 | ) |
| Net cash assumed on acquisition (note 3)                             |   |                 | –     |   |   |   | 909,579 |   |   |   | – |   |
| Cash and cash equivalents, beginning of year                         |   |                 | 19,460,141  |   |   |   | 2,337,716 |   |   |   | 3,119,189 |   |
| Cash and cash equivalents, end of year                               |   | $                    | 32,046,630  |   |   | $ | 19,460,141 |   |   | $ | 2,337,716 |   |
| Supplemental disclosure of non-cash transactions:                    |   |                 |        |   |   |   |   |   |   |   |   |   |
| Issuance of common shares on acquisition of Cytopia Limited (note 3) |   | $                    | –     |   |   | $ | 12,515,903 |   |   | $ | – |   |
| Issuance of stock options on acquisition of Cytopia Limited (note 3) |   |                 | –     |   |   |   | 126,000 |   |   |   | – |   |
| Issuance of broker warrants (note 8(a))                              |   |                 | –     |   |   |   | 175,371 |   |   |   | – |   |

----

----

| 1. | Basis of presentation: |
|----|------------------------|

----

----

| 2. | Significant accounting policies: |
|----|----------------------------------|

|   | (a) | Basis of consolidation: |
|--------|-----|-------------------------|

|   | (b) | Foreign currency translation: |
|--------|-----|-------------------------------|

----

----

| 2. | Significant accounting policies (continued): |
|----|----------------------------------------------|

|   | (c) | Revenue recognition: |
|--------|-----|----------------------|

|   | (d) | Cash and cash equivalents: |
|--------|-----|----------------------------|

----

----

| 2. | Significant accounting policies (continued): |
|----|----------------------------------------------|

|   | (e) | Short-term deposits: |
|--------|-----|----------------------|

|   | (f) | Property and equipment: |
|--------|-----|-------------------------|

| Computer equipment      | 3 years       |
|-------------------------|---------------|
| Vehicle                 | 3 years       |
| Furniture and equipment | 5 years       |
| Leasehold improvements  | Term of lease |

|   | (g) | Intangible assets: |
|--------|-----|--------------------|

|   | (h) | Impairment of long-lived assets: |
|--------|-----|----------------------------------|

----

----

| 2. | Significant accounting policies (continued): |
|----|----------------------------------------------|

|   | (i) | Development costs: |
|--------|-----|--------------------|

|   | (j) | Government assistance: |
|--------|-----|------------------------|

|   | (k) | Income taxes: |
|--------|-----|---------------|

----

----

| 2. | Significant accounting policies (continued): |
|----|----------------------------------------------|

|   | (l) | Stock-based compensation: |
|--------|-----|---------------------------|

|   | (m) | Basic and diluted loss per common share: |
|--------|-----|------------------------------------------|

|   | (n) | Use of estimates: |
|--------|-----|-------------------|

----

----

| 2. | Significant accounting policies (continued): |
|----|----------------------------------------------|

|   | (o) | Financial instruments: |
|--------|-----|------------------------|

|   | (p) | New accounting pronouncements: |
|--------|-----|--------------------------------|

|   | (i) | Goodwill and intangible assets: |
|--------|-----|---------------------------------|

|   | (ii) | Financial instruments: |
|--------|------|------------------------|

----

----

| 2. | Significant accounting policies (continued): |
|----|----------------------------------------------|

|   | (iii) | Business combinations, non-controlling interests and consolidated financial statements: |
|--------|-------|-----------------------------------------------------------------------------------------|

|   | (q) | Recent accounting pronouncements issued and not yet effective are as follows: |
|--------|-----|-------------------------------------------------------------------------------|

|   | International financial reporting standards: |
|--------|----------------------------------------------|

----

----

| 3. | Acquisition of Cytopia Limited: |
|----|---------------------------------|

| Fair value of consideration paid:        |   |   |       |
|------------------------------------------|--------|--------|------------|
| 7,276,688 common shares of the Company   |   | $      | 12,515,903 |   |
| 138,442 stock options of the Company     |   |   | 126,000    |   |
|                                     |   |   |       |   |
|                                     |   | $      | 12,641,903 |   |
|                                     |   |   |       |   |
| Assets acquired:                         |   |   |       |   |
| Cash                                     |   | $      | 909,579    |   |
| Accounts receivable                      |   |   | 187,186    |   |
| Property and equipment                   |   |   | 10,573     |   |
| Intangible assets (CYT 387 and CYT 997)  |   |   | 13,524,054 |   |
|                                     |   |   | 14,631,392 |   |
|                                     |   |   |       |   |
| Liabilities assumed:                     |   |   |       |   |
| Accounts payable and accrued liabilities |   |   | (1,989,489 | ) |
|                                     |   |   |       |   |
| Net assets acquired                      |   | $      | 12,641,903 |   |

|   | (a) | Cytopia shareholders received 0.0852 common shares of the Company for each Cytopia common share held at the record date.  This resulted in the issuance of a total of 7,215,053 common shares of the Company, based on the number of Cytopia common shares outstanding on the date of the Arrangement. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | The holders of Cytopia partly paid shares received 61,635 common shares of the Company and 138,442 fully vested stock options in the Company as consideration for the exchange of their partly paid shares. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| 3. | Acquisition of Cytopia (continued): |
|----|-------------------------------------|

----

----

| 4. | Cash and cash equivalents and short-term deposits: |
|----|----------------------------------------------------|

| 5. | Property and equipment: |
|----|-------------------------|

|                              |   | 2011   |    |   | 2010         |   |
|-----------------------------------|--------|--------|---------|--------|--------------|--------|
|                              |   |   |    |   | Accumulated  |   |   | Net book |   |   |   |   |   | Accumulated |   |   | Net book |   |
|                              |   | Cost   |    |   | amortization |   |   | value |   |   | Cost |   |   | amortization |   |   | value |   |
|                              |   |   |    |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Computer equipment                |   | $      | 338,354 |   |         | $      | 293,532 |   |   | $ | 44,822 |   |   | $ | 471,083 |   |   | $ | 411,950 |   |   | $ | 59,133 |   |
| Furniture and equipment      |   |   | 99,574  |   |         |   | 90,111 |   |   |   | 9,463 |   |   |   | 99,574 |   |   |   | 85,203 |   |   |   | 14,371 |   |
| Leasehold  improvements |   |   | 52,539  |   |         |   | 48,204 |   |   |   | 4,335 |   |   |   | 52,539 |   |   |   | 41,268 |   |   |   | 11,271 |   |
| Vehicle                           |   |   | 47,082  |   |         |   | 14,382 |   |   |   | 32,700 |   |   |   | – |   |   |   | – |   |   |   | – |   |
|                              |   |   |    |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                              |   | $      | 537,549 |   |         | $      | 446,229 |   |   | $ | 91,320 |   |   | $ | 623,196 |   |   | $ | 538,421 |   |   | $ | 84,775 |   |

