UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
 _____________________________
   **FORM
        20-F**


(Mark
      One)




o
            REGISTRATION
                  STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES
                  EXCHANGE
                  ACT OF 1934.ORx
            ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934.FOR THE FISCAL YEAR ENDED MAY 31, 2007.ORo
            TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934. FOR THE TRANSITION PERIOD FROM_________TO___________
                  ..COMMISSION
                  FILE NUMBER 001-32001ORo
            SHELL
                  COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                  EXCHANGE
                  ACT OF 1934.
                DATE
                  OF EVENT REQUIRING THIS SHELL COMPANY REPORT
                  __________________.







**LORUS
      THERAPEUTICS INC.**


*(Exact
      Name of Registrant as Specified in Its Charter)*




**Canada**


*(Jurisdiction
      of Incorporation or Organization)*




**2
      Meridian Road**


**Toronto,
      Ontario, Canada**


**M9W
      4Z7**


*(Address
      of Principal Executive Offices)*




Securities
      registered or to be registered pursuant to Section 12(b) of the
      Act:




**Title
                of Each Class**
            
            **Name
                of Each Exchange On Which Registered**Common
                Shares
            
            American
                Stock Exchange







Securities
      registered or to be registered pursuant to Section 12(g) of the
      Act:  **None**




Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act:  **None**




Indicate
      the number of outstanding shares of each of the issuer’s classes of capital or
      common stock as of the close of the period covered by the annual
      report.




Common
      Shares, without par value at May 31, 2007: 212,265,616




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.




Yes  o  No  x


















If
      this is an annual or transition report, indicate by check mark if the registrant
      is not required to file reports pursuant to Section 13 or 15(d) of the
      Securities Exchange Act of 1934.




Yes  o  No  x




Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or such shorter period that the registrant was required
      to
      file such reports), and (2) has been subject to such filing requirements for
      the
      past 90 days.




Yes  x  No  o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.




Large
      accelerated
      filer  o Accelerated filer
      o Non-accelerated
      filer x




Indicate
      by check mark which financial statement item the registrant has elected to
      follow.




Item
      17 x  Item
      18 o




If
      this is an annual report, indicate by check mark whether the registrant is
      a
      shell company (as defined in Rule 12b-2 of the Exchange Act).




Yes  o  No  x












**TABLE
      OF CONTENTS**






**Page****PART
                  I**ITEM
                  1.
              IDENTITY
                  OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
              
              
              2ITEM
                  2.
              OFFER
                  STATISTICS AND EXPECTED TIMETABLE
              
              
              2ITEM
                  3.
              KEY
                  INFORMATION
              
              
              2ITEM
                  4.
              INFORMATION
                  ON THE COMPANY
              
              
              13ITEM
                  4A.
              UNRESOLVED
                  STAFF COMMENTS
              
              
              32ITEM
                  5.
              OPERATING
                  AND FINANCIAL REVIEW AND PROSPECTS
              
              
              32ITEM
                  6.
              DIRECTORS,
                  SENIOR MANAGEMENT AND EMPLOYEES
              
              
              46ITEM
                  7.
              MAJOR
                  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
              
              
              58ITEM
                  8.
              FINANCIAL
                  INFORMATION
              
              
              58ITEM
                  9.
              THE
                  OFFER AND LISTING
              
              
              58ITEM
                  10.
              ADDITIONAL
                  INFORMATION
              
              
              60ITEM
                  11.
              QUALITATIVE
                  AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
              
              
              71ITEM
                  12.
              DESCRIPTION
                  OF SECURITIES OTHER THAN EQUITY SECURITIES
              
              
              72
 
 **PART
                  II**ITEM
                  13.
              DEFAULTS,
                  DIVIDENDS, ARREARAGES AND DELINQUENCIES
              
              
              72ITEM
                  14.
              MATERIAL
                  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
                  PROCEEDS
              
              
              72ITEM
                  15.
              CONTROLS
                  AND PROCEDURES
              
              
              72ITEM
                  16.
              [RESERVED]
              
              
              73ITEM
                  16A.
              AUDIT
                  COMMITTEE FINANCIAL EXPERT
              
              
              73ITEM
                  16B.
              CODE
                  OF ETHICS
              
              
              73ITEM
                  16C.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              
              
              74ITEM
                  16D.
              EXEMPTIONS
                  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
              
              
              74ITEM
                  16E.
              PURCHASES
                  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                  PURCHASERS
              
              
              74
  **PART
                  III**ITEM
                  17.
              FINANCIAL
                  STATEMENTS
              
              
              74ITEM
                  18.
              FINANCIAL
                  STATEMENTS
              
              
              75ITEM
                  19.
              EXHIBITS
              
              
              75










**General**




On
      July 10, 2007 (the "Arrangement Date"),we completed a plan of
      arrangement and corporate reorganization with, among others,
      4325231 Canada Inc. (now Global Summit Real Estate Inc.), formerly
      Lorus Therapeutics Inc. ("Old Lorus"), 6707157 Canada Inc.
      and Pinnacle International Lands, Inc. (the “Arrangement”). As a result of
      the plan of arrangement and reorganization, among other things, each common
      share of Old Lorus was exchanged for one of our common shares and the assets
      (excluding certain future tax assets and related valuation allowance) and
      liabilities of Old Lorus (including all of the shares of its subsidiaries)
      were
      transferred, directly or indirectly, to our corporation and/or our subsidiaries.
      We continued the business of Old Lorus after the Arrangement Date with the
      same
      officers and employees and continued to be governed by the same directors as
      Old
      Lorus prior to the Arrangement Date.  In this Annual Report on Form
      20-F, all references to the “Corporation”, the “Company”, "we", "our", "us" and
      similar expressions, unless otherwise stated, are references to Old Lorus prior
      to the Arrangement Date and us after the
      Arrangement Date.  References to this “Form 20-F” and this
“Annual Report” mean references to this Annual Report on Form 20-F for the year
      ended May 31, 2007.




We
      use the Canadian dollar as our reporting currency. All references in this Annual
      Report to “dollars” or “$” are expressed in Canadian dollars, unless otherwise
      indicated. See also “Item 3. Key Information” for more detailed currency and
      conversion information. Our consolidated financial statements which form part
      of
      the annual report are presented in Canadian dollars and are prepared in
      accordance with accounting principles generally accepted in Canada (“Canadian
      GAAP”) which differ in certain respects from accounting principles generally
      accepted in the United States (“U.S. GAAP”). The differences between Canadian
      GAAP and U.S. GAAP, as they relate to our business, are explained in the
      Supplementary Information included with the Financial Statements included in
      this Annual Report.




**Special
      note regarding forward-looking statements in this Annual
      Report**




*This
      Annual Report may contain forward-looking statements within the meaning of
      Canadian and U.S. securities laws.  Such statements include, but are
      not limited to, statements relating to:*




•
            *our
                expectations regarding future
                financings;*




•
            *our
                plans to conduct clinical
                trials;*




•
            *our
                expectations regarding the progress and the successful and timely
                completion of the various stages of our drug discovery, preclinical
                and
                clinical studies and the regulatory approval
                process;*




•
            *our
                plans to obtain partners to assist in the further development of
                our
                product candidates; and*




•
            *our
                expectations with respect to existing and future corporate alliances
                and
                licensing transactions with third parties, and the receipt and timing
                of
                any payments to be made by us or to us in respect of such arrangements,
                and*




*the
      Company’s plans, objectives, expectations and intentions and other statements,
      including words such as “anticipate”, “contemplate”, “continue”, “believe”,
“plan”, “estimate”, “expect”, “intend”, “will”, “should”, “may”, and other
      similar expressions.*




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




•
            *our
                ability to obtain the substantial capital required to fund research
                and
                operations;*




•
            *our
                lack of product revenues and history of operating
                losses;*




•
            *our
                early stage of development, particularly the inherent risks and
                uncertainties associated with (i) developing new drug candidates
                generally, (ii) demonstrating the safety and efficacy of these drug
                candidates in clinical studies in humans, and (iii) obtaining regulatory
                approval to commercialize these drug
                candidates;*






1




•
            *our
                drug candidates require time-consuming and costly preclinical and
                clinical
                testing and regulatory approvals before
                commercialization;*




•
            *clinical
                studies and regulatory approvals of our drug candidates are subject
                to
                delays, and may not be completed or granted on expected timetables,
                if at
                all, and such delays may increase our costs and could delay our ability
                to
                generate revenue;*




•
            *the
                regulatory approval process;*




•
            *the
                progress of our clinical
                trials;*




•
            *our
                ability to find and enter into agreements with potential
                partners;*




•
            *our
                ability to attract and retain key
                personnel;*




•
            *our
                ability to obtain patent protection and protect our intellectual
                property
                rights;*




•
            *our
                ability to protect our intellectual property rights and to not infringe
                on
                the intellectual property rights of
                others;*




•
            *our
                ability to comply with applicable governmental regulations and
                standards;*




•
            *development
                or commercialization of similar products by our competitors, many
                of which
                are more established and have greater financial resources than we
                do;*




•
            *commercialization
                limitations imposed by intellectual property rights owned or controlled
                by
                third parties;*




•
            *our
                business is subject to potential product liability and other
                claims;*




•
            *our
                ability to maintain adequate insurance at acceptable
                costs;*




•
            *further
                equity financing may substantially dilute the interests of our
                shareholders;*




•
            *changing
                market conditions; and*




•
            *other
                risks detailed from time-to-time in our ongoing quarterly filings,
                annual
                information forms, annual reports and annual filings with Canadian
                securities regulators and the United States Securities and Exchange
                Commission, and those which are discussed under Item 3.D. “Risk
                Factors”.*




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




**PART
      I**




**Item
      1.                 Identity
      of Directors, Senior Management and Advisors**




Not
      applicable.




**Item
      2.                 Offer
      Statistics and Expected Timetable**




Not
      applicable.




**Item
      3.                 Key
      Information**




**A.           Selected
      Financial Data**




The
      following tables present our selected consolidated financial
      data.  You should read these tables in conjunction with our audited
      consolidated financial statements and accompanying notes included
      in****Item 17****of this Annual Report and
      the “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” included in Item 5 of this Annual Report.




2


The
      financial data as at May 31, 2007, 2006, 2005, 2004 and 2003 and for the years
      ended May 31, 2007, 2006, 2005, 2004 and 2003 have been derived from, and are
      qualified in their entirety by reference to, our audited consolidated financial
      statements, which have been prepared in accordance with Canadian generally
      accepted accounting principles (Canadian GAAP) and reconciled to United States
      generally accepted accounting principles (U.S. GAAP) in
****the Supplementary Information included with the Financial
      Statements included in this Annual Report.




The
      following table presents a summary of our consolidated statement of operations
      derived from our audited financial statements for the years ended May 31, 2007,
      2006, 2005, 2004 and 2003.







**Consolidated
      statements of operations data:**


***(In
      thousands, except per share data)***




**Years
                Ended May 31,******
            **2007**
            **1**
            
            ****
            **2006**
            **1**
            
            ****
            **2005**
            **1**
            
            ****
            **2004**
            **1**
            
            ****
            **2003**
            **1**
            
            **Period
                From Inception2****In
                accordance with C****anadian
                GAAP**Revenue
            
            **$**
            **107**
            
            
            $
            26
            
            
            $
            6
            
            
            $
            608
            
            
            $
            66
            
            
            $
            813Research
                and development
            
            **$**
            **3,384**
            
            
            $
            10,237
            
            
            $
            14,394
            
            
            $
            26,785
            
            
            $
            12,550
            
            
            $
            113,859General
                and administrative
            
            **$**
            **3,848**
            
            
            $
            4,334
            
            
            $
            5,348
            
            
            $
            4,915
            
            
            $
            4,290
            
            
            $
            51,323Net
                loss
            
            **$**
            **9,638**
            
            
            $
            17,909
            
            
            $
            22,062
            
            
            $
            30,301
            
            
            $
            16,634
            
            
            $
            174,190Basic
                and diluted loss per share
            
            **$**
            **0.05**
            
            
            $
            0.10
            
            
            $
            0.13
            
            
            $
            0.18
            
            
            $
            0.12Weighted
                average number of common shares outstanding
            
            ****
            **204,860**
            
            
            
            173,523
            
            
            
            172,112
            
            
            
            171,628
            
            
            
            144,590**In
                accordance with U.S. GAAP**Net
                loss3
            
            **$**
            **9,150**
            
            
            $
            16,388
            
            
            $
            20,298
            
            
            $
            30,301
            
            
            $
            16,634
            
            
            $
            167,648Basic
                and diluted loss per share
            
            **$**
            **0.05**
            
            
            $
            0.09
            
            
            $
            0.12
            
            
            $
            0.18
            
            
            $
            0.12










The
      following table presents a summary of our consolidated balance sheet as at
      May
      31, 2007, 2006, 2005, 2004 and 2003.




**Consolidated
      balance sheet data:**


***(In
        Thousands)***


**As
                at May 31,******
            **2007**
            **1**
            
            ****
            **2006**
            **1**
            
            ****
            **2005**
            **1**
            
            ****
            **2004**
            **1**
            
            ****
            **2003**
            **1**I**n
                accordance with Canadian GAAP**Cash
                and cash equivalents
            
            **$**
            **1,405**
            
            
            $
            2,692
            
            
            $
            2,776
            
            
            $
            1,071
            
            
            $
            905Marketable
                securities and other investments
            
            **$**
            **10,993**
            
            
            $
            5,627
            
            
            $
            18,683
            
            
            $
            25,657
            
            
            $
            24,219Total
                assets
            
            **$**
            **15,475**
            
            
            $
            11,461
            
            
            $
            27,566
            
            
            $
            34,424
            
            
            $
            34,255Total
                debt
            
            **$**
            **14,714**
            
            
            $
            14,017
            
            
            $
            14,300
            
            
            $
            5,825
            
            
            $
            5,360Total
                shareholders’ deficit
            
            ****
            **761**
            
            
            $
            (2,556
            )
            
            $
            13,266
            
            
            $
            28,599
            
            
            $
            28,895Number
                of common shares outstanding
            
            ****
            **211,923**
            
            
            
            174,694
            
            
            
            172,541
            
            
            
            171,794
            
            
            
            171,517Dividends
                paid on common shares
            
            ****
            **-**
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -**In
                accordance with U.S. GAAP3**Total
                assets
            
            **$**
            **15,579**
            
            
            $
            11,625
            
            
            $
            27,838
            
            
            $
            34,424
            
            
            $
            34,255Total
                debt
            
            **$**
            **17,232**
            
            
            $
            17,277
            
            
            $
            18,040
            
            
            $
            5,825
            
            
            $
            5,360Total
                shareholders’ deficit
            
            **$**
            **(1,653**
            **)**
            
            $
            (5,652
            )
            
            $
            9,798
            
            
            $
            28,599
            
            
            $
            28,895





Footnotes:


1Changes
      in accounting polices:


2Period
        from inception September 5, 1986 to May 31, 2007
 3The significant differences between the line items under Canadian GAAP
        and
        those as determined under U.S. GAAP arise primarily
        from:






3





(a)**Stock based compensation:**Effective June 1, 2004, the Company adopted
      the fair value method of accounting for stock options granted to employees
      on or
      after June 1, 2002 as required by the amended CICA Handbook Section 3870,
      Stock-Based Compensation and Other Stock-Based Payments. The change was adopted
      retroactively without restatement as permitted under the revised
      section.





Under
      the fair value method, the estimated fair value of stock options granted is
      recognized over the service period, that is the applicable vesting period,
      as
      stock compensation expense and a credit to stock options. When options granted
      on or after June 1, 2002 are exercised, the proceeds received and the related
      amounts in stock options are credited to share capital.  When options
      granted prior to June 1, 2002 are exercised, the proceeds are credited to share
      capital.  The impact to the financial statements arising from adoption
      of the fair value method was an increase to the deficit and stock option
      balances presented in shareholders equity of $2.8 million at June 1,
      2004.





(b)
      **Business combinations, goodwill and other intangibles:**Goodwill
      represents the excess of the purchase price over the fair value of net
      identifiable assets acquired in the GeneSense business combination, and until
      June 1, 2002, was amortized on a straight-line basis over three
      years.  In August 2001, the CICA issued Handbook Sections 1581,
“Business Combinations”, and 3062, “Goodwill and Other Intangible Assets”. The
      new standards required that the purchase method of accounting must be used
      for
      business combinations and require that goodwill no longer be amortized but
      instead be tested for impairment at least annually. The standards also specify
      criteria that intangible assets must meet to be recognized and reported apart
      from goodwill. The new standards were substantially consistent with U.S.
      GAAP.





The
      Company adopted these new standards as of June 1, 2002 and the Company
      discontinued amortization of all existing goodwill. The Company also evaluated
      existing intangible assets, including estimates of remaining useful lives in
      accordance with the provisions of the standard.





In
      connection with Section 3062’s transitional goodwill impairment evaluation, the
      Company assessed whether goodwill was impaired as of June 1, 2002. The Company
      completed the transitional goodwill impairment assessment during the first
      quarter of 2003 and determined that no impairment existed at the date of
      adoption.




**Fiscal
      2003 and 2004:**




There
      were no significant differences between Canadian and U.S. GAAP during the years
      ended May 2003 and 2004.




**Fiscal
      2005 to 2007:**




The
      following table reconciles the loss per Canadian GAAP to loss per U.S. GAAP
      for
      years ended May 31, 2005, 2006 and 2007:





**Years
                ended May 31,****2007**
            
            
            **2006**
            
            
            **2005**Loss
                per Canadian GAAP
            
            **$**
            **(9,638**
            **)**
            
            $
            (17,909
            )
            
            $
            (22,062
            )Accretion
                of convertible debentures (i)
            
            ****
            **741**
            
            
            
            480
            
            
            
            329Amortization
                of debt issue costs (i)
            
            ****
            **(59**
            **)**
            
            
            (108
            )
            
            
            (40
            )Stock
                compensation expense (ii)
            
            ****
            **(194**
            **)**
            
            
            1,149
            
            
            
            1,475**Loss
                and comprehensive loss per U.S. GAAP**
            
            ****
            **(9,150**
            **)**
            
            
            (16,388
            )
            
            
            (20,298
            )**Basic
                and diluted loss per share per U.S. GAAP**
            
            **$**
            **(0.05**
            **)**
            
            $
            (0.09
            )
            
            $
            (0.12
            )




Under
      U.S. GAAP, the number of weighted average common shares outstanding for basic
      and diluted loss per share are the same as under Canadian GAAP.




4


***Convertible
      debentures***


Under
      Canadian GAAP, the conversion option embedded in the convertible debentures
      is
      presented separately as a component of shareholders’ equity. Under U.S. GAAP,
      the embedded conversion option is not subject to bifurcation and is thus
      presented as a liability along with the balance of the convertible debentures.
      Measurement differences resulting from the accretion of convertible debentures
      and amortization of debt issue costs are further explained in the supplementary
      note to the consolidated financial statements.




***Stock
      options***


For
      fiscal 2005 and 2006, the Company followed the fair value based method of
      recording stock compensation expense under Canadian GAAP, and an intrinsic
      value
      method of recording stock compensation expense under U.S. GAAP.  This
      is further explained in the supplementary note to the consolidated financial
      statements.




Effective
      June 1, 2006 the Company adopted the fair value-based method of accounting
      for
      stock options granted to employees and directors as required by FASB Statement
      No. 123R in accordance with the modified prospective
      method.  Accordingly the company has applied the fair value-based
      method to all employee stock options granted after June 1,
      2006.  Additionally, compensation costs for awards granted in prior
      periods for which the requisite service period has not been rendered as of
      June
      1, 2006 will be recognized in the consolidated statement of operations and
      deficit as the requisite service is rendered.




During
      2007, the Company recorded stock compensation expense of $503 thousand (2006
      -
      $1.2 million) in accordance with Canadian GAAP in the consolidated statement
      of
      operations, representing the amortization applicable to the current year at
      the
      estimated fair value of options granted since June 1, 2002; and an offsetting
      adjustment to stock options of $503 thousand in the consolidated balance sheets.
      Under U.S. GAAP, the Company recognized $697 thousand in expense during the
      same
      period as a result of adopting SFAS 123R.







We
      publish our consolidated financial statements in Canadian (“CDN”)
      dollars.  In this report, except where otherwise indicated, all
      amounts are stated in CDN dollars.




The
      following table sets out the exchange rates of CDN$ for 1 US$ for the following
      periods:




**Period**
              
              **Average
                  Close**
              
              
              **High**
              
              
              **Low**October,
                  2007
              
              
              0.9747
              
              
              
              0.9984
              
              
              
              0.9447September,
                  2007
              
              
              1.0246
              
              
              
              1.0562
              
              
              
              0.9914August,
                  2007
              
              
              1.0589
              
              
              
              1.0778
              
              
              
              1.0487July,
                  2007
              
              
              1.0517
              
              
              
              1.0684
              
              
              
              1.0378June,
                  2007
              
              
              1.0656
              
              
              
              1.0747
              
              
              
              1.0580May,
                  2007
              
              
              1.0953
              
              
              
              1.1122
              
              
              
              1.0696Fiscal
                  Year Ended May 31, 2007
              
              
              1.1366
              
              
              
              1.1855
              
              
              
              1.0696Fiscal
                  Year Ended May 31, 2006
              
              
              1.1701
              
              
              
              1.246
              
              
              
              1.0948Fiscal
                  Year Ended May 31, 2005
              
              
              1.2551
              
              
              
              1.378
              
              
              
              1.1746Fiscal
                  Year Ended May 31, 2004
              
              
              1.3423
              
              
              
              1.418
              
              
              
              1.2683Fiscal
                  Year Ended May 31, 2003
              
              
              1.5245
              
              
              
              1.601
              
              
              
              1.3438





5





**B.           Capitalization
      and Indebtedness**




Not
      applicable.




**C.           Reasons
      for the Offer and Use of Proceeds**




Not
      applicable.




**D.           Risk
      Factors**




Before
      making an investment decision with respect to our common shares, you should
      carefully consider the following risk factors, in addition to the other
      information included or incorporated by reference in this Annual
      Report.  Additional risks not currently known by us or that we
      consider immaterial at the present time may also impair our business, financial
      condition, prospects or results of operations.  If any of the
      following risks occur, our business, financial condition, prospects or results
      of operations would likely be affected.  In that case, the trading
      price of our common shares could decline and you may lose all or part of the
      money you paid to buy our common shares.  The risks set out below are
      not the only we currently face; other risks may arise in the
      future.




***We
      have a history of operating losses. We expect to incur net losses and we may
      never achieve or maintain profitability.***




We
      have not been profitable since our inception in 1986. We reported net losses
      of
      $9.6 million; $17.9 million and $22.1 million for the years ended May 31, 2007,
      2006 and 2005, respectively. As of May 31, 2007, we had an accumulated deficit
      of $174.2 million.




To
      date we have only generated nominal revenues from the sale of Virulizin® in
      Mexico and we stopped selling Virulizin® in Mexico in July 2005. We have not
      generated any other revenue from product sales to date and it is possible that
      we will never have sufficient product sales revenue to achieve profitability.
      We
      expect to continue to incur losses for at least the next several years as we
      or
      our collaborators and licensees pursue clinical trials and research and
      development efforts. To become profitable, we, either alone or with our
      collaborators and licensees, must successfully develop, manufacture and market
      our current product candidates, GTI-2040, as well as continue to identify,
      develop, manufacture and market new product candidates. It is possible that
      we
      will never have significant product sales revenue or receive significant
      royalties on our licensed product candidates. If funding is insufficient at
      any
      time in the future, we may not be able to develop or commercialize our products,
      take advantage of business opportunities or respond to competitive
      pressures.




Our
      current and anticipated operations, particularly our product development,
      requires substantial capital. We expect that our existing cash and cash
      equivalents, along with the funds available to us through the reorganization
      agreement described above, will sufficiently fund our current and planned
      operations through at least the next twelve months. However, our future capital
      needs will depend on many factors, including the extent to which we enter into
      collaboration agreements with respect to any of our proprietary product
      candidates, receive royalty and milestone payments from our possible
      collaborators and make progress in our internally funded research and
      development activities.




Our
      capital requirements will also depend on the magnitude and scope of these
      activities, our ability to maintain existing and establish new collaborations,
      the terms of those collaborations, the success of our collaborators in
      developing and marketing products under their respective collaborations with
      us,
      the success of our contract manufacturers in producing clinical and commercial
      supplies of our product candidates on a timely basis and in sufficient
      quantities to meet our requirements, competing technological and market
      developments, the time and cost of obtaining regulatory approvals, the extent
      to
      which we choose to commercialize our future products through our own sales
      and
      marketing capabilities, the cost of preparing, filing, prosecuting, maintaining
      and enforcing patent and other rights and our success in acquiring and
      integrating complementary products, technologies or companies. We do not have
      committed external sources of funding and we cannot assure you that we will
      be
      able to obtain additional funds on acceptable terms, if at all. If adequate
      funds are not available, we may be required to:






6




•
            engage
                in equity financings that would be dilutive to current
                shareholders;




•
            delay,
                reduce the scope of or eliminate one or more of our development programs;
                or




•
            obtain
                funds through arrangements with collaborators or others that may
                require
                us to relinquish rights to technologies, product candidates or products
                that we would otherwise seek to develop or commercialize ourselves;
                or
                license rights to technologies, product candidates or products on
                terms
                that are less favourable to us than might otherwise be
                available.




***Our
      cash flow may not be sufficient to cover interest payments on our secured
      convertible debentures or to repay the debentures at
      maturity.***




Our
      ability to make interest payments, if required to be paid in cash, and to repay
      at maturity or refinance our prime plus 1% convertible debentures due in
      approximately 22 months (October 2009) will depend on our ability to generate
      or
      raise sufficient cash or refinance them. We have never generated positive annual
      cash flow from our operating activities, and we may not generate or sustain
      positive cash flows from operations in the future. Our ability to generate
      sufficient cash flow will depend on our ability, or the ability of our strategic
      partners, to successfully develop and obtain regulatory approval for new
      products and to successfully market these products, as well as the results
      of
      our research and development efforts and other factors, including general
      economic, financial, competitive, legislative and regulatory conditions, many
      of
      which are outside of our control.




***We
      may violate one or more of the operational covenants related to our convertible
      debentures that could result in an event of default and the requirement for
      early payment of our convertible debentures.***




Our
      convertible debentures are subject to certain operational
      covenants.  In the event that one of those covenants is breached by
      us, an event of default could be declared requiring the immediate payment of
      the
      face value of the debentures.  This could result in our inability to
      pay and insolvency of the Company, a dilutive equity financing in attempt to
      raise funds to repay the debentures, or a significant reduction in cash
      available for us to use towards the development of our product
      candidates.




***We
      may be unable to obtain partnerships for one or more of our product candidates
      which could curtail future development and negatively impact our share
      price.***




Our
      product candidates require significant funding to reach regulatory approval
      upon
      positive clinical results.  Such funding, in particular for
      Virulizin®, will be very difficult, or impossible to raise in the public
      markets.  If such partnerships are not attainable, the development of
      these product candidates maybe significantly delayed or stopped
      altogether.  The announcement of such delay or discontinuation of
      development may have a negative impact on our share price.




In
      addition, our strategy for the research, development and commercialization
      of
      our products requires entering into various arrangements with corporate
      collaborators, licensers, licensees and others, and our commercial success
      is
      dependent upon these outside parties performing their respective contractual
      responsibilities. The amount and timing of resources that such third-parties
      will devote to these activities may not be within our control. We cannot assure
      you that such parties will perform their obligations as expected. We also cannot
      assure you that our collaborators will devote adequate resources to our
      programs. In addition, we could become involved in disputes with our
      collaborators, which could result in a delay or termination of the related
      development programs or result in litigation. We intend to seek additional
      collaborative arrangements to develop and commercialize some of our products.
      We
      may not be able to negotiate collaborative arrangements on favourable terms,
      or
      at all, in the future, or that our current or future collaborative arrangements
      will be successful.




If
      we cannot negotiate collaboration, licence or partnering agreements, we may
      never achieve profitability.




***Clinical
      trials are long, expensive and uncertain processes and Health Canada or the
      FDA
      may ultimately not approve any of our product candidates. We may never develop
      any commercial drugs or other products that generate
      revenues.***




7


None
      of our products has received regulatory approval for commercial use and sale
      in
      North America. We cannot market a pharmaceutical product in any jurisdiction
      until it has completed thorough preclinical testing and clinical trials in
      addition to that jurisdiction’s extensive regulatory approval process. In
      general, significant research and development and clinical studies are required
      to demonstrate the safety and effectiveness of our products before we can submit
      any regulatory applications.




Clinical
      trials are long, expensive and uncertain processes. Clinical trials may not
      be
      commenced or completed on schedule, and Health Canada or the FDA may not
      ultimately approve our product candidates for commercial sale. Further, even
      if
      the results of our preclinical studies or clinical trials are initially
      positive, it is possible that we will obtain different results in the later
      stages of drug development or that results seen in clinical trials will not
      continue with longer term treatment. Drugs in late stages of clinical
      development may fail to show the desired safety and efficacy traits despite
      having progressed through initial clinical testing. For example, positive
      results in early Phase I or Phase II clinical trials may not be repeated in
      larger Phase II or Phase III clinical trials.  The results of our
      Phase III clinical trial of Virulizinâ did not
      meet the
      primary endpoint of the study despite promising preclinical and early stage
      clinical data.  All of our potential drug candidates are prone to the
      risks of failure inherent in drug development.




Preparing,
      submitting and advancing applications for regulatory approval is complex,
      expensive and time intensive and entails significant uncertainty. The results
      of
      our completed preclinical studies and clinical trials may not be indicative
      of
      future clinical trial results. A commitment of substantial resources to conduct
      time-consuming research, preclinical studies and clinical trials will be
      required if we are to complete development of our products. Clinical trials
      of
      our products require that we identify and enrol a large number of patients
      with
      the illness under investigation. We may not be able to enrol a sufficient number
      of appropriate patients to complete our clinical trials in a timely manner
      particularly in smaller indications such as Acute Myeloid
      Leukemia.  If we experience difficulty in enrolling a sufficient
      number of patients to conduct our clinical trials, we may need to delay or
      terminate ongoing clinical trials and will not accomplish objectives material
      to
      our success that could affect the price of our common shares. Delays in planned
      patient enrolment or lower than anticipated event rates in our current clinical
      trials or future clinical trials may result in increased costs, program delays,
      or both.




In
      addition, unacceptable toxicities or adverse side effects may occur at any
      time
      in the course of preclinical studies or human clinical trials or, if any
      products are successfully developed and approved for marketing, during
      commercial use of any approved products. The appearance of any such unacceptable
      toxicities or adverse side effects could interrupt, limit, delay or abort the
      development of any of our product candidates or, if previously approved,
      necessitate their withdrawal from the market. Furthermore, disease resistance
      or
      other unforeseen factors may limit the effectiveness of our potential
      products.




The
      clinical trials of any of our drug candidates could be unsuccessful, which
      would
      prevent us from advancing, commercializing or partnering the drug.




Our
      failure to develop safe, commercially viable drugs would substantially impair
      our ability to generate revenues and sustain our operations and would materially
      harm our business and adversely affect our share price. We may never achieve
      profitability.




***As
      a result of intense competition and technological change in the pharmaceutical
      industry, the marketplace may not accept our products or product candidates,
      and
      we may not be able to compete successfully against other companies in our
      industry and achieve profitability.***




Many
      of our competitors have drug products that have already been approved or are
      in
      development, and operate large, well-funded research and development programs
      in
      these fields. Many of our competitors have substantially greater financial
      and
      management resources, stronger intellectual property positions and greater
      manufacturing, marketing and sales capabilities, areas in which we have limited
      or no experience. In addition, many of our competitors have significantly
      greater experience than we do in undertaking preclinical testing and clinical
      trials of new or improved pharmaceutical products and obtaining required
      regulatory approvals. Consequently, our competitors may obtain Health Canada,
      FDA and other regulatory approvals for product candidates sooner and may be
      more
      successful in manufacturing and marketing their products than we or our
      collaborators are. Existing and future products, therapies and technological
      approaches will compete directly with the products we seek to develop.




8
 
  Current
        and prospective competing products may provide greater therapeutic benefits
        for
        a specific problem or may offer easier delivery or comparable performance
        at a
        lower cost. Any product candidate that we develop and that obtains regulatory
        approval must then compete for market acceptance and market share. Our product
        candidates may not gain market acceptance among physicians, patients, healthcare
        payers and the medical community. Further, any products we develop may become
        obsolete before we recover any expenses we incurred in connection with the
        development of these products. As a result, we may never achieve
        profitability.




***If
      we fail to attract and retain key employees, the development and
      commercialization of our products may be adversely
      affected.***




We
      depend heavily on the principal members of our scientific and management staff.
      If we lose any of these persons, our ability to develop products and become
      profitable could suffer. The risk of being unable to retain key personnel may
      be
      increased by the fact that we have not executed long term employment contracts
      with our employees, except for our senior executives. Our future success will
      also depend in large part on our ability to attract and retain other highly
      qualified scientific and management personnel. We face competition for personnel
      from other companies, academic institutions, government entities and other
      organizations.




***We
      may be unable to obtain patents to protect our technologies from other companies
      with competitive products, and patents of other companies could prevent us
      from
      manufacturing, developing or marketing our products.***




**Patent
      protection:**


The
      patent positions of pharmaceutical and biotechnology companies are uncertain
      and
      involve complex legal and factual questions. The United States (U.S.) Patent
      and
      Trademark Office and many other patent offices in the world have not established
      a consistent policy regarding the breadth of claims that it will allow in
      biotechnology patents.  Further, allowable patentable subject matter
      and the scope of patent protection obtainable may differ between
      jurisdictions.  If a patent office allows broad claims, the number and
      cost of patent interference proceedings in the U.S. or analogous proceedings
      in
      other jurisdictions and the risk of infringement litigation may increase. If
      it
      allows narrow claims, the risk of infringement may decrease, but the value
      of
      our rights under our patents, licenses and patent applications may also
      decrease. In addition, the scope of the claims in a patent application can
      be
      significantly modified during prosecution before the patent is issued.
      Consequently, we cannot know whether our pending applications will result in
      the
      issuance of patents or, if any patents are issued, whether they will provide
      us
      with significant proprietary protection or will be circumvented, invalidated
      or
      found to be unenforceable. Until recently, patent applications in the U.S.
      were
      maintained in secrecy until the patents issued, and publication of discoveries
      in scientific or patent literature often lags behind actual discoveries. Patent
      applications filed in the United States after November 2000 generally will
      be
      published 18 months after the filing date unless the applicant certifies that
      the invention will not be the subject of a foreign patent
      application.  In many other jurisdictions, such as Canada, patent
      applications are published 18 months from the priority date.  We
      cannot assure you that, even if published, we will be aware of all such
      literature. Accordingly, we cannot be certain that the named inventors of our
      products and processes were the first to invent that product or process or
      that
      we were the first to pursue patent coverage for our inventions.




**Enforcement
      of intellectual property rights:**


Our
      commercial success depends in part on our ability to maintain and enforce our
      proprietary rights. If third-parties engage in activities that infringe our
      proprietary rights, our management’s focus will be diverted and we may incur
      significant costs in asserting our rights. We may not be successful in asserting
      our proprietary rights, which could result in our patents being held invalid
      or
      a court holding that the third-party is not infringing, either of which would
      harm our competitive position. In addition, we cannot assure you that others
      will not design around our patented technology. Moreover, we may have to
      participate in interference proceedings declared by the U.S. Patent and
      Trademark Office, European opposition proceedings, or other analogous
      proceedings in other parts of the world to determine priority of invention
      and
      the validity of patent rights granted or applied for, which could result in
      substantial cost and delay, even if the eventual outcome is favourable to us.
      We
      cannot assure you that our pending patent applications, if issued, would be
      held
      valid or enforceable. Additionally, many of our foreign patent applications
      have
      been published as part of the patent prosecution process in such
      countries.




9


**Trademark
      protection:**


Protection
      of the rights revealed in published patent applications can be complex, costly
      and uncertain. In order to protect goodwill associated with our company and
      product names, we rely on trademark protection for our marks. For example,
      we
      have registered the Virulizin® trademark with the U.S. Patent and Trademark
      Office. A third-party may assert a claim that the Virulizin® mark is confusingly
      similar to its mark and such claims or the failure to timely register the
      Virulizin® mark or objections by the FDA could force us to select a new name for
      Virulizin®, which could cause us to incur additional expense.




**Trade
      secrets:**


We
      also rely on trade secrets, know-how and confidentiality provisions in our
      agreements with our collaborators, employees and consultants to protect our
      intellectual property. However, these and other parties may not comply with
      the
      terms of their agreements with us, and we might be unable to adequately enforce
      our rights against these people or obtain adequate compensation for the damages
      caused by their unauthorized disclosure or use. Our trade secrets or those
      of
      our collaborators may become known or may be independently discovered by
      others.




***Our
      products and product candidates may infringe the intellectual property rights
      of
      others, which could increase our costs.***




Our
      success also depends on avoiding infringement of the proprietary technologies
      of
      others. In particular, there may be certain issued patents and patent
      applications claiming subject matter which we or our collaborators may be
      required to license in order to research, develop or commercialize at least
      some
      of our product candidates, including Virulizin®, GTI-2040, GTI-2501 and small
      molecules. In addition, third-parties may assert infringement or other
      intellectual property claims against us based on our patents or other
      intellectual property rights. An adverse outcome in these proceedings could
      subject us to significant liabilities to third-parties, require disputed rights
      to be licensed from third-parties or require us to cease or modify our use
      of
      the technology. If we are required to license such technology, we cannot assure
      you that a license under such patents and patent applications will be available
      on acceptable terms or at all. Further, we may incur substantial costs defending
      ourselves in lawsuits against charges of patent infringement or other unlawful
      use of another’s proprietary technology.




***If
      product liability claims are brought against us or we are unable to obtain
      or
      maintain product liability insurance, we may incur substantial liabilities
      that
      could reduce our financial resources.***




The
      clinical testing and commercial use of pharmaceutical products involves
      significant exposure to product liability claims. We have obtained limited
      product liability insurance coverage for our clinical trials on humans; however,
      our insurance coverage may be insufficient to protect us against all product
      liability damages. Further, liability insurance coverage is becoming
      increasingly expensive and we might not be able to obtain or maintain product
      liability insurance in the future on acceptable terms or in sufficient amounts
      to protect us against product liability damages. Regardless of merit or eventual
      outcome, liability claims may result in decreased demand for a future product,
      injury to reputation, withdrawal of clinical trial volunteers, loss of revenue,
      costs of litigation, distraction of management and substantial monetary awards
      to plaintiffs. Additionally, if we are required to pay a product liability
      claim, we may not have sufficient financial resources to complete development
      or
      commercialization of any of our product candidates and our business and results
      of operations will be adversely affected.




***We
      have no manufacturing capabilities. We depend on third-parties, including a
      number of sole suppliers, for manufacturing and storage of our product
      candidates used in our clinical trials. Product introductions may be delayed
      or
      suspended if the manufacture of our products is interrupted or
      discontinued.***




We
      do not have manufacturing facilities to produce supplies of Virulizin®,
      GTI-2040, GTI-2501, small molecule or any of our other product candidates to
      support clinical trials or commercial launch of these products, if they are
      approved. We are dependent on third-parties for manufacturing and storage of
      our
      product candidates. If we are unable to contract for a sufficient supply of
      our
      product candidates on acceptable terms, or if we encounter delays or
      difficulties in the manufacturing process or our relationships with our
      manufacturers, we may not have sufficient product to conduct or complete our
      clinical trials or support preparations for the commercial launch of our product
      candidates, if approved.




10


Dependence
      on contract manufacturers for commercial production involves a number of risks,
      many of which are outside our control. These risks include potential delays
      in
      transferring technology, and the inability of our contract manufacturer to
      scale
      production on a timely basis, to manufacture commercial quantities at reasonable
      costs, to comply with cGMP and to implement procedures that result in the
      production of drugs that meet our specifications and regulatory
      requirements.




Our
      reliance on contract manufacturers exposes us to additional risks,
      including:




•
            there
                may be delays in scale-up to quantities needed for clinical trials
                and
                commercial launch or failure to manufacture such quantities to our
                specifications, or to deliver such quantities on the dates we
                require;




•
            our
                current and future manufacturers are subject to ongoing, periodic,
                unannounced inspection by the FDA and corresponding Canadian and
                international regulatory authorities for compliance with strictly
                enforced
                cGMP regulations and similar standards, and we do not have control
                over
                our contract manufacturers’ compliance with these regulations and
                standards;




•
            our
                current and future manufacturers may not be able to comply with applicable
                regulatory requirements, which would prohibit them from manufacturing
                products for us;




•
            if
                we need to change to other commercial manufacturing contractors,
                the FDA
                and comparable foreign regulators must approve these contractors
                prior to
                our use, which would require new testing and compliance inspections,
                and
                the new manufacturers would have to be educated in, or themselves
                develop
                substantially equivalent processes necessary for the production or
                our
                products; and




•
            our
                manufacturers might not be able to fulfill our commercial needs,
                which
                would require us to seek new manufacturing arrangements and may result
                in
                substantial delays in meeting market
                demand.




Any
      of these factors could cause us to delay or suspend clinical trials, regulatory
      submission, required approvals or commercialization of our products under
      development, entail higher costs and result in our being unable to effectively
      commercialize our products. We do not currently intend to manufacture any of
      our
      product candidates, although we may choose to do so in the future. If we decide
      to manufacture our products, we would be subject to the regulatory risks and
      requirements described above. We would also be subject to similar risks
      regarding delays or difficulties encountered in manufacturing our pharmaceutical
      products and we would require additional facilities and substantial additional
      capital. We cannot assure you that we would be able to manufacture any of our
      products successfully in accordance with regulatory requirements and in a cost
      effective manner.




***Our
      operations involve hazardous materials and we must comply with environmental
      laws and regulations, which can be expensive and restrict how we do
      business.***




Our
      research and development activities involve the controlled use of hazardous
      materials, radioactive compounds and other potentially dangerous chemicals
      and
      biological agents. Although we believe our safety procedures for these materials
      comply with governmental standards, we cannot entirely eliminate the risk of
      accidental contamination or injury from these materials. We currently have
      insurance, in amounts and on terms typical for companies in businesses that
      are
      similarly situated, that could coverall or a portion of a damage claim arising
      from our use of hazardous and other materials. However, if an accident or
      environmental discharge occurs, and we are held liable for any resulting
      damages, the associated liability could exceed our insurance coverage and our
      financial resources.




***We
      have limited sales, marketing and distribution
      experience.***




We
      have very limited experience in the sales, marketing and distribution of
      pharmaceutical products. There can be no assurance that we will be able to
      establish sales, marketing, and distribution capabilities or make arrangements
      with our collaborators, licensees or others to perform such activities or that
      such efforts will be successful. If we decide to market any of our products
      directly, we must either acquire or internally develop a marketing and sales
      force with technical expertise and with supporting distribution capabilities.
      The acquisition or development of a sales and distribution infrastructure would
      require substantial resources, which may divert the attention of our management
      and key personnel and have a negative impact on our product development efforts.
      If we contract with third-parties for the sales and marketing of our products,
      our revenues will be dependent on the efforts of these third-parties, whose
      efforts may not be successful. If we fail to establish successful marketing
      and
      sales capabilities or to make arrangements with third-parties, our business,
      financial condition and results of operations will be materially adversely
      affected.




11


***Our
      interest income is subject to fluctuations of interest rates in our investment
      portfolio.***




Our
      investments are held to maturity and have staggered maturities to minimize
      interest rate risk. There can be no assurance that interest income fluctuations
      will not have an adverse impact on our financial condition. We maintain all
      our
      accounts in Canadian dollars, but a portion of our expenditures are in foreign
      currencies. We do not currently engage in hedging our foreign currency
      requirements to reduce exchange rate risk.




***Because
      of the uncertainty of pharmaceutical pricing, reimbursement and healthcare
      reform measures, if any of our product candidates are approved for sale to
      the
      public, we may be unable to sell our products
      profitably.***




The
      availability of reimbursement by governmental and other third-party payers
      affects the market for any pharmaceutical product. These third-party payers
      continually attempt to contain or reduce the costs of healthcare. There have
      been a number of legislative and regulatory proposals to change the healthcare
      system and further proposals are likely. Significant uncertainty exists with
      respect to the reimbursement status of newly approved healthcare products.
      In
      addition, third-party payers are increasingly challenging the price and cost
      effectiveness of medical products and services. We might not be able to sell
      our
      products profitably or recoup the value of our investment in product development
      if reimbursement is unavailable or limited in scope.




**RISKS
      RELATED TO OUR COMMON SHARES AND CONVERTIBLE DEBENTURES**




***Our
      share price has been and may continue to be volatile and an investment in our
      common shares could suffer a decline in value.***




You
      should consider an investment in our common shares as risky and invest only
      if
      you can withstand a significant loss and wide fluctuations in the market value
      of your investment. We receive only limited attention by securities analysts
      and
      frequently experience an imbalance between supply and demand for our common
      shares. The market price of our common shares has been highly volatile and
      is
      likely to continue to be volatile. Factors affecting our common share price
      include:




•
            the
                progress of our and our collaborators’ clinical trials, including our and
                our collaborators’ ability to produce clinical supplies of our product
                candidates on a timely basis and in sufficient quantities to meet
                our
                clinical trial requirements;




•
            announcements
                of technological innovations or new product candidates by us, our
                collaborators or our competitors;




•
            fluctuations
                in our operating results;




•
            published
                reports by securities analysts;




•
            developments
                in patent or other intellectual property
                rights;




•
            publicity
                concerning discovery and development activities by our
                licensees;




•
            the
                cash and short term investments held us and our ability to secure
                future
                financing;




•
            public
                concern as to the safety and efficacy of drugs that we and our competitors
                develop;






12




•
            governmental
                regulation and changes in medical and pharmaceutical product reimbursement
                policies; and




•
            general
                market conditions.




***Future
      sales of our common shares by us or by our existing shareholders could cause
      our
      share price to fall.***




Additional
      equity financings or other share issuances by us could adversely affect the
      market price of our common shares. Sales by existing shareholders of a large
      number of shares of our common shares in the public market and the sale of
      shares issued in connection with strategic alliances, or the perception that
      such additional sales could occur, could cause the market price of our common
      shares to drop.




***Conversion
      of our secured convertible debentures will dilute the ownership interest of
      existing shareholders.***




The
      conversion of some or all of the convertible debentures will dilute the
      ownership interests of existing shareholders. Any sales in the public market
      of
      the common shares issuable upon such conversion could adversely affect
      prevailing market prices of our common shares. In addition, the existence of
      the
      secured convertible debentures may encourage short selling by market
      participants.




**Item
      4.                 Information
      on the Company**




**A.           History
      and development of the Company**




Old
      Lorus was incorporated under the *Business Corporations Act*(Ontario) on
      September 5, 1986 under the name RML Medical Laboratories Inc.  On
      October 28, 1991, RML Medical Laboratories Inc. amalgamated with Mint Gold
      Resources Ltd., resulting in Old Lorus becoming a reporting issuer (as defined
      under Canadian securities law) in Ontario, on such date.  On August
      25, 1992, Old Lorus changed its name to IMUTEC Corporation.  On
      November 27, 1996, Old Lorus changed its name to Imutec Pharma Inc., and on
      November 19, 1998, Old Lorus changed its name to Lorus Therapeutics
      Inc.  On October 1, 2005, Old Lorus continued under the *Canada
      Business Corporations Act*.




New
      Lorus was incorporated on November 1, 2006 as 6650309 Canada Inc. under the
      *Canada Business Corporations Act*.




On
      July 10, 2007 (the “Arrangement Date”), Old Lorus completed a plan of
      arrangement and corporate reorganization with, among others, New Lorus, 6707157
      Canada Inc. and Pinnacle International Lands, Inc.  As a result of the
      plan of arrangement and reorganization, among other things, each common share
      of
      Old Lorus was exchanged for one common share of New Lorus and the assets
      (excluding certain future tax attributes and related valuation allowance) and
      liabilities of Old Lorus (including all of the shares of its subsidiaries held
      by it) were transferred, directly or indirectly, to the Company and/or its
      subsidiaries.  New Lorus continued the business of Old Lorus after the
      Arrangement Date with the same officers and employees and continued to be
      governed by the same directors as Old Lorus prior to the Arrangement
      Date.   At the Arrangement Date, New Lorus’ articles of
      incorporation were amended to change the name of the Company from 6650309 Canada
      Inc. to Lorus Therapeutics Inc.




The
      address of the Company’s head and registered office is 2 Meridian Road, Toronto,
      Ontario, Canada, M9W 4Z7.  Our corporate website is
      www.lorusthera.com.  The contents of the website are specifically not
      included in this 20-F by reference.




Our
      common shares are listed on the Toronto Stock Exchange under the symbol “LOR”
and are listed on the American Stock Exchange under the symbol
“LRP”.




Lorus’
      subsidiaries are GeneSense Technologies Inc. (“GeneSense”), a corporation
      incorporated under the laws of Canada, of which Lorus owns 100% of the issued
      and outstanding share capital, and NuChem Pharmaceuticals Inc. (“NuChem”), a
      corporation incorporated under the laws of Ontario, of which Lorus owns 80%
      of
      the issued and outstanding voting share capital and 100% of the issued and
      outstanding non-voting preference share capital.




13


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




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




We
      believe that the future of cancer treatment and management lies in drugs that
      are effective, safe and have minimal side effects, and therefore improve a
      patient's quality of life. Many of the cancer drugs currently approved for
      the
      treatment and management of cancer are toxic with severe side effects, and
      we
      therefore believe that a product development plan based on effective and safe
      drugs could have broad applications in cancer treatment.  Lorus'
      strategy is to continue the development of our product pipeline using several
      therapeutic approaches. Each therapeutic approach is dependent on different
      technologies, which we believe mitigates the development risks associated with
      a
      single technology platform. We evaluate the merits of each product throughout
      the clinical trial process and consider commercialization as appropriate. The
      most advanced anticancer drugs in our pipeline, each of which flow from
      different platform technologies, are antisense-DNA/RNA-based therapeutics,
      small
      molecules and immunotherapeutics.




Over
      the past three years, we have focused on advancing our product candidates
      through pre-clinical and clinical testing. You should be aware that it can
      cost
      millions of dollars and take many years before a product candidate may be
      approved for therapeutic use in humans. In addition, a product candidate may
      not
      meet the end points of any Phase I, Phase II or Phase III clinical trial. See
      “Risk Factors”.






***Antisense-DNA/RNA-based
      Therapeutics***




Our
      lead antisense product in clinical development is GTI-2040. In addition we
      have
      a number of other antisense molecules in development. See “-- Clinical
      Development” and “Business of the Company - Antisense-DNA/RNA-based
      Therapeutics” for more details.






***(i)***
            ***GTI-2040***




Seven
      of the nine clinical studies for GTI-2040 have been conducted in conjunction
      with the United States National Cancer Institute (“NCI”) with the remaining
      studies conducted or initiated by Lorus.  We have initiated, are
      conducting or conducted Phase I/II clinical trials of GTI-2040 in patients
      with
      refractory or relapsed acute myeloid leukemia (“AML”), metastatic breast cancer,
      non-small cell lung cancer, solid tumors, advanced unresectable colon cancer,
      hormone refractory prostate cancer, high grade myelodysplastic syndrome (“MDS”)
      and acute leukemia (“AL”).  Our collaboration with the NCI is active
      and ongoing. In addition, the Company is pursuing a Phase II clinical trial
      with
      GTI-2040 and high dose Ara-C in refractory and relapsed AML and completed a
      Phase I/II study of advanced, end-stage renal cell cancer.






***(ii)***
            ***siRNA***




As
      a complement to our antisense therapy, we are exploiting RNA intereference
      technology using a novel class of small interefering RNA (“siRNA”)
      molecules.  SiRNA has the potential to decrease the
      cellular  target RNA expression though a process known as RNA
      interference.






***(iii)***
            ***GTI-2501***




Our
      other antisense therapy, GTI-2501, is currently in a Phase II clinical trial
      for
      the treatment of hormone refractory prostate cancer at the Toronto Sunnybrook
      Regional Cancer Centre, following the successful conclusion of a Phase I
      clinical trial in the United States.




14






***(iv)***
            ***Other***




We
      have also entered into a collaboration agreement in respect of our antisense
      therapy, GTI-2601 and have other antisense molecules in pre-clinical
      development.






***Small
      Molecule***




We
      believe we have small molecule drug screening technologies and preclinical
      scientific expertise, which we are using to create a drug candidate pipeline.
      Our proprietary group of novel small molecule compounds, which include lead
      compounds LT-253 and ML-220, have unique structures and modes of action, and
      are
      promising candidates for the development of novel anticancer agents with high
      safety profiles.  See “-- Clinical Development” and “Business of the
      Company- Small Molecule Therapies”.






***Immunotherapy***




Lorus’
      immunotherapy product candidates are Virulizin® and IL-17E.  See “--
      Clinical Development” and “Business of the Company - Immunotherapy” for more
      details.






***(v)***
            ***Virulizin®***




In
      2002, we initiated a phase III clinical trial of Virulizin® for patients with
      locally advanced or metastatic pancreatic cancer who had not previously received
      systemic chemotherapy.  In July of 2005, we announced the completion
      of the study and in October 2005, we announced that the results of the trial
      indicated that the overall survival rate of patients who were treated with
      Virulizin® plus gemcitabine (a standard chemotherapy drug) was not statistically
      significant when compared to those patients in the study who were given
      gemcitabine plus a placebo. Subsequent sub-group analyses support the potential
      for further study in select patient populations. We are currently seeking
      partners to continue the clinical development of Virulizin®.






***(vi)***
            ***IL-17E***




We
      have discovered a new lead drug candidate, IL-17E, which belongs to a larger
      family of cytokines. In experiments with mice, IL-17E has demonstrated
      significant antitumor activity against a variety of human tumors, including
      melanoma, pancreatic, colon, lung and ovarian tumors grown in mice. We believe
      that these preliminary animal results support our further investigation of
      the
      potential clinical applications of IL-17E.






***Clinical
      Development***




The
      chart below illustrates our current view of the clinical development stage
      of
      each of our products.  This chart reflects the current regulatory
      approval process for biopharmaceuticals in Canada and the United States (with
      the exception of Virulizin® for malignant melanoma which is approved for use in
      the private market in Mexico).  See “Regulatory Requirements” for a
      description of the regulatory approval process in Canada and the United States.
      These qualitative estimates of the progress of our products are intended solely
      for illustrative purposes and the information contained herein is qualified
      in
      its entirety by the information appearing elsewhere or incorporated by reference
      in this annual information form.




15












**Capital
      Expenditures**




N/A




**Capital
      Commitments**




N/A




**B.           Business
      Overview**




**Overview**




Chemotherapeutic
      drugs have been the predominant medical treatment option for cancer,
      particularly metastatic cancer, for the past 30 years. More recently, a range
      of
      novel cancer drugs have been developed that are efficacious while improving
      patient quality of life.  Unlike chemotherapies, which are typically
      based on chemical synthesis, these new drugs may be of biological origin, based
      on naturally occurring molecules, proteins or genetic material. While
      chemotherapy drugs are relatively non-specific and as a result toxic to normal
      cells, these biological agents specifically target individual molecules or
      genes
      that are involved in disease and are therefore preferentially toxic to tumor
      cells.  The increased specificity of these drugs may result in fewer
      and milder side effects, meaning that, in theory, larger and therefore, more
      effective doses can be administered. The current paradigm in cancer management
      is a multi-modal approach that combines multiple treatment options tailored
      to
      the specific indication and individual patient. As a result, drug regimens
      that
      combine novel small molecule chemotherapies based on emerging understanding
      of
      cancer development with biological agents are of considerable
      interest.




We
      believe that the future of cancer treatment and management lies in drugs that
      are effective, safe and have minimal side effects leading to improved patient
      quality of life. Many of the drugs currently approved for the treatment and
      management of cancer are toxic resulting in severe side effects that limit
      dosing and efficacy.  We believe that a product development plan based
      on effective and safe drugs would have broad applications in cancer treatment.
      Lorus’ strategy is to continue the development of our product pipeline using
      several therapeutic approaches. Each therapeutic approach is dependent on
      different technologies, which we believe mitigates the development risks
      associated with a single technology platform. In developing and evaluating
      our
      products, we evaluate the merits of each product throughout the clinical trial
      process and consider commercialization opportunities.




16


**Antisense-DNA/RNA-based
      Therapeutics**






**Introduction**




Metabolism,
      cell growth and cell division are tightly controlled by complex protein
      signalling pathways in response to specific conditions, thereby maintaining
      normal function. Many human diseases, including cancer, can be traced to faulty
      protein production and/or regulation. As a result, traditional therapeutics
      are
      designed to interact with the disease-causing proteins and modify their
      function. A significant number of current anticancer drugs act by damaging
      either DNA or proteins within cells (e.g., chemotherapy) or by inhibiting the
      function of proteins or small molecules (*e.g.* estrogen blockers, such
      as Tamoxifen). Antisense therapeutics offer a novel approach to treatment in
      that they are designed to prevent the production of proteins causing
      disease.




The
      premise of this therapeutic approach is to target an earlier stage of the
      biochemical process than is usually possible with conventional drugs. The
      blueprint for protein production is encoded in the DNA of each cell. To
      translate this code into protein the cell first produces mRNAs (messenger
      ribonucleic acids) specific to each protein and these act as intermediaries
      between the information encoded in DNA and production of the corresponding
      protein. Most traditional therapies interact with the final synthesized or
      processed protein.  Often this interaction lacks specificity that
      would allow for interaction with only the intended target, resulting in
      undesired side effects.  In contrast, this newer approach alters
      gene-expression at the mRNA level, prior to protein synthesis, with specificity
      such that expression of only the intended target is affected.  We
      believe that drugs based on this approach may have broad applicability, greater
      efficacy and fewer side effects than conventional drugs.




We
      have developed a number of antisense drugs, of which our lead products are
      GTI-2040 and GTI-2501.  These products target the two components of
      ribonucleotide reductase (“RNR”). RNR is a highly regulated, cell
      cycle-controlled protein required for DNA synthesis and repair.  RNR
      is made up of two components, R1 and R2, encoded by different genes. RNR is
      essential for the formation of deoxyribonucleotides, which are the building
      blocks of DNA.  Since RNR activity is highly elevated in tumor cell
      populations and is associated with tumor cell proliferation, we have developed
      antisense molecules specific for the mRNA of the R1 (GTI-2501) or the R2
      (GTI-2040) components of RNR. Furthermore, the R2 component also appears to
      be a
      signal molecule in cancer cells and its elevation is believed to modify a
      biochemical pathway that can increase the malignant properties of tumor cells.
      Consequently, reducing the expression of the RNR components in a tumor cell
      with
      antisense drugs is expected to have antitumor effects.






**GTI-2040**




Our
      lead antisense therapy is GTI-2040, an antisense drug that targets the R2
      component of RNR and has exhibited antitumor properties against over a dozen
      different human cancers in standard mouse models, including chemotherapy
      resistant tumors. We have completed  a Phase I/II clinical trial of
      GTI-2040 for advanced or metastatic renal cell carcinoma.  We are also
      conducting or have completed a multiple Phase I/II clinical trial program in
      cooperation with the NCI, for the study of GTI-2040 for the treatment of AML,
      breast cancer, lung cancer, colon cancer, prostate cancer , a series of solid
      tumors  and myelodysplastic syndrome and acute leukemia. We also
      recently initiated Phase II clinical trial with GTI-2040 and high dose Ara-C
      in
      refractory and relapsed AML.






***Pre-clinical
      Testing***




GTI-2040
      has demonstrated excellent anti-tumour activity in a number of murine models
      of
      human cancer including xenograft tumour growth, metastasis and survival models.
      The results of these studies were published in the June 1, 2003 issue of
*Cancer Research*. Additional studies have demonstrated combination drug
      efficacy in xenograft tumour growth studies for human cancer cells, including
      drug resistant tumour cell lines. More recent studies, the results of which
      were
      presented at the 2007 annual meeting of the AACR, focus on dose schedule
      optimization for GTI-2040 in combination with docetaxel. These studies
      demonstrate that the timing of these two drugs can be optimized: observations
      that have implications for the ongoing NCI sponsored clinical trials. These
      studies continued in 2007. Lorus has also published results from studies aimed
      at development of an assay for R2 determination from clinical samples
      (*Journal of Clinical Laboratory Analysis*, 2005). Formal pre-clinical
      development of GTI-2040, including manufacturing and toxicology studies, was
      initiated in mid-1998.  Pre-clinical studies, including GLP toxicology
      studies in standard animal models, have demonstrated that GTI-2040 is well
      tolerated at concentrations that exceed commensurate therapeutic doses in
      humans.






17


***Clinical
      Development-Lorus Sponsored Trials***







*Acute
      Myeloid Leukemia:*


In
      August 2007, we announced an expansion of GTI-2040 development program in AML
      indication with initiation of a more advanced Phase II clinical trial with
      GTI-2040 and high dose Ara-C in refractory (HiDAC) and relapsed AML. This Phase
      II study includes both an efficacy study and a novel additional study to measure
      intracellular target activities and pharmacological synergies between the two
      agents. In the first stage of the 60 patient trial, the pharmacologic and target
      related activity of GTI-2040 and HiDAC will be evaluated in two groups, to
      determine the contribution of each agent alone and in combination. The second
      stage of the trial will provide efficacy evaluation in a larger patient
      population. Lorus expects the clinical trial to be completed by the end of
      2008.
      The decision to advance clinical development of GTI-2040 is based on the
      encouraging results from our recently completed proof of concept NCI-sponsored
      study of GTI-2040 in combination with HiDAC in patients with refractory and
      relapsed AML.




*Advanced
      Renal Cell Cancer:*


In
      April 2005, we announced completion of a Phase I/II clinical trial of GTI-2040
      in combination with capecitabine, in patients with advanced, end-stage renal
      cell cancer in the United States. This trial was a single-arm pilot study
      examining the safety and efficacy of GTI-2040 used in combination with the
      anticancer agent capecitabine. The majority of patients had failed two or more
      prior therapies before entering the study, exhibited extensive metastases,
      and
      were representative of a population with very poor prognostic outcome in renal
      cell cancer.  All 33 patients entering this study had advanced disease
      with multiple metastatic sites, with or without prior removal of the primary
      kidney tumor. However, more than half (52%) of the patients on the recommended
      dose exhibited disease stabilization or better, including one confirmed partial
      response. GTI-2040 was well tolerated when combined with a cytotoxic agent
      with
      expected adverse events. The results of this study were accepted for publication
      in the journal *Cancer Chemotherapy and Pharmacology* in 2007 (June 2007
      e-pub date).****Lorus is actively searching for partnerships
      to assist with the further development of GTI-2040 for the treatment of renal
      cell cancer.




***Clinical
      Development-NCI Sponsored Trials***




Current
      clinical development for GTI-2040 is in conjunction with the US NCI, which
      pays
      for the cost of all clinical trials.  See “-- Agreements -
      Collaboration Agreements - National Cancer Institute”.  To date we
      have announced and/or initiated seven clinical trials with the NCI for GTI-2040
      in patients with AML, metastic breast cancer, non-small cell lung cancer, solid
      tumors, unresectable colon cancer, hormone refractory prostate cancer, and
      MDS
      and acute leukemia.  These indications were selected based on the most
      promising results from our preclinical studies. Upon receipt of the clinical
      data from the****ongoing NCI clinical trials, Lorus will
      analyze and make decisions regarding the strategic direction of our antisense
      portfolio.  Lorus continues to search for partnerships for the future
      development of GTI-2040.




In
      September 2005, Lorus announced a steering committee assessment of progress
      in
      the ongoing U.S. NCI-sponsored clinical studies of GTI-2040. The committee
      concluded that all six studies continue to progress without unacceptable
      toxicity. Studies reviewed in this process included GTI-2040 in combination
      with
      chemotherapies in non-small cell lung cancer (NSCLC), hormone refractory
      prostate cancer (HRPC), breast cancer, acute myeloid leukemia (AML), colorectal
      cancer and a variety of solid tumors. Combination chemotherapies under study
      include docetaxel, capecitabine, oxaliplatin, cytarabine, and
      gemcitabine.




*Acute
      Myeloid Leukemia:*


In
      July 2003, we announced the FDA’s approval of the NCI-sponsored IND application
      for a clinical trial of GTI-2040 in combination with cytarabine, in patients
      with refractory or relapsed AML. Cytarabine is the current established drug
      for
      treating AML patients.  The study is part of a Phase II clinical
      program to be conducted under the sponsorship of the Cancer Treatment Evaluation
      Program of the NCI pursuant to a clinical trial agreement between Lorus and
      the
      NCI.




18


In
      December 2005, we announced interim data from the NCI-sponsored trial of
      GTI-2040 in acute myeloid leukemia.  The data presented showed
      complete responses in 44 per cent of patients 60 years of age or
      younger.  Patients in this trial had either failed to respond to prior
      therapy or had rapidly relapsed and as such had a low expectation of response
      to
      subsequent treatment (10-20%).  Complete responses in the clinical
      trial directly correlated with down regulation of R2, the intracellular target
      of GTI-2040, demonstrating drug specificity and providing strong evidence for
      an
      antisense mechanism of action. Toxicities for the combination were comparable
      to
      those expected for cytarabine alone and were non
      dose-limiting.  Updated results were presented at the 2006 annual
      meeting of ASCO and support the continued dose escalation study in younger
      cohorts of patients to establish a recommended phase II dose. The AML study
      group developed a novel method for analysis of GTI-2040 in biological samples
      (2006 issue of *Pharmaceutical Research*). Furthermore this group has
      reported the results of metabolic and pharmacokinetic analyses at the annual
      meeting of the American Association of Pharmaceutical Scientists and the 2006
      meeting of the International Society of Xenobiotics. Results have also been
      published in volume 8, issue 4 of the *American Association of Pharmaceutical
      Scientists Journal*. These studies demonstrate the uptake and accumulation
      of GTI-2040 in target tissues, important observations in support of an antisense
      mechanism of action for this drug candidate.




In
      August 2007, we announced the completion of this study. This clinical trial
      demonstrated safety and appropriate dosing of the combination regimen and showed
      promising clinical responses in patients under 60 years of
      age.  Moreover, the clinical responses correlated with downregulation
      of R2, the cellular target of GTI-2040, and were further supported by
      demonstration of intracellular GTI-2040 in circulating and bone marrow leukemic
      cells. Complete results from the clinical trial are expected to be presented
      by
      the investigators in a scientific publication.




*Metastatic
      Breast Cancer:*


In
      August 2003, we announced that the FDA had approved the NCI’s IND to begin a
      Phase I/II clinical trial to investigate GTI-2040 as a treatment for metastatic
      breast cancer in combination with capecitabine (Xeloda, manufactured by Roche
      Laboratories Inc.). In support of continued studies aimed at demonstrating
      R2
      target down-regulation in patient samples this group, in collaboration with
      Lorus, published preliminary results of RT-PCR studies in the May issue of
      *Oncology*Reports. The results**demonstrate that the assay
      developed by Lorus can feasibly assess R2 level is blood and tumour tissues
      from
      patients before and after treatment*.*  This study is
      ongoing.




*Non-Small
      Cell Lung Cancer:*


In
      September 2003, we received approval from Health Canada for initiation of a
      clinical trial of GTI-2040 in combination with docetaxel for the treatment
      of
      advanced non-small cell lung cancer (“NSCLC”), as part of a Phase I/II clinical
      program of GTI-2040 in collaboration with the NCI. Interim results from this
      study were announced in May 2005. Our interim results showed that the toxicity
      profile was determined to be acceptable for the specific combination therapy
      and
      the observed level of disease stabilizations was encouraging given the advanced
      stage of the disease in this subset of patients. The study group published
      a
      paper in the December issue of the  *Journal of Chromatography,*outlining the development of a method for determination of GTI-2040
      in
      human plasma samples. This highly sensitive method will be used for
      pharmacokinetic studies in patient samples from the trial.  This study
      is ongoing.




*Solid
      Tumors:*


In
      February 2004, we announced the initiation of a Phase I/II clinical trial
      examining the use of GTI-2040 in combination with gemcitabine in patients with
      solid tumors.  In June 2005, results from the trial were
      published.  The trial was intended to identify the recommended dose of
      GTI-2040 and its toxicity profile.  At the recommended dose GTI-2040
      demonstrated a manageable toxicity profile and was generally well tolerated
      when
      given as a single agent. This study is ongoing.




*Unresectable
      Colon Cancer:*


In
      May 2004, we announced the initiation of a Phase I/II clinical trial examining
      GTI-2040 in combination with oxaliplatin and capecitabine in the treatment
      of
      advanced unresectable colon cancer.  This study is part of a clinical
      trials program sponsored by the NCI.  This study is
      ongoing.




*Hormone
      Refractory Prostate Cancer:*


In
      November 2004, we announced the initiation of a Phase I/II clinical trial
      examining GTI-2040 in combination with docetaxel and prednisone in hormone
      refractory prostate cancer.  In November 2005, we announced interim
      data from this trial.  The data showed that along with an acceptable
      tolerability profile, nine of 22 PSA evaluable patients demonstrated a PSA
      response (reductions of greater than 50%).  PSA is overproduced in
      prostate cancer cells and is commonly used to assess disease progression and
      response. This data was also presented at the 2006 annual meeting of
      ASCO.




19


*High
      Grade Myelodysplastic Syndrome and acute leukemia:*


Lorus
      announced in June 2006 a plan for a new clinical investigation of GTI-2040
      as a
      single-agent in patients with high grade myelodysplastic syndrome and acute
      leukemia. This trial was initiated in mid 2007. This clinical study is designed
      to evaluate the safety and activity of GTI-2040 as a single agent for acute
      leukemia and MDS using a novel treatment schedule. The effect on leukemic blasts
      and blood count recovery will be assessed as part of a detailed investigation
      of
      the pharmacodynamic and pharmacokinetic  effects, dose-response
      relationships and tolerability of GTI-2040 during multiple courses of
      treatment.




***Orphan
      Drug Status***




On
      March 12, 2003, the FDA awarded Orphan Drug Status to GTI-2040 for the treatment
      of renal cell carcinoma. In May 2005, Lorus received Orphan Drug designation
      from the FDA for GTI-2040 in the treatment of AML.




**SiRNA**




In
      2003, Lorus began development of an anticancer therapeutic based on
      siRNA-mediated inhibition of R2 expression. Early screening experiments have
      identified lead compounds and preliminary *in vitro* and *in vivo*characterization of these compounds has yielded promising
      results. The
      results of these studies were published in the April 2007 issue of
*Anti-Cancer Drugs* and were presented at the 2007 annual meeting of the
      AACR. siRNA-1284, the lead compound identified from the screening study,
      specifically targets R2 expression. In *in vitro*studies,
      down-regulation of R2 expression by siRNA-1284 results in
      decreased   tumor cell growth (proliferation) with a concomitant
      block in cell cycle progression. Furthermore, siRNA-1284 demonstrates anti-tumor
      activity against human kidney, skin and colon cancer in mouse experimental
      models of tumor growth. We feel that the results of these studies warrant
      further development of siRNA-1284 as well as expansion of siRNA research to
      other cancer targets.






**GTI-2501**




Our
      other antisense therapy currently in clinical development is GTI-2501. GTI-2501
      targets the R1 subunit of RNR and has been shown to have antitumor activity
      and
      a good safety profile in pre-clinical testing. A  Phase I trial also
      demonstrated the safety of GTI-2501.






***Pre-clinical
      Testing***




GTI-2501
      has demonstrated antitumor activity in a number of standard mouse models of
      cancer progression including xenografts tumour growth, metastasis and survival
      models. GTI-2501 was effective against a broad range of cancers including human
      breast, kidney and prostate cancers (Results published in the February 2006
      Issue of the *International Journal of Oncology*).   In
      addition, pre-clinical studies have demonstrated that GTI-2501 is well tolerated
      in standard animal models at concentrations that exceed commensurate therapeutic
      doses in humans.






***Clinical
      Development Program***




GLP-toxicology
      studies for GTI-2501 were completed in November 2000 and approval of an IND
      was
      received from the FDA in February 2001. A Phase I dose-escalating study at
      the
      University of Chicago Medical Center was designed to establish the recommended
      clinical Phase II dose as well as look at the safety profile of
      GTI-2501.  A total of 34 patients with solid tumors or lymphoma were
      enrolled and have been evaluated following clinical completion. The study
      demonstrated a reasonable safety profile for GTI-2501 up to the predicted
      therapeutically relevant dose. In December 2003, we announced that a Phase
      I/II
      clinical trial for the treatment of hormone refractory prostate cancer (HRPC)
      had been initiated at the Toronto Sunnybrook Regional Cancer Centre, in which
      GTI-2501 is administered in combination with docetaxel. The combination of
      GTI-2501 and docetaxel in this clinical trial is being investigated in patients
      with asymptomatic or symptomatic HRPC where disease progression is
      uncontrolled.  This represents the first clinical trial of GTI-2501 in
      Canada following the successful conclusion of the Phase I clinical trial in
      2004
      in the United States.  We announced expansion of this ongoing HRPC
      trial to two additional sites in Canada in July 2004. The results of the dose
      escalation portion of the trial were presented at the 2006 annual meeteing
      of
      ASCO. This portion of the trial involved 13 patients in three dose cohorts.
      The
      results demonstrated that GTI-2501 given in combination with docetaxel was
      safe
      at the highest dose of GTI-2501 planned. These results warranted initiation
      of
      the Phase II portion of the trial which is currently ongoing.




20




**GTI-2601**




GTI-2601
      is an antisense compound that targets thioredoxin, a gene whose increased
      expression has been implicated in cancer progression and poor prognosis.
      GTI-2601 is an effective anti-cancer agent in pre-clinical studies in animal
      models of human colon cancer. The results of these studies were published in
      the
      February 2006 issue of *Anti-cancer Drugs*.




On
      April 5, 2005 we announced that we had signed a collaboration agreement with
      one
      of Japan’s leading pharmaceutical companies, Sumitomo Pharmaceuticals Co. Ltd.
      (“Sumitomo”) and Koken Co. Ltd (“Koken”) with respect to GTI-2601, our lead
      antisense compound targeting thioredoxin, a gene that is over-expressed in
      many
      tumor tissues and has been correlated with poor prognosis and chemotherapy
      resistance.  Sumitomo and Koken have developed an advanced delivery
      system based on collagen complexed with macromolecules.  The
      collaboration agreement provides that Sumitomo and Koken will further develop
      their delivery technology to complex with GTI-2601, so that increased efficacy
      is provided with decreased doses of the antisense drug.  This
      agreement provides that Lorus, Sumitomo and Koken will jointly own the compounds
      that result from this collaboration (Lorus will share the results of the
      collaboration with Sumitomo and Koken, 1:1).




**Other
      Antisense Targets**




Lorus’
antisense
      technology platform
      extends further to other anti-cancer drug targets including thioredoxin,
      thioredoxin reductase, neuropilin/VEGF165R and insulin-like
      growth factor II (IGF-II). All targets have been implicated in cancer as a
      growth stimulator, a growth factor, an inhibitor of apoptosis and/or an
      angiogenic factor. These projects are in the research phase of development
      which
      includes screening, lead candidate identification and efficacy
      studies.







**Small
      Molecule Therapies**






**Introduction**




Most
      anticancer chemotherapeutic treatments are DNA damaging, cytotoxic agents,
      designed to act on rapidly dividing cells.  Treatment with these drugs
      typically includes unpleasant or even serious side effects due to the inability
      of these drugs to differentiate between normal and cancer cells and/or due
      to a
      lack of high specificity for the targeted protein.  In addition, these
      drugs often lead to the development of tumor-acquired drug resistance. As a
      result of these limitations, a need exists for more effective anticancer
      drugs.  One approach is to develop small molecules with a greater
      specificity as anticancer drugs.  Chemical compounds weighing less
      than 1000 daltons (a unit of molecular weight) are designated as small or low
      molecular weight molecules. These molecules can be designed to target specific
      proteins or receptors that are known to be involved with disease.




**LT-253**




In
      August 2005 Lorus announced the selection of two leading small molecule
      compounds from a series of novel small molecules discovered by Lorus scientists
      that exhibit potent anticancer activity in *in vitro* screens. The
      results of characterization studies of these compounds were presented at the
      2006 annual meeting of the AACR and early formulation studies were published
      in
      the September 2006 issue of *Cancer Chemotherapy and Pharmacology .*Our
      studies identify the main mechanism of action of these compounds, which involves
      the induction of the tumor suppressor Krüppel-like factor 4. The down regulation
      of Krüppel-like factor 4 is believed to be critical in the development and
      progression of certain types of cancer and presents the possibility of
      exploiting a novel anticancer mechanism of action.  From these two
      compounds, LT-253 was selected as the lead compound for development as a drug
      candidate for the treatment of colon carcinoma and non-small cell lung cancer.
      This decision was based on its potent *in vitro* anti-proliferative
      activity, its efficacy in *in vivo* xenograft models of human colon and
      lung cancer, and on its safety profile. Manufacturing of a GMP product,
      formulation development as well as formal toxicology studies in different animal
      species with the aim of filing an IND application for the initiation of a Phase
      I clinical trial are in progress.




21


**Other
      Small Molecule Targets**




Lorus
      is also pursuing other candidates at earlier stages of development. These
      include:


•
            LT-253
                second generation derivatives for oral
                administration:


•
            Further
                structural modifications of LT-253 produced derivatives optimized
                for oral
                absorption. Animal efficacy studies are in
                progress.


•
            ML-220
                platform





Lorus
      is developing novel derivatives that target cancer relevant genes, which are
      critical in a major signaling pathway involved in tumorigenesis and represent
      important new cancer targets. Lead optimization of ML-220 yielded several novel
      derivatives that showed potent target inhibitory activity *in vitro* and
      in cancer cells, and growth inhibitory activity against prostate and renal
      carcinoma cell lines.







**Immunotherapy**






**Introduction**




Immunotherapy
      is a form of treatment that stimulates the body’s immune system to fight
      diseases including cancer.  Immunotherapy may help the immune system
      to fight cancer by improving recognition of differences between healthy cells
      and cancer cells. Alternatively it may stimulate the production of specific
      cancer fighting cells.






**Virulizin®**




Virulizin®,
      Lorus’ immunotherapeutic drug, has been shown in pre-clinical studies to be an
      effective immunotherapy that stimulates monocytes and macrophages to infiltrate
      tumor tissue and attack tumor cells. The ability to stimulate NK cells and
      macrophages results in Virulizin® anti-tumour efficacy demonstrated in a number
      of animal models of human tumour growth.  Monocytes and macrophages
      are types of white blood cells that are key players in the immune response
      to
      foreign pathogens and tumor cells.  When macrophages and monocytes are
      activated, they produce proteins called cytokines that have the ability to
      kill
      tumor cells directly.  Our studies indicate that Virulizin® stimulates
      the release of tumor necrosis factor (TNF-alpha), one type of cytokine, in
      immune cells to induce apoptosis (programmed cell death) of tumor cells. In
      addition, Virulizin® has been shown to increase the expression of IL-12 in
      macrophages. The resulting increased  levels of IL12 in mouse serum
      lead to NK cell activation. Since 2003 the results of these studies have been
      published in five peer-reviewed scientific journals and presented at a number
      of
      international conferences.