| 6. | Intangible assets: |
|----|--------------------|

|                       |   | 2011   |       |   | 2010         |   |
|----------------------------|--------|--------|------------|--------|--------------|--------|
|                       |   |   |       |   | Accumulated  |   |   | Net book |   |   |   |   |   | Accumulated |   |   | Net book |   |
|                       |   | Cost   |       |   | amortization |   |   | value |   |   | Cost |   |   | amortization |   |   | value |   |
|                       |   |   |       |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquired technologies |   | $      | 13,524,054 |   |         | $      | 6,386,356 |   |   | $ | 7,137,698 |   |   | $ | 13,524,054 |   |   | $ | 1,878,340 |   |   | $ | 11,645,714 |   |

----

----

| 6. | Intangible assets (continued): |
|----|--------------------------------|

| 7. | Consolidation of variable interest entity: |
|----|--------------------------------------------|

|                              |   |                 |       |   |   |   |        |   |   |
|-----------------------------------|--------|----------------------|------------|--------|--------|--------|-------------|--------|--------|
|                              |   | Years ended June 30, |       |
|                              |   | 2011                 |       |   | 2010   |   |        | 2009   |   |
|                              |   |                 |       |   |   |   |        |   |   |
| Out-licensing revenue             |   | $                    | 935,798    |   |   | $      | 2,265,292   |   |   | $ | 4,474,671 |   |
|                              |   |                 |       |   |   |   |        |   |   |   |   |   |
| Expenses:                         |   |                 |       |   |   |   |        |   |   |   |   |   |
| Licensing and product development |   |                 | 3,105,054  |   |   |   | 5,602,617   |   |   |   | 9,886,659 |   |
| General and administrative        |   |                 | 5,041,065  |   |   |   | 10,236,759  |   |   |   | 4,312,867 |   |
|                              |   |                 | 8,146,119  |   |   |   | 15,839,376  |   |   |   | 14,199,526 |   |
|                              |   |                 |       |   |   |   |        |   |   |   |   |   |
| Loss for the year                 |   | $                    | (7,210,321 | )      |   | $      | (13,574,084 | )      |   | $ | (9,724,855 | ) |

| 8. | Share capital: |
|----|----------------|

|   | 500,000,000 Class A preferred shares |
|--------|--------------------------------------|

|   | 500,000,000 Class B preferred shares, Series 1 |
|--------|------------------------------------------------|

|   | 500,000,000 Class A non-voting common shares |
|--------|----------------------------------------------|

|   | 500,000,000 common shares |
|--------|---------------------------|

----

----

| 8. | Share capital (continued): |
|----|----------------------------|

|                                              |   |      |        |   |   |   |
|---------------------------------------------------|--------|-----------|-------------|--------|--------|--------|
|                                              |   | Number of |        |   |   |   |
|                                              |   | shares    |        |   | Amount |   |
|                                              |   |      |        |   |   |   |
| Common shares:                                    |   |      |        |   |   |   |
|                                              |   |      |        |   |   |   |
| Balance, June 30, 2008 and 2009                   |   |      | 55,835,356  |   |   | $      | 172,921,153 |   |
| Issued on exercise of options                     |   |      | 164,579     |   |   |   | 144,833 |   |
| Issued on acquisition of Cytopia (note 3)         |   |      | 7,276,688   |   |   |   | 12,515,903 |   |
| Issued pursuant to prospectus offering (a)        |   |      | 14,583,000  |   |   |   | 14,594,464 |   |
| Issued pursuant to prospectus offering (d)        |   |      | 2,500,000   |   |   |   | 3,321,886 |   |
|                                              |   |      |        |   |   |   |   |   |
| Balanced, June 30, 2010                           |   |      | 80,359,623  |   |   |   | 203,498,239 |   |
|                                              |   |      |        |   |   |   |   |   |
| Issued on exercise of options                     |   |      | 1,074,077   |   |   |   | 1,965,589 |   |
| Issued on exercise of warrants                    |   |      | 723,248     |   |   |   | 1,226,229 |   |
| Issued pursuant to controlled equity offering (c) |   |      | 5,775,000   |   |   |   | 13,375,113 |   |
| Issued pursuant to prospectus offering (e)        |   |      | 28,750,000  |   |   |   | 43,334,522 |   |
|                                              |   |      |        |   |   |   |   |   |
| Balance, June 30, 2011                            |   |      | 116,681,948 |   |   | $      | 263,399,692 |   |

|   | (a) | On March 10, 2010, the Company completed a prospectus offering of 14,583,000 units at U.S. $1.20 per unit for gross proceeds of U.S. $17,499,600 (Cdn. $17,895,081), and net cash proceeds of U.S. $15,712,614 (Cdn. $16,067,710).  Each unit consisted of one common share and one-half common share purchase warrant.  In connection with the financing, the Company issued 874,980 broker warrants having an aggregate fair value of U.S. $171,496 (Cdn. $175,371), estimated using the Black-Scholes option pricing model.  Each whole common share purchase warrant and each broker warrant entitles the warrant holder to acquire one common share at an exercise price of U.S. $1.60 per share at any time from September 10, 2010 to its expiry on March 10, 2015. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| 8. | Share capital (continued): |
|----|----------------------------|