Our
      studies indicate that Virulizin® produces fewer negative side effects than
      commonly used chemotherapy agents likely because the drug works by stimulating
      the immune system to attack the cancer, rather than directly killing cancerous
      cells.






***Clinical
      Development Program***




In
      2002 Lorus initiated a Phase III double-blind, multicenter, randomized study
      in
      patients with locally advanced or metastatic pancreatic cancer who had not
      previously received systemic chemotherapy. This clinical trial was conducted
      at
      over 100 sites in North America and Europe with enrolment of 436 patients with
      advanced pancreatic cancer.  Patients enrolled in the study were
      randomly selected to receive treatment with either: (i) Virulizin® plus
      gemcitabine or (ii) placebo plus gemcitabine. Optional second line therapy
      for
      those patients who failed to respond or became resistant to gemcitabine included
      Virulizin® or placebo, alone or in combination with 5-fluorouracil
      (“5-FU”).  All study subjects were monitored throughout the remainder
      of their lifespan.  The end points of the study were survival and
      clinical benefits. In July 2005 Lorus announced completion of “last patient
      visit” for the phase III trial.  Lorus announced the results of the
      phase III trial in October 2005 and those results are discussed in detail
      below.






22


***Clinical
      Trial Results***




In
      October 2005, we released the results of the Phase III clinical trial evaluating
      Virulizin® for the treatment of pancreatic cancer.  The primary end
      points of the study were not met.  For the efficacy evaluable
      population, the study showed that the addition of Virulizin® to gemcitabine
      resulted in a median overall survival of 6.8 months and a one-year survival
      rate
      of 27.2%, compared to 6.0 months and 16.8% for placebo plus
      gemcitabine.  In the intent to treat population the median overall
      survivals were 6.3 months for Virulizin plus gemcitabine (one year survival
      rate
      of 25.9%) compared to 6.0 months for placebo plus gemcitabine (one year survival
      rate of 17.6%).  While comparison of the median overall survival times
      did not reach statistical significance, exploratory analysis did show promising
      trends in specific patient populations. The results of the exploratory sub-group
      analyses were presented at the 2006 annual meeting of the American Society
      of
      Clinical Oncology (“ASCO”). From these analyses the following sub-groups were
      identified as having demonstrated benefit that approaches statistical
      significance: patients with low ECOG scores (better overall performance),
      patients with metastatic disease and patients that continued Virulizin® therapy
      during second line therapy. In addition, those patients that continued
      Virulizin® during salvage therapy demonstrated a survival benefit that was
      statistically significant.




Lorus
      is currently seeking partners to continue the clinical development of Virulizin®
in these patient specific populations.






***Orphan
      Drug Status***




Lorus
      received Orphan Drug designation from the United States Food and Drug
      Administration (“FDA”) in February 2001 for Virulizin® in the treatment of
      pancreatic cancer.  Orphan drug status is awarded to drugs used in the
      treatment of a disease that afflicts less than 200,000 patients annually in
      the
      United States to encourage research and testing.  This status means
      that the FDA will help to facilitate the drug’s development process by providing
      financial incentives and granting seven years of market exclusivity in the
      United States (independent of patent protection) upon approval of the drug
      in
      the United States. In June 2005, Lorus announced that Virulizin® was granted
      Orphan Drug status in the European Union for pancreatic cancer.






**IL-17E**




Lorus
      has recently discovered a new lead drug candidate, IL-17E, which belongs to
      a
      larger family of cytokines. The results of these studies were presented at
      the
      2006 annual meeting of the American Association for Cancer Research (“AACR”).
      IL-17E has demonstrated significant antitumor activity against a variety of
      human tumors, including melanoma, pancreatic, colon, lung and ovarian tumors
      grown in mice. In addition, combinations of IL-17E with chemotherapeutic agents
      showed enhanced anti-tumor efficacy against human colon, lung, melanoma and
      ovarian tumor models in mice. The anti-tumor activity was dose-dependent and
      was
      observed using three different routes of administration. Studies on the
      mechanism of action showed that treatment with IL-17E resulted in increased
      serum levels of IL-5 and increased percentages of eosinophils in peripheral
      blood. Spleen cells isolated from IL-17E-treated mice showed increases in
      eosinophils and B-cells, as well as an increase in the percentage of activated
      B
      cells. Furthermore, treatment with IL-17E resulted in phosphorylation of kinases
      and activation of transcription factors involved in immune stimulation. Taken
      together, the data support further investigation of the potential clinical
      application of IL-17E, placing IL-17E in a growing class of anticancer
      immunotherapeutic drugs.







**Other
      Technologies**




We
      are currently assessing several new technologies for their potential as new
      drug
      candidates.  They include technologies in areas of tumor suppressor
      gene therapy and other small molecule technology platform that we believe to
      have the potential to work through a unique mechanism of action to decrease
      the
      expression of cancer relevant genes.






**Gene
      Therapy**




Researchers
      at Lorus have developed a gene therapy product using the R1 gene of
      ribonucleotide reductase (which has been shown to act as a tumour suppressor
      gene) encoded in a modified adenoviral vector (rAd5-R1) for the potential
      treatment of patients with colon cancer. This project is in the pre-clinical
      phase of development and has resulted in publication of an article in the
      October 2003 issue of *Clinical Cancer Research*.




23







**Agreements**






**(a)       Manufacturing
      Agreements**




***(i)***
            ***Bio
                Vectra dcl***




In
      July 2004, we entered into negotiations with Diagnostics Chemicals Limited
      (doing business as BioVectra dcl) in Prince Edward Island for the commercial
      manufacture of Virulizin®, for which a contract was executed in October 2004.
      BioVectra has a cGMP facility capable of large-scale commercial production.
      In
      June 2005 Lorus announced that BioVectra had successfully produced Virulizin® in
      both optimized clinical and commercial batch scales.  The contract
      remains in force, although Bio Vectra is not currently performing any
      manufacturing of Virulizin®.






**(b)**
            **Licence Agreements**




***(i)***
            ***Ion
                Pharmaceuticals and
                Cyclacel***




In
      December 1997, Lorus, through NuChem, acquired certain patent rights and a
      sublicense from Ion to develop and commercialize the anticancer applications
      of
      CLT and new chemical entities related to CLT (the “NuChem
      Analogs”).  To July 2006, NuChem had made cash payments totalling US
      $500,000 to Ion.  The balance is payable upon the achievement of
      certain milestones based on the commencement and completion of clinical trials
      related to the NuChem Analogs.




The
      NuChem Analog patents are ancillary to the Company’s primary development
      activities and do not relate to the Company’s core research and development
      focus, namely GTI-2040, nor did they relate specifically to the development
      of
      the Virulizin product.  In addition to the amounts previously paid in
      cash or shares, the Company is required to make future cash payments based
      on
      achieving certain future milestones on the first of any Sublicense Product
      or
      Lead Compound (as defined in the agreements), including: US$250 thousand on
      completion of a Phase I trial, US$500 thousand on completion of a Phase II
      trial, US$750 thousand upon completion of the first Phase III trial and US$1.5
      million on marketing approval for the production the United States, Canada,
      England or France.  The company does not currently expect to achieve
      any of the above milestones in fiscal year ended May 31, 2008 and cannot
      reasonably predict when such milestones will be achieved, if at
      all.




All
      research and development activities to be undertaken by NuChem are to be funded
      by us through subscriptions for non-participating preference shares of
      NuChem.  During  2007, no amounts were paid to
      NuChem.  Up to  May 31, 2007, we had provided a total of
      $5,749,000 of funding to NuChem.




In
      September 2003, Lorus, NuChem and Cyclacel Limited signed an exclusive worldwide
      license agreement for the development and commercialization of the NuChem
      Analogs.  Under the terms of the agreement, Lorus received upfront
      fees of US $400,000 and will receive milestone payments which, assuming all
      milestones are achieved, will total approximately US $11.6 million for our
      pre-clinical compound NC 381, and similar milestone payments for each of any
      other compounds developed from the compound library.  In addition to
      these payments, we will receive royalties based on product
      sales.  Cyclacel is responsible for all future drug development
      costs.




In
      reference to the Cyclacel agreement, the Company is entitled to receive certain
      future milestone payments based on the commencement of future trials in relation
      to those products developed by Cyclacel under the agreement including for the
      first product/follow-on products, as defined in the agreement and in certain
      cases, back-up product as defined in the agreement:  $US600,000 upon
      commencement of a Phase II trial, US$3,000,000 on commencement of a Phase III
      trial, and  between US$1,750,000 and $4,000,000 upon receipt of
      marketing approval in each of various geographic areas.  Thereafter
      the company is entitled to a royalty of between 2.0% and 4.0% depending upon
      the
      level of sales.  The agreement also contains certain milestone and
      royalty obligations based on whether Cyclacel chooses to sublicense any of
      the
      products covered by that agreement.   The company does not
      currently expect Cyclacel to achieve any of the above milestones in fiscal
      year
      ended May 31, 2008 and cannot reasonably predict when such milestones will
      be
      achieved, if at all.




24




***(ii)***
            ***University
                of Manitoba***




The
      University of Manitoba (the “University”), Dr. Jim Wright, Dr. Aiping Young and
      Cancer Care entered into an exclusive license agreement (the “License
      Agreement”) with GeneSense dated June 20, 1997 pursuant to which GeneSense was
      granted an exclusive worldwide license to certain patent rights with the right
      to sub-license.  In consideration for the exclusive license to
      GeneSense of the patent rights, the University and Cancer Care are entitled
      to
      an aggregate of 1.67% of the net sales received by GeneSense from the sale
      of
      products or processes derived from the patent rights and 1.67% of all monies
      received by GeneSense from sub-licenses of the patent rights. GeneSense is
      solely responsible for the preparation, filing, prosecution and maintenance
      of
      all patent applications and patents included in the patent rights and all
      related expenses.  Pursuant to the terms of the License Agreement, any
      and all improvements to any of the patent rights derived in whole or in part
      by
      GeneSense after the date of the License Agreement are not included within the
      scope of the License Agreement and do not trigger any payment of
      royalties.




The
      University of Manitoba agreement relates specifically to antisense patents
      in
      existence or pending at the time of the agreement, subsequent patent amendments
      or advancements to these patents remain as the property of Lorus, without
      license rights accruing back to the University of Manitoba.  The
      Company is currently pursing its antisense development program, primarily as
      a
      function of advancements and amendments to the original patents. The company
      has
      not yet earned any revenue from the products covered under the agreement and
      therefore has not paid any royalties under this agreement and cannot reasonably
      predict the timing and amount of any future payment.  The company does
      not expect to make any royalty payments under this agreement in fiscal year
      ended May 31, 2008 and cannot reasonably predict when such royalties will become
      payable, if at all.






**(c)**
            **Collaboration Agreements**




***(i)***
            ***National
                Cancer Institute***




In
      February 2003, Lorus and the United States National Cancer Institute approved
      clinical protocols to conduct a series of clinical trials in a Phase II program
      to investigate the safety and efficacy of our lead antisense drug, GTI-2040
      in
      breast cancer, colon cancer, non-small cell lung cancer, acute myeloid leukemia,
      prostate cancer, and in a range of solid tumours. Lorus and the NCI signed
      a
      formal clinical trial agreement (expiring in October 2007 and subsequently
      extended to October 2010) in which the NCI financially sponsors the GTI-2040
      clinical trials, while Lorus provides the clinical trial drug. All six trials
      were in progress as of May 31, 2007.  In July 2006, we announced a
      seventh trial to be conducted with the NCI for GTI-2040 for the treatment of
      MDS
      and AML that commenced in 2007.    In August 2007, as a
      result of the prior NCI sponsored clinical trials the Company announced a self
      sponsored expanded clinical program to measure intracellular target activities
      and pharmacological synergies between GTI-2040 and HiDAC.




NCI
      carries out clinical trials on behalf of the Company at its own
      cost.   The rights to publish data remains with the NCI sponsored
      investigator generating the information.  The commercial results of
      the studies, including commercialization of any products remain with Lorus
      with
      no financial, license, or intellectual property rights accruing to the
      Investigator or NCI for their participation.




All
      projects underway are and at various stages of completion.  The NCI
      has no rights to exploit the research results, except through the right of
      investigators to publish data accumulated by it during the testing, nor does
      it
      have any obligation to pay or receive royalties under the
      agreement.  Any royalty rights on products derived from the work
      performed by NCI will need to be negotiated by Lorus under a marketing agreement
      with third parties (if not carried out by Lorus).   It is not
      possible to reasonably estimate the amount and timing of any royalty receipts,
      if any.




In
      regards to future payment obligations, Lorus’ obligations under this agreement
      are limited to the supply of drugs, the cost for which has been
      incurred.  The company does not currently expect any significant costs
      associated with the supply of the drug in the future, depending on the outcome
      of the projects.




***(ii)***
            ***Sumitomo
                and Koken***




In
      April 2005, we signed a collaboration agreement with Sumitomo and Koken with
      respect to GTI-2601, our antisense compound targeting
      thioredoxin.  Sumitomo and Koken have developed an advanced delivery
      system based on collagen complexed with macromolecules.  The
      collaboration agreement provides that Sumitomo and Koken will further develop
      their delivery technology to complex with GTI-2601, so that increased efficacy
      is provided with decreased doses of the antisense drug.  This
      agreement provides that Lorus, Sumitomo and Koken will jointly own the compounds
      that result from this collaboration (Lorus: Sumitomo and Koken,
      1:1).




25


The
      company does not have any significant payment obligations for this
      project.  Both Lorus and Sumitomo and Koken are responsible for their
      own costs during the feasibility study phase.    To date the
      project has not produced significant results and therefore the Company cannot
      predict any royalty revenue, if any.




**(d)**
            **Other**




From
      time to time, we enter into other research and technology agreements with third
      parties under which research is conducted and monies expended.  These
      agreements outline the responsibilities of each participant and the appropriate
      arrangements in the event the research produces a product
      candidate.




We
      also have licensing agreements to use proprietary technology of third parties
      in
      relation to our research and development.  If this research ultimately
      results in a commercialized product, we have agreed to pay certain royalties
      and
      licensing fees.








**Business
      Strategy**




By
      developing cancer therapeutics using different mechanisms of action that may
      be
      efficacious against a wide variety of cancers, we seek to maximize our
      opportunity to address multiple cancer therapeutic markets.  In our
      efforts to obtain the greatest return on our investment in each drug candidate,
      we separately evaluate the merits of each candidate throughout the clinical
      trial process and consider commercialization opportunities when
      appropriate.  In the next fiscal year, we intend to pursue
      partnerships and further development of our lead technologies.




Our
      objective is to maximize the therapeutic value and potential commercial success
      of GTI-2040 and the small molecule platform while at the same time pursuing
      partnership opportunities for development of our immunotherapy products and
      others.  In the near term, we intend to pursue research and early
      clinical development with our own funds with respect to GTI-2040 and the small
      molecule platform. In our efforts to obtain the greatest return on our
      investment in each drug candidate, we separately evaluate the merits of each
      candidate throughout the clinical trial process and will consider
      commercialization opportunities when appropriate.




**Financial
      Strategy**




To
      meet future financing requirements, we intend to finance our operations through
      some or all of the following methods: public or private equity or debt
      financings, capital leases, and collaborative and licensing
      agreements.  We intend to pursue financing opportunities as they
      arise.




**(i)**
            **Secured
                Convertible Debentures**




On
      October 6, 2004, the Company entered into a subscription agreement (the
“Agreement”) with The Erin Mills Investment Corporation (“TEMIC”) to issue an
      aggregate of $15 million of secured convertible debentures (the “Debentures”)
      issuable in three tranches of $5 million each, in each of, October 2004, January
      2005 and April 2005.  The Debentures are secured by a first charge
      over all of the assets of the Company.  All Debentures issued under
      the Agreement are due on October 6, 2009 and are subject to interest payable
      monthly at a rate of prime plus 1% until such time as the Company’s share price
      reaches $1.75 for 60 consecutive trading days, at which time interest will
      no
      longer be charged.  Interest is payable in common shares of Lorus
      until Lorus’ shares trade at a price of $1.00 or more after which interest will
      be payable in cash or common shares at the option of the debenture holder.
      Common shares issued in payment of interest are issued at a price equal to
      the
      weighted average trading price of such shares for the ten trading days
      immediately preceding their issue in respect of each interest payment. The
      $15.0
      million principal amount of Debentures is convertible at the holder’s option at
      any time into common shares of the Company with a conversion price per share
      of
      $1.00.  With the issuance of each $5.0 million debenture, the Company
      issued to the debt holder 1,000,000 warrants with a term of five years to
      purchase common shares of the Company at a price per share equal to
      $1.00.




26


As
      a condition to agreeing to the Arrangement (as discussed below), the holder
      of
      Lorus’ $15.0 million secured convertible debenture required the repurchase by
      Lorus of its outstanding three million common share purchase warrants at a
      purchase price of $252,000.




**(ii)**
            **Share
                Issuances**




On
      July 13, 2006 the company entered into an agreement with High Tech Beteiligungen
      GmbH & Co. KG (“High Tech”) to issue 28.8 million common shares at $0.36 per
      share for gross proceeds of $10.4 million. The subscription price represented
      a
      premium of 7.5% over the closing price of the common shares on the Toronto
      Stock
      Exchange on July 13, 2006. The closing of the transaction is subject to certain
      conditions, including the approval of the Toronto Stock Exchange and the
      American Stock Exchange and the filing and clearance of a prospectus in Ontario
      qualifying the issuance of the common shares.  The transaction closed
      on August 31, 2006. In connection with the transaction, High Tech received
      demand registration rights that will enable High Tech to request the
      registration or qualification of the common shares for resale in the United
      States and Canada, subject to certain restrictions. These demand registration
      rights expire on June 30, 2012. In addition, High Tech received the right to
      nominate one nominee to the board of directors of Lorus or, if it does not
      have
      a nominee, it will have the right to appoint an observer to the board. Upon
      completion of the transaction, High Tech held approximately 14% of the issued
      and outstanding common shares of Lorus Therapeutics Inc.





On
      July 24, 2006 Lorus entered into an agreement with Technifund Inc. to issue
      on a
      private placement basis, 5 million common shares at $0.36 per share for gross
      proceeds of $1.8 million. The transaction closed on September 1,
      2006.




**(iii)**
            **Plan
                of Arrangement and Corporate
                Reorganization**




On
      July 10, 2007, Old Lorus and the Company completed a plan of arrangement and
      corporate reorganization with, among others, 6707157 Canada Inc. (“Investor’)
      and Pinnacle International Lands, Inc. (the “Arrangement”).  As part
      of the Arrangement, all of the assets and liabilities of Old Lorus (including
      all of the shares of its subsidiaries held by it), with the exception of certain
      future tax assets were transferred, directly or indirectly, from Old Lorus
      to
      the Company.  Securityholders in Old Lorus exchanged their securities
      in Old Lorus for equivalent securities in New Lorus (the "Exchange") and the
      board of directors and management of Old Lorus continued as the board of
      directors and management of New Lorus.  New Lorus obtained
      substitutional listings of its common shares on both the Toronto Stock Exchange
      and the American Stock Exchange.





As
      part of the Arrangement, the Company changed its name to Lorus Therapeutics
      Inc.
      and continues as a biopharmaceutical company, specializing in the research
      and
      development of pharmaceutical products and technologies for the management
      of
      cancer as a continuation of the business of Old Lorus.




In
      connection with the Arrangement and after the Exchange, the share capital of
      Old
      Lorus was reorganized into voting common shares and non-voting common shares
      and
      Investor acquired from New Lorus and Selling Shareholders (as defined below)
      approximately 41% of the voting common shares and all of the non-voting common
      shares of Old Lorus for a cash consideration of approximately $8.5 million
      on
      closing of the transaction less an escrowed amount of $600,000, subject to
      certain post-closing adjustments and before transaction costs.  The
      remaining 59% of the voting common shares of Old Lorus were distributed to
      the
      shareholders of New Lorus who were not residents of the United States on a
      pro-rata basis.  Shareholders of New Lorus who were residents of the
      United States received a nominal cash payment in lieu of their pro-rata share
      of
      voting common shares of Old Lorus.  After completion of the
      Arrangement, New Lorus is not related to the former Lorus Therapeutics Inc.,
      which was subsequently renamed 4325231 Canada Inc.




As
      a condition of the Arrangement, High Tech Beteilingungen GmbH & Co. KG and
      certain other shareholders of Old Lorus (the “Selling Shareholders”) agreed to
      sell to Investor the voting common shares of Old Lorus to be received under
      the
      Arrangement at the same price per share as was paid to shareholders who are
      residents of the United States.   The proceeds received by the
      Selling Shareholders were nominal.




Also
      as a condition of the Arrangement, the holder of Old Lorus' secured convertible
      debenture agreed to vote in favour of the transaction subject to the repurchase
      by New Lorus of its outstanding three million common share purchase warrants
      at
      a purchase price of $252,000 upon closing of the Arrangement.




27


The
      Company and its subsidiaries have agreed to indemnify Old Lorus and its
      directors, officers and employees from and against all damages, losses, expenses
      (including fines and penalties), other third party costs and legal expenses,
      to
      which any of them may be subject arising out of any matter occurring (i) prior
      to, at or after the effective time of the Arrangement (the "Effective Time")
      and
      directly or indirectly relating to any of the assets of Old Lorus transferred
      to
      the Company pursuant to the Arrangement (including losses for income, sales,
      excise and other taxes arising in connection with the transfer of any such
      asset) or conduct of the business prior to the Effective Time; (ii) prior to,
      at
      or after the Effective Time as a result of any and all interests, rights,
      liabilities and other matters relating to the assets transferred by Old Lorus
      to
      the Company pursuant to the Arrangement; and (iii) prior to or at the Effective
      Time and directly or indirectly relating to, with certain exceptions, any of
      the
      activities of Old Lorus or the Arrangement.





In
      connection with the Arrangement the Company and Investor entered into an escrow
      agreement in which $600,000 of the purchase price payable by Investor to the
      Company under was withheld by Investor and placed into escrow with Equity
      Transfer & Trust Company, as escrow agent.  The monies placed into
      escrow will be held as security for and a partial, but not exclusive, source
      of
      satisfaction of Company’s indemnification obligations to the Investor until the
      first anniversary of the Closing Date.




Following
      the Arrangement, New Lorus and its subsidiaries have approximately $7.0 million
      of unrecognized future tax benefits resulting from non-capital losses carried
      forward, and scientific research and experimental development
      expenditures.  In light of the uncertainty regarding the Company's
      ability to generate taxable income in the future, management is of the opinion
      that it is more likely than not that these future tax assets will not be
      realized in the foreseeable future and hence, a full valuation allowance will
      be
      recorded against these future tax assets.




**Revenues**




The
      Company has not earned substantial
      revenues from its drug candidates and is therefore considered to be in the
      development stage.




**Employees**




As
      at May 31, 2007, we employed 27 full-time persons and three part-time person
      in
      research and drug development and administration activities. Of our employees,
      eight hold Ph.D.s.  To encourage a focus on achieving long-term
      performance, employees and members of the board of directors have the ability
      to
      acquire an ownership interest in the Company through Lorus’ stock option plan
      and employees can participate in the employee share purchase plan, which was
      established in 2005.




Our
      ability to develop commercial products and to establish and maintain our
      competitive position in light of technological developments will depend, in
      part, on our ability to attract and retain qualified personnel. There is a
      significant level of competition in the marketplace for such personnel. We
      believe that to date we have been successful in attracting and retaining the
      highly skilled personnel critical to our business. We have also chosen to
      outsource activities where skills are in short supply or where it is
      economically prudent to do so.




None
      of our employees are unionized, and we consider our relations with our employees
      to be good.




**Office
      Facilities**




Our
      head office, which occupies 20,500 square feet, is located at 2 Meridian Road,
      Toronto, Ontario.  The leased premises include approximately 8,000
      square feet of laboratory and research space.  We believe that our
      existing facilities are adequate to meet our requirements for the near
      term.  Our current lease expires on March 31, 2008.




28


**Competition**




The
      biotechnology and pharmaceutical industries are characterized by rapidly
      evolving technology and intense competition.  There are many companies
      in both these industries that are focusing their efforts on activities similar
      to ours.  Some of these are companies with established positions in
      the pharmaceutical industry and may have substantially more financial and
      technical resources, more extensive research and development capabilities,
      and
      greater marketing, distribution, production and human resources than
      us.  In addition, we may face competition from other companies for
      opportunities to enter into collaborative agreements with biotechnology and
      pharmaceutical companies and academic institutions.  Many of these
      other companies are not solely focused on cancer, as is the mission of our
      drug
      development.  We specialize in the development of drugs that we
      believe will manage cancer.




Products
      that may compete with our products include chemotherapeutic agents, monoclonal
      antibodies, antisense therapies and immunotherapies with novel mechanisms of
      action.  These are drugs that are delivered by specific means and are
      targeting cancers with large disease populations.  We also expect that
      we may experience competition from established and emerging pharmaceutical
      and
      biotechnology companies that have other forms of treatment for the cancers
      that
      we target.  There are many drugs currently in development for the
      treatment of cancer that employ a number of novel approaches for attacking
      these
      cancers.  Cancer is a complex disease with more than 100 indications
      requiring drugs for treatment.  The drugs in competition with our
      drugs have specific targets for attacking the disease, targets which are not
      necessarily the same as ours.  These competitive drugs therefore could
      potentially also be used together in combination therapies with our drugs to
      manage the disease.




**Government
      Regulation**






**Overview**




Regulation
      by government authorities in Canada, the United States, Mexico and the European
      Union is a significant factor in our current research and drug development
      activities.  To clinically test, manufacture and market drug products
      for therapeutic use, we must satisfy the rigorous mandatory procedures and
      standards established by the regulatory agencies in the countries in which
      we
      currently operate or intend to operate.




The
      laws of most of these countries require the licensing of manufacturing
      facilities, carefully controlled research and the extensive testing of
      products.  Biotechnology companies must establish the safety and
      efficacy of their new products in clinical trials, establish cGMP and control
      over marketing activities before being allowed to market their
      products.  The safety and efficacy of a new drug must be shown through
      clinical trials of the drug carried out in accordance with the mandatory
      procedures and standards established by regulatory agencies.




The
      process of completing clinical trials and obtaining regulatory approval for
      a
      new drug takes a number of years and requires the expenditure of substantial
      resources.  Once a new drug or product license application is
      submitted, we cannot assure you that a regulatory agency will review and approve
      the application in a timely manner.  Even after initial approval has
      been obtained, further studies, including post-marketing studies, may be
      required to provide additional data on efficacy and safety necessary to confirm
      the approved indication or to gain approval for the use of the new drug as
      a
      treatment for clinical indications other than those for which the new drug
      was
      initially tested.  Also, regulatory agencies require post-marketing
      surveillance programs to monitor a new drug’s side effects.  Results
      of post-marketing programs may limit or expand the further marketing of new
      drugs.  A serious safety or effectiveness problem involving an
      approved new drug may result in a regulatory agency requiring withdrawal of
      the
      new drug from the market and possible civil action.  We cannot assure
      you that we will not encounter such difficulties or excessive costs in our
      efforts to secure necessary approvals, which could delay or prevent us from
      manufacturing or marketing our products.




In
      addition to the regulatory product approval framework, biotechnology companies,
      including Lorus, are subject to regulation under local provincial, state and
      federal law, including requirements regarding occupational safety, laboratory
      practices, environmental protection and hazardous substance control, and may
      be
      subject to other present and future local, provincial, state, federal and
      foreign regulation, including possible future regulation of the biotechnology
      industry.






**Canada**




In
      Canada, the manufacture and sale of new drugs are controlled by Health Canada
      (“HC”).  New drugs must pass through a number of testing stages,
      including pre-clinical testing and clinical trials.  Pre-clinical
      testing involves testing the new drug’s chemistry, pharmacology and toxicology
*in vitro* and *in vivo*.  Successful results (that is,
      potentially valuable pharmacological activity combined with an acceptable low
      level of toxicity) enable the developer of the new drug to file a clinical
      trial
      application (“CTA”) to begin clinical trials involving humans.




29


To
      study a drug in Canadian patients, a CTA submission must be filed with
      HC.  The CTA submission must contain specified information, including
      the results of the pre-clinical tests completed at the time of the submission
      and any available information regarding use of the drug in humans.  In
      addition, since the method of manufacture may affect the efficacy and safety
      of
      a new drug, information on manufacturing methods and standards and the stability
      of the drug substance and dosage form must be presented.  Production
      methods and quality control procedures must be in place to ensure an acceptably
      pure product, essentially free of contamination, and to ensure uniformity with
      respect to all quality aspects.




Provided
      HC does not reject a CTA submission, clinical trials can
      begin.  Clinical trials for product candidates to treat cancer are
      generally carried out in three phases.  Phase I involves studies to
      evaluate toxicity and ideal dose levels in humans.  The new drug is
      administered to human patients who have met the clinical trial entry criteria
      to
      determine pharmacokinetics, human tolerance and prevalence of adverse side
      effects.  Phases II and III involve therapeutic studies.  In
      Phase II, efficacy, dosage, side effects and safety are established in a small
      number of patients who have the disease or disorder that the new drug is
      intended to treat.  In Phase III, there are controlled clinical trials
      in which the new drug is administered to a large number of patients who are
      likely to receive benefit from the new drug.  In Phase III, the
      effectiveness of the new drug is compared to that of standard accepted methods
      of treatment in order to provide sufficient data for the statistical proof
      of
      safety and efficacy for the new drug.




If
      clinical studies establish that a new drug has value, the manufacturer submits
      a
      new drug submission (“NDS”) application to HC for marketing
      approval.  The NDS contains all information known about the new drug,
      including the results of pre-clinical testing and clinical
      trials.  Information about a substance contained in an NDS includes
      its proper name, its chemical name, and details on its method of manufacturing
      and purification, and its biological, pharmacological and toxicological
      properties.  The NDS also provides information about the dosage form
      of the new drug, including a quantitative listing of all ingredients used in
      its
      formulation, its method of manufacture, manufacturing facility information,
      packaging and labelling, the results of stability tests, and its diagnostic
      or
      therapeutic claims and side effects, as well as details of the clinical trials
      to support the safety and efficacy of the new drug.  Furthermore, for
      biological products, an on-site evaluation is required prior to the issuance
      of
      a notice of compliance (“NOC”).  All aspects of the NDS are critically
      reviewed by HC. If an NDS is found satisfactory, a NOC is issued permitting
      the
      new drug to be sold.  In Canada an Establishment license must be
      obtained prior to marketing the product.




HC
      has a policy of priority evaluation of new drug submissions for all drugs
      intended for serious or life-threatening diseases for which no drug product
      has
      received regulatory approval in Canada and for which there is reasonable
      scientific evidence to indicate that the proposed new drug is safe and may
      provide effective treatment.




The
      monitoring of a new drug does not cease once it is on the market.  For
      example, a manufacturer of a new drug must report any new information received
      concerning serious side effects, as well as the failure of the new drug to
      produce desired effects.  As well, if HC determines it to be in the
      interest of public health, a notice of compliance for a new drug may be
      suspended and the new drug may be removed from the market.




An
      exception to the foregoing requirements relating to the manufacture and sale
      of
      a new drug is the limited authorization that may be available in respect of
      the
      sale of new drugs for emergency treatment.  Under the special access
      program, HC may authorize the sale of a quantity of a new drug for human use
      to
      a specific practitioner for the emergency treatment of a patient under the
      practitioner’s care.  Prior to authorization, the practitioner must
      supply HC with information concerning the medical emergency for which the new
      drug is required, such data as is in the possession of the practitioner with
      respect to the use, safety and efficacy of the new drug, the names of the
      institutions at which the new drug is to be used and such other information
      as
      may be requested by HC.  In addition, the practitioner must agree to
      report to both the drug manufacturer and HC the results of the new drug’s use in
      the medical emergency, including information concerning adverse reactions,
      and
      must account to HC for all quantities of the new drug made
      available.




The
      Canadian regulatory approval requirements for new drugs outlined above are
      similar to those of other major pharmaceutical markets.  While the
      testing carried out in Canada is often acceptable for the purposes of regulatory
      submissions in other countries, individual regulatory authorities may request
      supplementary testing during their assessment of any submission. We cannot
      assure you that the clinical testing conducted under HC authorization or the
      approval of regulatory authorities of other countries will be accepted by
      regulatory authorities outside Canada or such other countries.




30




**United
      States**




In
      the United States, the FDA controls the manufacture and sale of new
      drugs.  New drugs require FDA approval of a marketing application
      (*e.g.* an NDA or FDA application) prior to commercial
      sale.  To obtain marketing approval, data from adequate and
      well-controlled clinical investigations, demonstrating to the FDA’s satisfaction
      a new drug’s safety and effectiveness for its intended use, are
      required.  Such data are generated in studies conducted pursuant to an
      IND submission, similar to that required for a CTA in Canada.  As in
      Canada, clinical studies are characterized as Phase I, Phase II and Phase III
      trials or a combination thereof.  In a marketing application, the
      manufacturer must also demonstrate the identity, potency, quality and purity
      of
      the active ingredients of the new drug involved, and the stability of those
      ingredients.  Further, the manufacturing facilities, equipment,
      processes and quality controls for the new drug must comply with the FDA’s cGMP
      regulations for drugs or biological products both in a pre-licensing inspection
      before product licensing and in subsequent periodic inspections after
      licensing.  In the case of a biological product, an establishment
      license must be obtained prior to marketing and batch releasing.




A
      five-year period of market exclusivity for a drug comprising a new chemical
      entity (“NCE”) is available to an applicant that succeeds in obtaining FDA
      approval of a NCE, provided the active ingredient of the NCE has never before
      been approved in an NDA. During this exclusivity period, the FDA may not approve
      any abbreviated application filed by another sponsor for a generic version
      of
      the NCE. Further, a three-year period of market exclusivity for a new use or
      indication for a previously approved drug is available to an applicant that
      submits new clinical studies that are essential to support the new use or
      indication. During the latter period of exclusivity, the FDA may not approve
      an
      abbreviated application filed by another sponsor for a generic version of the
      product for that use or indication.




The
      FDA has “fast track” regulations intended to accelerate the approval process for
      the development, evaluation and marketing of new drugs used to diagnose or
      treat
      life-threatening and severely debilitating illnesses for which no satisfactory
      alternative therapies exist.  “Fast track” designation affords early
      interaction with the FDA in terms of protocol design and permits, although
      it
      does not require, the FDA to issue marketing approval after completion of Phase
      II clinical trials (although the FDA will require subsequent clinical trials
      or
      even post-approval efficacy studies).




**C.           Organizational
      Structure**




Old
      Lorus was incorporated under the *Business Corporations Act*(Ontario) on
      September 5, 1986 under the name RML Medical Laboratories Inc.  On
      October 28, 1991, RML Medical Laboratories Inc. amalgamated with Mint Gold
      Resources Ltd., resulting in Old Lorus becoming a reporting issuer (as defined
      under Canadian securities law) in Ontario, on such date.  On August
      25, 1992, Old Lorus changed its name to IMUTEC Corporation.  On
      November 27, 1996, Old Lorus changed its name to Imutec Pharma Inc., and on
      November 19, 1998, Old Lorus changed its name to Lorus Therapeutics
      Inc.  On October 1, 2005, Old Lorus continued under the *Canada
      Business Corporations Act*.  On July 10, 2007, the Old Lorus
      changed its name from Lorus Therapeutics Inc. to 4325231 Canada Inc. and on
      October 17, 2007 changed its name to Global Summit Real Estate
      Inc.  As of the Arrangement Date, Old Lorus is not related to New
      Lorus.




New
      Lorus was incorporated on November 1, 2006 as 6650309 Canada Inc. under the
      *Canada Business Corporations Act*.




On
      July 10, 2007 (the Arrangement Date), Old Lorus completed a plan of arrangement
      and corporate reorganization with, among others, 6650309 Canada Inc.,
      subsequently renamed Lorus Therapeutics Inc. (New Lorus), 6707157 Canada Inc.
      and Pinnacle International Lands, Inc.  As a result of the plan of
      arrangement and reorganization, among other things, each common share of Old
      Lorus was exchanged for one common share of New Lorus and the assets (excluding
      certain future tax attributes and related valuation allowance) and liabilities
      of Old Lorus (including all of the shares of its subsidiaries held by it) were
      transferred, directly or indirectly, to the Company and/or its
      subsidiaries.  New Lorus continued the business of Old Lorus after the
      Arrangement Date with the same officers and employees and continued to be
      governed by the same directors as Old Lorus prior to the Arrangement
      Date.   At the Arrangement Date, New Lorus’ articles of
      incorporation were amended to change the name of the Company from 6650309 Canada
      Inc. to Lorus Therapeutics Inc.




31


The
      address of the Company’s head and registered office is 2 Meridian Road, Toronto,
      Ontario, Canada, M9W 4Z7.  Our corporate website is
      www.lorusthera.com.  The contents of the website are specifically not
      included in this 20-F by reference.




**D.           Property,
      Plant and Equipment**




Our
      head office, which occupies 20,500 square feet, is located at 2 Meridian Road,
      Toronto, Ontario.  The leased premises include approximately 8,000
      square feet of laboratory and research space.  We believe that our
      existing facilities are adequate to meet our requirements for the near
      term.  Our current lease expires on March 31, 2008.




**Item
      4A.              Unresolved
      Staff Comments**




Not
      applicable.




**Item
      5.                 Operating
      and Financial Review and Prospects**




**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**




**A.           Operating
      Results**




The
      following discussion should be read in conjunction with the audited financial
      statements of the Company for the year ended May 31, 2007 which includes as
      supplemental financial information the audited consolidated financial statements
      and accompanying notes of Old Lorus and the accompanying notes (collectively
      the
      "Financial Statements") set forth elsewhere in this report. The Financial
      Statements, and all financial information discussed below, have been prepared
      in
      accordance with Canadian generally accepted accounting principles ("GAAP").
      Significant differences between Canadian and United States GAAP are identified
      in the  Supplementary Information included with the Financial
      Statements included in this Annual Report. All amounts are expressed in Canadian
      dollars unless otherwise noted. In this Management's Discussion and Analysis,
      "Lorus", the "Company”, "we", "us" and "our" each refers to Lorus Therapeutics
      Inc. both before and after the Arrangement Date.




**Overview**




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




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




We
      believe that the future of cancer treatment and management lies in drugs that
      are effective, safe and have minimal side effects, and therefore improve a
      patient's quality of life. Many of the cancer drugs currently approved for
      the
      treatment and management of cancer are toxic with severe side effects, and
      we
      therefore believe that a product development plan based on effective and safe
      drugs could have broad applications in cancer treatment.  Lorus'
      strategy is to continue the development of our product pipeline using several
      therapeutic approaches. Each therapeutic approach is dependent on different
      technologies, which we believe mitigates the development risks associated with
      a
      single technology platform. We evaluate the merits of each product throughout
      the clinical trial process and consider commercialization as appropriate. The
      most advanced anticancer drugs in our pipeline, each of which flow from
      different platform technologies, are antisense, small molecules and
      immunotherapeutics.




32


Our
      net loss for 2007 decreased 46% to $9.6 million ($0.05 per share) compared
      to a
      net loss of $17.9 million ($0.10 per share) in 2006. Research and development
      expenses in 2007 decreased to $3.4 million from $10.2 million in 2006. The
      close
      of the Virulizin® Phase III
      clinical
      trial in 2006 as well as staff reductions resulting from the November 2005
      corporate changes (described below) continue to contribute to the decrease
      in
      net loss over 2006. We utilized cash of $6.3 million in our operating activities
      in 2007 compared with $13.1 million in 2006; the lower utilization is consistent
      with lower research and development activities and lower general and
      administrative expenses. At the end of 2007 we had cash and cash equivalents
      and
      marketable securities of $12.4 million compared to $8.3 million at the end
      of
      2006. As a result of the Arrangement, the Company expects that, subject to
      the
      post closing adjustments, it will receive net proceeds of approximately $7
      million inclusive of an amount held in escrow.