|   | (b) | From May 2, 2005 to May 2, 2010, 2,380,953 common shares were held in escrow for contingent payments related to the Delex acquisition.  These common shares were returned to the Company for cancellation because the milestones were not met by May 2, 2010. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | On April 23, 2010, the Company entered into a Sales Agreement with Cantor Fitzgerald & Co. ("CF&Co"), under which the Company may, at its discretion, from time to time, sell up to a maximum of 7,750,000 of its common shares through an at-the-market equity offering program known as a Controlled Equity Offering.  CF&Co will act as sales agent for any sales made under the Controlled Equity Offering.  The common shares will be sold at market prices prevailing at the time of a sale (if any) of the common shares or at prices negotiated with CF&Co and, as a result, prices may vary between purchasers and during the period of the offering.  The Company is not required to sell any of the reserved shares at any time during the term of the Controlled Equity Offering, which extends until October 16, 2011, and the Sales Agreement does not prohibit the Company from conducting additional financings.  There are no standby fees for having established the arrangement.  CF&Co is entitled to receive a cash fee equal to but not exceeding 5.0% of the first aggregate gross proceeds of U.S. $5 million and, thereafter, 3% of the gross proceeds realized from the sale of common shares for services rendered in connection with the offering.  As at June 30, 2011, 5,775,000 common shares have been sold under this agreement for net proceeds of $13,375,113. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| 8. | Share capital (continued): |
|----|----------------------------|

|   | (d) | On June 2, 2010, the Company completed a prospectus offering of 2,500,000 common shares at U.S. $1.27 per common share for gross proceeds of U.S. $3,175,000 (Cdn. $3,367,723), resulting in net cash proceeds of Cdn. $3,321,886. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (e) | On December 17 and 23, 2010, the Company completed a prospectus offering of 25,000,000 and 3,750,000 common shares at U.S. $1.60 per common share, respectively, for gross proceeds of U.S. $46,000,000 (Cdn. $46,493,000), resulting in net cash proceeds of U.S. $42,874,672 (Cdn. $43,334,522). |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 9. | Share purchase warrants: |
|----|--------------------------|

|                                       |   |      |       |   |     |   |    |   |   |
|--------------------------------------------|--------|-----------|------------|--------|----------|--------|---------|--------|--------|
|                                       |   |      |       |   | Weighted |   |    |   |   |
|                                       |   |      |       |   | average  |   |    |   |   |
|                                       |   | Number of |       |   | exercise |   |    |   |   |
|                                       |   | warrants  |       |   | price    |   |    | Amount |   |
|                                       |   |      |       |   |     |   |    |   |   |
| Outstanding, June 30, 2008                 |   |      | 5,709,765  |   |     | $      | 2.43    |   |   | $ | 3,150,539 |   |
| Expired                                    |   |      | (5,709,765 | )      |     |   | 2.43    |   |   |   | (3,150,539 | ) |
|                                       |   |      |       |   |     |   |    |   |   |   |   |   |
| Outstanding, June 30, 2009                 |   |      | –    |   |     |   | – |   |   |   | – |   |
| Issued pursuant to prospectus offering (a) |   |      | 8,166,480  |   |     | U.S.$  | 1.60    |   |   |   | 1,473,246 |   |
|                                       |   |      |       |   |     |   |    |   |   |   |   |   |
| Outstanding, June 30, 2010                 |   |      | 8,166,480  |   |     | U.S.$  | 1.60    |   |   |   | 1,473,246 |   |
| Warrants exercised                         |   |      | (800,062   | )      |     | U.S.$  | 1.60    |   |   |   | (144,011 | ) |
|                                       |   |      |       |   |     |   |    |   |   |   |   |   |
| Outstanding, June 30, 2011                 |   |      | 7,366,418  |   |     | U.S.$  | 1.60    |   |   | $ | 1,329,235 |   |

|   | (a) | In connection with the March 10, 2010 financing, the Company issued 8,166,480 common share purchase warrants with an exercise price of U.S. $1.60 per common share.  The warrants may be exercised at any time from September 10, 2010 to their expiry on March 10, 2015. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| 10. | Contributed surplus: |
|-----|----------------------|

|                                              |   |   |       |
|---------------------------------------------------|--------|--------|------------|
| Balance, June 30, 2008                            |   | $      | 9,123,824  |   |
| Stock-based compensation                          |   |   | 760,760    |   |
| Expiry of warrants                                |   |   | 3,150,539  |   |
|                                              |   |   |       |   |
| Balance, June 30, 2009                            |   |   | 13,035,123 |   |
| Stock-based compensation                          |   |   | 983,242    |   |
| Exercise of options                               |   |   | (55,694    | ) |
| Options issued on acquisition of Cytopia (note 3) |   |   | 126,000    |   |
|                                              |   |   |       |   |
| Balance, June 30, 2010                            |   |   | 14,088,671 |   |
| Stock-based compensation                          |   |   | 1,565,395  |   |
| Exercise of options                               |   |   | (798,278   | ) |
|                                              |   |   |       |   |
| Balance, June 30, 2011                            |   | $      | 14,855,788 |   |

| 11. | Stock-based compensation: |
|-----|---------------------------|

----

| YM BIOSCIENCES INC.                                     |
|---------------------------------------------------------|
| Notes to Consolidated Financial Statements (continued)  |
| (Expressed in Canadian dollars, unless otherwise noted) |
|                                                    |
| Years ended June 30, 2011, 2010 and 2009                |
|                                                    |

| 11. | Stock-based compensation (continued): |
|-----|---------------------------------------|

|                                           |   | 2011        |       |   | 2010        |   |       | 2009        |   |
|------------------------------------------------|--------|-------------|------------|--------|-------------|--------|------------|-------------|--------|
|                                           |   |        |       |   |        |   |       |        |   |
| Number of options issued                       |   |        | 1,633,000  |   |        |   | 1,544,392  |        |   |   | 2,114,250 |   |
| Risk-free interest rate                        |   |        | 1.8% - 3.0 | %      |        |   | 0.5% - 3.3 | %           |   |   | 1.9% - 3.3 | % |
| Volatility factor                              |   |        | 80% - 91   | %      |        |   | 83% - 115  | %           |   |   | 68% - 87 | % |
| Dividend rate                                  |   |        | 0          | %      |        |   | 0          | %           |   |   | 0 | % |
| Expected life of options                       |   | 5 - 7 years |       |   | 0 - 7 years |   |       | 4 - 7 years |   |
| Vesting period (months)                        |   | 0 to 24     |       |   | 0 to 24     |   |       | 0 to 24     |   |
| Weighted average fair value of options granted |   | $           | 1.31       |   |        | $      | 1.00       |        |   | $ | 0.31 |   |
| Fair value of options granted                  |   | $           | 2,141,045  |   |        | $      | 1,544,392  |        |   | $ | 660,001 |   |