**Selected
      Annual Financial Data**




The
      following selected consolidated financial data has been derived from, and should
      be read in conjunction with, the accompanying audited Financial Statements
      for
      the year ended May 31, 2007 which are prepared in accordance with Canadian
      GAAP.






**Consolidated
      Statements of Loss and Deficit(1)**


*(amounts
        in Canadian 000's except for per common share data)*


Years
                Ended May 31**2007**
            
            
            2006
            
            
            2005**REVENUE**
            
            **$**
            **107**
            
            
            $
            26
            
            
            $
            6**EXPENSES**Cost
                of sales
            
            ****
            **16**
            
            
            
            3
            
            
            
            1Research
                and development
            
            ****
            **3,384**
            
            
            
            10,237
            
            
            
            14,394General
                and administrative
            
            ****
            **3,848**
            
            
            
            4,334
            
            
            
            5,348Stock-based
                compensation
            
            ****
            **503**
            
            
            
            1,205
            
            
            
            1,475Depreciation
                and amortization
            
            ****
            **402**
            
            
            
            771
            
            
            
            564**Operating
                expenses**
            
            ****
            **8,153**
            
            
            
            16,550
            
            
            
            21,782Interest
                expense on convertible debentures
            
            ****
            **1,050**
            
            
            
            882
            
            
            
            300Accretion
                in carrying value of secured convertible debentures
            
            ****
            **935**
            
            
            
            790
            
            
            
            426Amortization
                of deferred financing charges
            
            ****
            **110**
            
            
            
            87
            
            
            
            84Interest
                income
            
            ****
            **(503**
            **)**
            
            
            (374
            )
            
            
            (524
            )**Loss
                for the period**
            
            ****
            **9,638**
            
            
            
            17,909
            
            
            
            22,062**Basic
                and diluted loss per common share**
            
            **$**
            **0.05**
            
            
            $
            0.10
            
            
            $
            0.13**Weighted
                  average number of common sharesoutstanding
                  used inthecalculationof  basic
                  and diluted loss per share**
            
            ****
            **204,860**
            
            
            
            173,523
            
            
            
            172,112**Total
                Assets**
            
            **$**
            **15,475**
            
            
            $
            11,461
            
            
            $
            27,566**Total
                Long-term liabilities**
            
            **$**
            **11,937**
            
            
            $
            11,002
            
            
            $
            10,212


(1)On
      the Arrangement
      Date, the Company completed the Arrangement.  As a result of the
      Arrangement, each common share of Old Lorus was exchanged for one common share
      of the Company and the assets (excluding certain future tax assets and related
      valuation allowance) and liabilities of Old Lorus were transferred to the
      Company and/or its subsidiaries.  The Company continued the business
      of Old Lorus after the Arrangement Date with the same officers and employees
      and
      continued to be governed by the same directors as Old Lorus prior to the
      Arrangement Date. Therefore, the Company’s operations have been accounted for on
      a continuity of interest basis and accordingly, the consolidated financial
      statement information above reflect that of the Company as if it had always
      carried on the business formerly carried on by Old Lorus.




33


**Recent
      Accounting Pronouncements Adopted -Canadian GAAP**




No
      new accounting policies were adopted during the year ended May 31, 2007 under
      Canadian GAAP.  The following accounting policies were adopted during
      the year ended May 31, 2006.




*Variable
      interest
      entities:*




Effective
      June 1, 2005, the Company adopted the recommendations of CICA Handbook
      Accounting Guideline 15 ("AcG-15"), Consolidation of Variable Interest Entities,
      effective for fiscal years beginning on or after November 1,
      2004.  Variable interest entities ("VIEs") refer to those entities
      that are subject to control on a basis other than ownership of voting
      interests.  AcG-15 provides guidance for identifying VIEs and criteria
      for determining which entity, if any, should consolidate them.  The
      adoption of AcG-15 did not have an effect on the financial position, results
      of
      operations or cash flows in the current period or the prior period
      presented.




*Financial
      instruments - disclosure and
      presentation:*




Effective
      June 1, 2005, the Company adopted the amended recommendations of CICA Handbook
      Section 3860, Financial Instruments - Disclosure and Presentation, effective
      for
      fiscal years beginning on or after November 1, 2004.  Section 3860
      requires that certain obligations that may be settled at the issuer's option
      in
      cash or the equivalent value by a variable number of the issuer's own equity
      instruments be presented as a liability.  The Company has determined
      that there is no impact on the consolidated financial statements resulting
      from
      the adoption of the amendments to Section 3860 either in the current period
      or
      the prior period presented.




*Non-monetary
      transactions:*




In
      June 2005, the CICA released Handbook Section 3831, Non-monetary
      Transaction*s*, effective for all non-monetary transactions initiated in
      periods beginning on or after January 1, 2006.  This standard
      requires all non-monetary transactions to be measured at fair value unless
      they
      meet one of four very specific criteria.  Commercial substance
      replaces culmination of the earnings process as the test for fair value
      measurement.  A transaction has commercial substance if it causes an
      identifiable and measurable change in the economic circumstances of the
      entity.  Commercial substance is a function of the cash flows expected
      by the reporting entity.  The Company has not entered into any
      non-monetary transactions and, as such, this section is not
      applicable.




**Recent
      Accounting Pronouncements Adopted - U.S. GAAP**




*Considering
      the Effect of Prior Year Misstatements when Quantifying Misstatements in Current
      Year Financial Statements*




In
      September 2006, the staff of the Securities and Exchange Commission (“SEC”)
      issued Staff Accounting Bulletin No. 108, Considering the Effect of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements (“ SAB No. 108”), which addresses staff’s views on how uncorrected
      errors in previous years should be considered when quantifying errors in current
      financial statements.  SAB 108 requires SEC registrants to consider
      the effect of all carryover and reversing effects of prior year misstatements
      when quantifying errors in current year financial statements.  SAB 108
      does not change the SEC staff’s previous guidance on evaluating the materiality
      of errors.  The adoption of SAB No. 108 using the dual method approach
      for quantifying errors in financial statements effective June 1, 2006 did not
      have an impact on the Company’s Reconciliation to U.S. GAAP for the year ended
      May 31, 2007.




34


*Share
      - Based Payment*





On
      June 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123 (revised 2004), “Share - Based Payment” (FAS 123(R)), which requires
      companies to recognize in the statement of operations all share-based payments
      to employees, including grants of employee stock options, based on their fair
      value. The statement eliminates the ability to account for share-based
      compensation transactions.





The
      Company adopted FAS 123(R) using the modified prospective method, which requires
      the application of the accounting standards as of June 1, 2006. The consolidated
      financial statements as of and for Fiscal 2007 reflect the impact of adopting
      FAS 123(R). In accordance with the modified prospective method, the consolidated
      financial statements for prior periods have not been restated to reflect, and
      do
      not include, the impact of FAS 123(R).





Stock-based
      compensation expense recognized during the period is based on the value of
      the
      portion of stock-based payment awards that is ultimately expected to vest.
      Stock-based compensation expense recognized in the consolidated statement of
      operations during Fiscal 2007 included compensation expense for stock-based
      payment awarded prior to, but not yet vested as of June 1, 2006 based on the
      grant date fair value estimated in accordance with the pro forma provisions
      of
      FAS No. 148, “Accounting for Stock-Based Compensation - Transition and
      Disclosures” (FAS 148) and compensation expense for the stock-based payment
      awards granted subsequent to May 31, 2006, based on the grant date fair value
      estimated in accordance with FAS 123(R). As stock-based compensation expense
      recognized in statement of operations for Fiscal 2007 is based on awards
      ultimately expected to vest, it has been reduced for estimated forfeitures.
      FAS
      123(R) requires forfeitures to be estimated at the time of grant and revised,
      if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates,





As
      of May 31, 2007, the aggregate intrinsic values for options outstanding and
      options exercisable is nil as the common stock price as of May 31, 2007 was
      below the range of exercise prices.





Total
      unrecognized compensation cost relating to unvested stock options at May 31,
      2007, prior to the consideration of expected forfeitures, is approximately
      $503
      thousand and is expected to be recognized over a weighted average period of
      1.8
      years.





The
      total intrinsic value of options exercised during the years ended May 31, 2007
      and 2006 was $2 thousand and nil, respectively.





As
      a result of the adoption of FAS 123(R) on June 1, 2006, the Company recorded
      stock-based compensation of $697 thousand for the year ended May 31, 2007.
      No
      stock-based compensation was recorded for the year ended May 31, 2006 as Fiscal
      2007 was the first year of FAS 123 (R) adoption.







**Critical
      Accounting Policies**




The
      Company periodically reviews its financial reporting and disclosure practices
      and accounting policies to ensure that they provide accurate and transparent
      information relative to the current economic and business environment. As part
      of this process, the Company has reviewed its selection, application and
      communication of critical accounting policies and financial disclosures.
      Management has discussed the development and selection of the critical
      accounting policies with the Audit Committee of the Board of Directors and
      the
      Audit Committee has reviewed the disclosure relating to critical accounting
      policies in this Management's Discussion and Analysis. Other important
      accounting polices are described in note 2 of
      the****Financial Statements.




*Drug
      Development Costs*




We
      incur costs related to the research and development of pharmaceutical products
      and technologies for the management of cancer. These costs include internal
      and
      external costs for preclinical research and clinical trials, drug costs,
      regulatory compliance costs and patent application costs. All research costs
      are
      expensed as incurred as required under GAAP.




Development
      costs, including the cost of drugs for use in clinical trials, are expensed
      as
      incurred unless they meet the criteria under GAAP for deferral and amortization.
      The Company continually assesses its activities to determine when, if ever,
      development costs may qualify for capitalization. By expensing the research
      and
      development costs as required under GAAP, the value of the product portfolio
      is
      not reflected on the Company's Financial Statements.




35


The
      Company does not currently have any development activities that are close to
      meeting the criteria under GAAP for deferral and therefore continues to expense
      all development costs as incurred.  In management’s opinion there is
      limited risk of a significant impact on financial statement measurement relating
      to differing conditions or assumptions for the periods presented in these
      current financial statements.




*Stock-Based
      Compensation*




We
      have applied the fair value based method to expense stock options awarded since
      June 1, 2002 using the Black-Scholes option-pricing model as allowed under
      CICA
      Handbook Section 3870. The model estimates the fair value of fully transferable
      options, without vesting restrictions, which significantly differs from the
      stock option awards issued by Lorus. The model also requires four highly
      subjective assumptions including future stock price volatility and expected
      time
      until exercise, which greatly affect the calculated values. The increase or
      decrease of one of these assumptions could materially increase or decrease
      the
      fair value of stock options issued and the associated expense.




The
      Company, in so determining the valuation parameters for use in the Black Scholes
      model utilizes generally accepted methodologies for valuing the determinants
      and, in management’s opinion, sufficiently broad periods in determining share
      price volatility.  In general, the model assumes immediate
      vesting.  As the Company’s options currently vest over three years,
      management considers its valuation to be conservative.   The
      interest rate used for valuation purposes is the Bank of Canada five year fixed
      term rate.  Management estimates that a 10% differential in the rate
      of volatility used in determining the fair value of new options issued in the
      year under the Black Scholes model would result in an
      approximately****$65 thousand change in expense for the year,
      alternatively, a one percentage point change in interest rate used in the
      calculation would result in an approximately  **$**8
      thousand change in expense for the year**.**  In
      management’s opinion there is limited risk of a significant impact on financial
      statement measurement relating to differing conditions or assumptions for the
      periods presented in these current financial statements.




The
      financial impact of the differences between Canadian and U.S. GAAP as related
      to
      Stock-Based Compensation is
      presented****in****the Supplementary
      Information included with the Financial Statements included in this Annual
      Report. ****As discussed therein, applying the Canadian GAAP
      for stock compensation expense resulted in a approximately $194 thousand lower
      loss for the year ended May 31, 2007 as compared to the U.S. GAAP methodology.
      This difference has the impact of increasing the balance of Stock Options and
      a
      corresponding increase in the Deficit by $4,201,000 in Shareholders’ Deficiency
      as of May 31, 2007.





*Valuation
      Allowance for Future Tax Assets*




We
      have a net tax benefit resulting from non-capital losses carried forward, and
      scientific research and experimental development expenditures. In light of
      the
      recent net losses and uncertainty regarding our future ability to generate
      taxable income, management is of the opinion that it is not more likely than
      not
      that these tax assets will be realized in the foreseeable future and hence,
      a
      full valuation allowance has been recorded against these income tax assets.
      Consequently, no future income tax assets or liabilities are recorded on the
      balance sheets.




The
      generation of future taxable income could result in the recognition of some
      portion or all of the remaining benefits, which could result in an improvement
      in our results of operations through the recovery of future income
      taxes.




As
      the company continues to incur losses and, based on its current pipeline status,
      is likely to continue to do so in the near future, management believes that
      it
      has not met the criteria under GAAP for inclusion of any amount of future tax
      assets and has therefore taken a full valuation allowance reserve against such
      assets.  It is not possible to predict when, how much or if profits
      will be earned in the future.  In management’s opinion there is
      limited risk of a significant impact on financial statement measurement relating
      to differing conditions or assumptions for the periods presented in these
      current financial statements.




36


In
      light of the fact that the Company believed that it could not fully utilize
      a
      significant portion of its future tax assets prior to their expiry, subsequent
      to the year-end, it underwent a reorganization that resulted in certain tax
      attributes not being carried forward to the successor entity.  As a
      result, the Company will not have available to it approximately $39.8 million
      of
      its future tax assets.




*Valuation
      of Long Lived Assets*




We
      periodically review the useful lives and the carrying values of our long lived
      assets. We review for impairment in long lived assets whenever events or changes
      in circumstances indicate that the carrying amount of the assets may not be
      recoverable. If the sum of the undiscounted future cash flows expected to result
      from the use and eventual disposition of an asset is less than its carrying
      amount, it is considered to be impaired. An impairment loss is measured at
      the
      amount by which the carrying amount of the asset exceeds its fair value; which
      is estimated as the expected future cash flows discounted at a rate commensurate
      with the risks associated with the recovery of the asset.




Lorus
      does not currently have any significant long-lived assets on its balance
      sheet.  In management’s opinion there is limited risk of a significant
      impact on financial statement measurement relating to differing conditions
      or
      assumptions for the periods presented in these current financial
      statements.




To
      date management believes that there have been no material changes to the
      assumptions used in the preparation of these financial statements that would
      materially affect the valuations of the above.




**Recent
      Accounting Pronouncements Yet To Be Adopted - Canadian
      GAAP**




The
      following Recent Accounting Pronouncements under Canadian GAAP have yet to
      be
      adopted:




*Comprehensive
      Income and Equity*




In
      January 2005, the CICA released new Handbook Section 1530, Comprehensive Income,
      and Section 3251, Equity. Section 1530 establishes standards for reporting
      comprehensive income. The section does not address issues of recognition or
      measurement for comprehensive income and its components. Section 3251
      establishes standards for the presentation of equity and changes in equity
      during the reporting period. The requirements in this section are in addition
      to
      Section 1530.




*Section
      3855, Financial Instruments - Recognition and
      Measurement*




CICA
      Handbook Section 3855 establishes standards for the recognition and measurement
      of all financial instruments, provides a characteristics-based definition of
      a
      derivative instrument, provides criteria to be used to determine when a
      financial instrument should be recognized, and provides criteria to be used
      to
      determine when a financial liability is considered to be
      extinguished.




*Section
      3865, Hedges*




Section
      3865 establishes standards for when and how hedge accounting may be applied.
      Hedge accounting is optional.




These
      three Sections are effective for fiscal years beginning on or after October
      1,
      2006.  An entity adopting these Sections for a fiscal year beginning
      before October 1, 2006 must adopt all the Sections simultaneously.




*Section
      3861, Financial Instruments - Disclosure and Presentation*




Section
      3861 discusses the presentation and disclosure of these items.  In
      December 2006, the Canadian Institute of Chartered Accountants issued Section
      3862 Financial Instrument - Disclosures and Section 3863 Financial Instruments
      -
      Presentation to replace 3861 Financial Instruments - Disclosure and
      Presentation.  These new Sections are effective for interim and annual
      financial statements with fiscal years beginning on or after October 1, 2007,
      but may be adopted in place of Section 3861, before that date.





37





**Recent
      Accounting Pronouncements Yet To Be Adopted - U.S. GAAP**




The
      following Recent Accounting Pronouncements under U.S. GAAP have yet to be
      adopted:







In
      June 2006, the FASB approved FASB Interpretation No. 48, Accounting for
      Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 ("FIN
      48").  FIN 48 clarifies the criteria for recognizing tax benefits
      under FASB Statement No. 109, Accounting for Income Taxes.  It also
      requires additional financial statement disclosures about uncertain tax
      positions.  FIN 48 is effective for fiscal years beginning after
      December 15, 2006, specifically July 1, 2007 for the Company.  The
      Company is evaluating the impact of this standard on its consolidated financial
      position and results of operations.




In
      September 2006, the FASB issued FASB Statement No. 157 ("SFAS 157"), Fair Value
      Measurements, which defines fair value, establishes a framework for measuring
      fair value under GAAP, and expands disclosures about fair value
      measurements.  SFAS 157 applies to other accounting pronouncements
      that require or permit fair value measurements. The new statement is effective
      for financial statements issued for fiscal years beginning after November 15,
      2007, and for interim periods within those fiscal years, specifically July
      1,
      2008 for the Company.  The Company is currently evaluating the
      potential impact, if any, of the adoption of SFAS 157 on the consolidated
      financial position, results of operations and cash flows.




In
      February 2007, the FASB issued FASB Statement No. 159 ("SFAS 159"), The Fair
      Value Options for Financial Assets and Financial Liabilities, which permits
      entities to choose to measure many financial instruments and certain warranty
      and insurance contracts at fair value on a contract-by-contract basis. SFAS
      159
      applies to all reporting entities, including not-for-profit organizations,
      and
      contains financial statement presentation and disclosure requirements for assets
      and liabilities reported at fair value as a consequence of the election. SFAS
      159 is effective as of the beginning of an entity's first year that begins
      after
      November 15, 2007.  Early adoption is permitted subject to certain
      conditions; however an early adopter must also adopt FASB Statement No. 157
      at
      the same time.  The Company does not expect the adoption of SFAS 159
      to have an impact on its consolidated financial position, results of operations
      or cash flows.







**Operating
      Results**




***Revenues***




Revenues
      for the year increased to $107 thousand compared with 2006 revenue of $26
      thousand and $6 thousand in 2005.  The increase in revenue in 2007 is
      related to increased laboratory services work performed by Lorus personnel
      on
      behalf of other companies.




***Research
      and Development***




Research
      and development expenses totalled $3.4 million in 2007 compared to $10.2 million
      in 2006 and $14.4 million in 2005. The decrease in spending compared with 2006
      and 2005 is due to the close of our Virulizin® Phase III
      clinical
      trial for the treatment of advanced pancreatic cancer in 2006 as well as a
      reduction in headcount in November 2005.  The ongoing research and
      development costs relate to the GTI-2040 and GTI-2501 clinical development
      programs ongoing as well as our small molecule preclinical program.  A
      significant portion of the Company’s GTI-2040 Phase II testing costs are covered
      by the US NCI with Lorus continuing to be responsible for any additional
      GTI-2040 manufacturing costs, thus reducing our overall research and development
      costs.




Costs
      incurred during the current period and to date are summarized in Note 10 to
      the
      Financial Statements.  In respect of future costs to be incurred on
      the Company’s principal pipeline products:




38


*Immunotherapy:*




Since
      the completion of its Virulizin® project, the Company has not expended, nor does
      it intend to expend, significant resources on this project into the future
      unless it establishes a partnership relationship to investigate certain
      secondary indications identified in the previous Phase III study.




*Antisense:*




The
      Company expects that certain of its development projects currently  in
      Phase I within the GTI-2040 platform could be completed as early as
      2011.  Overall, the antisense project involves investigating several
      indications all of which are in various stages of development.  As
      development progresses, the Company will focus on those indications providing
      the best probability for success, each having its own timeline for completion
      and cost budget.  As such the outcome of any one or series of
      activities cannot be determined and therefore costs and timing of completion
      cannot be determined at this time.




*Small
      Molecule:*




The
      Company’s small molecule project is in the early research stage and while it has
      identified certain possible indications, it has not established a firm
      development path and therefore timing to complete this project and costs cannot
      be estimated.




The
      Company continues to monitor and assess its development schedules with a view
      to
      identifying those indications with the most probable likelihood for success
      within the financial resources available to it currently and in the foreseeable
      future.  There always exists the risk that the indications will not
      result in a feasible drug therapy or a drug therapy having sufficient financial
      return and will have to be abandoned.   The Company’s strategy is
      to investigate a number of indications within each platform group to diversify
      its risk should a certain indication need to be abandoned.  As per the
      discussion in the Risk Factors, Item 3 D, there exists the risk that none of
      the
      Company’s development activities will result in an effective drug therapy or a
      financially feasible return to the Company, in which case there would be a
      significant and material impact on the Company’s ability to finance future
      development activities through existing or future financing
      activities.




Given
      its early stage development activities in a variety of indications, it is not
      currently possible to predict when the Company expects material cash inflows
      from its development activities.




***General
      and Administrative***




General
      and administrative expenses totalled $3.8 million in 2007 compared to $4.3
      million in 2006 and $5.3 million in 2005.  The decrease in general and
      administrative costs is the result of staff reductions, and a continued focus
      on
      lowering costs in all areas of the business. The cost savings realized during
      the current year is partially offset by charges incurred under the mutual
      separation agreement entered into with Dr. Jim Wright discussed under “Corporate
      Changes” below.




***Stock-Based
      Compensation***




Stock-based
      compensation expense totalled $503 thousand in 2007 compared with $1.2 million
      in 2006 and $1.5 million in 2005.  The decrease in stock-based
      compensation expense in 2007 is the result of reduced fair values on the stock
      options issued, due to a decline in our stock price, as well as a significant
      number of unvested options that were forfeited during the year, reducing the
      overall expense.




During
      2006, employees of the Company (excluding directors and officers) were given
      the
      opportunity to choose between keeping 100% of the options they held at the
      existing exercise prices or forfeiting 50% of the options held in exchange
      for
      having the remaining 50% of the exercise prices of the options re-priced to
      $0.30 per share.  Employees holding 2,290,000 stock options opted for
      re-pricing their options, resulting in the amendment of the exercise price
      of
      1,145,000 stock options and the forfeiture of 1,145,000 stock options during
      the
      quarter ended February 28, 2006.  The 2005 expense represents the
      amortization of the estimated fair value of stock options granted since June
      1,
      2002 applicable to the current service period as well as a charge of $208
      thousand recorded in the second quarter of 2005 representing the increase in
      value attributed to the shareholder approved amendment to the stock option
      plan
      to extend the contractual life of all options outstanding from five years to
      ten
      years.




39


***Depreciation
      and Amortization***




Depreciation
      and amortization expenses decreased to $403 thousand in 2007 as compared to
      $771
      thousand in 2006 and $564 thousand in 2005.  The decrease in
      depreciation and amortization expense is the result of reduced capital asset
      purchases during fiscal 2007 and 2006. In 2006, the Company took a write-down
      of
      $250 thousand on certain furniture and equipment whose carrying value was deemed
      to be unrecoverable and in excess of the fair value of the underlying
      assets.




***Interest
      Expense***




Non-cash
      interest expense was $1.0 million in 2007 compared with $882 thousand in 2006
      and $300 thousand in 2005.  These amounts represent interest at a rate
      of prime plus 1% on the $15.0 million convertible debentures.  The
      increase in interest expense in 2007 compared with 2006 is a function of higher
      interest rates due to increases in the prime rate in late 2006.  In
      2005, the interest accrued based on the cash advanced beginning October 6,
      2004
      when the first tranche of $5 million was advanced through to May 31, 2005 when
      the entire $15.0 million had been advanced. All interest accrued on the
      debentures to date has been paid in common shares of the Company.




***Accretion
      in Carrying Value of Secured Convertible Debentures***




Accretion
      in the carrying value of the Company’s secured convertible debentures amounted
      to $935 thousand in 2007 compared with $790 thousand in 2006 and $426 thousand
      in 2005.  The accretion charges arise as under GAAP the Company has
      allocated the proceeds from each tranche of the debentures to the debt and
      equity instruments issued on a relative fair value basis resulting in the $15.0
      million debentures having an initial cumulative carrying value of $9.8 million
      as of their dates of issuance.  Each reporting period, the Company is
      required to accrete the carrying value of the convertible debentures such that
      at maturity on October 6, 2009, the carrying value of the debentures will be
      the
      face value of $15.0 million.  The increase in expense in 2007 compared
      with 2006 is due to higher effective rate of interest.




***Amortization
      of Deferred Financing Charges***




Amortization
      of deferred financing charges totalled $110 thousand in 2007 compared with
      $87
      thousand in 2006 and $84 thousand in 2005. The deferred financing charges relate
      to the convertible debenture transaction and will be amortized using the
      effective interest rate method over the five-year life of the debt commencing
      October 6, 2004.




During
      the year, the Company incurred approximately $1.3 million in deferred
      arrangement costs associated with negotiating the arrangement agreement outlined
      below (see “Subsequent Events”).  The agreements were completed and
      signed in July, 2007.  These costs will be netted against proceeds
      from the arrangement in the first quarter of fiscal 2008.




***Interest
      and Other Income***




Interest
      income totalled $503 thousand in 2007 compared to $374 thousand in 2006 and
      $524
      thousand in 2005. The increase from 2006 to 2007 is due to a higher average
      cash
      and marketable securities balances in 2007 and by higher interest rates during
      2007.  Higher average cash and marketable securities balances were
      primarily a function of the funds received as part to of the August 2006 private
      placements.




***Loss
      for the Year***




Net
      loss for the year decreased to $9.6 million or $0.05 per share in 2007 compared
      to $17.9 million or $0.10 per share in 2006 and $22.1 million or $0.13 per
      share
      in 2005.  The decrease in net loss in 2007 compared with 2006 is due
      to lower research and development costs resulting from the close of our
      Virulizin® Phase
      III clinical trial as well as staff reductions due to corporate changes, lower
      general and administrative costs due to staff reductions and lower legal,
      consulting and investor relations charges, depreciation and amortization and
      higher interest income and offset by higher accretion costs.  The
      decrease in net loss in 2006 compared with 2005 is primarily due to lower
      research and development costs resulting from the wind down of the Phase III
      Virulizin®
      clinical trial.




40


**Corporate
      Changes**




Dr.
      Jim Wright resigned as the President and Chief Executive Officer effective
      September 21, 2006.  The Company accrued a liability based on a mutual
      separation agreement executed during the year.  As a result, we
      recorded severance compensation expense of $500 thousand recorded in general
      and
      administrative expense.   All amounts payable under the mutual
      separation agreement were paid during the third quarter of fiscal
      2007.




In
      November 2005, as a means to conserve cash and refocus operations, Lorus scaled
      back some activities related to the Virulizin® technology
      and
      implemented a workforce reduction of approximately 39% or 22
      employees.  As a result, the Company recorded severance compensation
      expense for former employees of $557 thousand.  Of this expense, $468
      thousand is presented in the income statement as general and administrative
      expense and $89 thousand as research and development
      expense.  Accounts payable and accrued liabilities at May 31, 2006
      includes severance and compensation expense liabilities relating to the
      Company’s November 2005 corporate changes of $154 thousand that were paid out by
      December 2006.




**Quarterly
      Results of Operations**




The
      following table sets forth certain unaudited consolidated statements of
      operations data for each of the eight most recent fiscal quarters that, in
      management's opinion, have been prepared on a basis consistent with the audited
      consolidated financial statements contained elsewhere in this annual report
      and
      includes all adjustments, consisting only of normal recurring adjustments,
      necessary for a fair presentation of the information presented.




Research
      and development expenses have decreased throughout 2007 in comparison with
      the
      same quarters in the prior year.  This reduction is due to the close
      of our Phase III Virulizin® clinical
      trial as
      well as corporate changes in November 2005 to reduce headcount.




General
      and administrative expenses have remained relatively consistent across quarters
      in the current fiscal year with the exception of an increase for the quarter
      ended November 30, 2006 due to severance charges relating to the mutual
      separation agreement executed in September 2006 as described in the Corporate
      Changes section, above.  Expenditures have continued to decline since
      Q2 2007 due to reduced headcount as well as reduced consulting, patent costs
      and
      investor relation costs.




Net
      loss decreased in Q3 and Q4 of 2007 as the result of reduced research and
      development and general and administrative expenditures.







**Fiscal
                2007**
              **Quarter
                Ended**
            
            
            **Fiscal
                2006**
              **Quarter
                Ended***(Amounts
                in 000’s except for per common share data)*
            
            **May
                31,**
              **2007**
            
            
            **Feb.
                28,**
              **2007**
            
            
            **Nov.
                30,**
              **2006**
            
            
            **Aug.
                31,**
              **2006**
            
            
            **May
                31,**
              **2006**
            
            
            **Feb.
                28,**
              **2006**
            
            
            **Nov.
                30,**
              **2005**
            
            
            **Aug.
                31,**
              **2005**Revenue
            
            $
            40
            
            
            $
            37
            
            
            $
            23
            
            
            $
            7
            
            
            $
            14
            
            
            $
            5
            
            
            $
            6
            
            
            $
            1Research
                and development
            
            
            259
            
            
            
            672
            
            
            
            1,122
            
            
            
            1,331
            
            
            
            1,353
            
            
            
            2,296
            
            
            
            2,631
            
            
            
            3,957General
                and administrative
            
            
            820
            
            
            
            833
            
            
            
            1,407
            
            
            
            788
            
            
            
            730
            
            
            
            909
            
            
            
            1,619
            
            
            
            1,076Net
                loss
            
            
            (1,689
            )
            
            
            (2,062
            )
            
            
            (3,117
            )
            
            
            (2,770
            )
            
            
            (2,970
            )
            
            
            (4,095
            )
            
            
            (5,102
            )
            
            
            (5,742
            )**Basic
                  and diluted** **net
                  loss per share**
            
            **$**
            **(0.01**
            **)**
            
            **$**
            **(0.01**
            **)**
            
            **$**
            **(0.01**
            **)**
            
            **$**
            **(0.01**
            **)**
            
            **$**
            **(0.02**
            **)**
            
            **$**
            **(0.02**
            **)**
            
            **$**
            **(0.03**
            **)**
            
            **$**
            **(0.03**
            **)**Cash
                used in operating activities
            
            $
            (89
            )
            
            $
            (1,805
            )
            
            $
            (2,585
            )
            
            $
            (1,814
            )
            
            $
            (1,940
            )
            
            $
            (3,956
            )
            
            $
            (2,360
            )
            
            $
            (4,809
            )








41


**Outstanding
      Share Data**




As
      at November 15, 2007, the Company had 214,356,114 common shares issued and
      outstanding. In addition, the Company had issued and outstanding 15,051,338
      stock options to purchase an equal number of common shares, and a $15 million
      convertible debenture convertible into common shares of Lorus at $1.00 per
      share.




At
      May 31, 2007, the Company recorded the repurchase of its 3,000,000 warrants
      in
      accordance with the terms of an agreement with the Company’s convertible
      debenture holder for $252,000 as related to the Arrangement that closed July
      10,
      2007.  The amount was set up as a liability and the difference between
      the carrying value of the warrants and the amount paid was been credited to
      contributed surplus.




**B.           Liquidity
      and capital resources**




Since
      its inception, Lorus has financed its operations and technology acquisitions
      primarily from equity and debt financing, the exercise of warrants and stock
      options, and interest income on funds held for future investment. We continue
      to
      leverage the ongoing costs of the six GTI-2040 Phase II clinical trials through
      work being done by the US NCI at its cost.  These trials are currently
      in the late stages of completion; Lorus intends to continue an expanded GTI-2040
      trial at its own cost.  The Company has sufficient GTI-2040 drug to
      support ongoing trials.  The Company is currently in the assessment
      phase of results from its GTI-2501 Phase II clinical trial and is not incurring
      significant costs thereon.  We will continue the development of our
      small molecule program from internal resources until their anticipated
      completion.




We
      have not earned substantial revenues from our drug candidates and are therefore
      considered to be in the development stage. The continuation of our research
      and
      development activities and the commercialization of the targeted therapeutic
      products are dependent upon our ability to successfully finance and complete
      our
      research and development programs through a combination of equity financing
      and
      payments from strategic partners.  We have no current sources of
      payments from strategic partners.  In addition, we will need to repay
      or refinance the secured convertible debentures on their maturity should the
      holder not choose to convert the debentures into common shares.  There
      can be no assurance that additional funding will be available at all or on
      acceptable terms to permit further clinical development of our products or
      to
      repay the convertible debentures on maturity.  If we are not able to
      raise additional funds, we may not be able to continue as a going concern and
      realize our assets and pay our liabilities as they fall due. The financial
      statements do not reflect adjustments that would be necessary if the going
      concern assumption were not appropriate.  If the going concern basis
      were not appropriate for our financial statements, then adjustments would be
      necessary in the carrying value of the assets and liabilities, the reported
      revenues and expenses and the balance sheet classifications used.




We
      believe our current level of cash and marketable securities are sufficient
      to
      execute our current planned expenditures for the next twelve
      months.




***Operating
      Cash Requirements***




Lorus
      utilized cash in operating activities of $6.3 million in 2007 compared with
      $13.1 million in 2006 and $18.7 million in 2005.  The decrease in cash
      used in operating activities in 2007 is due to lower research and development
      and general and administrative expenses, as described above and higher interest
      income.  The significant decrease in cash used in operating activities
      in 2006 compared with 2005 is due to lower research and development expenses,
      offset by lower interest income.




***Cash
      Position***




At
      May 31, 2007, Lorus had cash and cash equivalents and marketable securities
      totaling $12.4 million compared to $8.3 million at the end of 2006. The Company
      invests in highly rated and liquid debt instruments. Investment decisions are
      made in accordance with an established investment policy administered by senior
      management and overseen by the board of directors. Working capital (representing
      primarily cash and cash equivalents and marketable securities having maturities
      of less than one year) at May 31, 2007 was $6.2 million as compared to $5.8
      million at May 31, 2006.  Subsequent to year-end, the Company
      completed the Arrangement that resulted in approximately $8.5 million in
      additional cash for Lorus, subject to a $600,000 holdback and post closing
      adjustments, not including the costs.  The Company estimates that the
      net proceeds after costs of the Arrangement and including the amount held in
      escrow will be approximately $7 million.  Also as a condition of the
      transaction, the holder of Lorus’ $15.0 million secured convertible debenture
      agreed to vote in favour of the transaction subject to the repurchase by Lorus
      of its outstanding three million common share purchase warrants at a purchase
      price of $252,000 upon closing of the Arrangement.




42


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




We
      may seek to access the public or private equity markets from time to time,
      even
      if we do not have an immediate need for additional capital at that time. We
      intend to use our resources to fund our existing drug development programs
      and
      develop new programs from our portfolio of preclinical research technologies.
      The amounts actually expended for research and drug development activities
      and
      the timing of such expenditures will depend on many factors, including the
      progress of the Company's research and drug development programs, the results
      of
      preclinical and clinical trials, the timing of regulatory submissions and
      approvals, the impact of any internally developed, licensed or acquired
      technologies, our ability to find suitable partnership agreements to assist
      financially with future development, the impact from technological advances,
      determinations as to the commercial potential of the Company's compounds and
      the
      timing and development status of competitive products.




***Financing***




On
      July 10, 2007, the Company completed the Arrangement that had the effect of
      providing the Company with non-dilutive financing of $8.5 million in additional
      cash for New Lorus, subject to a $600,000 holdback, a post closing adjustment
      and not including the costs of the transaction.  As a result, the
      Company expects that, subject to the post closing adjustments, net proceeds
      of
      the transaction will be approximately $7 million inclusive of the amount held
      in
      escrow to be received in July 2008. See “Subsequent Events”, below.




On
      July 13, 2006 the Company entered into an agreement with High Tech Beteiligungen
      GmbH & Co. KG (High Tech) to issue 28.8 million common shares at $0.36 per
      share for gross proceeds of $10.4 million. The subscription price represented
      a
      premium of 7.5% over the closing price of the common shares on the Toronto
      Stock
      Exchange on July 13, 2006.  The transaction closed on August 31, 2006.
      In connection with the transaction, High Tech received demand registration
      rights that will enable High Tech to request the registration or qualification
      of the common shares for resale in the United States and Canada, subject to
      certain restrictions. These demand registration rights expire on June 30, 2012.
      In addition, High Tech received the right to nominate one nominee to the board
      of directors of Lorus or, if it does not have a nominee, it will have the right
      to appoint an observer to the board. Upon completion of the transaction, High
      Tech held approximately 14% of the issued and outstanding common shares of
      Lorus
      Therapeutics Inc.




On
      July 24, 2006 Lorus entered into an agreement with Technifund Inc. to issue
      on a
      private placement basis, 5.0 million common shares at $0.36 per share for gross
      proceeds of $1.8 million. The transaction closed on September 1,
      2006.




In
      2007, Lorus issued common shares on the exercise of stock options for proceeds
      of $22 thousand (2006, nil, 2005 $112 thousand).




On
      October 6, 2004, we entered into an agreement to raise aggregate net proceeds
      of
      $13.9 million through the issuance of secured convertible debentures and
      warrants. The debentures are secured by a first charge over all of the assets
      of
      the Company. We received $4.4 million on October 6, 2004 (representing a $5.0
      million debenture less an investor fee representing 4% of the $15.0 million
      to
      be received under the agreement), and $5.0 million on each of January 14 and
      April 15, 2005. All debentures issued under this agreement are due on October
      6,
      2009 and are subject to interest payable monthly at a rate of prime plus1%
      until
      such time as the Company's share price reaches $1.75 for 60 consecutive trading
      days, at which time, interest will no longer be charged. Interest is payable
      in
      common shares of Lorus until Lorus' shares trade at a price of $1.00 or more
      after which interest will be payable in cash or common shares at the option
      of
      the debenture holder. Common shares issued in payment of interest will be issued
      at a price equal to the weighted average trading price of such shares for the
      ten trading days immediately preceding their issue in respect of each interest
      payment. For the year ended May 31, 2007, the Company has issued 3,726,000
      in
      settlement of $1.0 million in interest compared with 2,153,000 common shares
      in
      settlement of $882 thousand in interest in the previous year.




43


The
      $15.0 million principal amount of debentures is convertible at the holder's
      option at any time into common shares of the Company with a conversion price
      per
      share of $1.00.




The
      Company issued to the debt holder 3,000,000 warrants expiring October 6, 2009
      to
      buy common shares of the Company at a price per share equal to
      $1.00.  These warrants were repurchased by the Company subsequent to
      the year-end as part of the Arrangement.




On
      June 11, 2003, Lorus raised net proceeds of $29.9 million by way of a public
      offering of 26,220,000 units at a price of $1.25 per unit, each unit consisting
      of one common share and one-half of one purchase warrant. In 2004, Lorus issued
      common shares on the exercise of stock options for proceeds of $171
      thousand




***Use
      of Proceeds***




In
      our prospectus dated August 11, 2006 related to the subscription of shares
      by
      High Tech, the Company indicated that proceeds from the financing would be
      used
      as follows: $8.6 million to fund the development of our product candidates,
      and
      the balance for working capital and general corporate purposes. Since the date
      of receipt of funds, the Company has incurred $1.2 million in research and
      development expenses on our immunotherapy and small molecule programs and $1.1
      million on preliminary and discovery programs.




**Subsequent
      Events**




On
      July 10, 2007 Old Lorus and the Company completed a plan of arrangement and
      corporate reorganization with, among others, Investor and Pinnacle International
      Lands, Inc. (the Arrangement).




As
      part of the Arrangement, all of the assets and liabilities of Old Lorus
      (including all of the shares of the subsidiaries held by it), with the exception
      of certain future tax assets were transferred, directly or indirectly, from
      Old
      Lorus directly or indirectly, to the Company.  Securityholders in Old
      Lorus exchanged their securities in Old Lorus for equivalent securities in
      New
      Lorus on a one-for-one basis (the “Exchange”) and the board of directors and
      management of Old Lorus continued as the board of directors and management
      of
      Company.  Lorus obtained substitutional listings of its common shares
      on both the Toronto Stock Exchange (TSX) and the American Stock Exchange (AMEX),
      and continues to specialize in the discovery, research and development of
      pharmaceutical products and technologies that were previously being performed
      by
      Old Lorus.




In
      connection with the Arrangement and after the Exchange, the share capital of
      Old
      Lorus was reorganized into voting common shares and non-voting common shares
      and
      the Investor acquired from Lorus and Selling Shareholders (as defined below)
      approximately 41% of the voting common shares and all of the non-voting common
      shares by making an aggregate cash payment to New Lorus and the Selling
      Shareholders equal to approximately $8.5 million on closing of the transaction
      less, in the case of Lorus, an escrowed amount of $600,000, subject to certain
      post-closing adjustments and before transaction costs.  The remaining
      59% of the voting common shares of Old Lorus was distributed to the shareholders
      of Lorus who were not residents of the United States on a pro-rata basis, and
      shareholders of Lorus who were residents of the United States received a nominal
      cash payment in lieu of their pro-rata share of voting common shares of Old
      Lorus.  After completion of the Arrangement, Lorus was not related to
      Old Lorus, which was subsequently renamed 4325231 Canada Inc. (now Global Summit
      Real Estate Inc.).




As
      a condition of the agreement, High Tech Beteiligungen GmbH & Co. KG and
      certain other shareholders of Old Lorus (the “Selling Shareholders”) agreed to
      sell to the Investor the voting common shares to be received by them under
      the
      Arrangement at the same price per share as was paid to shareholders who are
      residents of the United States.  The proceeds received by the Selling
      Shareholders was nominal.




44


Also
      as a condition of the Arrangement, the holder of Old Lorus’ secured convertible
      debenture agreed to vote in favour of the transaction subject to the repurchase
      by Lorus of its outstanding three million common share purchase warrants at
      a
      purchase price of $252,000 upon closing of the Arrangement.




Following
      the Arrangement, the Company has approximately $7.0 million in unrecognized
      future tax benefits resulting from non-capital losses carried forward, and
      scientific research and experimental development expenditures. In light of
      the
      uncertainty regarding our future ability to generate taxable income, management
      is of the opinion that it is not more likely than not that these tax assets
      will
      be realized in the foreseeable future and hence, a full valuation allowance
      has
      been recorded against these income tax assets. Consequently, no future income
      tax assets or liabilities are recorded on the balance sheets.




Under
      the Arrangement, Lorus and its subsidiaries indemnified Old Lorus and its
      directors, officers and employees against any and all liabilities, losses,
      costs, expenses, claims and damages, other than for certain tax liabilities
      related to the operations carried out by Old Lorus prior to and by the Company
      subsequent to the transfer of assets, liabilities and operations to the
      Company.




Subsequent
      to the Arrangement and as disclosed in the consolidated financial statements
      (note 16), on July 10, 2007, certain transactions took place between 4325231
      Canada Inc., the shell company of Lorus and the Investor.  4325231
      Canada Inc. issued 294 million additional non-voting common shares for gross
      proceeds of $1.2 million and acquired certain limited partnership units for
      a
      total purchase price of $1.2 million.  These transactions are not part
      of Lorus as a continuing entity.




In
      addition, subsequent to the year-end, the Company extended the option exercise
      period to those directors not seeking re-election at the annual general meeting
      and Dr. Wright in relation to his options earned as president and chief
      executive officer.  These transactions result in modification of the
      terms of the original awards, and the incremental compensation expense relating
      to the modified options will be accounted for in the second quarter ended
      November 30, 2007.





Also
      subsequent to the year-end, the Company received a statement of claim in respect
      of a dispute with a former employee. It is currently not possible to determine
      the outcome of such action or the amount of settlement if any, but the Company
      believes that the suit is without merit and will defend the action
      vigorously.  No provision has been made in the consolidated financial
      statements.








**C.           Research
      and development, patents and licenses, etc.**




Certain
      information concerning research and development and intellectual property is
      set
      forth in Item 4, "Information of the Company".




**D.           Trend
      information**




The
      Company does not currently know of any material trends that would be material
      to
      our operations.




**E.           Off-balance
      sheet arrangements**




As
      at May 31, 2007, we have not entered into any off-balance sheet
      arrangements.




**F.           Tabular
      disclosure of contractual obligations**




As
      at May 31, 2007, we had contractual obligations requiring annual payments as
      follows:




*(Amounts
                in 000s)***Less
                than 1 year**
            
            
            **1-3
                years**
            
            
            **4-5
                years**
            
            
            **5+
                years**
            
            
            **Total**Operating
                leases
            
            
            118
            
            
            
            8
            
            
            
            -
            
            
            
            -
            
            
            
            126Convertible
                Debentures1
            
            
            -
            
            
            
            15,000
            
            
            
            -
            
            
            
            -
            
            
            
            15,000**Total**
            
            ****
            **118**
            
            
            ****
            **15,008**
            
            
            
            -
            
            
            ****
            **-**
            
            
            ****
            **15,126**


1The
      convertible
      debentures as described above may be converted into common shares of Lorus
      at a
      conversion price of $1.00 per share.  In the event that the holder
      does not convert the debentures, Lorus has an obligation to repay the $15.0
      million in cash.    The convertible debentures bear interest
      at the rate of prime plus 1% per annum, payable monthly in common shares until
      such time as the Company’s share price reaches $1.75 for 60 consecutive trading
      days, at which time, interest will no longer be charged.  Interest is
      payable in common shares of Lorus until Lorus’ shares trade at a price of $1.00
      or more after which interest will be payable in cash or common shares at the
      option of the debenture holder.




45


All
      research and development activities
      under the Company’s current license agreements and collaboration agreements are
      in the early stage research or development in a variety of indications;
      therefore, any payment obligations, if any, and the timing thereof under these
      agreements cannot be reasonably predicted.    In relation to
      the Company’s GTI-2040 project, it has previously incurred the drug
      manufacturing cost and is supplying the drug out of existing
      supply.







**Reference
      Information**


**Item
      6.                 Directors,
      Senior Management and Employees**




**A.           Directors
      and Senior Management**




The
      following table and notes thereto provide the name, province or state and
      country of residence, positions with the Company and term of office of each
      person who serves as a director or executive officer of Lorus as of May 31,
      2007.  In addition, such information is provided for directors elected
      to the board of directors after May 31, 2007.




Each
      director has been elected or appointed to serve until the next annual meeting
      or
      until a successor is elected or appointed.  We have an Audit
      Committee, an Environmental, Health and Safety Committee, a Corporate Governance
      and Nominating Committee and a Compensation Committee the members of each such
      committee are shown below.  As at May 31, 2007, our directors and
      executive officers, as a group, beneficially owned, directly or indirectly,
      or
      exercised control over approximately 59,995,700 common shares or approximately
      28% of our outstanding common shares.






The
      Corporation currently has nine directors,  Messrs. Graham
      Strachan, Don Paterson and Michael Moore did not stand for re-election as
      directors at the Company’s annual meeting in September 2007.






**Name
                and Province/State and Country of Residence**
            **Position**
            **Director
                or Officer Since**J.
                Kevin Buchi(1)
              Pennsylvania,
                United States
            Director
            December
                2002Donald
                W. Paterson(1)(3)(5)
              Ontario,
                Canada
            Director
            July
                1991Alan
                Steigrod(2)
              Florida,
                United States
            Director
            May
                2001Georg
                Ludwig(2)
              Eschen,
                Liechtenstein
            Director
            September
                2006








46


**Name
                  and Province/State and Country of Residence**
              **Position**
              **Director
                  or Officer Since**


Michael
                Moore(2)(5)
              Surrey,
                United Kingdom
            Director
            September
                2006Graham
                Strachan(1))(3)(4)(5)
              Ontario,
                Canada
            Chairman,
                Director
            May
                2001Dr.
                Jim Wright
              Ontario,
                Canada
            Director,
                Former President and Chief Executive Officer, Director
            October
                1999Dr.
                Aiping Young(4)
              Ontario,
                Canada
            President
                and Chief Executive Officer, former Chief Operating
                Officer
            October
                1999Elizabeth
                Williams
              Ontario,
                Canada
            Director
                of Finance and Acting Chief Financial Officer
            November
                2005Directors
                elected subsequent to the year-end:HERBERT
                ABRAMSON
              Ontario,
                Canada
            Director
            July
                2007DR.
                DENIS BURGER
              Oregon,
                United States
            Chairman,
                Director
            September
                2007SUSAN
                KOPPY
              California,
                United States
            Director
            September
                2007Dr.
                Mark vincent
              Ontario,
                Canada
            Director
            September
                2007


(1)      Member
      of Audit Committee at May 31, 2007.


(2)      Member
      of the Compensation Committee at May 31, 2007.


(3)      Member
      of the Corporate Governance and Nominating Committee at May 31,
      2007.


(4)      Member
      of Environment, Health and Safety Committee at May 31, 2007.


(5)       Director
      did not stand for re-election at the annual general meeting in September
      2007.





The
      principal occupation and employment of each of the foregoing persons for the
      past five years is set forth below:




*J.
      Kevin Buchi*: Mr. Buchi is Executive Vice President and Chief Financial
      Officer of Cephalon Inc., an international biopharmaceutical
      company.  Mr. Buchi is responsible for finance, accounting,
      manufacturing and information systems and has been involved in raising
      significant financing for Cephalon. He is a certified public accountant and
      has
      received a master’s degree in management from the J.L. Kellogg Graduate School
      of Management at Northwestern University.




*Donald
        W. Paterson*:  Mr. Paterson is President of Cavandale Corporation,
        a corporation principally engaged in providing strategic corporate consulting
        to
        emerging growth companies within the technology industry.




47




*Alan
      Steigrod*:  Mr. Steigrod is Managing Director of Newport
      Healthcare Ventures, a consulting firm for the healthcare industry, located
      in
      Newport Beach, California.




*Georg
      Ludwig*:  Mr. Ludwig is Managing Director of ConPharm Anstalt, a
      consulting and managment company for life science funds, located in
      Lechteinstein.




*Michael
      Moore:*Mr. Moore is Chief Executive Officer, Piramed Limited, a
      biopharmaceutical specializing in new classes of small molecule anti-tumour
      agents.




*Graham
      Strachan*:  Mr. Strachan is President of GLS Business Development
      Inc., a life-science consulting firm located in Etobicoke, Ontario.




*Dr.
      Jim Wright*:  Dr. Wright is presently Chief Executive Officer
      of NuQuest Bio Inc.  Dr. Wright co-founded GeneSense Technologies
      Inc. in 1996, and served as Lorus' President, Chief Scientific Officer and
      a member of the Board of Directors in October 1999 on a merger
      with GeneSense.  In September 2006 he stepped down as the
      President and Chief Executive Officer of Lorus.




*Dr.
      Aiping Young*:  Dr. Young has been our President and Chief
      Executive Officer since September 21, 2006 and was a cofounder with Dr. Wright
      of GeneSense Technologies Inc.  Dr. Young previously held the position
      of Chief Operating Officer, Senior Vice President, Research and Development
      and
      Chief Technical Officer at Lorus.




*Elizabeth
      Williams*: Prior to joining Lorus in July 2004, Ms. Williams was an Audit
      Manager with Ernst and Young LLP.  Ms. Williams is a chartered
      accountant and has received a bachelor’s degree in business
      administration.   Ms. Williams lectured on introductory auditing
      at Wilfrid Laurier University during 2005.




Directors
      elected subsequent to the year-end




*Herbert
      Abramson:*  Mr Abramson is currently Chairman, CEO and Portfolio
      Manager, Trapeze Capital Corp., an investment dealer/portfolio manager and
      Chairman and Portfolio Manager, Trapeze Asset Management Inc., an investment
      counsellor.





*Dr.
      Denis Burger:*Dr Burger
      is currently lead independent director of Trinity Biotech plc., a developer,
      manufacturer of clinical diagnostic products and is past Chairman and CEO of
      AVI
      BioPharma, Inc. a  biopharmaceutical using gene-targeted therapeutics
      to interfere with ribosomal translation.





*Susan
      Koppy:* Ms. Koppy is
      currently Senior Vice President Corporate & Business Development, Idenix
      Pharmaceuticals, Inc, a fully integrated anti-viral therapeutic
      company.  Prior to that, Ms Koppy was VP Strategy and Business
      Development, Applied Biosystems, a life sciences tools company and prior to
      that, Business Development Director, Novartis Pharmaceuticals,  a
      biopharmaceutical company focused on the development of a wide range of drug
      therapies.





*Dr.
      Mark Vincent:* Dr Vincent
      is currently Chief Executive Officer, Sarissa Inc. a biotechnology company
      focused on development of targeted products for the therapeutic manipulation
      of
      gene expression.




48


The
      following table outlines other reporting issuers that Board members are
      directors of:




**Director
                    or Nominee Director**
                **Reporting
                    Issuer**Herbert
                    Abramson(2)
                St
                    Andrew Goldfields Ltd.J.
                    Kevin Buchi
                Encysive
                    PharmaceuticalsDr.
                    Denis Burger(2)
                Trinity
                    Biotech plcSusan
                    Koppy(2)
                -Georg
                    Ludwig
                -Michael
                    Moore(1)
                -
 Donald
                    W. Paterson(1)
                ANGOSS
                    Software Corporation
                  NewGrowth
                    Inc.
                  Homeserve
                    Technologies Inc.
                  Utility
                    CorporationAlan
                    Steigrod
                Sepracor
                    Inc.Graham
                    Strachan(1)
                Amorfix
                    BiotechnologiesInc.
                  Ibex
                    Technologies Inc.Dr.
                    Mark Vincent(2)
                -Dr.
                    Jim A. Wright
                -Dr.
                    Aiping Young
                -




(1)
            Did
                not stand for re-election at the Company’s annual and special meeting of
                shareholders.


(2)
            Elected
                at the Company’s annual and special meeting of shareholders subsequent to
                the year-end.








**B.           Compensation**




**Summary
      of Executive Compensation**




The
      following table provides a summary of compensation earned during each of the
      last three fiscal years by our Chief Executive Officer, our Chief Financial
      Officer (or acting Chief Financial Officer) and for the next three most highly
      compensated executive officers (the “named executive officers”).  The
      figures are in Canadian dollars.




***Summary
      Compensation Table***




**Annual
                Compensation**
            **Long-Term**
              **Compensation**
              **Awards****Name
                and Principal Position**
            **Fiscal**
              **Year**
            **Salary**
              **($)**
            **Bonus**
              **($)**
            **Other
                Annual**
              **Compensation**
              **($)**
            **Securities
                Under**
              **Options/SARs**
              **Granted**
              **(#)(1)**
            **All
                Other**
              **Compensation**
              **($)**Dr.
                Aiping Young
              President
                and Chief Executive Officer,
              former
                Chief Operating Officer
            2007
              2006
              2005
            286,269
              259,692
              222,697
            41,250
              32,000
              46,125
            Nil
              Nil
              Nil
            2,312,496
              1,194,144
              250,000
            Nil
              Nil
              NilMs.
                Elizabeth Williams
              Director
                of Finance,
              Acting
                Chief Financial Officer
            2007
              2006
              2005
            87,152
              88,631
              84,163
            7,565
              7,000
              7,990
            Nil
              Nil
              Nil
            139,739
              228,035
              52,388
            Nil
              Nil
              NilDr.
                Jim A. Wright
              Former
                President and
              Chief
                Executive Officer
            2007
              2006
              2005
            108,814
              345,442
              313,586
            131,070
              53,000
              95,760
            Nil
              Nil
              Nil
              Nil
            (265,000)
              947,500
              228,000
            584,630
              Nil
              NilMr.
                Paul Van Damme(3)
              Former
                Chief Financial Officer
            2007
              2006
              2005
            Nil
              152,654
              Nil
            Nil
              35,030
              Nil
            Nil
              Nil
              Nil
            Nil
              Nil
              202,500
            Nil
              74,633
              37,000





___________




(1)
            Options
                granted are net of forfeitures.


(2)
            Dr. Wright
                resigned from his position on September 21, 2006. The amount
                of  "All Other Compensation" relates
                to  a  lump sum amount paid pursuant to our separation
                agreement with Dr. Wright.


(3)
            Mr. Van
                Damme resigned from his position on November 9, 2005. The amount of
                "All Other Compensation" relates to a lump sum amount paid pursuant
                to our
                separation agreement with Mr. Van
                Damme.






49





**Directors’
      Compensation**






During
      the fiscal year of Old Lorus ended May 31, 2007, each director who was not
      an officer of the Corporation was entitled to receive 50,000 stock options
      (the
      Chair received 100,000) and, at his election, common shares, deferred share
      units and/or cash compensation for attendance at the board of directors of
      the
      Corporation (the "Board") committee meetings. Compensation consisted of an
      annual fee of $15,000 (the Chair received $35,000) and $1,500 per Board meeting
      attended ($4,500 to the Chair of a Board meeting). Members of the Audit
      Committee received an annual fee of $8,000 (the Chair received $10,000). Each
      member of the Compensation Committee, Corporate Governance and Nominating
      Committee and the Environment, Health and Safety Committee received an annual
      fee of $5,000 per committee.




In
      September 2006, stock options to purchase 400,000 common shares at a price
      of $0.30 per share expiring September 20, 2016 were granted, in aggregate,
      to our directors. These options vested 50% upon issuance and the remaining
      50%
      will vest after one year. In addition, Old Lorus reimbursed the directors
      for expenses incurred in attending meetings of the Board and committees of
      the
      Board.




Directors
      are entitled to participate in our Deferred Share Unit Plan. See "Equity
      Compensation Plans  - Directors' and Officers' Deferred Share Unit
      Plan".





**Management
      Contracts**





Under
      the employment agreement with Dr. Aiping Young dated September 21,
      2006, Dr. Young is President and Chief Executive Officer of the Corporation
      at an annual salary of $300,000. This agreement provides for a notice period
      equal to 18 months plus one additional month for each year of employment
      under the agreement in the event of termination without cause or a resignation.
      If within 18 months of a change of control of Lorus, Dr. Young's
      employment is terminated without cause or if she terminates the agreement with
      good reason as defined in the agreement, then she is entitled to receive the
      equivalent of two years’ of her basic salary plus one month salary for each year
      under the agreement, plus an annual bonus prorated over the severance period
      (based on the bonus paid in respect of the last completed fiscal
      year).





Dr. Young
      will also be entitled to benefits coverage for the severance period or a cash
      payment in lieu thereof. The employment agreement provides that the Corporation
      may at any time assign Dr. Young to perform other functions that are
      consistent with her skills, experience and position within the Corporation.
      Dr. Young reports directly to the Board. The bonus and options allocation
      of the President and Chief Executive Officer is determined by the Board and
      is
      awarded based 100% on achievement of corporate objectives. Ms. Young is
      entitled to five weeks annual vacation pro rated to reflect a period of
      employment less than a full calendar year.





Under
      the employment agreement with Ms. Elizabeth Williams dated May 31,
      2004, Ms. Williams' position is Director of Finance of the Corporation for
      an annual salary of $124,000. This agreement provides for a notice period equal
      to the greater of one month and the applicable notice entitlement under
      employment legislation in the event of termination. Ms. Williams reports to
      the Chief Executive Officer. The bonus and options allocation of the Director
      of
      Finance is as recommended to the Board by the Chief Executive Officer.
      Ms Williams is entitled to four weeks of paid vacation, pro rated to
      reflect a period of employment less than a full calendar year.





Salary
      and bonus amounts for each of the Named Executive Officers for the fiscal year
      2007 were as set out in the above Summary Compensation Table.





The
      following table sets forth certain details as at the end of the last fiscal
      year
      ended May 31, 2007 with respect to compensation plans pursuant to which equity
      securities of the Company are authorized for issuance.





50


The
      following table sets forth certain details as at the end of the fiscal year
      of
      Old Lorus, ended May 31, 2007 and at November 15, 2007 with respect to
      compensation plans pursuant to which equity securities of the Corporation are
      authorized for issuance.






**Number of
                common shares to be issued upon exercise of outstanding
                options**
              **(a)**
            
            **Number of
                common shares remaining available for future issuance under the equity
                compensation plans (Excluding Securities reflected
                in Column (a))**
              **(c)**
            **Total
                Stock Options outstanding and available for Grant**
              **(a)
                + (c)****Plan
                Category**
            **Number**
            **% of
                common shares outstanding**
            **Weighted-**
              **average**
              **exercise
                price of outstanding options**
              **(b)**
            **Number**
            **% of
                common shares outstanding**
            **Number**
            **% of
                Common**
              **shares**
              **outstanding**Equity
                compensation plans approved
              byShareholders
            12,987,431
            6.1
            $0.59
            18,800,951
            8.9
            31,788,382
            15%Equity
                compensation plans approved
              byShareholders
                (November 15, 2007)
            15,051,338
            7.0
            $0.52
            16,842,843
            8.0
            31,894,181
            15%







**Equity
      Compensation Plans**




Our
      original stock option plan was established in the 1993 Plan; however, due to
      significant developments in the laws relating to share option plans and our
      then
      future objectives, in November 2003 we created the 2003 Plan, ratified by
      our shareholders, pursuant to which all future grants of stock options would
      be
      made.





On
      January 1, 2005, the TSX amended its rules (the "TSX Rules") to provide
      that, among other things, the maximum number of shares issuable under a stock
      option plan of a TSX issuer may be a rolling number based on a fixed percentage
      of the number of outstanding shares of such issuer from time to time.
      Previously, the TSX Rules required a stock option plan to have a fixed number
      of
      shares issuable thereunder. The amended TSX Rules require that a stock option
      plan with a rolling maximum be approved by the shareholders of an issuer every
      three years.





At
      our annual meeting held on September 13, 2005, shareholders of the
      Corporation approved an amendment to the Stock Option Plans to provide that
      the
      number of shares available for issue is a rolling rate of 15% of the issued
      common shares of the Corporation. Shareholders also approved amendments to
      remove all prior limits on grants of options and issuance of common shares to
      any one individual and for individual insiders under the 1993 Stock Option
      Plan
      and 5% limits for individual insiders under the 2003 Stock Option Plan, and
      to
      replace such limits with the 10% limit for insiders as a group as provided
      under
      the amended TSX Rules.





The
      1993 Plan and 2003 Plan were continued as stock option plans of the Corporation
      in connection with the Arrangement.





1993
      Plan





Under
      the 1993 Plan, options were granted to directors, officers, consultants and
      employees of the Corporation or its subsidiaries. The total number of options
      issued under the 1993 Plan is 3,635,534. This represents 1.7% of the
      Corporation's issued and outstanding capital as at November 15**,**
      2007. As of November 2003, option grants were no longer made under the 1993
      Plan. Therefore, no further options are issuable under the 1993 Plan. The total
      number of common shares issuable under actual grants pursuant to the1993 Plan
      is
      3,635,534, being 1.7% of the Corporation's issued and outstanding capital as
      at
      November 15, 2007.




The
      number of common shares issuable to insiders, at any time, under the 1993 Plan
      and any other compensation arrangement of the Corporation cannot exceed 10%
      of
      the issued and outstanding common shares of the Corporation. The number of
      shares issued to insiders, within any one year period, under the 2003 Plan
      and
      any other compensation arrangement of the Corporation cannot exceed 10% of
      the
      issued and outstanding common shares of the Corporation. The




51
 maximum
        percentage of common shares reserved for issuance to any one person is 5%
        of the
        issued and outstanding common shares of the Corporation. The exercise
        price of options granted under the 1993 Plan was established by the Board
        on the
        basis of the closing market price of common shares of the Corporation on
        the TSX
        on the last trading day preceding the date of grant. If such a price was
        not
        available, the exercise price was to be determined on the basis of the average
        of the bid and ask for the common shares on the TSX on the date preceding
        the
        date of grant. The vesting period of options was determined by the Board
        at the
        time of granting the option. The term of options granted under the 1993 Plan
        and
        outstanding as of October 7, 2004 is 10 years from the date of
        grant.




If
      an option holder ceases to be an officer, director, continuing consultant or
      employee of the Corporation or a subsidiary, each unexpired, vested option
      may
      be exercised within 3 months of the date of cessation. In the event of the
      death of an optionee, each unexpired, vested option may be exercised within
      9 months of the option holder's date of death.




Options
      granted under the 1993 Plan are not transferable. Currently, the 1993 Plan
      may
      be amended by the Board subject to regulatory approval in certain
      circumstances.




2003
      Plan




Under
      the 2003 Plan, options may be granted to employees, officers, directors or
      consultants of the Corporation as well as employees of an affiliate of the
      Corporation or consultants of a related entity of the Corporation. The total
      number of options issued under the 2003 Plan is
      11,415,804.****This represents 5.3% of the Corporation's
      issued and outstanding capital as at November 15, 2007. The total number of
      shares issuable under the 2003 Plan is 31,894,181. This represents 15% of the
      Corporation's issued and outstanding capital as at November 15,
      2007.  The total number of common shares issuable under actual grants
      pursuant to the 2003 Plan
      is****11,415,804****being 5.3% of the
      Corporation's currently issued and outstanding capital as at November 15,
      2007.




The
      maximum number of common shares reserved for issuance to insiders, at any time,
      under the 2003 Plan and any other compensation arrangement of the Corporation
      is
      10% of the issued and outstanding common shares of the Corporation. The maximum
      number of common shares that may be issued to insiders, at any time, under
      the
      2003 Plan and any other compensation arrangement of the Corporation within
      a
      12 month period is 10% of the issued and outstanding common shares of the
      Corporation. The maximum number of common shares reserved for issuance to any
      one person is 5% of the issued and outstanding common shares of the Corporation.
      The exercise price of options granted under the 2003 Plan is established by
      the
      Board and will be equal to the closing market price of the common shares on
      the
      TSX on the last trading day preceding the date of grant. If there is no trading
      on that date, the exercise price will be the average of the bid and ask on
      the
      TSX on the last trading date preceding the date of grant. If not otherwise
      determined by the Board, an option granted under the 2003 Plan will vest as
      to
      50% on the first anniversary of the date of grant of the option and an
      additional 25% on the second and third anniversaries after the date of grant.
      The Board fixes the term of each option when granted, but such term may not
      be
      greater than 10 years from the date of grant.




If
      an option holder is terminated without cause, resigns or retires, each option
      that has vested will cease to be exercisable 3 months after the option
      holder's termination date. Any portion of an option that has not vested on
      or
      prior to the termination date will expire immediately. If an option holder
      is
      terminated for cause, each option that has vested will cease to be exercisable
      immediately upon the Corporation's notice of termination. Any portion of an
      option that has not vested on or prior to the termination date will expire
      immediately.





Options
      granted under the 2003 Plan are not assignable. Currently, the 2003 Plan may
      be
      amended by the Board subject to regulatory and shareholder approval in certain
      circumstances.





During
      the period June 1, 2006 to May 31, 2007, options to purchase 5,318,000
      common shares were granted under the 2003 Plan at exercise prices between $0.27
      and $0.33 per common share. During the year ended May 31, 2007, we granted
      options to employees, other than executive officers of the Corporation, to
      purchase 2,183,067 common shares, being 41% of the total incentive stock options
      granted during the year to employees and executive officers.








52


**Performance
      Based Compensation Plans**





Executive
      officers of the Corporation are eligible to participate in a performance related
      compensation plan (the "Compensation Plan"). The Compensation Plan provides
      for
      potential annual cash bonus payments and annual granting of options to purchase
      common shares under our 2003 Plan. The potential annual cash bonus and annual
      granting of options to each executive officer are conditional upon the
      achievement by the Corporation and each executive officer of predetermined
      objectives reviewed by the Compensation Committee and approved by the Board.
      See
      "Compensation Committee" and "Report on Executive Compensation".








**Employee
      Share Purchase Plan**




In
      November 2004, the Board adopted the Employee Share Purchase Plan ("ESPP"),
      effective January 1, 2005. For the year ended May 31, 2007 a total of
      69,000 common shares had been purchased by employees under the ESPP at prices
      per share between $0.23 and $0.35 per common share and a weighted average
      purchase price of $0.26. During fiscal 2007, no executive officers purchased
      shares under the ESPP. The purpose of the ESPP is to assist the Corporation
      to
      retain the services of its employees, to secure and retain the services of
      new
      employees and to provide incentives for such persons to exert maximum efforts
      for the success of the Corporation. The ESPP provides a means by which employees
      of the Corporation and its affiliates may purchase common shares at a 15%
      discount through accumulated payroll deductions. Eligible participants in the
      ESPP include all employees, including executive officers, who work at least
      20 hours per week and are customarily employed by the Corporation or an
      affiliate of the Corporation for at least six months per calendar year.
      Generally, each offering is of three months' duration with purchases occurring
      every month. Participants may authorize payroll deductions of up to 15% of
      their
      base compensation for the purchase of common shares under the ESPP.




The
      Employee Share Purchase Plan was adopted by the Corporation in connection with
      the Arrangement.




**Deferred
      Profit Sharing Plan**




We
      have a Deferred Profit Sharing Plan ("DPSP") matching program which is available
      to all employees. The DPSP matching program provides 100% matching of employee
      contributions into each employee's Group RRSP account up to a maximum of 3%
      of
      the employee's gross earnings. We began making contributions to the employees'
      Group Retirement Savings Plan in fiscal 1998. Beginning February 2001, our
      contributions have been paid into an employer-sponsored DPSP.




**Directors'
      and Officers' Deferred Share Unit Plan**




We
      have a deferred share unit plan for directors and officers (the "Deferred Share
      Unit Plan"). Under the Deferred Share Unit Plan, participating directors may
      elect to receive either a portion or all of their annual fees for acting as
      a
      director ("Annual Fees") from us in deferred share units. Under the Deferred
      Share Unit Plan, the Compensation Committee may at any time during the period
      between the annual meetings of our shareholders, in its discretion recommend
      the
      Corporation credit to each participating director who has elected under the
      terms of the Deferred Share Unit Plan, the number of units equal to the gross
      amount of the Annual Fees to be deferred divided by the fair market value of
      the
      common shares. The fair market value of the common shares is determined as
      the
      closing price of the common shares on the TSX on the day immediately preceding
      such recommendation by the Compensation Committee or such other amount as
      determined by the Board and permitted by the stock exchanges or other market(s)
      upon which the common shares are from time to time listed for trading and by
      any
      other applicable regulatory authority (collectively, the "Regulatory
      Authorities").




In
      addition, the participating directors may elect under the Deferred Share Unit
      Plan to receive deferred share units in satisfaction for meeting fees earned
      by
      the Participating Directors as a result of attendance at meetings of the Board
      held between the annual meetings of our shareholders by the credit to each
      Participating Director of the number of units equal to the gross amount of
      the
      meeting fees to be deferred divided by the fair market value of the common
      shares, being the closing price of the common shares on the TSX on the day
      immediately preceding the recommendation by the Compensation Committee or such
      other amount as determined by the Board and permitted by the Regulatory
      Authorities.




53





The
      Deferred Share Unit Plan is administered by the Board (in consultation with
      the
      Compensation Committee) and, subject to regulatory requirements, may be amended
      by the Board without shareholder approval. When a participating director ceases
      to hold the position of director and is no longer otherwise employed by us,
      the
      participating director receives either (a) a lump sum cash payment equal to
      the number of deferred share units held multiplied by the then fair market
      value
      of the common shares on the date of termination, or (b) the number of
      common shares that can be acquired in the open market with the amount described
      in (a), either case being subject to withholding for income tax. The Board
      may
      terminate the Deferred Share Unit Plan any time before or after any allotment
      or
      accrediting of deferred share units thereunder.





The
      Deferred Share Unit Plan was adopted by the Corporation in connection with
      the Arrangement.








**Option
      Grants During Fiscal Year 2007**




The
      following tables set forth the options granted to and exercised by each of
      the
      Named Executive Officers during the year ended May 31, 2007:




***Option/SAR
      Grants During the Most Recently Completed Financial
      Year***







**Name
                and Principal Position**
            **Securities
                Under Options/SARs Granted**
              **(#)(1)**
            **% of Total
                Options/SARs Granted to Employees in
                Financial**
              **Year**
              **(%)**
            **Exercise or
                Base Price**
              **($/Security)**
            **Market Value
                of Securities Underlying Options/SARs on the Date of Grant
                ($/Security)**
            **Expiration**
              **Date**Dr.
                Aiping Young
              President
                and Chief Executive Officer, Former Chief Operating
                Officer
            75,000(1)
              1,000,000(2)
              500,000(3)
              1,000,000(4)
            1.40
              18.80
              9.40
              18.80
            0.33
              0.27
              0.27
              0.27
            0.33
              0.27
              0.27
              0.27
            July
                28, 2016
              October
                5, 2016
              October
                5, 2016
              October
                5, 2106Ms.
                Elizabeth Williams
              Director
                of Finance, Acting Chief Financial Officer
            159,848(1)
            3.00
            0.33
            0.33
            July
                28, 2016Dr.
                Jim A. Wright
              Former
                President and Chief Executive Officer
            50,000(5)
            0.90
            0.30
            0.30
            Sept.
                20, 2016





___________




(1)
            These
                options were granted on July 29, 2006 in respect of corporate and
                personal performance during the year ended May 31, 2006. The options
                vest on the basis of 50% on the first anniversary and 25% on the
                second
                and third anniversaries of the date of
                granting.


(2)
            Options
                granted upon entering into Employment Agreement. The options vested
                upon
                granting.


(3)
            These
                options to purchase common shares are incentive options. The options
                vest
                upon the attainment of specific undertakings based on certain corporate
                performance objectives; failing to achieve the undertakings will
                result in
                forfeiture on the specified
                deadline.


(4)
            These
                options to purchase common shares are incentive options. The options
                vest
                upon attainment of certain share price performance objectives; failing
                to
                achieve the undertakings will result in forfeiture on the specified
                deadline.


(5)
            These
                options were granted by virtue of Dr. Wright's role as director. No
                options were granted in reference to his role as
                a                    President
                and Chief Executive officer.






54





***Aggregated
      Option/SAR Exercises During the Most Recently
      Completed***


***Financial
      Year and Financial Year-End Option/SAR Values***







**Name**
            **Securities**
              **Acquired on**
              **Exercise**
              **(#)**
            **Aggregate**
              **Value**
              **Realized**
              **($)Nil**
            **Unexercised**
              **Options/SARs
                at**
              **May
                31, 2007**
              **(#)**
              **Exercisable/**
              **Unexercisable**
            **Value
                of Unexercised**
              **in-the-Money**
              **Options/SARs
                at**
              **May
                31, 2007 ($)**
              **Exercisable/**
              **Unexercisable**Dr.
                Aiping Young
              President
                and Chief Executive Officer Former Chief Operating Officer
            Nil
            Nil
            2,890,255/1,617,187
            0/0Ms.
                Elizabeth Williams
              Director
                of Finance, Acting Chief Financial Officer
            Nil
            Nil
            299,802/120,360
            0/0Dr.
                Jim A. Wright
              Former
                President and Chief Executive Officer
            Nil
            Nil
            2,447,500/25,000
            0/0





**C.           Board
      Practices**




Lorus
      is authorized to have a board of at least one director and no more than
      ten.  Lorus currently has nine directors.  Directors are
      elected for a term of about one year, from annual meeting to annual meeting,
      or
      until an earlier resignation, death or removal.  Each officer serves
      at the discretion of the Board or until an earlier resignation, death or
      removal.  There are no family relationships among any of our directors
      or officers.




**Committees
      of the Board of Directors**




The
      Company has an Audit Committee, a Nominating and Corporate Governance Committee,
      a Compensation Committee and an Environment, Health and Safety
      Committee.




The
      members of these committees are as follows to September 19, 2007:




Audit
                Committee:
            J.
                Kevin Buchi, Donald W. Paterson and Graham StrachanCompensation
                Committee:
            Alan
                Steigrod, Georg Ludwig and Michael MooreNominating
                and Corporate Governance Committee:
            Donald
                W. Paterson, Graham Strachan and J. Kevin BuchiEnvironment,
                Health and Safety Committee:
            Graham
                Strachan and Dr. Aiping Young







The
      members of these committees effective September 19, 2007 are as
      follows:




Audit
                Committee:
            J.
                Kevin Buchi, Dr. Denis Burger and Alan SteigrodCompensation
                Committee:
            Alan
                Steigrod, Dr Denis Burger and Susan KoppyNominating
                and Corporate Governance Committee:
            Herbert
                Abramson, J. Kevin Buchi, and Susan KoppyEnvironment,
                Health and Safety Committee:
            Dr.
                Mark Vincent, Dr. Jim Wright and Dr. Aiping
                Young







**Compensation
      Committee**




**Composition
      of the Compensation Committee**





The
      Board, upon the advice of the Compensation Committee, determines executive
      compensation. During the period from June 1 to September 21, 2006 the
      Compensation Committee was comprised of three independent directors,
      Mr. Steigrod, Mr. Strachan and Mr. Buchi.  From
      September 21, 2006 to September 19, 2007**,**the
      Compensation  committee was comprised of Mr. Steigrod,
      Mr. Ludwig and Dr. Moore. Dr. Moore acted as interim chair of the
      Compensation Committee. The Compensation Committee met once during the above
      period.  The current Compensation Committed is comprised
      of  Mr. Steigrod (Chairman), Dr Burger, and Susan Koppy.








55


**Compensation
      Objectives and Philosophy**





The
      Compensation Committee's mandate is to review, and advise the Board on, the
      recruitment, appointment, performance, compensation, benefits and termination
      of
      executive officers. The Compensation Committee also administers and reviews
      procedures and policies with respect to our 2003 Stock Option Plan, employee
      benefit programs, pay equity and employment equity. The philosophy of the
      Compensation Committee regarding executive officer compensation is to reward
      performance and to provide a total compensation package that will attract and
      retain qualified, motivated and achievement oriented executive
      officers.





The
      Compensation Committee attempts to create compensation arrangements that will
      align the interests of our executive officers and our shareholders. The key
      components of executive officer compensation are base salary, potential annual
      cash bonuses and annual participation in the 2003 Stock Option
      Plan.








**Audit
      Committee**





Pursuant
      to Canadian securities laws, our board of directors has determined that Messrs.
      Buchi, Paterson and Strachan are financially literate, as all have experience
      in
      reviewing and analysing the financial reports and ascertaining the financial
      position of a corporation.  Mr. Buchi is a certified public accountant
      and holds the position of Chief Financial Officer in a public pharmaceutical
      company.  Pursuant to United States securities laws, Mr. Buchi is also
      an audit committee “financial expert”.  Mr. Paterson, in his position
      as President of Cavandale Corporation, is educated and experienced in reading
      and analyzing financial statements.  Mr. Strachan has experience
      reading and analysing financial statements both as President of his own life
      science consulting firm and in a prior position as President, Chief Executive
      Officer and a director of a biopharmaceutical company.  Additionally,
      we believe that all three members of the audit committee qualify as
“independent” as that term is defined in the relevant Canadian and United States
      securities laws and stock exchange rules relating to the composition of the
      audit committee.





The
      current audit committee is comprised of Mr Buchi, Mr. Steigrod and Mr.
      Burger.  Messrs. Steigrod and Burger each have significant experience
      in reading and analyzing financial statements.  We believe that all
      members of the current audit committee qualify as “independent” as that term is
      defined in the relevant Canadian and United States securities laws and stock
      exchange rules relating to the composition of the audit committee.