|                      |   | 2011   |       |   | 2010     |   |   | 2009   |   |
|--------------------------------|--------|--------|------------|--------|----------|--------|--------|--------|--------|
|                           |   |   |       |   | Weighted |   |   |   |   |   | Weighted |   |   |   |   |   | Weighted |   |
|                           |   |   |       |   | average  |   |   |   |   |   | average |   |   |   |   |   | average |   |
|                           |   |   |       |   | exercise |   |   |   |   |   | exercise |   |   |   |   |   | exercise |   |
|                           |   | Number |       |   | price    |   |   | Number |   |   | price |   |   | Number |   |   | price |   |
|                           |   |   |       |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding, beginning of year |   |   | 7,582,971  |   |     | $      | 2.29   |   |   |   | 6,563,615 |   |   | $ | 2.08 |   |   |   | 5,633,102 |   |   | $ | 2.80 |   |
| Granted                        |   |   | 1,633,000  |   |     |   | 1.77   |   |   |   | 1,544,392 |   |   |   | 3.07 |   |   |   | 2,114,250 |   |   |   | 0.55 |   |
| Expired                        |   |   | (1,015,978 | )      |     |   | 4.30   |   |   |   | (360,457 | ) |   |   | 2.49 |   |   |   | (1,183,737 | ) |   |   | 2.78 |   |
| Exercised                      |   |   | (1,074,077 | )      |     |   | 1.09   |   |   |   | (164,579 | ) |   |   | 0.54 |   |   |   | – |   |   |   | – |   |
|                           |   |   |       |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding, end of year       |   |   | 7,125,916  |   |     |   | 2.07   |   |   |   | 7,582,971 |   |   |   | 2.29 |   |   |   | 6,563,615 |   |   |   | 2.08 |   |
|                           |   |   |       |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercisable, end of year       |   |   | 5,848,888  |   |     | $      | 2.15   |   |   |   | 6,193,865 |   |   | $ | 2.57 |   |   |   | 4,664,072 |   |   | $ | 2.60 |   |

----

| YM BIOSCIENCES INC.                                     |
|---------------------------------------------------------|
| Notes to Consolidated Financial Statements (continued)  |
| (Expressed in Canadian dollars, unless otherwise noted) |
|                                                    |
| Years ended June 30, 2011, 2010 and 2009                |
|                                                    |

| 11. | Stock-based compensation (continued): |
|-----|---------------------------------------|

|       |   | Options outstanding |      |   | Options exercisable |   |
|-----------------|--------|---------------------|-----------|--------|---------------------|--------|
|            |   |                |      |   | Weighted            |   |   |   |   |   |   |   |   | Weighted |   |   |   |   |
|            |   |                |      |   | average             |   |   | Weighted |   |   |   |   |   | average |   |   | Weighted |   |
|            |   |                |      |   | remaining           |   |   | average |   |   |   |   |   | remaining |   |   | average |   |
| Range of        |   | Number              |      |   | contractual         |   |   | exercise |   |   | Number |   |   | contractual |   |   | exercise |   |
| exercise prices |   | outstanding         |      |   | life (years)        |   |   | price |   |   | exercisable |   |   | life (years) |   |   | price |   |
|            |   |                |      |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| $0.50 - $ 1.00  |   |                | 1,266,652 |   |                |   | 6.9 |   |   | $ | 0.50 |   |   |   | 1,266,652 |   |   |   | 6.9 |   |   | $ | 0.50 |   |
| $1.01 - $ 2.00  |   |                | 4,128,776 |   |                |   | 6.7 |   |   |   | 1.59 |   |   |   | 3,044,254 |   |   |   | 6.1 |   |   |   | 1.59 |   |
| $2.01 - $ 3.00  |   |                | 355,563   |   |                |   | 8.7 |   |   |   | 2.49 |   |   |   | 163,057 |   |   |   | 7.8 |   |   |   | 2.59 |   |
| $3.01 - $ 4.00  |   |                | 552,558   |   |                |   | 4.2 |   |   |   | 3.40 |   |   |   | 552,558 |   |   |   | 4.2 |   |   |   | 3.40 |   |
| $4.01 - $15.27  |   |                | 822,367   |   |                |   | 5.0 |   |   |   | 5.79 |   |   |   | 822,367 |   |   |   | 5.0 |   |   |   | 5.79 |   |
|            |   |                |      |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|            |   |                | 7,125,916 |   |                |   | 6.5 |   |   |   | 2.07 |   |   |   | 5,848,888 |   |   |   | 6.0 |   |   |   | 2.15 |   |

| 12. | Deferred revenue: |
|-----|-------------------|

| 13. | Related party transactions: |
|-----|-----------------------------|

----

| YM BIOSCIENCES INC.                                     |
|---------------------------------------------------------|
| Notes to Consolidated Financial Statements (continued)  |
| (Expressed in Canadian dollars, unless otherwise noted) |
|                                                    |
| Years ended June 30, 2011, 2010 and 2009                |
|                                                    |

| 14. | Commitments: |
|-----|--------------|

| 2012   |   | $      | 235,091 |   |
|--------|--------|--------|---------|--------|
| 2013   |   |   | 58,013  |   |
|   |   |   |    |   |
|   |   | $      | 293,104 |   |