*Audit
      Committee Mandate*


The
      Audit Committee’s mandate is to assist the board of directors in fulfilling its
      oversight responsibilities.  In particular, the Audit
      Committee:




(a)
            serves
                as an independent and objective party to monitor the integrity of
                our
                financial reporting process and systems of internal controls regarding
                finance, accounting, and legal compliance, including the review of
                our
                financial statements, MD&A and annual and interim
                results;




(b)
            identifies
                and monitors the management of the principal risks that could impact
                our
                financial reporting;




(c)
            monitors
                the independence and performance of our independent auditors, including
                the pre-approval of all audit fees and all permitted non-audit
                services;




(d)
            provides
                an avenue of communication among the independent auditors, management,
                and
                our board of directors; and




(e)
            encourages
                continuous improvement of, and foster adherence to, our policies,
                procedures and practices at all
                levels.






The
      Audit Committee is also responsible for implementing and overseeing our
      whistle-blowing procedures.




56





**D.           Employees**




As
      at May 31, 2007, we employed 27 full-time persons and three part-time person
      in
      research and drug development and administration activities. Of our employees,
      eight hold Ph.D.s.  To encourage a focus on achieving long-term
      performance, employees and members of the board of directors have the ability
      to
      acquire an ownership interest in the Company through Lorus’ stock option plan
      and employees can participate in the employee share purchase plan, which was
      established in 2005.




Our
      ability to develop commercial products and to establish and maintain our
      competitive position in light of technological developments will depend, in
      part, on our ability to attract and retain qualified personnel. There is a
      significant level of competition in the marketplace for such personnel. We
      believe that to date we have been successful in attracting and retaining the
      highly skilled personnel critical to our business. We have also chosen to
      outsource activities where skills are in short supply or where it is
      economically prudent to do so.




None
      of our employees is unionized, and we consider our relations with our employees
      to be good.




**E.           Share
      Ownership**




The
      following table sets forth information regarding beneficial ownership of our
      common shares as of November 15, 2007, by our officers and directors
      individually and as a group.




**Number
                of Shares**
              **Beneficially
                Owned**
            
            
            **Percentage
                of Shares Outstanding**Dr.
                Jim A. Wright
            
            
            4,439,541
            
            
            
            2.07
            %Dr.
                Aiping H. Young
            
            
            37,803
            
            
            
            0.00
            %Elizabeth
                Williams
            
            
            6,852
            
            
            
            0.00
            %Michael
                Moore(1)
            
            Nil
            
            
            
            0.00
            %Georg
                Ludwig(3)
            
            
            29,090,000
            
            
            
            13.57
            %Donald
                Paterson(1)
            
            
            125,260
            
            
            
            0.06
            %Graham
                Strachan(1)
            
            
            10,000
            
            
            
            0.00
            %Alan
                Steigrod
            
            
            10,000
            
            
            
            0.00
            %J.
                Kevin Buchi
            
            
            50,000
            
            
            
            0.02
            %Herbert
                Abramson(2)(4)
            
            
            25,946,625
            
            
            
            12.10
            %Dr.
                Denis Burger(2)
            
            
            59,620
            
            
            
            0.02
            %Susan
                Koppy(2)
            
            Nil
            
            
            
            0.00
            %Dr.
                Mark Vincent(2)
            
            Nil
            
            
            
            0.00
            %All
                directors and executive officers as a group
            
            
            59,995,701
            
            
            
            27.89
            %





(1)
            Director
                did not stand for re-election at the annual general meeting in September
                2007


(2)
            Elected
                subsequent to
                the  year-end


(3)
            Mr.
                Ludwig is deemed to control the shares held by High Tech in his capacity
                as managing director of High Tech.


(4)
            In
                addition to shares held personally, Mr. Abramson is deemed to control
                the
                shares held by Technifund Inc. in his capacity as sole owner of
                Technifund.





See
      item 6.B for a description of arrangements pursuant to which employees may
      become involved in the capital of Lorus.




57


**Item
      7.                 Major
      Shareholders and Related Party Transactions**




**A.           Major
      Shareholders**




To
      the knowledge of our directors and officers, as of the date hereof, no person
      or
      company beneficially owns, directly or indirectly, or exercises control or
      direction over, more than 5% of the outstanding common shares, other than as
      described below.




On
      July 13, 2006, Lorus entered into a share purchase agreement with High Tech
      Beteiligungen GmbH & Co. KG (“High Tech”) to issue 28.8 million common
      shares at $0.36 per share for gross proceeds of $10.4 million.  The
      transaction closed on August 30, 2006.  Subsequent to that date, High
      Tech indirectly acquired an additional 290,000 common shares.  As of
      November 15, 2007****based solely on public filings with
      securities regulators, High Tech holds approximately 14% of the issued and
      outstanding common shares of Lorus.  As part of the
      Arrangement,  High Tech agreed to sell to Investor the voting common
      shares of Old Lorus to be received under the Arrangement at the same price
      per
      share as was paid to shareholders who are residents of the United
      States.   The proceeds received by the High Tech were
      nominal.




On
      July 24, 2006 Lorus entered into a share purchase agreement with Technifund
      Inc.
      (“Technifund”) to issue, on a private placement basis, 5,000,000 common shares
      at $0.36 for gross proceeds of $1,800,000.    As of November
      15, 2007 based solely on public filings with Security regulators, Mr.
      Abramson (directly or indirectly through Technifund) holds approximately
      12% of the issued and outstanding common shares of Lorus.  As part of
      the Arrangement, Mr. Abramson and Technifund agreed to sell to Investor the
      voting common shares of Old Lorus to be received under the Arrangement at the
      same price per share as was paid to shareholders who are residents of the United
      States.   The proceeds received by the Technifund were
      nominal.




**B.           Related
      Party Transactions**




See
      Item 7.A.




In
      2007, other than the reorganization completed on July 10, 2007, we did not
      enter
      into any transactions with related parties.  In order to effectively
      execute our business strategy, we expect to continue outsourcing various
      functions to the expertise of third-parties such as contract manufacturing
      organizations, contract research organizations, and other research
      organizations. These relationships are with non-related third-parties and occur
      at arm's length and on normal commercial terms.




**C.           Interests
      of Experts and Counsel**




Not
      applicable.




**Item
      8.                 Financial
      Information**




**A.           Consolidated
      Financial Statements and Other Financial Information**




See
      Item 17.




**B.           Significant
      Changes**




None.




**Item
      9.                 The
      Offer and Listing**




**A.           Offer
      and Listing details**




Not
      applicable, except for Item 9A (4).




58


**Price
      Range of Common Stock and Trading Markets**




Our
      common shares are currently listed on the TSX under the symbol “LOR” and on the
      AMEX under the symbol “LRP”.  The following table sets out the price
      ranges and trading volumes of our common shares on the TSX and Amex for the
      periods indicated:




American
                Stock Exchange/Amex
              (US$)
            
            
            Toronto
                Stock Exchange/TSX
              (CDN$)Five
                most recent full fiscal years:
            
            High
            
            
            Low
            
            
            High
            
            
            LowYear
                ended May 31, 2007
            
            
            0.34
            
            
            
            0.14
            
            
            
            0.39
            
            
            
            0.22Year
                ended May 31, 2006
            
            
            0.79
            
            
            
            0.19
            
            
            
            0.92
            
            
            
            0.22Year
                ended May 31, 2005
            
            
            0.70
            
            
            
            0.45
            
            
            
            0.94
            
            
            
            0.57Year
                ended May 31, 2004
            
            
            1.09
            
            
            
            0.60
            
            
            
            1.47
            
            
            
            0.83Year
                ended May 31, 2003
            
            
            1.40
            
            
            
            0.18
            
            
            
            2.04
            
            
            
            0.31Year
                ended May 31, 2007
            
            
            0.34
            
            
            
            0.14
            
            
            
            0.39
            
            
            
            0.22Quarter
                ended May 31, 2007
            
            
            0.27
            
            
            
            0.22
            
            
            
            0.33
            
            
            
            0.25Quarter
                ended February 28, 2007
            
            
            0.34
            
            
            
            0.14
            
            
            
            0.39
            
            
            
            0.22Quarter
                ended November 30, 2006
            
            
            0.31
            
            
            
            0.19
            
            
            
            0.34
            
            
            
            0.22Quarter
                ended August 31, 2006
            
            
            0.34
            
            
            
            0.25
            
            
            
            0.39
            
            
            
            0.28Year
                ended May 31, 2006
            
            
            0.79
            
            
            
            0.19
            
            
            
            0.92
            
            
            
            0.22Quarter
                ended May 31, 2006
            
            
            0.36
            
            
            
            0.30
            
            
            
            0.42
            
            
            
            0.34Quarter
                ended February 28, 2006
            
            
            0.42
            
            
            
            0.19
            
            
            
            0.49
            
            
            
            0.22Quarter
                ended November 30, 2005
            
            
            0.79
            
            
            
            0.22
            
            
            
            0.92
            
            
            
            0.25Quarter
                ended August 31, 2005
            
            
            0.68
            
            
            
            0.55
            
            
            
            0.84
            
            
            
            0.60Year
                ended May 31, 2005
            
            
            0.70
            
            
            
            0.45
            
            
            
            0.94
            
            
            
            0.57Quarter
                ended May 31, 2005
            
            
            0.68
            
            
            
            0.55
            
            
            
            0.94
            
            
            
            0.58Quarter
                ended February 28, 2005
            
            
            0.70
            
            
            
            0.46
            
            
            
            0.88
            
            
            
            0.66Quarter
                ended November 30, 2004
            
            
            0.69
            
            
            
            0.55
            
            
            
            0.86
            
            
            
            0.57Quarter
                ended August 31, 2004
            
            
            0.69
            
            
            
            0.45
            
            
            
            0.82
            
            
            
            0.67October
                2007
            
            
            0.27
            
            
            
            0.16
            
            
            
            0.24
            
            
            
            0.17September
                2007
            
            
            0.23
            
            
            
            0.18
            
            
            
            0.24
            
            
            
            0.19August
                2007
            
            
            0.23
            
            
            
            0.15
            
            
            
            0.25
            
            
            
            0.16July
                2007
            
            
            0.24
            
            
            
            0.20
            
            
            
            0.24
            
            
            
            0.21June
                2007
            
            
            0.26
            
            
            
            0.21
            
            
            
            0.26
            
            
            
            0.23May
                2007
            
            
            0.27
            
            
            
            0.22
            
            
            
            0.29
            
            
            
            0.25




**B.           Plan
      of Distribution**




Not
      applicable.




**C.           Markets**




See
      Item 9.A.




**D.           Selling
      Shareholders**




Not
      applicable.




**E.           Dilution**




Not
      applicable.




59


**F.           Expense
      of the Issue**




Not
      applicable.




**Item
      10.                 Additional
      Information**




**A.           Share
      Capital**




**Description
      of Securities**




**Our
      authorized share capital consists of an unlimited number of common shares,
      without par value.**




As
      of May 31, 2007, 212,265,616 common shares were issued and
      outstanding.  In addition, as of May 31, 2007 there were 12,987,431
      common shares issuable upon the exercise of outstanding stock options at a
      weighted average exercise price of $0.59 per share.  The Company has
      16,842,843 common shares reserved for future grant or issuance under our stock
      option plans as of November 15, 2007. As of May 31, 2007 the Company had
      3,000,000 common shares issuable upon the exercise of outstanding warrants
      at a
      weighted-average exercise price of $1.00 per share, these warrants were
      repurchased by the Company at the Arrangement Date.




**B.           Articles
      of Incorporation and By-laws**




We
      are incorporated pursuant to the laws of Canada. Our Articles of Incorporation
      and By-laws provide no restrictions as to the nature of our business operations.
      Under Canadian law, a director must inform us, at a meeting of the Board of
      Directors, of any interest in a material contract or proposed material contract
      with us. Directors may not vote in respect of any such contracts made with
      us or
      in any such contract in which a director is interested, and such directors
      shall
      not be counted for purposes of determining a quorum. However, these provisions
      do not apply to (i) a contract relating primarily to their remuneration as
      a director, officer, employee or agent of the Corporation or affiliate,
      (ii) a contract for their indemnity or insurance as permitted under the
*Canada Business Corporations Act*, or (iii) a contract with an
      affiliate.




We
      are authorized to issue an unlimited number of common shares. Our stockholders
      have no rights to share in our profits, are subject to no redemption or sinking
      fund provisions, have no liability for further capital calls and are not subject
      to any discrimination due to number of shares owned. By not more than
      50 days or less than seven days in advance of a dividend, the Board of
      Directors may establish a record date for the determination of the persons
      entitled to such dividend.




The
      rights of holders of our common stock can be changed at any time in a
      stockholder meeting where the modifications are approved by 66 2/3% of the
      shares represented by proxy or in person at a meeting at which a quorum
      exists.




All
      holders of our common stock are entitled to vote at annual or special meetings
      of stockholders, provided that they were stockholders as of the record date.
      The
      record date for stockholder meetings may precede the meeting date by no more
      than 50 days and not less than 21 days, provided that notice by way of
      advertisement is given to stockholders at least seven days before such record
      date. Notice of the time and place of meetings of stockholders may not be less
      than 21 or greater than 50 days prior to the date of the meeting. There are
      no:




•
            limitations
                on share ownership;




•
            provisions
                of the Articles or by-laws that would have the effect of delaying,
                deferring or preventing a change of control of our
                company;




•
            by-law
                provisions that govern the ownership threshold above which stockholder
                ownership must be disclosed; and




•
            conditions
                imposed by the Articles or by-laws governing changes in capital,
                but
                Canadian Corporate law requires any changes to the terms of share
                capital
                be approved by 66b%
                of the shares represented by proxy or in person at a stockholders’ meeting
                convened for that purpose at which a quorum
                exists.






60




**Common
      Stock**




Each
      holder of record of common stock is entitled to one vote for each share held
      on
      all matters properly submitted to the stockholders for their vote, except
      matters which are required to be voted on as a particular class or series of
      stock. Cumulative voting for directors is not permitted.




Holders
      of outstanding shares of common stock are entitled to those dividends declared
      by the Board of Directors out of legally available funds. In the event of
      liquidation, dissolution or winding up our affairs, holders of common stock
      are
      entitled to receive, pro rata, our net assets available after provision has
      been
      made for the preferential rights of the holders of preferred stock. Holders
      of
      outstanding common stock have no pre-emptive, conversion or redemption rights.
      All of the issued and outstanding shares of common stock are, and all unissued
      shares of common stock, when offered and sold will be, duly authorized, validly
      issued, fully paid and non-assessable. To the extent that additional shares
      of
      common stock may be issued in the future, the relative interests of the then
      existing stockholders may be diluted. There were 212,265,616 common shares
      issued and outstanding at May 31, 2007.




**Convertible
      Debentures**




On
      October 6, 2004, we entered into an agreement to raise aggregate net proceeds
      of
      $13.9 million through the issuance of secured convertible debentures and
      warrants. The debentures are secured by a first charge over all of the assets
      of
      the Company. We received $4.4 million on October 6, 2004 (representing a $5.0
      million debenture less an investor fee representing 4% of the $15.0 million
      to
      be received under the agreement), and $5.0 million on each of January 14 and
      April 15, 2005. All debentures issued under this agreement are due on October
      6,
      2009 and are subject to interest payable monthly at a rate of prime plus 1%
      until such time as the Company's share price reaches $1.75 for 60 consecutive
      trading days, at which time, interest will no longer be charged. Interest is
      payable in common shares of Lorus until Lorus' shares trade at a price of $1.00
      or more after which interest will be payable in cash or common shares at the
      option of the debenture holder. Common shares issued in payment of interest
      will
      be issued at a price equal to the weighted average trading price of such shares
      for the ten trading days immediately preceding their issue in respect of each
      interest payment. For the year ended May 31, 2007, the Company has issued
      3,726,000 common shares in settlement of $1 million in interest.  For
      the year ended May 31, 2006 the Company issued 2,153,000 common shares in
      settlement of $882 thousand in interest.




The
      $15.0 million principal amount of debentures is convertible at the holder's
      option at any time into common shares of the Company with a conversion price
      per
      share of $1.00.




**Shares
      Eligible for Future Sale**




Future
      sales of substantial amounts of our common stock in the public market or even
      the perception that such sales may occur, could adversely affect the market
      price for our common stock and could impair our future ability to raise capital
      through an offering of our equity securities.




At
      May 31, 2007 there were 12,987,431 options outstanding under the plan to
      purchase an equal number of shares of common stock. The outstanding options
      are
      exercisable at a weighted average price per share of $0.59.




**Indemnification
      of Executive Officers and Directors**




We
      have agreed to indemnify our executive officers and directors for all costs,
      charges and expenses, including an amount paid to settle an action or satisfy
      a
      judgment, reasonably incurred by them in respect of any civil, criminal or
      administrative action or proceeding to which they are made a party by reason
      of
      being or having been a director or officer, if (a) they acted honestly and
      in good faith with a view to our best interests, and (b) in the case of a
      criminal or administrative action or proceeding that is enforced by a monetary
      penalty, they had reasonable grounds for believing that their conduct was
      lawful.




61


**C.           Material
      Contracts**




Other
      than the agreements described below, we have not, during our financial year
      ending May 31, 2007, entered into any material agreements other than contracts
      in the ordinary course of business.  Agreements completed prior to
      July 10, 2007 are filed on SEDAR under Old Lorus (Global Summit Real Estate
      Inc.) and those completed after July 10, 2007 are filed on SEDAR under New
      Lorus.




1.
            Subscription
                Agreement dated July 13, 2006 between the Company and HighTech. See
                “Business of the Company - Financial Strategy - Share
                Issuances”.




2.
            Subscription
                Agreement dated July 24, 2006 between the Company and Technifund.
                See
                “Business of the Company - Financial Strategy - Share
                Issuances”.




3.
            Registration
                Rights Agreement dated August 30, 2006 between the Company and High
                Tech
                under which certain rights were granted to High Tech, including the
                right
                to require the Company to file a Canadian prospectus or a United
                States
                Registration Statement and the right to require the Company to include
                in
                any public offering such number of securities of the Company held
                by High
                Tech as High Tech may request.




4.
            Arrangement
                Agreement dated May 1, 2007, as amended, between the Company, Old
                Lorus,
                6707157 Canada Inc., NuChem Pharmaceuticals Inc. (“NuChem”), GeneSense
                Technologies Inc. (“GeneSense”) and Pinnacle International Lands Inc., as
                amended May 14, 2007 and July 4, 2007. See “Business of the Company -
                Financial Strategy - Plan of Arrangement and Corporate
                Reorganization”.




5.
            Warrant
                Repurchase Agreement dated May 1, 2007 between the Company and TEMIC.
                See
                “Business of the Company - Financial Strategy - Secured Convertible
                Debentures”.




6.
            Assignment,
                Novation and Amendment Agreement and Consent dated May 1, 2007 among
                the
                Company, Old Lorus, GeneSense and TEMIC as amended June 28, 2007
                under
                which the Company assumed Old Lorus’ obligation to pay TEMIC the $15
                million aggregate principal amount of the Debentures plus accrued
                unpaid
                interest thereon in consideration for Old Lorus issuing a non-interest
                bearing promissory note.




7.
            Tangible
                Business Assets Transfer Agreement dated July 10, 2007 between Old
                Lorus
                and GeneSense under which Old Lorus transferred certain depreciable
                property to GeneSense, as contemplated in the plan of
                arrangement.




8.
            Antisense
                Patent Transfer Agreement dated July 10, 2007 between the Company
                and
                GeneSense under which GeneSense transferred certain Antisense patent
                assets to the Company in exchange for a demand non-interest bearing
                promissory note issued by the
                Company.




9.
            Virulizin
                and Small Molecule Patent Assets Transfer Agreement dated July 10,
                2007
                between Old Lorus and GeneSense under which Old Lorus transferred
                Virulizin and Small Molecule Patent Assets to GeneSense in consideration
                for the issuance by GeneSense of one common share of
                GeneSense.




10.
            Prepaid
                Expenses and Receivables Transfer Agreement dated July 10, 2007 between
                Old Lorus and GeneSense under which Old Lorus transferred certain
                prepaid
                expenses and receivables to GeneSense in exchange for the issuance
                by
                GeneSense of one common share of
                GeneSense.




11.
            Share
                Purchase Agreement dated July 10, 2007 under which Old Lorus transferred
                all of the common shares of NuChem held by it to the Company at a
                price
                equal to their fair market value in consideration for the issuance
                of a
                demand non-interest bearing promissory
                note.




12.
            Share
                Purchase Agreement dated July 10, 2007 under which Old Lorus transferred
                all of the common shares of GeneSense held by it to the Company at
                a price
                equal to their fair market value in exchange for the assumption by
                the
                Company of Old Lorus’ remaining liabilities and the issuance of a demand
                non-interest bearing promissory
                note.






62




13.
            Share
                purchase agreement dated July 10, 2007 under which the Company transferred
                certain shares of Old Lorus held by it to 6707157 Canada Inc. in
                consideration of a cash payment as specified in the plan of arrangement,
                subject to payment and adjustment in accordance with such agreement
                and a
                holdback to an escrow agreement.




14.
            Indemnification
                Agreement dated July 10, 2007 between Old Lorus and the Company.
                See
                “Business of the Company - Financial Strategy - Plan of Arrangement
                and
                Corporate Reorganization”.




15.
            Escrow
                Agreement between 6707157 Canada Inc, the Company and Equity Transfer
                & Trust Company dated July 10, 2007 providing for an escrow amount
                related to the plan of arrangement. See “Business of the Company -
                Financial Strategy - Plan of Arrangement and Corporate
                Reorganization”.




16.
            Amended
                and Restated Guarantee and Indemnity between GeneSense and TEMIC
                dated
                July 10, 2007 reaffirming TEMIC’s guaranties and indemnities in respect of
                TEMIC’s Debentures.




17.
            Amended
                and Restated Share Pledge Agreement between the Company and TEMIC
                dated
                July 10, 2007 reaffirming the Company’s pledge of shares in its
                subsidiaries in respect of TEMIC’s
                Debentures.




Please
      refer to Item 4 - Business
      Overview - Business Strategy, for details of the share purchase agreements
      entered into with each of High Tech and Technifund.  Please refer to
      Item 4 - Business Overview - Business Strategy - Secured Convertible Debentures,
      for details of the subscription agreement, debentures and warrants entered
      into
      with TEMIC.  Please refer to Item 5 - Operating and Financial Review
      and Prospects - Subsequent Events, for details of agreements entered into in
      relation to the Arrangement.




Other
      than the agreements described in the preceding paragraphs, we have not, during
      our financial year ending May 31, 2007, entered into any material contracts
      other than contracts in the ordinary course of business.  The Company
      is not a party to any other material contracts entered into since January 1,
      2002 and still in effect.




**D.           Exchange
      Controls**




There
      is no law or governmental decree or regulation in Canada that restricts the
      export or import of capital, or affects the remittance of dividends, interest
      or
      other payments to non-resident holders of our voting shares, other than
      withholding tax requirements.




There
      is no limitation imposed by Canadian law or by our Articles or our other charter
      documents on the right of a non-resident to hold or vote voting shares, other
      than as provided by the *Investment Canada Act*, the North American Free
      Trade Agreement Implementation Act (Canada) and the World Trade Organization
      Agreement Implementation Act.




The
      Investment Canada Act requires notification and, in certain cases, advance
      review and approval by the government of Canada of the acquisition by a
      non-Canadian of control of a Canadian business, all as defined in the
*Investment Canada Act.* Generally, the threshold for review will be
      higher in monetary terms for a member of the World Trade Organization or North
      American Free Trade Agreement.




**E.           Taxation**




**U.S.
      Federal Income Tax Consequences**




The
      following is a summary of the anticipated material U.S. federal income tax
      consequences to a U.S. Holder (as defined below) arising from and relating
      to
      the acquisition, ownership, and disposition of common shares of the Company
      (“Common Shares”).




This
      summary is for general information purposes only and does not purport to be
      a
      complete analysis or listing of all potential U.S. federal income tax
      consequences that may apply to a U.S. Holder as a result of the acquisition,
      ownership, and disposition of Common Shares.  In addition, this
      summary does not take into account the individual facts and circumstances of
      any
      particular U.S. Holder that may affect the U.S. federal income tax consequences
      of the acquisition, ownership, and disposition of Common
      Shares.  Accordingly, this summary is not intended to be, and should
      not be construed as, legal or U.S. federal income tax advice with respect to
      any
      U.S. Holder.  Each U.S. Holder should consult its own financial
      advisor, legal counsel, or accountant regarding the U.S. federal, U.S. state
      and
      local, and foreign tax consequences of the acquisition, ownership, and
      disposition of Common Shares.




63


**Scope
      of this Disclosure**




*Authorities*




This
      summary is based on the Internal Revenue Code of 1986, as amended (the “Code”),
      Treasury Regulations (whether final, temporary, or proposed), published rulings
      of the Internal Revenue Service (“IRS”), published administrative positions of
      the IRS, the Convention Between Canada and the United States of America with
      Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended
      (the “Canada-U.S. Tax Convention”), and U.S. court decisions that are applicable
      and, in each case, as in effect and available, as of the date of this Annual
      Report.  Any of the authorities on which this summary is based could
      be changed in a material and adverse manner at any time, and any such change
      could be applied on a retroactive basis.  This summary does not
      discuss the potential effects, whether adverse or beneficial, of any proposed
      legislation that, if enacted, could be applied on a retroactive
      basis.




*U.S.
      Holders*




For
      purposes of this summary, a “U.S. Holder” is a beneficial owner of Common Shares
      that, for U.S. federal income tax purposes, is (a) an individual who is a
      citizen or resident of the U.S., (b) a corporation, or any other entity
      classified as a corporation for U.S. federal income tax purposes, that is
      created or organized in or under the laws of the U.S. or any state in the U.S.,
      including the District of Columbia, (c) an estate if the income of such
      estate is subject to U.S. federal income tax regardless of the source of such
      income, or (d) a trust if (i) such trust has validly elected to be
      treated as a U.S. person for U.S. federal income tax purposes or (ii) a
      U.S. court is able to exercise primary supervision over the administration
      of
      such trust and one or more U.S. persons have the authority to control all
      substantial decisions of such trust.




*Non-U.S.
      Holders*




For
      purposes of this summary, a “non-U.S. Holder” is a beneficial owner of Common
      Shares other than a U.S. Holder.  This summary does not address the
      U.S. federal income tax consequences of the acquisition, ownership, and
      disposition of Common Shares to non-U.S. Holders.  Accordingly, a
      non-U.S. Holder should consult its own financial advisor, legal counsel, or
      accountant regarding the U.S. federal, U.S. state and local, and foreign tax
      consequences (including the potential application of and operation of any tax
      treaties) of the acquisition, ownership, and disposition of Common
      Shares.




*U.S.
      Holders Subject to Special U.S. Federal Income Tax Rules Not
      Addressed*




This
      summary does not address the U.S. federal income tax consequences of the
      acquisition, ownership, and disposition of Common Shares to U.S. Holders that
      are subject to special provisions under the Code, including the following U.S.
      Holders:  (a) U.S. Holders that are tax-exempt organizations,
      qualified retirement plans, individual retirement accounts, or other
      tax-deferred accounts; (b) U.S. Holders that are financial institutions,
      insurance companies, real estate investment trusts, or regulated investment
      companies; (c) U.S. Holders that are broker-dealers, dealers, or traders in
      securities or currencies that elect to apply a mark-to-market accounting method;
      (d) U.S. Holders that have a “functional currency” other than the U.S.
      dollar; (e) U.S. Holders that are liable for the alternative minimum tax
      under the Code; (f) U.S. Holders that own Common Shares as part of a
      straddle, hedging transaction, conversion transaction, constructive sale, or
      other arrangement involving more than one position; (g) U.S. Holders that
      acquired Common Shares in connection with the exercise of employee stock options
      or otherwise as compensation for services; (h) U.S. Holders that hold
      Common Shares other than as a capital asset within the meaning of
      Section 1221 of the Code; or (i) U.S. Holders that own, directly or
      indirectly, 10% or more, by voting power or value, of the outstanding shares
      of
      the Company.  U.S. Holders that are subject to special provisions
      under the Code, including U.S. Holders described immediately above, should
      consult their own financial advisor, legal counsel or accountant regarding
      the
      U.S. federal, U.S. state and local, and foreign tax consequences of the
      acquisition, ownership, and disposition of Common Shares.




64


If
      an entity that is classified as partnership (or “pass-through” entity) for U.S.
      federal income tax purposes holds Common Shares, the U.S. federal income tax
      consequences to such partnership (or “pass-through” entity) and the partners of
      such partnership (or owners of such “pass-through” entity) generally will depend
      on the activities of the partnership (or “pass-through” entity) and the status
      of such partners (or owners).  Partners of entities that are
      classified as partnerships (or owners of “pass-through” entities) for U.S.
      federal income tax purposes should consult their own financial advisor, legal
      counsel or accountant regarding the U.S. federal income tax consequences of
      the
      acquisition, ownership, and disposition of Common Shares.




*Tax
      Consequences Other than U.S. Federal Income Tax Consequences Not
      Addressed*




This
      summary does not address the U.S. state and local, U.S. federal estate and
      gift,
      or foreign tax consequences to U.S. Holders of the acquisition, ownership,
      and
      disposition of Common Shares.  Each U.S. Holder should consult its own
      financial advisor, legal counsel, or accountant regarding the U.S. state and
      local, U.S. federal estate and gift, and foreign tax consequences of the
      acquisition, ownership, and disposition of Common Shares.  (See
“Taxation - Canadian  Taxation” below).




**U.S.
      Federal Income Tax Consequences of the Acquisition, Ownership, and Disposition
      of Common Shares**




**Distributions
      on Common Shares**




*General
      Taxation of Distributions*




A
      U.S. Holder that receives a distribution, including a constructive distribution,
      with respect to the Common Shares will be required to include the amount of
      such
      distribution in gross income as a dividend (without reduction for any Canadian
      income tax withheld from such distribution) to the extent of the current or
      accumulated “earnings and profits” of the Company.  To the extent that
      a distribution exceeds the current and accumulated “earnings and profits” of the
      Company, such distribution will be treated (a) first, as a tax-free return
      of capital to the extent of a U.S. Holder’s tax basis in the Common Shares and,
      (b) thereafter, as gain from the sale or exchange of such Common
      Shares.  (See more detailed discussion at “Disposition of Common
      Shares” below).




*Reduced
      Tax Rates for Certain Dividends*




For
      taxable years beginning before January 1, 2011, a dividend paid by the Company
      generally will be taxed at the preferential tax rates applicable to long-term
      capital gains if (a) the Company is a “qualified foreign corporation” (as
      defined below), (b) the U.S. Holder receiving such dividend is an
      individual, estate, or trust, and (c) such dividend is paid on Common
      Shares that have been held by such U.S. Holder for at least 61 days during
      the
      121-day period beginning 60 days before the “ex-dividend date” (i.e., the first
      date that a purchaser of such Common Shares will not be entitled to receive
      such
      dividend).




The
      Company generally will be a “qualified foreign corporation” under
      Section 1(h)(11) of the Code (a “QFC”) if (a) the Company is eligible
      for the benefits of the Canada-U.S. Tax Convention, or (b) the Common
      Shares are readily tradable on an established securities market in the
      U.S.  However, even if the Company satisfies one or more of such
      requirements, the Company will not be treated as a QFC if the Company is a
      “passive foreign investment company” (as defined below) for the taxable year
      during which the Company pays a dividend or for the preceding taxable
      year.  In 2003, the U.S. Department of the Treasury (the “Treasury”)
      and the IRS announced that they intended to issue Treasury Regulations providing
      procedures for a foreign corporation to certify that it is a QFC.




**As
      discussed below, the Company may have been a “passive foreign investment
      company” for one or more prior taxable years, and the Company may be a “passive
      foreign investment company” for the current taxable
      year.**  (See more detailed discussion at “Additional Rules
      that May Apply to U.S. Holders” below).  Accordingly, there can be no
      assurances that the Company will be a QFC for the current or any future taxable
      year, or that the Company will be able to certify that it is a QFC in accordance
      with the certification procedures issued by the Treasury and the
      IRS.




65


If
      the Company is not a QFC, a dividend paid by the Company to a U.S. Holder,
      including a U.S. Holder that is an individual, estate, or trust, generally
      will
      be taxed at ordinary income tax rates (and not at the preferential tax rates
      applicable to long-term capital gains).  The dividend rules are
      complex, and each U.S. Holder should consult its own financial advisor, legal
      counsel, or accountant regarding the dividend rules.




*Distributions
      Paid in Foreign Currency*




The
      amount of a distribution paid to a U.S. Holder in foreign currency generally
      will be equal to the U.S. dollar value of such distribution based on the
      exchange rate applicable on the date of receipt.  A U.S. Holder that
      does not convert foreign currency received as a distribution into U.S. dollars
      on the date of receipt generally will have a tax basis in such foreign currency
      equal to the U.S. dollar value of such foreign currency on the date of
      receipt.  Such a U.S. Holder generally will recognize ordinary income
      or loss on the subsequent sale or other taxable disposition of such foreign
      currency (including an exchange for U.S. dollars).




*Dividends
      Received Deduction*




Dividends
      paid on the Common Shares generally will not be eligible for the “dividends
      received deduction.”  The availability of the dividends received
      deduction is subject to complex limitations that are beyond the scope of this
      discussion, and a U.S. Holder that is a corporation should consult its own
      financial advisor, legal counsel, or accountant regarding the dividends received
      deduction.




*Disposition
      of Common Shares*




A
      U.S. Holder will recognize gain or loss on the sale or other taxable disposition
      of Common Shares in an amount equal to the difference, if any, between
      (a) the amount of cash plus the fair market value of any property received
      and (b) such U.S. Holder’s tax basis in the Common Shares sold or otherwise
      disposed of.  Subject to the passive foreign investment company rules
      discussed below, any such gain or loss generally will be capital gain or loss,
      which will be long-term capital gain or loss if the Common Shares are held
      for
      more than one year.  Gain or loss recognized by a U.S. Holder on the
      sale or other taxable disposition of Common Shares generally will be treated
      as
“U.S. source” for purposes of applying the U.S. foreign tax credit
      rules.  Where a U.S. Holder pays Canadian income tax with respect to
      gain on the disposition of Common Shares, an election is available under the
      Code whereby such U.S. Holder can treat the gain as arising from foreign
      sources.  (See more detailed discussion at “Foreign Tax Credit”
below).




Preferential
      tax rates apply to long-term capital gains of a U.S. Holder that is an
      individual, estate, or trust.  There are currently no preferential tax
      rates for long-term capital gains of a U.S. Holder that is a
      corporation.  Deductions for capital losses and net capital losses are
      subject to complex limitations under the Code.




*Foreign
      Tax Credit*




A
      U.S. Holder who pays (whether directly or through withholding) Canadian income
      tax with respect to dividends paid on the Common Shares generally will be
      entitled, at the election of such U.S. Holder, to receive either a deduction
      or
      a credit for such Canadian income tax paid.  Generally, a credit will
      reduce a U.S. Holder’s U.S. federal income tax liability on a dollar-for-dollar
      basis, whereas a deduction will reduce a U.S. Holder’s income subject to U.S.
      federal income tax.  This election is made on a year-by-year basis and
      applies to all foreign taxes paid (whether directly or through withholding)
      by a
      U.S. Holder during a year.




Complex
      limitations apply to the foreign tax credit, including the general limitation
      that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S.
      federal income tax liability that such U.S. Holder’s “foreign source” taxable
      income bears to such U.S. Holder’s worldwide taxable income.  In
      applying this limitation, a U.S. Holder’s various items of income and deduction
      must be classified, under complex rules, as either “foreign source” or “U.S.
      source.”  In addition, this limitation is calculated separately with
      respect to specific categories of income.  Dividends paid by the
      Company generally will constitute “foreign source” income and generally will be
      categorized as “passive income.”  The foreign tax credit rules are
      complex, and each U.S. Holder should consult its own financial advisor, legal
      counsel, or accountant regarding the foreign tax credit rules.




66


*Information
      Reporting; Backup Withholding Tax*




Payments
      made within the U.S., or by a U.S. payor or U.S. middleman, of dividends on,
      and
      proceeds arising from certain sales or other taxable dispositions of, Common
      Shares generally will be subject to information reporting and backup withholding
      tax, at the rate of 28%, if a U.S. Holder (a) fails to furnish such U.S.
      Holder’s correct U.S. taxpayer identification number (generally on Form W-9),
      (b) furnishes an incorrect U.S. taxpayer identification number, (c) is
      notified by the IRS that such U.S. Holder has previously failed to properly
      report items subject to backup withholding tax, or (d) fails to certify,
      under penalty of perjury, that such U.S. Holder has furnished its correct U.S.
      taxpayer identification number and that the IRS has not notified such U.S.
      Holder that it is subject to backup withholding tax.  However, U.S.
      Holders that are corporations generally are excluded from these information
      reporting and backup withholding tax rules.  Any amounts withheld
      under the U.S. backup withholding tax rules will be allowed as a credit against
      a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded,
      if such U.S. Holder furnishes required information to the IRS.  Each
      U.S. Holder should consult its own financial advisor, legal counsel, or
      accountant regarding the information reporting and backup withholding tax
      rules.




**Additional
      Rules that May Apply to U.S. Holders**




If
      the Company is a “controlled foreign corporation” or a “passive foreign
      investment company” (each as defined below), the preceding sections of this
      summary may not describe the U.S. federal income tax consequences to U.S.
      Holders of the acquisition, ownership, and disposition of Common
      Shares.




*Controlled
      Foreign Corporation*




The
      Company generally will be a “controlled foreign corporation” under
      Section 957 of the Code (a “CFC”) if more than 50% of the total voting
      power or the total value of the outstanding shares of the Company is owned,
      directly or indirectly, by citizens or residents of the U.S., domestic
      partnerships, domestic corporations, domestic estates, or domestic trusts (each
      as defined in Section 7701(a)(30) of the Code), each of which own, directly
      or indirectly, 10% or more of the total voting power of the outstanding shares
      of the Company (a “10% Shareholder”).




If
      the Company is a CFC, a 10% Shareholder generally will be subject to
      current U.S. federal income tax with respect to (a) such 10% Shareholder’s
      pro rata share of the “subpart F income” (as defined in Section 952 of the
      Code) of the Company and (b) such 10% Shareholder’s pro rata share of
      the earnings of the Company invested in “United States property” (as defined in
      Section 956 of the Code).  In addition, under Section 1248
      of the Code, any gain recognized on the sale or other taxable disposition of
      Common Shares by a U.S. Holder that was a 10% Shareholder at any time
      during the five-year period ending with such sale or other taxable disposition
      generally will be treated as a dividend to the extent of the “earnings and
      profits” of the Company that are attributable to such Common
      Shares.  If the Company is both a CFC and a “passive foreign
      investment company” (as defined below), the Company generally will be treated as
      a CFC (and not as a “passive foreign investment company”) with respect to any
      10% Shareholder.




The
      Company does not believe that it has previously been, or currently is, a
      CFC.  However, there can be no assurance that the Company will not be
      a CFC for the current or any future taxable year.