----

| YM BIOSCIENCES INC.                                     |
|---------------------------------------------------------|
| Notes to Consolidated Financial Statements (continued)  |
| (Expressed in Canadian dollars, unless otherwise noted) |
|                                                    |
| Years ended June 30, 2011, 2010 and 2009                |
|                                                    |

| 15. | Income taxes: |
|-----|---------------|

|   | (a) | Reconciliations of the income tax provisions with the amounts shown in the consolidated statements of operations and comprehensive loss and deficit are as follows: |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                           |   | 2011   |        |   | 2010   |   |        | 2009   |   |
|------------------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|--------|-------------|--------|--------|
|                                                                                           |   |   |        |   |   |   |        |   |   |
| Average Canadian income tax rate                                                               |   |   | 29.26       | %      |   |   | 29.64       | %      |   |   | 33.25 | % |
|                                                                                           |   |   |        |   |   |   |        |   |   |   |   |   |
| Loss before income taxes                                                                       |   | $      | (31,191,239 | )      |   | $      | (20,993,364 | )      |   | $ | (13,065,156 | ) |
|                                                                                           |   |   |        |   |   |   |        |   |   |   |   |   |
| Income tax recovery calculated  at average Canadian income  tax rates      |   | $      | (9,126,557  | )      |   | $      | (6,222,433  | )      |   | $ | (4,344,164 | ) |
| Change in income taxes  resulting from:                                              |   |   |        |   |   |   |        |   |   |   |   |   |
| Tax effect of changes in rates                                                                 |   |   | 467,678     |   |   |   | 6,024,579   |   |   |   | (205,046 | ) |
| Differences in rates applicable  to subsidiaries in foreign  jurisdictions |   |   | (230,596    | )      |   |   | (52,966     | )      |   |   | 449,471 |   |
| Other non-deductible items                                                                     |   |   | (410,239    | )      |   |   | 300,718     |   |   |   | 194,049 |   |
| Other adjustments                                                                              |   |   | (175,152    | )      |   |   | 643,708     |   |   |   | – |   |
| Change in valuation allowance                                                                  |   |   | 9,474,866   |   |   |   | (693,606    | )      |   |   | 3,910,000 |   |
|                                                                                           |   |   |        |   |   |   |        |   |   |   |   |   |
| Current income taxes                                                                           |   | $      | –     |   |   | $      | –     |   |   | $ | 4,310 |   |

----

| YM BIOSCIENCES INC.                                     |
|---------------------------------------------------------|
| Notes to Consolidated Financial Statements (continued)  |
| (Expressed in Canadian dollars, unless otherwise noted) |
|                                                    |
| Years ended June 30, 2011, 2010 and 2009                |
|                                                    |

| 15. | Income taxes (continued): |
|-----|---------------------------|

|   | (b) | The tax effects of temporary differences that give rise to significant portions of future tax assets and future tax liabilities as at June 30 are as follows: |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                 |   | 2011   |       |   | 2010   |   |
|--------------------------------------|--------|--------|------------|--------|--------|--------|
|                                 |   |   |       |   |   |   |
| Future tax assets:                   |   |   |       |   |   |   |
| Property and equipment               |   | $      | 4,206,000  |   |   | $      | 4,358,000 |   |
| Investment in subsidiary             |   |   | 158,000    |   |   |   | 158,000 |   |
| Financing costs                      |   |   | 1,263,000  |   |   |   | 785,000 |   |
| Accruals                             |   |   | 36,000     |   |   |   | 27,000 |   |
| Deferred revenue                     |   |   | 606,000    |   |   |   | 794,000 |   |
| Capital loss carryforward            |   |   | 131,000    |   |   |   | 131,000 |   |
| Eligible capital expenditures        |   |   | 35,000     |   |   |   | 35,000 |   |
| Federal Ontario harmonization credit |   |   | 983,000    |   |   |   | 973,000 |   |
| Non-capital losses - United States   |   |   | 22,035,000 |   |   |   | 23,702,000 |   |
| Non-capital losses - Canada          |   |   | 24,993,000 |   |   |   | 22,441,000 |   |
| Non-capital losses - Australia       |   |   | 24,759,000 |   |   |   | 18,736,000 |   |
| Research and development expenses    |   |   | 8,040,000  |   |   |   | 6,982,000 |   |
|                                 |   |   | 87,245,000 |   |   |   | 79,122,000 |   |
|                                 |   |   |       |   |   |   |   |   |
| Future tax liabilities:              |   |   |       |   |   |   |   |   |
| Acquired technologies                |   |   | (2,141,000 | )      |   |   | (3,494,000 | ) |
|                                 |   |   | 85,104,000 |   |   |   | 75,628,000 |   |
|                                 |   |   |       |   |   |   |   |   |
| Less valuation allowance             |   |   | 85,104,000 |   |   |   | 75,628,000 |   |
|                                 |   |   |       |   |   |   |   |   |
| Net future tax asset                 |   | $      | –    |   |   | $      | – |   |

----

| YM BIOSCIENCES INC.                                     |
|---------------------------------------------------------|
| Notes to Consolidated Financial Statements (continued)  |
| (Expressed in Canadian dollars, unless otherwise noted) |
|                                                    |
| Years ended June 30, 2011, 2010 and 2009                |
|                                                    |

| 15. | Income taxes (continued): |
|-----|---------------------------|

|   | (c) | The Company has available Canadian, United States and Australian non-capital loss carryforwards that expire as follows: |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------|

|         |   | Canada |       |   | United States |   |       | Australia |   |
|--------------|--------|--------|------------|--------|---------------|--------|------------|-----------|--------|
|         |   |   |       |   |          |   |       |      |   |
| 2014         |   | $      | 4,932,000  |   |          | $      | –    |      |   | $ | – |   |
| 2015         |   |   | 16,578,000 |   |          |   | –    |      |   |   | – |   |
| 2019         |   |   | –    |   |          |   | 1,000      |      |   |   | – |   |
| 2020         |   |   | –    |   |          |   | 26,000     |      |   |   | – |   |
| 2021         |   |   | –    |   |          |   | 80,000     |      |   |   | – |   |
| 2022         |   |   | –    |   |          |   | 2,463,000  |      |   |   | – |   |
| 2023         |   |   | –    |   |          |   | 4,361,000  |      |   |   | – |   |
| 2024         |   |   | –    |   |          |   | 2,880,000  |      |   |   | – |   |
| 2025         |   |   | –    |   |          |   | 2,977,000  |      |   |   | – |   |
| 2026         |   |   | 13,286,000 |   |          |   | 41,211,000 |      |   |   | – |   |
| 2027         |   |   | 10,200,000 |   |          |   | 4,725,000  |      |   |   | – |   |
| 2028         |   |   | 16,235,000 |   |          |   | 2,495,000  |      |   |   | – |   |
| 2029         |   |   | 13,262,000 |   |          |   | 1,141,000  |      |   |   | – |   |
| 2030         |   |   | 15,290,000 |   |          |   | 335,000    |      |   |   | – |   |
| 2031         |   |   | 10,189,000 |   |          |   | 2,113,000  |      |   |   | – |   |
| Indefinitely |   |   | –    |   |          |   | –    |      |   |   | 82,530,000 |   |
|         |   |   |       |   |          |   |       |      |   |   |   |   |
|         |   | $      | 99,972,000 |   |          | $      | 64,808,000 |      |   | $ | 82,530,000 |   |