*Passive
      Foreign Investment Company*




The
      Company generally will be a “passive foreign investment company” under
      Section 1297 of the Code (a “PFIC”) if, for a taxable year, (a) 75% or
      more of the gross income of the Company for such taxable year is passive income
      or (b) on average 50% or more of the assets held by the Company either
      produce passive income or are held for the production of passive income, based
      on the fair market value of such assets (or on the adjusted tax basis of such
      assets, if the Company is not publicly traded and either is a “controlled
      foreign corporation” or makes an election).  “Passive income”
includes, for example, dividends, interest, certain rents and royalties, certain
      gains from the sale of stock and securities, and certain gains from commodities
      transactions.  However, for transactions entered




67
 into
        on or before December 31, 2004, gains arising from the sale of commodities
        generally are excluded from passive income if (a) a foreign corporation
        holds the commodities directly (and not through an agent or independent
        contractor) as inventory or similar property or as dealer property,
        (b) such foreign corporation incurs substantial expenses related to the
        production, processing, transportation, handling, or storage of the commodities,
        and (c) gross receipts from sales of commodities that satisfy the
        requirements of clauses (a) and (b) constitute at least 85% of the total
        gross
        receipts of such foreign corporation.  For transactions entered into
        after December 31, 2004, gains arising from the sale of commodities generally
        are excluded from passive income if substantially all of a foreign corporation’s
        commodities are (a) stock in trade of such foreign corporation or other
        property of a kind which would properly be included in inventory of such
        foreign
        corporation, or property held by such foreign corporation primarily for sale
        to
        customers in the ordinary course of business, (b) property used in the
        trade or business of such foreign corporation that would be subject to the
        allowance for depreciation under Section 167 of the Code, or (c) supplies
        of a type regularly used or consumed by such foreign corporation in the ordinary
        course of its trade or business.




For
      purposes of the PFIC income test and assets test described above, if the Company
      owns, directly or indirectly, 25% or more of the total value of the outstanding
      shares of another foreign corporation, the Company will be treated as if it
      (a) held a proportionate share of the assets of such other foreign
      corporation and (b) received directly a proportionate share of the income
      of such other foreign corporation.  In addition, for purposes of the
      PFIC income test and asset test described above, “passive income” does not
      include any interest, dividends, rents, or royalties that are received or
      accrued by the Company from a “related person” (as defined in
      Section 954(d)(3) of the Code), to the extent such items are properly
      allocable to the income of such related person that is not passive
      income.




In
      addition, if the Company is a PFIC and owns shares of another foreign
      corporation that also is a PFIC (a “Subsidiary PFIC”), under certain indirect
      ownership rules, a disposition by the Company of the common stock of such
      Subsidiary PFIC or a distribution received by the Company from such Subsidiary
      PFIC generally will be treated as an indirect disposition by a U.S. Holder
      or an
      indirect distribution received by a U.S. Holder, subject to the rules of Section
      1291 of the Code discussed below.  To the extent that gain recognized
      on the actual disposition by a U.S. Holder of the Common Shares or income
      recognized by a U.S. Holder on an actual distribution received on the Common
      Shares was previously subject to U.S. federal income tax under these indirect
      ownership rules, such amount generally should not be subject to U.S. federal
      income tax.




The
      Company believes it was a PFIC for one or more prior taxable years, and the
      Company expects to be a PFIC for its current taxable year.  However,
      the determination of whether the Company was, or will be, a PFIC for a taxable
      year depends, in part, on the application of complex U.S. federal income tax
      rules, which are subject to various interpretations.  In addition,
      whether the Company will be a PFIC for the current taxable year and each
      subsequent taxable year depends on the assets and income of the Company over
      the
      course of each such taxable year and, as a result, cannot be predicted with
      certainty as of the date of this Circular.  Accordingly, there can be
      no assurance that the IRS will not challenge the determination made by the
      Company concerning its PFIC status.




If
      the Company is a PFIC, the U.S. federal income tax consequences to a U.S. Holder
      of the acquisition, ownership, and disposition of Common Shares will depend
      on
      whether such U.S. Holder makes an election to treat the Company as a “qualified
      electing fund” or “QEF” under Section 1295 of the Code (a “QEF Election”)
      or a mark-to-market election under Section 1296 of the Code (a
“Mark-to-Market Election”).  A U.S. Holder that does not make either a
      QEF Election or a Mark-to-Market Election will be referred to in this summary
      as
      a “Non-Electing U.S. Holder.”




U.S.
      Holders should be aware that there can be no assurance that the Company will
      satisfy record keeping requirements that apply to a QEF, or that the Company
      will supply U.S. Holders with information that such U.S. Holders require to
      report under the QEF rules, in event that the Company is a PFIC and a U.S.
      Holder wishes to make a QEF Election. Each U.S. Holder should consult its own
      financial advisor, legal counsel, or accountant regarding the availability
      of,
      and procedure for making, a QEF Election.




Under
      Section 1291 of the Code, any gain recognized on the sale or other taxable
      disposition of Common Shares, and any “excess distribution” (as defined in
      Section 1291(b) of the Code) paid on the Common Shares, must be rateably
      allocated to each day in a Non-Electing U.S. Holder’s holding period for the
      Common Shares.  The amount of any such gain or excess distribution
      allocated to prior years of such Non-Electing U.S. Holder’s holding period for
      the Common Shares generally will be subject to U.S. federal income tax at the
      highest tax applicable to ordinary income in each such prior year.  A
      Non-Electing U.S. Holder will be required to pay interest on the resulting
      tax
      liability for each such prior year, calculated as if such tax liability had
      been
      due in each such prior year.




68


A
      U.S. Holder that makes a QEF Election generally will not be subject to the
      rules
      of Section 1291 of the Code discussed above.  However, a U.S.
      Holder that makes a QEF Election generally will be subject to U.S. federal
      income tax on such U.S. Holder’s pro rata share of (a) the “net capital
      gain” of the Company, which will be taxed as long-term capital gain to such U.S.
      Holder, and (b) and the “ordinary earnings” of the Company, which will be
      taxed as ordinary income to such U.S. Holder.  A U.S. Holder that
      makes a QEF Election will be subject to U.S. federal income tax on such amounts
      for each taxable year in which the Company is a PFIC, regardless of whether
      such
      amounts are actually distributed to such U.S. Holder by the
      Company.




A
      U.S. Holder that makes a Mark-to-Market Election generally will not be subject
      to the rules of Section 1291 of the Code discussed above.  A U.S.
      Holder may make a Mark-to-Market Election only if the Common Shares are
“marketable stock” (as defined in Section 1296(e) of the
      Code).  A U.S. Holder that makes a Mark-to-Market Election will
      include in gross income, for each taxable year in which the Company is a PFIC,
      an amount equal to the excess, if any, of (a) the fair market value of the
      Common Shares as of the close of such taxable year over (b) such U.S.
      Holder’s tax basis in such Common Shares.  A U.S. Holder that makes a
      Mark-to-Market Election will, subject to certain limitations, be allowed a
      deduction in an amount equal to the excess, if any, of (a) such U.S.
      Holder’s adjusted tax basis in the Common Shares over (b) the fair market
      value of such Common Shares as of the close of such taxable year.




The
      PFIC rules are complex, and each U.S. Holder should consult its own financial
      advisor, legal counsel, or accountant regarding the PFIC rules and how the
      PFIC
      rules may affect the U.S. federal income tax consequences of the acquisition,
      ownership, and disposition of Common Shares.




**Canadian
      Taxation**




The
      following summary fairly describes, as of the date hereof, the principal
      Canadian federal income tax considerations under the *Income Tax Act*
      (Canada) (the “ITA”) generally applicable to an owner of Common Shares who is
      not and has not been or deemed to be resident in Canada for purposes of the
      ITA
      at any time while such Holder holds the Common Shares, is a resident of the
      U.S.
      for purposes of the Canada-U.S. Tax Convention , and who, for purposes of the
      ITA, at all relevant times:  holds the Common Shares as capital
      property; does not have a “permanent establishment” or “fixed base” in Canada,
      as defined in the Canada-U.S. Tax Convention; does not use or hold (and is
      not
      deemed to use or hold) the Common Shares in carrying on a business in Canada
      for
      purposes of the ITA; and deals at arm’s length and is not affiliated with the
      Company within the meaning of the ITA (a “Holder”).  The Common Shares
      will generally constitute capital property to a Holder unless such Holder holds
      such Common Shares in the course of carrying on a business of trading or dealing
      in securities or has acquired such Common Shares in a transaction or
      transactions considered to be an adventure in the nature of trade.




This
      summary is not applicable to a Holder an interest in which is a “tax shelter
      investment” as defined in the ITA, to a Holder who is a “financial institution”
for purposes of the “mark-to-market” rules contained in the ITA, or to a Holder
      who is a “specified financial institution” for the purposes of the
      ITA.  Such Holders should consult their own tax advisors.




This
      summary is based on the current provisions of the ITA, the regulations
      thereunder (the “Regulations”), the Canada-U.S. Tax Convention, all specific
      proposed amendments to the ITA or the Regulations publicly announced by or
      on
      behalf of the Canadian Minister of Finance prior to the date hereof, (the
“Specific Proposals”) and the Company’s understanding of the current published
      administrative and assessing practices of the Canada Revenue Agency (the “CRA”).
      This summary assumes the Specific Proposals will be enacted as proposed but
      no
      assurance can be given that this will be the case and this summary does not
      otherwise take into account or anticipate any changes in administrative practice
      or in law, whether by way of judicial, governmental or legislative decision
      or
      action, nor does it take into account any income tax laws or considerations
      of
      any province or territory of Canada or any jurisdiction other than Canada,
      which
      may differ from the Canadian federal income tax consequences described in this
      document.




69


This
      summary is of a general nature only, is not exhaustive of all possible tax
      considerations applicable to an investor, and is not intended to be relied
      on as
      legal or tax advice or representations to any particular
      investor.  Consequently, investors are urged to seek independent tax
      advice in respect of their particular circumstances and the consequences to
      them
      of the acquisition, ownership or disposition of Common Shares having regard
      to
      their particular circumstances.




*Dividends*




Under
      the Canada-U.S. Tax Convention, dividends paid or credited, or deemed to be
      paid
      or credited, on the Common Shares to a Holder generally will be subject to
      Canadian withholding tax at the rate of 15% of the gross amount of those
      dividends. If a Holder is a company within the meaning of the Canada-U.S. Tax
      Convention and owns 10% or more of the Company’s voting stock, the rate is
      reduced from 15% to 5%.




Under
      the Canada-U.S. Tax Convention, dividends paid to religious, scientific,
      literary, educational or charitable organizations or certain pension, retirement
      or employee benefit organizations that have complied with administrative
      procedures specified by the CRA are exempt from the aforementioned Canadian
      withholding tax so long as such organization is resident in and exempt from
      tax
      in the U.S.  Such exemption does not apply to the extent the dividends
      are received in connection with a trade or business carried on by such Holder
      or
      where the Company is related to such Holder.




*Disposition
      of Common Shares*




A
      Holder will only be subject to taxation in Canada under the ITA on capital
      gains
      realized by the Holder on a disposition or deemed disposition of the Common
      Shares if such shares  constitute “taxable Canadian property” within
      the meaning of the ITA at the time of the disposition or deemed disposition
      and
      the Holder is not afforded relief under the Canada-U.S. Tax Convention. In
      general, the Common Shares will not be “taxable Canadian property” to a Holder
      if, at the time of their disposition, they are listed on a stock exchange that
      is prescribed in the Regulations (which includes the American Stock Exchange),
      unless:




•
            at
                any time within the 60-month period immediately preceding the disposition
                or deemed disposition, the Holder, persons not dealing at arm’s length
                with the Holder, or the Holder together with such non-arm’s length
                persons, owned 25% or more of the issued shares of any class or series
                of
                the Company’s capital stock;




•
            the
                Holder was formerly resident in Canada and, upon ceasing to be a
                Canadian
                resident, elected under the ITA to have the Common Shares deemed
                to be
                “taxable Canadian property”; or




•
            the
                Holder’s Common Shares were acquired in a tax deferred exchange in
                consideration for property that was itself “taxable Canadian
                property.”




If
      a Holder’s Common Shares are “taxable Canadian property,” such Holder will
      recognize a capital gain (or a capital loss) for the taxation year during which
      the Holder disposes, or is deemed to have disposed of, the Common Shares. Such
      capital gain (or capital loss) will be equal to the amount by which the proceeds
      of disposition exceed (or are less than) the Holder’s adjusted cost base of such
      Common Shares and any reasonable costs of making the disposition. One-half
      of
      any such capital gain (a “taxable capital gain”) must be included in income in
      computing the Holder’s income and one half of any such capital loss (an
“allowable capital loss”) is generally deductible by the Holder from taxable
      capital gains arising in the year of disposition. To the extent a Holder has
      insufficient taxable capital gains in the current taxation year against which
      to
      apply an allowable capital loss, the deficiency will constitute a net capital
      loss for the current taxation year and may generally be carried back to any
      of
      the three preceding taxation years or carried forward to any future taxation
      year, to the extent and under the circumstances described in the
      ITA.




**F.           Dividends
      and Paying Agents**




Not
      applicable.




70


**G.           Statement
      by Experts**




Not
      applicable.




**H.           Documents
      on Display**




We
      are subject to the information and reporting requirements of the Securities
      Exchange Act of 1934, as amended, and file periodic reports and other
      information with the SEC.  However, as a foreign private issuer, we
      are exempt from the rules and regulations under the Exchange Act prescribing
      the
      furnishing and content of proxy statements, and our officers, directors and
      principal stockholders are exempt from the reporting and short-swing profit
      recovery provisions contained in Section 16 of the Exchange
      Act.  Our reports and other information filed with the SEC may be
      inspected at the public reference facilities maintained by the SEC at 100 F
      Street, N.E., Washington, D.C. 20549. Copies of these materials may be obtained
      at prescribed rates from the SEC at that address. Our reports and other
      information can also be inspected at no charge on the SEC’s Web site at
      www.sec.gov.




We
      are also subject to the information and reporting requirements of the Securities
      Act (Ontario) and the Canada Business Corporations Act.  Such reports
      and information can be inspected at no charge on the website
      www.sedar.com.




If
      you are a stockholder, you may request a copy of these filings at no cost by
      contacting us at:




2
      Meridian Road


Toronto,
      Ontario, M9W 4Z7


Canada


Phone
      (416) 798-1200


Fax
      (416) 798-2200




**I.           Subsidiary
      Information**




Lorus’
      subsidiaries are GeneSense Technologies Inc. (“GeneSense”), a corporation
      incorporated under the laws of Canada, of which Lorus owns 100% of the issued
      and outstanding share capital, and NuChem Pharmaceuticals Inc. (“NuChem”), a
      corporation incorporated under the laws of Ontario, of which Lorus owns 80%
      of
      the issued and outstanding voting share capital and 100% of the issued and
      outstanding non-voting preference share capital.




**Item
      11.                 Qualitative
      and Quantitative Disclosures about Market Risk**




Refer
      to notes 12 and 14 of the consolidated financial statements in Item
      17.




The
      Company's primary market risk exposures are related to interest rate
      risks.  The company does not currently have significant credit or
      foreign currency risk. The Company is exposed to interest rate risk on its
      cash,
      cash equivalents, marketable securities and convertible debentures.





The
      Company does not utilize derivative financial instruments to hedge its interest
      rate or foreign currency rate risks.





***Interest
      rate risk***


The
      Company invests its cash resources in liquid government and corporate debt
      instruments. We do not believe that the results of operations or cash flows
      would be affected to any significant degree by a sudden change in market
      interest rates relative to interest rates on our investments, owing to the
      relative short-term nature of the investments.





Based
      on the Company’s marketable securities balance at May 31, 2007, for every 1%
      change in interest rate interest revenue and liquidity would be impacted by
      approximately $125 thousand per annum.





71


The
      interest payable on the Company’s convertible debentures is based on a premium
      over the Bank of Canada prime rate.  In the most recent year the prime
      rate has been relatively stable.  The Company’s results of operations
      would be significantly impacted only with a significant and prolonged change
      in
      the prime interest rate.  The interest expense on these debentures is
      paid in common shares of the Company and, therefore, its liquidity position
      would not be impacted by an interest rate change.   For every 1%
      change in prime rate, the interest expense on the convertible debentures would
      be impacted by $150 thousand per annum.  As discussed above, liquidity
      would not be impacted





***Credit
      Risk***


Financial   instruments   potentially   exposing   the
      Company to a concentration of credit risk consist principally of cash and cash
      equivalents and marketable securities.  The Company manages this
      credit risk by maintaining bank accounts with Schedule I banks and investing
      only in highly rated Canadian with securities that are traded on active markets
      and are capable of prompt liquidation.





***Exchange
      rate sensitivity***


The
      functional currency of the Company is the Canadian dollar. The company does
      not
      have significant cash balances in any foreign currencies, does not generally
      invest in marketable securities denominated in currencies other than Canadian
      dollars and does not have significant ongoing supply contracts or revenue
      sources denominated in foreign currencies. Any foreign exchange gains and losses
      are included in the determination of loss for the period.





***Limitations***


The
      above discussion includes only those exposures that exist as of May 31, 2007,
      and as a result, does not consider exposures or positions that could arise
      after
      that date. The Company's ultimate realized gain or loss with respect to interest
      rate and exchange rate fluctuations would depend on the exposures that arise
      during the period.









**Risk
      Factors**




See
      item 3.D.




**Item
      12.                 Description
      of Securities Other Than Equity Securities**




Not
      applicable.




**PART
      II**




**Item
      13.                 Defaults,
      Dividends, Arrearages and Delinquencies**




Not
      applicable.




**Item
      14.                 Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds**




Not
      applicable.




**Item
      15.                 Controls
      and Procedures**




**Disclosure
      Controls and Procedure***s*




Disclosure
      controls and procedures are designed to provide reasonable assurance that all
      material information required to be publicly disclosed by a public company
      is
      gathered and communicated to management, including the certifying officers,
      on a
      timely basis so that appropriate decisions can be made regarding public
      disclosure. As at the end of May 31, 2007, the certifying officers and other
      members of management evaluated the effectiveness of our disclosure controls
      and
      procedures (as this term is defined in the rules adopted by Canadian securities
      regulatory authorities and the United States Securities and Exchange
      Commission).  This evaluation included a review of our existing
      disclosure and insider trading policy, compliance with regard to that policy,
      the




72
 disclosure
        controls currently in place surrounding our interim and annual financial
        statements, MD&A and other required documents and discussions with
        management surrounding the process of communicating material information
        to
        management and in turn the certifying officers and all procedures taking
        into
        consideration the size of the company and the number of
        employees.  Based on the evaluation described above, the certifying
        officers have concluded that, as of May 31, 2007, the disclosure controls
        and
        procedures were effective to provide reasonable assurance that the information
        we are required to disclose on a continuous basis in annual and interim filings
        and other reports is recorded, processed, summarized and reported or disclosed
        on a timely basis as required**.**




**(a)  Evaluation
      of disclosure controls and procedures**




As
      of the end of Old Lorus’ fiscal year ended May 31, 2007, an evaluation of the
      effectiveness of  Old Lorus’ “disclosure controls and procedures” (as
      such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act),
      was
      carried out by Old Lorus’ management with the participation of the principal
      executive officer and principal financial officer.  Based upon on that
      evaluation, Old Lorus’ principal executive officer and principal financial
      officer (who also serve those roles for New Lorus) have concluded that as of
      the
      end of that fiscal year, Old Lorus’ disclosure controls and procedures were
      effective to ensure that information required to be disclosed by us in reports
      thatwe file or submit under the Exchange Act is (i) recorded, processed,
      summarized and reported within the time periods specified in SEC rules and
      forms
      and (ii) accumulated and communicated to our management, including its principal
      executive officer and principal financial officer, to allow timely decisions
      regarding required disclosure.




It
      should be noted that while our principal executive officer and principal
      financial officer believe that our disclosure controls and procedures provide
      a
      reasonable level of assurance that they are effective, they do not expect that
      the disclosure controls and procedures or internal control over financial
      reporting will prevent all errors and fraud.  A control system, no
      matter how well conceived or operated, can provide only reasonable, not
      absolute, assurance that the objectives of the control system are
      met.




**(b)  Management’s
      annual report on internal control over financial reporting**




Not
      applicable.




**(c)  Attestation
      report of the independent registered public accounting
      firm**




Not
      applicable.




**(d)  Changes
      in internal control over financial reporting**




There
      was no change in Old Lorus’ internal control over financial reporting during the
      period covered by this Annual Report that has materially affected, or is
      reasonably likely to materially affect, our internal control over financial
      reporting.




**Item
      16.              
[Reserved]**




**Item
      16A.            Audit
      Committee Financial Expert**




Our
      Board of Directors has determined that J. Kevin Buchi, a director of the Company
      and the Chairman of the Audit Committee, possesses the attributes required
      of an
“audit committee financial expert,” and is “independent,” under applicable AMEX
      rules.




**Item
      16B.           Code of
      Ethics**




We
      have adopted a Code of Ethics, which applies to all of our officers, directors,
      employees and consultants.  The Code of Ethics is publicly available
      on our website at www.lorusthera.com.  A copy of the Code of Ethics is
      also available upon written request from our Director of Finance at our offices
      located at 2 Meridian Road, Toronto, Ontario  M9W
      4Z7.  There were no amendments to, or waivers granted under, the Code
      of Ethics during our fiscal year ended May 31, 2007.




73


**Item
      16C.            Principal
      Accountant Fees and Services**




KPMG
      LLP has served as our principal independent auditors since October
      1994.  The total fees billed for professional services by KPMG LLP
      (our independent auditors) for the years ended May 31, 2007 and 2006 are as
      follows:




**2007**
            
            
            **2006**Audit
                Fees
            
            $
            330,000
            
            
            $
            198,500Tax
                Fees
            
            $
            8,500
            
            
            $
            13,100Total
            
            $
            338,500
            
            
            $
            211,600


Audit
      fees consist of the fees paid with respect to the audit of our consolidated
      annual financial statements, quarterly reviews and accounting assistance and
      fees for services associated with the filing of the management proxy circular
      in
      May 2007 amounting to $150,000.  Tax fees relate to assistance
      provided with respect of proposed transactions and review of tax
      returns.




**Pre-Approval
      Policies and Procedures**




The
      audit committee of our board of directors has, pursuant to the audit committee
      charter, adopted specific responsibilities and duties regarding the provision
      of
      services by our external auditors, currently KPMG LLP.  Our charter
      requires audit committee pre-approval of all permitted audit and audit-related
      services.  Any audit and non-audit services must also be submitted to
      the audit committee for review and approval.  Under the charter, all
      permitted services to be provided by KPMG LLP must be pre-approved by the audit
      committee.




Subject
      to the charter, the audit committee may establish fee thresholds for a group
      of
      pre-approved services.  The audit committee then recommends to the
      board of directors approval of the fees and other significant compensation
      to be
      paid to the independent auditors.




No
      services were provided by KPMG LLP under a *de minimus*exemption for our
      fiscal year ended May 31, 2007.




**Item
      16D.                      Exemptions
      from the Listing Standards for Audit Committees**




Not
      applicable.




**Item
      16E.                      Purchases
      of Equity Securities by the Issuer and Affiliated
      Purchasers**




Not
      applicable.




**PART
      III**




**Item
      17.                 Financial
      Statements**




The
      Consolidated Financial Statements of Lorus Therapeutics Inc. are attached as
      follows:




PageManagements
                Responsibility for Financial Reporting
            F-1Report
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Balance Sheets as of May 31, 2006 and 2005
            F-4Consolidated
                Statements of Loss and Deficit for the years ended May 31, 2006,
                2005 and
                2004
            F-5Consolidated
                Statements of Cash Flows for the years ended May 31, 2006, 2005 and
                2004
            F-6Notes
                to Consolidated Financial Statements
            F-7Supplementary
                Information: Reconciliation of Canadian and United States Generally
                Accepted Accounting Principals
            F-40





74




**Item
      18.                 Financial
      Statements**




We
      have responded to Item 17 in lieu of responding to this Item.




**Item
      19.                 Exhibits**




Number
            Exhibit1.1
                *
            Articles
                of Arrangement1.2
                *
            By-law
                #2 of the Registrant2.1**
            Share
                Purchase Agreement dated as of July 13, 2006 between Lorus and High
                Tech
                Beteiligungen GmbH & Co. KG (“High Tech”)2.2**
            Registration
                Rights Agreement dated as of August 30, 2006 between Lorus and High
                Tech2.3**
            Share
                Purchase Agreement dated as of July 24, 2006 between Lorus and Technifund
                Inc.2.4
                ***
            Subscription
                Agreement entered into with The Erin Mills Investment Corporation
                dated
                October 6, 20042.5**
            Convertible
                Secured Debentures issued to The Erin Mills Investment Corporation
                on
                April 15, 2005, January 14, 2005 and October 6, 20042.6****
            Arrangement
                Agreement dated May 1, 2007, as amended, between the Company, Old
                Lorus,
                6707157 Canada Inc., NuChem Pharmaceuticals Inc. (“NuChem”), GeneSense
                Technologies Inc. (“GeneSense”) and Pinnacle International Lands Inc., as
                amended May 14, 2007 and July 4, 2007.2.7*****
            Warrant
                Repurchase Agreement dated May 1, 2007 between the Company and
                TEMIC2.8*****
            Assignment,
                Novation and Amendment Agreement and Consent dated May 1, 2007 among
                the
                Company, Old Lorus, GeneSense and TEMIC as amended June 28,
                20072.9+
            Tangible
                Business Assets Transfer Agreement dated July 10, 2007 between Old
                Lorus
                and GeneSense2.10+
            Antisense
                Patent Transfer Agreement dated July 10, 2007 between the Company
                and
                GeneSense2.11+
            Virulizin
                and Small Molecule Patent Assets Transfer Agreement dated July 10,
                2007
                between Old Lorus and GeneSense2.12+
            Prepaid
                Expenses and Receivables Transfer Agreement dated July 10, 2007 between
                Old Lorus and GeneSense2.13+
            Nuchem
                Share Purchase Agreement dated July 10, 2007 between Old Lorus and
                GeneSense2.14+
            GeneSense
                Share Purchase Agreement dated July 10, 2007 between Old Lorus and
                New
                Lorus2.15*****
            Pinnacle
                Share purchase agreement dated July 10, 2007 between Old Lorus and
                6707157
                Canada Inc.2.16+
            Indemnification
                Agreement dated July 10, 2007 between Old Lorus and the
                Company2.17+
            Escrow
                Agreement between 6707157 Canada Inc, the Company and Equity Transfer
                & Trust Company dated July 10, 20072.18+
            Amended
                and Restated Guarantee and Indemnity between GeneSense and TEMIC
                dated
                July 10,2.19+
            Amended
                and Restated Share Pledge Agreement between the Company and TEMIC
                dated
                July 10, 2007






75





4.1
            Stock
                Option Plans4.2**
            Form
                of Officer and Director Indemnity Agreement4.3
                ++
            Amalgamation
                Agreement dated August 23, 1991, among the Company, Mint Gold
                Resources Ltd., Harry J. Hodge and Wayne Beach.8.1**
            List
                of Subsidiaries11.1**
            Code
                of Business Conduct and Ethics12.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act12.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act13.1
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act13.2
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act*
            Incorporated
                by reference to File 0-32001, Form 6-K dated November 19,
                2007.**
            Incorporated
                by reference to File 1-32001-Form 20 F, Annual Report, dated November
                21,
                2006.***
            Incorporated
                by reference to File 1-32001, Form 6-K dated February 10,
                2005.****
            Incorporated
                by reference to File 1-32001, Form 6-K dated May 30,
                2007.*****
            Incorporated
                by reference to File 1-32001, Form 6-K dated November 20,
                2007.+
            Incorporated
                by reference to File 1-32001, Form 6-K dated September 4,
                2007.++
            Incorporated
                by reference to File 0-19763, Registration Statement on Form 20-FR,
                dated March 4, 1992.




**Signatures**




The
      registrant hereby certifies that it meets all of the requirements for filing
      on
      Form 20-F and that it has duly caused and authorized the undersigned to sign
      this annual report on its behalf.







LORUS
                THERAPEUTICS INC.By:
            /s/
                  Aiping H. YoungName:         Aiping
                H. Young
              Title:           President
                and Chief Executive Officer
              
              Date:           November
                29, 2007








By:
            /s/
                  Elizabeth WilliamsName:         Elizabeth
                Williams
              Title:           Director
                of Finance and Acting ChiefFinancial Officer
              
              Date:           November
                29, 2007






76




**MANAGEMENT’S
      RESPONSIBILITY FOR FINANCIAL REPORTING**





The
      accompanying consolidated financial statements of Lorus Therapeutics Inc. and
      other financial information contained in this annual report are the
      responsibility of Management and have been approved by the Board of Directors
      of
      the Company.





The
      consolidated financial statements have been prepared in conformity with Canadian
      generally accepted accounting principles, using Management’s best estimates and
      judgments where appropriate. In the opinion of Management, these consolidated
      financial statements reflect fairly the financial position and the results
      of
      operations and cash flows of the Company within reasonable limits of
      materiality. The financial information contained elsewhere in this annual report
      has been reviewed to ensure consistency with that in the consolidated financial
      statements. The integrity and objectivity of data in the financial statements
      and elsewhere in this annual report are the responsibility of
      Management.





In
      discharging its responsibility for the integrity and fairness of the financial
      statements, management maintains a system of internal controls designed to
      provide reasonable assurance, at appropriate cost, that transactions are
      authorized, assets are safeguarded and proper records are maintained. Management
      believes that the internal controls provide reasonable assurance that financial
      records are reliable and form a proper basis for the preparation of the
      consolidated financial statements, and that assets are properly accounted for
      and safeguarded.  The internal control process includes management’s
      communication to employees of policies that govern ethical business
      conduct.





The
      Board of Directors, through an Audit Committee, oversees management’s
      responsibilities for financial reporting. This committee, which consists of
      three independent directors, reviews the audited consolidated financial
      statements and recommends the financial statements to the Board for
      approval.  Other key responsibilities of the Audit Committee include
      reviewing the adequacy of the Company’s existing internal controls, audit
      process and financial reporting with management and the external
      auditors.





The
      consolidated financial statements have been audited by KPMG LLP, Chartered
      Accountants, who are independent auditors appointed by the shareholders of
      the
      Company upon the recommendation of the Audit Committee.  Their report
      follows.  The independent auditors have free and full access to the
      Audit Committee.








/s/
              Aiping H. Young
            /s/
              Elizabeth WilliamsAiping
                H. Young
              President and Chief
                Executive
            Elizabeth
                Williams
              OfficerDirector of Finance (Acting Chief Financial
                Officer)











F-1






**REPORT
        OF INDEPENDENT REGISTERED
        PUBLIC**
 **ACCOUNTING
        FIRM**
   To
        the
        Board of Directors of Lorus Therapeutics Inc.
   We
        have
        audited the accompanying consolidated balance sheets of Lorus Therapeutics
        Inc.
        (the "Company") as at May 31, 2007 and 2006 and the related consolidated
        statements of operations and deficit and cash flows for each of the years
        in the
        three-year period ended May 31, 2007 and for the period from inception on
        September 5, 1986 to May 31, 2007.  These consolidated financial
        statements are the responsibility of the Company's management.  Our
        responsibility is to express an opinion on these consolidated financial
        statements based on our audits.  The cumulative statements of
        operations and deficit and cash flows for the period from inception on September
        5, 1986 to May 31, 2007 include amounts for the period from inception on
        September 5, 1986 to May 31, 1994, which were audited by other auditors in
        accordance with Canadian generally accepted auditing standards whose report
        has
        been furnished to us, and our opinion, insofar as it relates to the amounts
        included for the period from September 5, 1986 through May 31, 1994 is
        based solely on the report of other auditors.
  We
        conducted our audits in accordance with Canadian generally accepted auditing
        standards.  With respect of the consolidated financial statements for
        each of the years in the three-year period ended May 31, 2007, we also conducted
        our audits in accordance with the standards of the Public Company Accounting
        Oversight Board (United States).  We did not audit the consolidated
        statements of operations and deficit and cash flows for the period from
        inception on September 5, 1986 to May 31, 2007 in accordance with the
        standards of the Public Company Accounting Oversight Board (United
        States).  Canadian generally accepted auditing standards and the
        standards of the Public Company Accounting Oversight Board (United States)
        require that we plan and perform an audit to obtain reasonable assurance
        about
        whether the financial statements are free of material
        misstatement.  An audit includes examining, on a test basis, evidence
        supporting the amounts and disclosures in the financial
        statements.  An audit also includes assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall financial statement presentation.  We believe
        that our audits provide a reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of the Company as at May
        31,
        2007 and 2006 and the results of its operations and its cash flows for each
        of
        the years in the three-year period ended May 31, 2007 and for the period
        from
        inception on September 5, 1986 to May 31, 2007, in conformity with Canadian
        generally accepted accounting principles.
  F-2
  Page
        2
 
  The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern.  As discussed in note 1
        to the consolidated financial statements, the Company has suffered recurring
        losses from operations that raise substantial doubt about its ability to
        continue as a going concern.  Management's plan in regard to these
        matters is also described in note 1.  The consolidated financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty.
   /s/
          KPMG
          LLP
 Chartered
        Accountants, Licensed Public Accountants
  
  Toronto,
        Canada
 August
        7, 2007
  F-3
  **LORUS
        THERAPEUTICS INC.**
 Consolidated
        Balance Sheets (Expressed
          in thousands of Canadian dollars)
 May
          31,
          2007 and 2006
 
 2007
              
              
              2006AssetsCurrent
                  assets:Cash
                  and cash
                  equivalents (note 11)
              
              $
              1,405
              
              
              $
              2,692Marketable
                  securities and other investments (note 4)
              
              
              7,265
              
              
              
              5,627Prepaid
                  expenses and other assets
              
              
              335
              
              
              
              5159,005
              
              
              
              8,834Marketable
                  securities and other
                  investments (note 4)
              
              
              3,728
              
              
              
              -Fixed
                  assets (note
                  5)
              
              
              503
              
              
              
              885Deferred
                  financing
                  charges
              
              
              371
              
              
              
              481Deferred
                  arrangement costs (note
                  16)
              
              
              1,262
              
              
              
              -Goodwill
              
              
              606
              
              
              
              606Acquired
                  patents and licenses
                  (note 6)
              
              
              -
              
              
              
              655$
              15,475
              
              
              $
              11,461Liabilities
                  and Shareholders'
                  Equity (Deficiency)Current
                  liabilities:Accounts
                  payable
              
              $
              1,104
              
              
              $
              555Liability
                  to
                  repurchase warrants (note 7)
              
              
              252
              
              
              
              -Accrued
                  liabilities
              
              
              1,421
              
              
              
              2,4602,777
              
              
              
              3,015Secured
                  convertible debentures
                  (note 12)
              
              
              11,937
              
              
              
              11,002Shareholders'
                  equity
                  (deficiency):Share
                  capital
                  (note 7):Common
                  shares
              
              
              157,714
              
              
              
              145,001Equity
                  portion
                  of secured convertible debentures
              
              
              3,814
              
              
              
              3,814Stock
                  options
              
              
              4,898
              
              
              
              4,525Contributed
                  surplus
              
              
              8,525
              
              
              
              7,665Warrants
              
              
              -
              
              
              
              991Deficit
                  accumulated during development stage
              
              
              (174,190
              )
              
              
              (164,552
              )761
              
              
              
              (2,556
              )Basis
                  of presentation (note
                  1)Subsequent
                  events (note
                  16)$
              15,475
              
              
              $
              11,461
 
 See
        accompanying notes to consolidated financial statements.
  On
        behalf of the Board:
 
  Director
 
  F-4
  **LORUS
        THERAPEUTICS INC.**
 Consolidated
        Statements of Operations and Deficit
 (Expressed
          in thousands of Canadian dollars, except for per common share
          data)
  Periodfrom
                  inceptionSeptember
                  5,1986
                  toYears
                  ended May
                  31,
              
              
              May
                  31,2007
              
              
              2006
              
              
              2005
              
              
              2007Revenue
              
              $
              107
              
              
              $
              26
              
              
              $
              6
              
              
              $
              813Expenses:Cost
                  of
                  sales
              
              
              16
              
              
              
              3
              
              
              
              1
              
              
              
              103Research
                  and
                  development (note 10)
              
              
              3,384
              
              
              
              10,237
              
              
              
              14,394
              
              
              
              113,859General
                  and
                  administrative
              
              
              3,848
              
              
              
              4,334
              
              
              
              5,348
              
              
              
              51,323Stock-based
                  compensation (note 8)
              
              
              503
              
              
              
              1,205
              
              
              
              1,475
              
              
              
              7,253Depreciation
                  and amortization of fixed assets
              
              
              402
              
              
              
              771
              
              
              
              564
              
              
              
              9,2258,153
              
              
              
              16,550
              
              
              
              21,782
              
              
              
              181,763(8,046
              )
              
              
              (16,524
              )
              
              
              (21,776
              )
              
              
              (180,950
              )Other
                  expenses
                  (income):Interest
                  on
                  convertible debentures
              
              
              1,050
              
              
              
              882
              
              
              
              300
              
              
              
              2,232Accretion
                  in
                  carrying value of convertible debentures (note 12)
              
              
              935
              
              
              
              790
              
              
              
              426
              
              
              
              2,151Amortization
                  of
                  deferred financing charges
              
              
              110
              
              
              
              87
              
              
              
              84
              
              
              
              281Interest
              
              
              (503
              )
              
              
              (374
              )
              
              
              (524
              )
              
              
              (11,424
              )1,592
              
              
              
              1,385
              
              
              
              286
              
              
              
              (6,760
              )Loss
                  for the
                  period
              
              
              (9,638
              )
              
              
              (17,909
              )
              
              
              (22,062
              )
              
              
              (174,190
              )Deficit,
                  beginning of
                  period
              
              
              (164,552
              )
              
              
              (146,643
              )
              
              
              (124,581
              )
              
              
              -Deficit,
                  end of
                  period
              
              $
              (174,190
              )
              
              $
              (164,552
              )
              
              $
              (146,643
              )
              
              $
              (174,190
              )Basic
                  and diluted loss per common
                  share
              
              $
              (0.05
              )
              
              $
              (0.10
              )
              
              $
              (0.13
              )Weighted
                  average number of common
                  shares outstanding used in the calculation of basic and diluted
                  loss per
                  share (in
                  thousands)
              
              
              204,860
              
              
              
              173,523
              
              
              
              172,112
  See
        accompanying notes to consolidated financial statements.
  F-5
  **LORUS
        THERAPEUTICS INC.**
 Consolidated
        Statements of Cash Flows (Expressed
          in thousands of Canadian dollars)
  Periodfrom
                  inceptionSeptember
                  5,1986
                  toYears
                  ended May
                  31,
              
              
              May
                  31,2007
              
              
              2006
              
              
              2005
              
              
              2007Cash
                  flows from operating
                  activities:Loss
                  for the
                  period
              
              $
              (9,638
              )
              
              $
              (17,909
              )
              
              $
              (22,062
              )
              
              $
              (174,190
              )Items
                  not
                  involving cash:Stock-based
                  compensation
              
              
              503
              
              
              
              1,205
              
              
              
              1,475
              
              
              
              7,253Interest
                  on
                  convertible debentures
              
              
              1,050
              
              
              
              882
              
              
              
              300
              
              
              
              2,232Accretion
                  in
                  carrying value of convertible debentures
              
              
              935
              
              
              
              790
              
              
              
              426
              
              
              
              2,151Amortization
                  of
                  deferred financing charges
              
              
              110
              
              
              
              87
              
              
              
              84
              
              
              
              281Depreciation,
                  amortization and write-down of fixed assets and acquired patents
                  and
                  licenses
              
              
              1,057
              
              
              
              2,342
              
              
              
              2,260
              
              
              
              21,786Other
              
              
              -
              
              
              
              -
              
              
              
              (38
              )
              
              
              707Change
                  in
                  non-cash operating working capital (note 11)
              
              
              (310
              )
              
              
              (462
              )
              
              
              (1,166
              )
              
              
              1,282Cash
                  flows used
                  in operating activities
              
              
              (6,293
              )
              
              
              (13,065
              )
              
              
              (18,721
              )
              
              
              (138,498
              )Cash
                  flows from financing
                  activities:Issuance
                  of
                  debentures, net of issuance costs
              
              
              -
              
              
              
              -
              
              
              
              12,948
              
              
              
              12,948Issuance
                  of
                  warrants
              
              
              -
              
              
              