|   | (d) | The Company has approximately $32,158,000 (2010 - $27,929,000) of unclaimed development costs that may be claimed against future taxable income. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (e) | The Company has accumulated net capital losses for tax purposes of approximately $1,048,000, which may be carried forward and used to reduce taxable capital gains in future years. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| YM BIOSCIENCES INC.                                     |
|---------------------------------------------------------|
| Notes to Consolidated Financial Statements (continued)  |
| (Expressed in Canadian dollars, unless otherwise noted) |
|                                                    |
| Years ended June 30, 2011, 2010 and 2009                |
|                                                    |

| 15. | Income taxes (continued): |
|-----|---------------------------|

|   | (f) | The Company performs certain activities that result in investment tax credits ("ITCs") that can be used to offset future Canadian and United States federal taxes payable and Ontario Research and Development tax credits ("ORDTCs") that can be used to offset future Ontario provincial taxes payable and Ontario innovation tax credits ("OITCs") that are payable in cash from the Province of Ontario.  The Company does not accrue the federal ITCs or the ORDTCs as they can only be used to offset future taxes payable and the Company has not recorded the benefit of any tax assets to date.  The ITCs and ORDTCs expire as follows: |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | Ontario |    |   | Canada |   |      | United States |   |
|--------|--------|---------|---------|--------|--------|--------|-----------|---------------|--------|
|   |   |    |    |   |   |   |      |          |   |
| 2019   |   | $       | – |   |   | $      | –   |          |   | $ | 2,000 |   |
| 2020   |   |    | – |   |   |   | 6,000     |          |   |   | 8,000 |   |
| 2021   |   |    | – |   |   |   | 257,000   |          |   |   | 107,000 |   |
| 2022   |   |    | – |   |   |   | 426,000   |          |   |   | 72,000 |   |
| 2023   |   |    | – |   |   |   | 354,000   |          |   |   | 185,000 |   |
| 2024   |   |    | – |   |   |   | 301,000   |          |   |   | 168,000 |   |
| 2025   |   |    | – |   |   |   | 422,000   |          |   |   | 188,000 |   |
| 2026   |   |    | – |   |   |   | 1,060,000 |          |   |   | 338,000 |   |
| 2027   |   |    | – |   |   |   | 1,049,000 |          |   |   | 194,000 |   |
| 2028   |   |    | – |   |   |   | 926,000   |          |   |   | 88,000 |   |
| 2029   |   |    | 212,000 |   |   |   | 994,000   |          |   |   | 43,000 |   |
| 2030   |   |    | 204,000 |   |   |   | 879,000   |          |   |   | – |   |
| 2031   |   |    | 245,000 |   |   |   | 1,058,000 |          |   |   | 1,000 |   |
|   |   |    |    |   |   |   |      |          |   |   |   |   |
|   |   | $       | 661,000 |   |   | $      | 7,732,000 |          |   | $ | 1,394,000 |   |

|                                            |   | 2011   |       |   | 2010   |   |       | 2009   |   |
|-------------------------------------------------|--------|--------|------------|--------|--------|--------|------------|--------|--------|
|                                            |   |   |       |   |   |   |       |   |   |
| Gross development expenses                      |   | $      | 23,249,053 |   |   | $      | 16,674,790 |   |   | $ | 14,456,637 |   |
| OITCs                                           |   |   | –    |   |   |   | –    |   |   |   | (283,792 | ) |
|                                            |   |   |       |   |   |   |       |   |   |   |   |   |
| Licensing and product development expenses |   | $      | 23,249,053 |   |   | $      | 16,674,790 |   |   | $ | 14,172,845 |   |

----

| YM BIOSCIENCES INC.                                     |
|---------------------------------------------------------|
| Notes to Consolidated Financial Statements (continued)  |
| (Expressed in Canadian dollars, unless otherwise noted) |
|                                                    |
| Years ended June 30, 2011, 2010 and 2009                |
|                                                    |

| 15. | Income taxes (continued): |
|-----|---------------------------|

|   | (g) | The Province of Ontario harmonized its corporate taxation system with the Government of Canada effective at the commencement of the first taxation year that included January 1, 2009.  At that time, the Company's accumulated loss carryforwards, undepreciated capital costs, research and development expenditure pools and undeducted eligible capital expenditures for Ontario purposes were required to be adjusted to the federal values.  Since the Company's Ontario balances exceeded its federal balances, the reduction resulted in a harmonization credit of $983,000 (2010 - $973,000) which can be utilized to reduce Ontario taxes payable over the next four years.  A full valuation allowance has been provided against the future tax amount. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 16. | Capital management: |
|-----|---------------------|

| 17. | Financial instruments: |
|-----|------------------------|

|   | (a) | Financial assets and liabilities: |
|--------|-----|-----------------------------------|

----

| YM BIOSCIENCES INC.                                     |
|---------------------------------------------------------|
| Notes to Consolidated Financial Statements (continued)  |
| (Expressed in Canadian dollars, unless otherwise noted) |
|                                                    |
| Years ended June 30, 2011, 2010 and 2009                |
|                                                    |

| 17. | Financial instruments (continued): |
|-----|------------------------------------|

|   | (b) | Risks arising from financial instruments and risk management: |
|--------|-----|---------------------------------------------------------------|

|   | (i) | Market risk: |
|--------|-----|--------------|

|   | (a) | Foreign exchange risk: |
|--------|-----|------------------------|

|                                          |   | Pound         |    |   |         |   |       | Australian |   |
|-----------------------------------------------|--------|---------------|---------|--------|--------------|--------|------------|------------|--------|
|                                          |   | U.K. Sterling |    |   | U.S. dollars |   |       | dollars    |   |
|                                          |   |          |    |   |         |   |       |       |   |
| Cash and short-term deposits                  |   | £        | 9,786   |   |         | $      | 31,533,484 |       |   | $ | 602,892 |   |
| Accounts receivable                           |   |          | – |   |         |   | –    |       |   |   | 32,566 |   |
| Accounts payable and accrued liabilities |   |          | 190,355 |   |         |   | 880,924    |       |   |   | 247,236 |   |
|                                          |   |          |    |   |         |   |       |       |   |   |   |   |
|                                          |   | £        | 200,141 |   |         | $      | 32,414,408 |       |   | $ | 882,694 |   |

|   | (b) | Interest rate risk: |
|--------|-----|---------------------|

----

| YM BIOSCIENCES INC.                                     |
|---------------------------------------------------------|
| Notes to Consolidated Financial Statements (continued)  |
| (Expressed in Canadian dollars, unless otherwise noted) |
|                                                    |
| Years ended June 30, 2011, 2010 and 2009                |
|                                                    |

| 17. | Financial instruments (continued): |
|-----|------------------------------------|

|   | (ii) | Credit risk: |
|--------|------|--------------|

|   | (iii) | Liquidity risk: |
|--------|-------|-----------------|

| 18. | Canadian and United States accounting policy differences: |
|-----|-----------------------------------------------------------|

----

| YM BIOSCIENCES INC.                                     |
|---------------------------------------------------------|
| Notes to Consolidated Financial Statements (continued)  |
| (Expressed in Canadian dollars, unless otherwise noted) |
|                                                    |
| Years ended June 30, 2011, 2010 and 2009                |
|                                                    |

| 18. | Canadian and United States accounting policy differences (continued): |
|-----|-----------------------------------------------------------------------|

|   | (a) | Consolidated statements of operations and comprehensive loss: |
|--------|-----|---------------------------------------------------------------|

|                                                                      |   | 2011   |        |   | 2010   |   |        | 2009   |   |
|---------------------------------------------------------------------------|--------|--------|-------------|--------|--------|--------|-------------|--------|--------|
|                                                                      |   |   |        |   |   |   |        |   |   |
| Loss for the year based on Canadian GAAP                             |   | $      | (31,191,239 | )      |   | $      | (20,993,364 | )      |   | $ | (13,069,466 | ) |
| Amortization of acquired  technologies (i)                      |   |   | –     |   |   |   | 1,060,551   |   |   |   | 1,060,541 |   |
| Change in fair value of warrants (iii)                                    |   |   | (9,411,163  | )      |   |   | (4,885,234  | )      |   |   | – |   |
| Impairment of acquired technologies                                       |   |   | –     |   |   |   | 1,944,317   |   |   |   | – |   |
|                                                                      |   |   |        |   |   |   |        |   |   |   |   |   |
| Loss for the year and comprehensive loss based on United States GAAP |   | $      | (40,602,402 | )      |   | $      | (22,873,730 | )      |   | $ | (12,008,925 | ) |

|                                                      |   | 2011   |       |   | 2010   |   |       | 2009   |   |
|-----------------------------------------------------------|--------|--------|------------|--------|--------|--------|------------|--------|--------|
|                                                      |   |   |       |   |   |   |       |   |   |
| Basic and diluted loss per share (ii)                     |   | $      | (0.42      | )      |   | $      | (0.36      | )      |   | $ | (0.22 | ) |
|                                                      |   |   |       |   |   |   |       |   |   |   |   |   |
| Weighted average number of common shares outstanding |   |   | 97,764,811 |   |   |   | 63,607,316 |   |   |   | 55,835,356 |   |

|   | (i) | Under United States GAAP, effective for business combinations prior to July 1, 2009, the Company's acquired technologies, which primarily comprise patents and technologies which require regulatory approval to be commercialized and which have no proven alternative future uses, were considered in-process research and development and were immediately expensed upon acquisition.  The Company's acquired technologies relating to the Delex acquisition do not have an alternative future use given their specialized nature.  Under Canadian GAAP, the acquired technologies were considered to be development assets that were capitalized and amortized over their expected useful lives. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| YM BIOSCIENCES INC.                                     |
|---------------------------------------------------------|
| Notes to Consolidated Financial Statements (continued)  |
| (Expressed in Canadian dollars, unless otherwise noted) |
|                                                    |
| Years ended June 30, 2011, 2010 and 2009                |
|                                                    |

| 18. | Canadian and United States accounting policy differences (continued): |
|-----|-----------------------------------------------------------------------|

|   | (ii) | Loss per common share has been calculated using the weighted average number of common shares outstanding during the year.  The potential effect of share options is not dilutive to the loss per common share. |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (iii) | United States GAAP requires that share purchase warrants with a strike price in a foreign currency other than the Company's functional currency requires them to be classified as long-term liabilities and measured at fair value with changes in fair value recognized in the consolidated statements of operations. |
|--------|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | Consolidated statements of changes in shareholders' equity: |
|--------|-----|-------------------------------------------------------------|

|                                                               |   |    |        |   |    |   |         | Additional |   |   | Share      |   |   |   |       |
|--------------------------------------------------------------------|--------|---------|-------------|--------|---------|--------|--------------|------------|--------|--------|------------|--------|--------|--------|------------|
|                                                               |   | Share   |        |   |    |   |         | paid-in    |   |   | purchase   |   |   |   |       |
|                                                               |   | capital |        |   | Deficit |   |         | capital    |   |   | warrants   |   |   | Total  |       |
|                                                               |   |    |        |   |    |   |         |       |   |   |       |   |   |   |       |
| Total shareholders' equity under U.S. GAAP, June 30, 2008     |   | $       | 172,921,153 |   |    | $      | (135,429,560 | )          |   | $      | 7,362,712  |   |   | $      | 3,150,539  |   |   | $ | 48,004,844 |   |
| Expiry of warrants                                                 |   |    | –     |   |    |   | –      |       |   |   | 3,150,539  |   |   |   | (3,150,539 | ) |   |   | – |   |
| Stock-based compensation                                           |   |    | –     |   |    |   | –      |       |   |   | 760,760    |   |   |   | –    |   |   |   | 760,760 |   |
| Loss for the year                                                  |   |    | –     |   |    |   | (12,008,925  | )          |   |   | –    |   |   |   | –    |   |   |   | (12,008,925 | ) |
|                                                               |   |    |        |   |    |   |         |       |   |   |       |   |   |   |       |   |   |   |   |   |
| Total shareholders' equity under U.S. GAAP, June 30, 2009     |   |    | 172,921,153 |   |    |   | (147,438,485 | )          |   |   | 11,274,011 |   |   |   | –    |   |   |   | 36,756,679 |   |
| Issued on exercise of options                                      |   |    | 144,833     |   |    |   | –      |       |   |   | (55,694    | )      |   |   | –    |   |   |   | 89,139 |   |
| Issued on acquisition of Cytopia                                   |   |    | 12,515,903  |   |    |   | –      |       |   |   | 126,000    |   |   |   | –    |   |   |   | 12,641,903 |   |
| Issued on financing                                                |   |    | 17,916,350  |   |    |   | –      |       |   |   | –    |   |   |   | –    |   |   |   | 17,916,350 |   |
| Stock-based compensation                                           |   |    | –     |   |    |   | –      |       |   |   | 983,242    |   |   |   | –    |   |   |   | 983,242 |   |
| Loss for the year                                                  |   |    | –     |   |    |   | (22,873,730  | )          |   |   | –    |   |   |   | –    |   |   |   | (22,873,730 | ) |
|                                                               |   |    |        |   |    |   |         |       |   |   |       |   |   |   |       |   |   |   |   |   |
| Total shareholders' equity under U.S. GAAP, June 30, 2010     |   |    | 203,498,239 |   |    |   | (170,312,215 | )          |   |   | 12,327,559 |   |   |   | –    |   |   |   | 45,513,583 |   |
| Stock-based compensation                                           |   |    | –     |   |    |   | –      |       |   |   | 1,565,395  |   |   |   | –    |   |   |   | 1,565,395 |   |
| Issued on exercise of options                                      |   |    | 1,965,588   |   |    |   | –      |       |   |   | (798,278   | )      |   |   | –    |   |   |   | 1,167,310 |   |
| Issued on exercise of warrants                                     |   |    | 2,375,181   |   |    |   | –      |       |   |   | –    |   |   |   | –    |   |   |   | 2,375,181 |   |
| Issue pursuant to financing                                        |   |    | 56,709,635  |   |    |   | –      |       |   |   | –    |   |   |   | –    |   |   |   | 56,709,635 |   |
| Loss for the year                                                  |   |    | –     |   |    |   | (40,602,402  | )          |   |   | –    |   |   |   | –    |   |   |   | (40,602,402 | ) |
|                                                               |   |    |        |   |    |   |         |       |   |   |       |   |   |   |       |   |   |   |   |   |
| Total shareholders' equity under U.S. GAAP, June 30, 2011     |   |    | 264,548,643 |   |    |   | (210,914,617 | )          |   |   | 13,094,676 |   |   |   | –    |   |   |   | 66,728,702 |   |
| Stock-based compensation (i)                                       |   |    | –     |   |    |   | (1,818,334   | )          |   |   | 1,761,112  |   |   |   | –    |   |   |   | (57,222 | ) |
| Share purchase warrants (ii)                                       |   |    | (1,148,951  | )      |    |   | 14,296,397   |       |   |   | –    |   |   |   | 1,329,235  |   |   |   | 14,476,681 |   |
|                                                               |   |    |        |   |    |   |         |       |   |   |       |   |   |   |       |   |   |   |   |   |
| Total shareholders' equity under Canadian GAAP, June 30, 2011 |   | $       | 263,399,692 |   |    | $      | (198,436,554 | )          |   | $      | 14,855,788 |   |   | $      | 1,329,235  |   |   | $ | 81,148,161 |   |

----

| YM BIOSCIENCES INC.                                     |
|---------------------------------------------------------|
| Notes to Consolidated Financial Statements (continued)  |
| (Expressed in Canadian dollars, unless otherwise noted) |
|                                                    |
| Years ended June 30, 2011, 2010 and 2009                |
|                                                    |

| 18. | Canadian and United States accounting policy differences (continued): |
|-----|-----------------------------------------------------------------------|

|   | (i) | Under Canadian GAAP, the Company has applied the fair value-based method of accounting for stock options granted to employees for options granted on or after July 1, 2002.  Effective July 1, 2005, the Company adopted the fair valued-based method of accounting for stock options granted to employees and directors as required by FASB Statement No. 123R.  In accordance with one of the transitional options permitted under this provision, the Company elected to apply the modified prospective application method and, according, has applied the fair value-based method to all employee stock options granted on or after July 1, 2005.  Additionally, compensation cost for awards granted in prior periods for which the requisite service has not been rendered as of July 1, 2005 will be recognized in the consolidated statements of operations as the requisite service is rendered. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (ii) | United States GAAP requires that share purchase warrants with a strike price in a foreign currency other than the Company's functional currency requires them to be classified as long-term liabilities and measured at fair value with changes in fair value recognized in the consolidated statements of operations.  The fair value of the warrants is based on inputs that are not derived from observable market inputs in the Company's fair value hierarchy. |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| YM BIOSCIENCES INC.                                     |
|---------------------------------------------------------|
| Notes to Consolidated Financial Statements (continued)  |
| (Expressed in Canadian dollars, unless otherwise noted) |
|                                                    |
| Years ended June 30, 2011, 2010 and 2009                |
|                                                    |

| 18. | Canadian and United States accounting policy differences (continued): |
|-----|-----------------------------------------------------------------------|

|   | (c) | Investment tax credits: |
|--------|-----|-------------------------|

|   | (d) | Income taxes: |
|--------|-----|---------------|

----

| YM BIOSCIENCES INC.                                     |
|---------------------------------------------------------|
| Notes to Consolidated Financial Statements (continued)  |
| (Expressed in Canadian dollars, unless otherwise noted) |
|                                                    |
| Years ended June 30, 2011, 2010 and 2009                |
|                                                    |

| 18. | Canadian and United States accounting policy differences (continued): |
|-----|-----------------------------------------------------------------------|

|   | (e) | New accounting pronouncements: |
|--------|-----|--------------------------------|

|   | (f) | Supplemental pro forma information: |
|--------|-----|-------------------------------------|

----