              -
              
              
              
              991
              
              
              
              37,405Issuance
                  of
                  common shares, net of issuance costs (note 7)
              
              
              11,654
              
              
              
              -
              
              
              
              112
              
              
              
              109,025Additions
                  to
                  deferred financing/ arrangement charges
              
              
              (1,262
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,507
              )Cash
                  flows
                  provided by financing activities
              
              
              10,392
              
              
              
              -
              
              
              
              14,051
              
              
              
              157,871Cash
                  flows from investing
                  activities:Maturity
                  (purchase) of marketable securities and other investments,
                  net
              
              
              (5,366
              )
              
              
              13,056
              
              
              
              6,974
              
              
              
              (10,993
              )Business
                  acquisition, net of cash received
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (539
              )Acquired
                  patents and licenses
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (715
              )Additions
                  to
                  fixed assets
              
              
              (20
              )
              
              
              (75
              )
              
              
              (599
              )
              
              
              (6,069
              )Proceeds
                  on
                  sale of fixed assets
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              348Cash
                  flows
                  provided by (used in) investing activities
              
              
              (5,386
              )
              
              
              12,981
              
              
              
              6,375
              
              
              
              (17,968
              )Increase
                  (decrease) in cash and
                  cash equivalents
              
              
              (1,287
              )
              
              
              (84
              )
              
              
              1,705
              
              
              
              1,405Cash
                  and cash equivalents,
                  beginning of period
              
              
              2,692
              
              
              
              2,776
              
              
              
              1,071
              
              
              
              -Cash
                  and cash equivalents, end of
                  period
              
              $
              1,405
              
              
              $
              2,692
              
              
              $
              2,776
              
              
              $
              1,405
  Supplemental
        cash flow information (note 11).
  See
        accompanying notes to consolidated financial statements.
  F-6
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 
 
  **1.**
              **Basis
                  of presentation:**
  Lorus
        Therapeutics Inc. (subsequently renamed 4325231 Canada Inc.) ("Lorus" or
        the "Company") is a biopharmaceutical company specializing in the research
        and development of pharmaceutical products and technologies for the management
        of cancer.  With products in various stages of evaluation, from
        preclinical through to Phase II trials, Lorus develops therapeutics that
        seek to
        manage cancer with efficacious low-toxicity compounds that improve patients'
        quality of life.
  On
        November 1, 2006, the Company incorporated a wholly owned subsidiary, 6650309
        Canada Inc. ("New Lorus").  On July 10, 2007, the Company completed a
        plan of arrangement and corporate reorganization with, among others,
        6707157 Canada Inc. and Pinnacle International Lands, Inc. (the
        "Arrangement") which, among other things, resulted in New Lorus receiving
        cash
        of approximately $8.5 million, subject to a $600 thousand holdback and
        post-closing adjustment and before costs of the transaction.  As part
        of the Arrangement, all of the assets and liabilities of the Company (including
        the shares of its subsidiaries held by it), with the exception of certain
        future
        tax assets, were transferred, directly or indirectly, from the Company to
        New
        Lorus.  Securityholders in the Company exchanged their securities in
        the Company for equivalent securities in New Lorus.  Also as part of
        the Arrangement, the Company changed its name from Lorus Therapeutics Inc.
        to
        4325231 Canada Inc. and New Lorus changed its name from 6650309 Canada Inc.
        to
        Lorus Therapeutics Inc. and carried on the business formerly carried on by
        the
        Company (note 16).
  The
        ability of 4325231 Canada Inc. to continue as a going concern is dependent
        upon
        the nature of the operations management pursues and the Company's ability
        to
        obtain financing to fund such operations.  The outcome of these
        matters cannot be predicted with certainty at this time.
  F-7
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 
 **1.**
              **Basis
                  of presentation
                  (continued):**
  In
        relation to the net assets of and operations that were transferred on July
        10,
        2007, the Company has not earned substantial revenue from its drug candidates
        and is, therefore, considered to be a development stage company.  The
        continuation of the Company's research and development activities is dependent
        upon the Company's ability to successfully finance its cash requirements
        through
        a combination of equity financing and payments from strategic
        partners.  The Company has no current sources of payments from
        strategic partners.  In addition, the Company will need to repay or
        refinance the secured convertible debentures on their maturity in October
        2009
        should the holder not choose to convert the debentures into common
        shares.  There can be no assurance that additional funding will be
        available at all or on acceptable terms to permit further clinical development
        of the Company's products or to repay the convertible debentures on
        maturity.  If the Company is not able to raise additional funds, it
        may not be able to continue as a going concern and realize its assets and
        pay
        its liabilities as they fall due.  The consolidated financial
        statements do not reflect adjustments that would be necessary if the going
        concern assumption were not appropriate.  If the going concern basis
        were not appropriate for these consolidated financial statements, then
        adjustments would be necessary in the carrying value of the assets and
        liabilities, the reported revenue and expenses and the balance sheet
        classifications used.
  Management
        believes that the Company's current level of cash, marketable securities
        and the
        additional funds available upon the successful reorganization as described
        in
        note 16 will be sufficient to execute the Company's current planned expenditures
        beyond the next 12 months in New Lorus.
  **2.**
              **Significant
                  accounting policies:**
  (a)
              Principles
                  of consolidation:
  The
        consolidated financial statements include the accounts of Lorus, its 80%
        owned
        subsidiary, NuChem Pharmaceuticals Inc. ("NuChem"), and its wholly owned
        subsidiaries, GeneSense Technologies Inc. ("GeneSense") and 6650309 Canada
        Inc.,
        which are all located in Canada.  The results of operations for
        acquisitions are included in these consolidated financial statements from
        the
        date of acquisition.  All significant intercompany balances and
        transactions have been eliminated on consolidation.
  F-8
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 
 **2.**
              **Significant
                  accounting policies
                  (continued):**
  The
        consolidated financial statements have been prepared by management in accordance
        with Canadian generally accepted accounting principles ("Canadian
        GAAP").
  (b)
              Revenue
                  recognition:
  Revenue
        includes product sales, service, license and royalty revenue.
  The
        Company recognizes revenue from product sales and provision of services when
        persuasive evidence of an arrangement exists, delivery has occurred, the
        Company's price to the customer is fixed or determinable and collectibility
        is
        reasonably assured.  The Company allows customers to return product
        within a specified period of time before and after its expiration
        date.  Provisions for these returns are estimated based on historical
        return and exchange levels, and third-party data with respect to inventory
        levels in the Company's distribution channels.
  License
        fees are comprised of initial fees and milestone payments derived from a
        worldwide exclusive license agreement. Non-refundable license fees are
        recognized when the Company has no further involvement or obligation to perform
        under the arrangement, the fee is fixed and determinable and collection of
        the
        amount is deemed probable.  Future non-refundable milestone payments
        receivable upon the achievement of third party performance are recognized
        upon
        the achievement of specified milestones when the milestone payment is
        substantive in nature, achievement of the milestone was not reasonably assured
        at the inception of the agreement and the Company has no further significant
        involvement or obligation to perform under the arrangement.
  The
        Company earned royalties from its distributor during the year ended May 31,
        2005. Royalties from the distribution agreement are recognized when the amounts
        are reasonably determinable and collection is reasonably assured.  In
        2006, the distribution agreement was terminated and no royalties were earned
        during the years ended May 31, 2007 and 2006.
  (c)
              Cash
                  and cash equivalents:
  The
        Company considers unrestricted cash on hand and in banks, term deposits and
        guaranteed investment certificates with original maturities of three months
        or
        less as cash and cash equivalents.
  F-9
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 
 **2.**
              **Significant
                  accounting policies
                  (continued):**
  (d)
              Marketable
                  securities and other investments:
  Lorus
        invests in high quality fixed income government and corporate instruments
        with
        low credit risk.
  Short-term
        investments, which consist of fixed income securities with a maturity of
        more
        than three months but less than one year, are recorded at their accreted
        value
        as they are held-to-maturity instruments.  Long-term investments
        consist primarily of fixed income securities with a maturity of more than
        one
        year and are recorded at their accreted value as they are held-to-maturity
        instruments.  All investments held at year end approximate fair value
        and are denominated in Canadian dollars.
  (e)
              Fixed
                  assets:
  Fixed
        assets are recorded at cost less accumulated depreciation and
        amortization.  The Company records depreciation and amortization at
        rates which are expected to charge operations with the cost of the assets
        over
        their estimated useful lives on a straight-line basis as follows:
  Furniture
                  and
                  equipment
              Over
                  3 to 5
                  yearsLeasehold
                  improvements
              Over
                  the lease
                  term
 
  (f)
              Research
                  and development:
  Research
        costs are charged to expense as incurred.  Development costs,
        including the cost of drugs for use in clinical trials, are expensed as incurred
        unless they meet the criteria under Canadian GAAP for deferral and
        amortization.  No development costs have been deferred to
        date.
  F-10
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 
 **2.**
              **Significant
                  accounting policies
                  (continued):**
  (g)
              Goodwill
                  and acquired patents and licenses:
  Intangible
        assets with finite lives acquired in a business combination or other transaction
        are amortized over their estimated useful lives.
  Goodwill
        represents the excess of the purchase price over the fair value of net
        identifiable assets acquired in the GeneSense business
        combination.  Goodwill acquired in a business combination is tested
        for impairment on an annual basis and at any other time if an event occurs
        or
        circumstances change that would indicate that impairment may
        exist.  When the carrying value of a reporting unit's goodwill exceeds
        its fair value, an impairment loss is recognized in an amount equal to the
        excess.
  The
        Company capitalized the cost of acquired patent and license assets on the
        acquisitions of GeneSense and the NuChem compounds.  The nature of
        this asset is such that it was categorized as an intangible asset with a
        finite
        life.  These costs have now been fully amortized.
  The
        Company has identified no impairment relating to goodwill and intangible
        assets
        for 2007 and 2006.
  (h)
              Impairment
                  of long-lived assets:
  The
        Company periodically reviews the useful lives and the carrying values of
        its
        long-lived assets.  The Company reviews for impairment in long-lived
        assets whenever events or changes in circumstances indicate that the carrying
        amount of the assets may not be recoverable.  If the sum of the
        undiscounted expected future cash flows expected to result from the use and
        eventual disposition of an asset is less than its carrying amount, it is
        considered to be impaired.  An impairment loss is measured at the
        amount by which the carrying amount of the asset exceeds its fair value,
        which
        is estimated as the expected future cash flows discounted at a rate
        proportionate with the risks associated with the recovery of the
        asset.
  F-11
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 
  **2.**
              **Significant
                  accounting policies
                  (continued):**
  (i)
              Stock-based
                  compensation:
  The
        Company has a stock-based compensation plan described in note
        8.  Prior to June 1, 2004, stock-based awards were accounted for using
        the intrinsic method with the exception of options with contingent vesting
        criteria for which the settlement method was used.  On June 1, 2004,
        the Company adopted the fair value method of accounting for stock-based awards
        to employees, officers and directors granted or modified after June 1,
        2004.  This method requires the Company to expense, over the vesting
        period, the fair value of all employee stock-based awards granted or modified
        since June 1, 2002. Stock options and warrants awarded to non-employees are
        accounted for using the fair value method and expensed as the service or
        product
        is received.  Consideration paid on the exercise of stock options and
        warrants is credited to capital stock.  The fair value of
        performance-based options is recognized over the estimated period to achievement
        of performance conditions.  Fair value is determined using the
        Black-Scholes option pricing model.
  The
        Company has a deferred share unit plan that provides directors the option
        of
        receiving payment for their services in the form of share units rather than
        common shares or cash.  Share units entitle the director to elect to
        receive, on termination of his or her services with the Company, an equivalent
        number of common shares, or the cash equivalent of the market value of the
        common shares at that future date.  Lorus records an expense and a
        liability equal to the market value of the shares issued.  The
        accumulated liability is adjusted for market fluctuations on a quarterly
        basis.
  Shares
        issued under the alternate compensation plans ("ACP") are accounted for using
        the fair value of the common shares on the day they are granted.
  (j)
              Investment
                  tax credits:
  The
        Company is entitled to Canadian federal and provincial investment tax credits,
        which are earned as a percentage of eligible research and development
        expenditures incurred in each taxation year.  Investment tax credits
        are accounted for as a reduction of the related expenditure for items of
        a
        current nature and a reduction of the related asset cost for items of a
        long-term nature, provided that the Company has reasonable assurance that
        the
        tax credits will be realized.
  F-12
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 
 **2.**
              **Significant
                  accounting policies
                  (continued):**
  (k)
              Income
                  taxes:
  Income
        taxes are accounted for using the asset and liability method.  Under
        this method, future tax assets and liabilities are recorded for the future
        tax
        consequences attributable to differences between the financial statement
        carrying amounts of assets and liabilities and their respective tax bases,
        and
        operating loss and research and development expenditure
        carryforwards.  Future tax assets and liabilities are measured using
        enacted or substantively enacted tax rates expected to apply when the asset
        is
        realized or the liability is settled.  The effect on future tax assets
        and liabilities of a change in tax rates is recognized in income in the year
        that enactment or substantive enactment occurs.  A valuation allowance
        is recorded for the portion of the future tax assets where the realization
        of
        any value is uncertain for which management has deemed to be 100% of the
        assets
        available.
  (l)
              Loss
                  per share:
  Basic
        loss per common share is calculated by dividing the loss for the year by
        the
        weighted average number of common shares outstanding during the
        year.  Diluted loss per common share is calculated by dividing the
        loss for the year by the sum of the weighted average number of common shares
        outstanding and the dilutive common equivalent shares outstanding during
        the
        year.  Common equivalent shares consist of the shares issuable upon
        exercise of stock options, warrants and conversion of the convertible debentures
        calculated using the treasury stock method.  Common equivalent shares
        are not included in the calculation of the weighted average number of shares
        outstanding for diluted loss per common share when the effect would be
        anti-dilutive.
  (m)
              Deferred
                  financing charges:
  Deferred
        financing charges, comprised primarily of legal costs, represent costs related
        to the issuance of the Company's convertible debentures.  Deferred
        financing charges are amortized using the effective interest rate method
        over
        the five-year term of the convertible debentures.
  F-13
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 
 **2.**
              **Significant
                  accounting policies
                  (continued):**
  (n)
              Segmented
                  information:
  The
        Company is organized and operates as one operating segment, the research,
        development, and commercialization of pharmaceuticals.  Substantially
        all of the Company's identifiable assets as at May 31, 2007 and 2006 are
        located
        in Canada.
  (o)
              Foreign
                  currency translation:
  Foreign
        currency transactions are translated into Canadian dollars at rates prevailing
        on the transaction dates.  Monetary assets and liabilities are
        translated into Canadian dollars at the rates in effect on the balance sheet
        dates.  Gains or losses resulting from these transactions are
        accounted for in the loss for the period and are not significant.
  (p)
              Use
                  of estimates:
  The
        preparation of financial statements in accordance with Canadian GAAP requires
        management to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities and the disclosure of contingent assets and liabilities
        at the date of the financial statements, and the reported amounts of revenue
        and
        expenses during the year.  Actual results may differ from those
        estimates.  Significant estimates include the valuation of the
        convertible debentures, the fair value of stock options granted and warrants
        issued and the useful lives of fixed and intangible assets.
  (q)
              Recent
                  Canadian accounting pronouncements not yet
                  adopted:
  (i)
              Comprehensive
                  income and equity:
  In
        January 2005, The Canadian Institute of Chartered Accountants ("CICA") released
        Handbook Section 1530, Comprehensive Income, and Section 3251, Equity.
        Section 1530 establishes standards for reporting comprehensive
        income.  The section does not address issues of recognition or
        measurement for comprehensive income and its components.  Section 3251
        establishes standards for the presentation of equity and changes in equity
        during the reporting period.  The requirements in Section 3251 are in
        addition to Section 1530.
  F-14
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 
 **2.**
              **Significant
                  accounting policies
                  (continued):**
  (ii)
              Financial
                  instruments - recognition and
                  measurement:
  Section
        3855, Financial Instruments - Recognition and Measurement, establishes standards
        for the recognition and measurement of all financial instruments, provides
        a
        characteristics-based definition of a derivative instrument, provides criteria
        to be used to determine when a financial instrument should be recognized,
        and
        provides criteria to be used to determine when a financial liability is
        considered to be extinguished.
  (iii)
              Hedges:
  Section
        3865, Hedges, establishes standards for when and how hedge accounting may
        be
        applied.  Hedge accounting is optional.
  These
        three Sections are effective for fiscal years beginning on or after October
        1,
        2006.  The Company has not yet determined the impact, if any, of the
        adoption of these standards on its results from operations or financial
        position, which became effective June 1, 2007.
  (iv)
              Financial
                  instruments - disclosure and
                  presentation:
  Section
        3861, Financial Instruments - Disclosure and Presentation, discusses the
        presentation and disclosure of these financial instruments.  In
        December 2006, the CICA issued Section 3862, Financial Instruments -
        Disclosures, and Section 3863, Financial Instruments - Presentation, to replace
        Section 3861.  These new Sections are effective for interim and annual
        financial statements with fiscal years beginning on or after October 1, 2007,
        but may be adopted in place of Section 3861 before that
        date.
  F-15
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 
 **3.**
              **Changes
                  in accounting policies:**
  No
        new
        accounting policies were adopted during the year ended May 31,
        2007.  The following accounting policies were adopted during the year
        ended May 31, 2006.  For accounting policies adopted during the year
        ended May 31, 2005, refer to note 2 under the heading "Stock-based
        compensation".
  (a)
              Variable
                  interest entities:
  Effective
        June 1, 2005, the Company adopted the recommendations of CICA Handbook
        Accounting Guideline 15 ("AcG-15"), Consolidation of Variable Interest Entities,
        effective for fiscal years beginning on or after November 1,
        2004.  Variable interest entities ("VIEs") refer to those entities
        that are subject to control on a basis other than ownership of voting
        interests.  AcG-15 provides guidance for identifying VIEs and criteria
        for determining which entity, if any, should consolidate them.  The
        adoption of AcG-15 did not have an effect on the financial position, results
        of
        operations or cash flows in the current period or the prior period
        presented.
  (b)
              Financial
                  instruments - disclosure and
                  presentation:
  Effective
        June 1, 2005, the Company adopted the amended recommendations of CICA Handbook
        Section 3860, Financial Instruments - Disclosure and Presentation, effective
        for
        fiscal years beginning on or after November 1, 2004.  Section 3860
        requires that certain obligations that may be settled at the issuer's option
        in
        cash or the equivalent value by a variable number of the issuer's own equity
        instruments be presented as a liability.  The Company has determined
        that there is no impact on the consolidated financial statements resulting
        from
        the adoption of the amendments to Section 3860 either in the current period
        or
        the prior period presented.
  F-16
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 
 **3.**
              **Changes
                  in accounting policies
                  (continued):**
  (c)
              Non-monetary
                  transactions:
  In
        June
        2005, the CICA released Handbook Section 3831, Non-monetary
        Transaction*s*, effective for all non-monetary transactions initiated in
        periods beginning on or after January 1, 2006.  This standard
        requires all non-monetary transactions to be measured at fair value unless
        they
        meet one of four very specific criteria.  Commercial substance
        replaces culmination of the earnings process as the test for fair value
        measurement.  A transaction has commercial substance if it causes an
        identifiable and measurable change in the economic circumstances of the
        entity.  Commercial substance is a function of the cash flows expected
        by the reporting entity.  The Company has not entered into any
        non-monetary transactions and, as such, this section is not
        applicable.
 **4.**
                **Marketable
                      securities and other
                      investments:**
  
 Less
                  than
              
              
              Greater
                  thanone
                  year
              
              
              one
                  year
              
              
              
              
              
              Yield
                  to2007
              
              maturities
              
              
              maturities
              
              
              Total
              
              
              maturityFixed
                  income government
                  investments
              
              $
              1,549
              
              
              $
              -
              
              
              $
              1,549
              
              
              
              3.91
              %Corporate
                  instruments
              
              
              5,716
              
              
              
              3,728
              
              
              
              9,444
              
              
              
              3.89-4.11
              %$
              7,265
              
              
              $
              3,728
              
              
              $
              10,993
 
 
 Less
                  than
              
              
              Greater
                  thanone
                  year
              
              
              one
                  year
              
              
              
              
              
              Yield
                  to2006
              
              maturities
              
              
              maturities
              
              
              Total
              
              
              maturityFixed
                  income government
                  investments
              
              $
              2,838
              
              
              $
              -
              
              
              $
              2,838
              
              
              
              3.55-3.64
              %Corporate
                  instruments
              
              
              2,789
              
              
              
              -
              
              
              
              2,789
              
              
              
              3.46-3.87
              %$
              5,627
              
              
              $
              -
              
              
              $
              5,627
 
 
  F-17
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **4.**
              **Marketable
                  securities and other investments
                  (continued):**
  At
        May
        31, 2007 and 2006, the carrying values of short-term investments approximate
        their quoted market values.  Short-term investments held at May 31,
        2007 have varying maturities from one to ten months (2006 - one to six
        months).  Long-term investments have maturities varying from one to
        five years (2006 - none greater than one year).  Long-term investments
        are valued at carrying value that, by virtue of the nature of the investments,
        primarily interest bearing instruments, approximates their quoted market
        value.
  **5.**
              **Fixed
                  assets:**
  
 Accumulateddepreciationand
              
              
              Net
                  book2007
              
              Cost
              
              
              amortization
              
              
              valueFurniture
                  and
                  equipment
              
              $
              2,670
              
              
              $
              2,387
              
              
              $
              283Leasehold
                  improvements
              
              
              908
              
              
              
              688
              
              
              
              220$
              3,578
              
              
              $
              3,075
              
              
              $
              503
 
 Accumulateddepreciationand
              
              
              Net
                  book2006
              
              Cost
              
              
              amortization
              
              
              valueFurniture
                  and
                  equipment
              
              $
              2,650
              
              
              $
              2,136
              
              
              $
              514Leasehold
                  improvements
              
              
              908
              
              
              
              537
              
              
              
              371$
              3,558
              
              
              $
              2,673
              
              
              $
              885
  During
        the year ended May 31, 2006, a write-down of $250 thousand was taken on certain
        furniture and equipment whose carrying value was deemed to be unrecoverable
        and
        in excess of the estimated fair value of the residual value of the underlying
        assets.  The impairment charge was reported in the consolidated
        statements of operations and deficit in depreciation and
        amortization.
  F-18
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **6.**
              **Acquired
                  patents and licenses:**
  
 2007
              
              
              2006Cost
              
              $
              12,228
              
              
              $
              12,228Accumulated
                  amortization
              
              
              (12,228
              )
              
              
              (11,573
              )$
              -
              
              
              $
              655
  Amortization
        of $655 thousand (2006 - $1.6 million; 2005 - $1.7 million) has been included
        in
        the research and development expense reported in the consolidated statements
        of
        operations and deficit.
  **7.**
              **Share
                  capital:**
  (a)
              Continuity
                  of common shares and warrants:
  Common
                  shares
              
              
              WarrantsNumber
              
              
              Amount
              
              
              Number
              
              
              AmountBalance,
                  May 31,
                  2004
              
              
              171,794
              
              
              $
              143,670
              
              
              
              13,110
              
              
              $
              4,325Interest
                  payment (note
                  12)
              
              
              421
              
              
              
              300
              
              
              
              -
              
              
              
              -Issuance
                  under ACP
                  (d)
              
              
              50
              
              
              
              37
              
              
              
              -
              
              
              
              -Exercise
                  of stock
                  options
              
              
              276
              
              
              
              112
              
              
              
              -
              
              
              
              -Convertible
                  debentures (note
                  12)
              
              
              -
              
              
              
              -
              
              
              
              3,000
              
              
              
              991Warrants
                  expired
                  unexercised
              
              
              -
              
              
              
              -
              
              
              
              (13,110
              )
              
              
              (4,325
              )Balance,
                  May 31,
                  2005
              
              
              172,541
              
              
              
              144,119
              
              
              
              3,000
              
              
              
              991Interest
                  payment (note
                  12)
              
              
              2,153
              
              
              
              882
              
              
              
              -
              
              
              
              -Balance
                  at May 31,
                  2006
              
              
              174,694
              
              
              
              145,001
              
              
              
              3,000
              
              
              
              991Share
                  issuance
              
              
              33,800
              
              
              
              11,641
              
              
              
              -
              
              
              
              -Interest
                  payments (note
                  12)
              
              
              3,726
              
              
              
              1,050
              
              
              
              -
              
              
              
              -Exercise
                  of stock
                  options
              
              
              46
              
              
              
              22
              
              
              
              -
              
              
              
              -Repurchase
                  of warrants
                  (g)
              
              
              -
              
              
              
              -
              
              
              
              (3,000
              )
              
              
              (991
              )Balance,
                  May 31,
                  2007
              
              
              212,266
              
              
              $
              157,714
              
              
              
              -
              
              
              $
              -
   F-19
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **7.**
              **Share
                  capital (continued):**
  (b)
              Contributed
                  surplus:
  
 2007
              
              
              2006
              
              
              2005Balance,
                  beginning of
                  year
              
              $
              7,665
              
              
              $
              6,733
              
              
              $
              1,003Forfeiture
                  of stock
                  options
              
              
              121
              
              
              
              932
              
              
              
              -Expiry
                  of
                  warrants
              
              
              -
              
              
              
              -
              
              
              
              4,325Expiry
                  of compensation
                  options
              
              
              -
              
              
              
              -
              
              
              
              1,405Repurchase
                  of warrants
                  (g)
              
              
              739
              
              
              
              -
              
              
              
              -Balance,
                  end of
                  year
              
              $
              8,525
              
              
              $
              7,665
              
              
              $
              6,733
  
  (c)
              Continuity
                  of stock options:
  
 2007
              
              
              2006
              
              
              2005Balance,
                  beginning of
                  year
              
              $
              4,525
              
              
              $
              4,252
              
              
              $
              2,777Stock
                  option
                  expense
              
              
              494
              
              
              
              1,205
              
              
              
              1,475Forfeiture
                  of stock
                  options
              
              
              (121
              )
              
              
              (932
              )
              
              
              -Balance,
                  end of
                  year
              
              $
              4,898
              
              
              $
              4,525
              
              
              $
              4,252
 (d)
                Alternate
                      compensation plans:
  In
        2000, the Company established an ACP for directors and officers, which allows
        the Company, in certain circumstances, to issue common shares to pay directors'
        fees or performance bonuses to officers in lieu of cash.  The number
        of common shares reserved for issuance under this plan is
        2,500,000.  Since inception, 121,000 common shares have been issued
        under this plan.  This plan was terminated in September 2005;
        therefore, for the year ended May 31, 2007, no common shares were issued
        under
        this plan (2006 - nil; 2005 - 50,000).
  F-20
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **7.**
              **Share
                  capital (continued):**
  The
        Company also established a deferred share unit plan that provides directors
        the
        option of receiving payment for their services in the form of share units
        rather
        than common shares or cash.  Share units entitle the director to elect
        to receive, on termination of their services to the Company, an equivalent
        number of common shares, or the cash equivalent of the market value of the
        common shares at that future date.  The share units are granted based
        on the market value of the common shares on the date of issue.  During
        the year ended May 31, 2007, nil deferred share units were issued (2006 -
        168,581; 2005 - 99,708), with a cash value of nil (2006 - $64 thousand; 2005
        -
        $71 thousand) being recorded in accrued liabilities.
  (e)
              Share
                  issuance:
  On
        July
        13, 2006, the Company entered into an agreement with HighTech Beteiligungen
        GmbH
& Co. KG ("HighTech") to issue 28,800,000 common shares at $0.36 per share
        for gross proceeds of $10.4 million.  The cost of issuance amounted to
        $450 thousand.  The subscription price represented a premium of 7.5%
        over the closing price of the common shares on the Toronto Stock Exchange
        on
        July 13, 2006.  The closing of the transaction is subject to certain
        conditions, including the approval of the Toronto Stock Exchange ("TSX")
        and the
        American Stock Exchange ("AMEX") and the filing and clearance of a prospectus
        in
        Ontario qualifying the issuance of the common shares.  The transaction
        closed on August 31, 2006.  In connection with the transaction,
        HighTech received demand registration rights that will enable HighTech to
        request the registration or qualification of the common shares for resale
        in the
        United States and Canada, subject to certain restrictions.  These
        demand registration rights expire on June 30, 2012.  In addition,
        HighTech received the right to nominate one nominee to the board of directors
        of
        Lorus or, if it does not have a nominee, it will have the right to appoint
        an
        observer to the board.  Upon completion of the transaction, HighTech
        held approximately 14% of the issued and outstanding common shares of
        Lorus.
  On
        July
        24, 2006, Lorus entered into an agreement with Technifund Inc. to issue,
        on a
        private placement basis, 5,000,000 common shares at $0.36 per share for gross
        proceeds of $1.8 million.  The cost of issuance amounted to $78
        thousand.  The transaction closed on September 1,
        2006.
  F-21
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **7.**
              **Share
                  capital (continued):**
 (f)
                Employee
                      share purchase plan:
 The
        Company's employee share purchase plan ("ESPP") was established on January
        1,
        2005.  The purpose of the ESPP is to assist the Company in retaining
        the services of its employees, to secure and retain the services of new
        employees and to provide incentives for such persons to exert maximum efforts
        for the success of the Company.  The ESPP provides a means by which
        employees of the Company and its affiliates may purchase common shares of
        the
        Company at a discount through accumulated payroll
        deductions.  Generally, each offering is of three months' duration
        with purchases occurring every month.  Participants may authorize
        payroll deductions of up to 15% of their base compensation for the purchase
        of
        common shares under the ESPP.  For the year ended May 31, 2007, 69,000
        (2006 - 293,000; 2005 - 106,000) common shares have been purchased under
        the
        ESPP, and Lorus has recognized an expense of $5 thousand (2006 - $46 thousand;
        2005 - $16 thousand) related to this plan in these consolidated financial
        statements.
  (g)
              Repurchase
                  of warrants:
  In
        May
        2007, the Company entered into an agreement with the holder of the Lorus
        $15.0 million secured convertible debenture to the repurchase by New Lorus
        upon close of the Arrangement of its outstanding 3,000,000 common share purchase
        warrants at a purchase price of $252 thousand.  As discussed in the
        note 16, the Arrangement closed on July 10, 2007 and, therefore, the conditions
        were met such that the repurchase amount is set up as a liability and the
        difference between the carrying value of the warrants and the amount paid
        has
        been credited to contributed surplus.
  F-22
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **8.**
              **Stock-based
                  compensation:**
  Stock
        option plan:
  Under
        the Company's stock option plan, options may be granted to directors, officers,
        employees and consultants of the Company to purchase up to a maximum of 15%
        of
        the total number of outstanding common shares currently estimated at 31,800,000
        options.  Options are granted at the fair market value of the common
        shares on the date immediately preceding the date of the
        grant.  Options vest at various rates (immediate to three years) and
        have a term of 10 years.  Stock option transactions for the three
        years ended May 31, 2007 are summarized as follows:
  2007
              
              
              2006
              
              
              2005Weighted
              
              
              
              
              
              Weighted
              
              
              
              
              
              Weightedaverage
              
              
              
              
              
              average
              
              
              
              
              
              averageexercise
              
              
              
              
              
              exercise
              
              
              
              
              
              exerciseOptions
              
              
              price
              
              
              Options
              
              
              price
              
              
              Options
              
              
              price(In
                  thousands)
              
              
              
              
              
              (In
                  thousands)
              
              
              
              
              
              (In
                  thousands)Outstanding,
                  beginning of
                  year
              
              
              10,300
              
              
              $
              0.70
              
              
              
              8,035
              
              
              $
              0.96
              
              
              
              6,372
              
              
              $
              1.05Granted
              
              
              5,318
              
              
              
              0.30
              
              
              
              6,721
              
              
              
              0.58
              
              
              
              3,173
              
              
              
              0.77Exercised
              
              
              (46
              )
              
              
              0.30
              
              
              
              -
              
              
              
              -
              
              
              
              (276
              )
              
              
              0.40Forfeited
              
              
              (2,584
              )
              
              
              0.44
              
              
              
              (4,456
              )
              
              
              0.83
              
              
              
              (1,234
              )
              
              
              1.05Outstanding,
                  end of
                  year
              
              
              12,988
              
              
              
              0.59
              
              
              
              10,300
              
              
              
              0.70
              
              
              
              8,035
              
              
              
              0.96Exercisable,
                  end of
                  year
              
              
              9,796
              
              
              $
              0.68
              
              
              
              6,714
              
              
              $
              0.79
              
              
              
              4,728
              
              
              $
              1.04
 
  F-23
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **8.**
              **Stock-based
                  compensation (continued):**
  The
        following table summarizes information about stock options outstanding at
        May
        31, 2007:
  Options
                  outstanding
              
              
              
              
              
              Options
                  exercisableWeightedaverage
              
              
              Weighted
              
              
              
              
              
              Weightedremaining
              
              
              average
              
              
              
              
              
              averageRange
                  of
              
              
              
              
              
              contractual
              
              
              exercise
              
              
              
              
              
              exerciseexercise
                  prices
              
              
              Options
              
              
              life
                  (years)
              
              
              price
              
              
              Options
              
              
              price(In
                  thousands)
              
              
              
              
              
              
              
              
              (In
                  thousands)$0.26
                to $0.49
              
              
              $
              7,353
              
              
              
              8.13
              
              
              $
              0.30
              
              
              $
              4,285
              
              
              $
              0.29$0.50
                to $0.99
              
              
              
              3,766
              
              
              
              6.31
              
              
              
              0.75
              
              
              
              3,642
              
              
              
              0.75$1.00
                to $1.99
              
              
              
              1,581
              
              
              
              5.90
              
              
              
              1.23
              
              
              
              1,581
              
              
              
              1.23$2.00
                to $2.50
              
              
              
              288
              
              
              
              3.38
              
              
              
              2.46
              
              
              
              288
              
              
              
              2.46$
              12,988
              
              
              
              7.23
              
              
              
              0.59
              
              
              $
              9,796
              
              
              
              0.68
  For
        the
        year ended May 31, 2007, stock-based compensation expense of $503 thousand
        (2006 - $1.2 million; 2005 - $1.5 million) was recognized, representing the amortization
        applicable to the current period of the estimated fair value of options granted
        since June 1, 2002.
  During
        the year ended May 31, 2006, employees of the Company (excluding directors
        and
        officers) were given the opportunity to choose between keeping 100% of their
        existing options at the existing exercise price or forfeiting 50% of the options
        held in exchange for having the remaining 50% of the exercise price of the
        options re-priced to $0.30 per share.  Employees holding 2,290,000
        stock options opted for re-pricing their options, resulting in the amendment
        of
        the exercise price of 1,145,000 stock options and the forfeiture of 1,145,000
        stock options.  This re-pricing resulted in additional compensation
        expense of $76 thousand, representing the incremental value conveyed to holders
        of the options as a result of reducing the exercise price, of which $52 thousand
        has been included in the stock-based compensation expense during the year
        ended
        May 31, 2006.  The additional compensation expense of $24 thousand
        will be recognized as the amended options vest.  This increased
        expense is offset by $113 thousand representing amounts previously expensed
        on
        unvested stock options due to the forfeiture of 1,145,000 stock options,
        which
        was reversed from the stock-based compensation expense for the year ended
        May
        31, 2006.
  F-24
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **8.**
              **Stock-based
                  compensation (continued):**
  For
        the
        year ended May 31, 2005, additional stock-based compensation expense of
        $208 thousand was recorded due to the shareholder
        approved amendment of the 1993 Stock Option Plan to extend the life of options
        from 5 years to 10 years.  This additional expense represented the
        incremental value conveyed to holders of the options as a result of extending
        the life of the options.
  For
        the
        year ended May 31, 2007, stock-based compensation expense of $503 thousand
        (2006 - $1.2 million; 2005 - $1.5 million) comprised $216 thousand (2006 -
        $300 thousand; 2005 - $445 thousand) related to research and development and
        $287
        thousand (2006 - $900 thousand; 2005 - $1.0 million) related to
        general and administrative.
  The
        following assumptions were used in the Black-Scholes option pricing model
        to
        determine the fair value of stock options granted during the year:
  2007
              
              
              2006
              
              
              2005Risk-free
                  interest
                  rate
              
              
              4.50
              %
              
              
              2.25%-4.00
              %
              
              
              2.25%-3.00
              %Expected
                  volatility
              
              
              75%-80
              %
              
              
              70%-81
              %
              
              
              70%-90
              %Expected
                  life of
                  options
              
              5
                  years
              
              
              2.5
                  - 5
                  years
              
              
              1-5
                  yearsWeighted
                  average fair value of
                  options granted or modified during the year
              
              $
              0.20
              
              
              $
              0.33
              
              
              $
              0.54
 
 The
        Company has assumed no forfeiture rate as adjustments for actual forfeitures
        are
        made in the year they occur.
  F-25
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **9.**
              **Income
                  taxes:**
  Income
        tax recoveries attributable to losses from operations differ from the amounts
        computed by applying the combined Canadian federal and provincial income
        tax
        rates to pre-tax income from operations primarily as a result of the provision
        of a valuation allowance on net future income tax benefits.
  Significant
        components of the Company's future tax assets are as follows:
  2007
              
              
              2006Non-capital
                  loss
                  carryforwards
              
              $
              24,459
              
              
              $
              25,174Research
                  and development
                  expenditures
              
              
              20,156
              
              
              
              22,089Book
                  over tax
                  depreciation
              
              
              1,904
              
              
              
              1,995Other
              
              
              309
              
              
              
              738Future
                  tax
                  assets
              
              
              46,828
              
              
              
              49,996Valuation
                  allowance
              
              
              (46,828
              )
              
              
              (49,996
              )$
              -
              
              
              $
              -
  In
        assessing the realizable benefit from future tax assets, management considers
        whether it is more likely than not that some portion or all of the future
        tax
        assets will not be realized.  The ultimate realization of future tax
        assets is dependent on the generation of future taxable income during the
        years
        in which those temporary differences become deductible.  Management
        considers projected future taxable income, uncertainties related to the industry
        in which the Company operates and tax planning strategies in making this
        assessment.  Due to the Company's stage of development and operations,
        and uncertainties related to the industry in which the Company operates,
        the tax
        benefit of the above amounts has been completely offset by a valuation
        allowance.
  F-26
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **9.**
              **Income
                  taxes (continued):**
  The
        Company has undeducted research and development expenditures, totalling
        $62.5 million for federal purposes and $59.2 million for provincial
        purposes and these can be carried forward indefinitely.  In addition,
        the Company has non-capital loss carryforwards of $73.6 million for federal
        purposes and $74.8 million for provincial purposes.  To the extent
        that the non-capital loss carryforwards are not used, they expire as
        follows:
  2008
              
              $
              4,9852009
              
              
              6,6582010
              
              
              8,6602011
              
              
              1,1312014
              
              
              22,0292015
              
              
              13,3402026
              
              
              9,7122027
              
              
              7,126$
              73,641
  Income
        tax rate reconciliation:
  2007
              
              
              2006
              
              
              2005Recovery
                  of income taxes based on
                  statutory rates
              
              $
              (3,481
              )
              
              $
              (6,469
              )
              
              $
              (7,971
              )Expiry
                  of
                  losses
              
              
              1,311
              
              
              
              1,252
              
              
              
              780Change
                  in valuation
                  allowance
              
              
              (3,168
              )
              
              
              3,861
              
              
              
              6,124Non
                  deductible accretion and
                  stock-based compensation expense
              
              
              519
              
              
              
              721
              
              
              
              687Change
                  in enacted tax
                  rates
              
              
              4,437
              
              
              
              -
              
              
              
              -Other
              
              
              382
              
              
              
              635
              
              
              
              380$
              -
              
              
              $
              -
              
              
              $
              -
 
  F-27
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **10.**
              **Research
                  and development programs:**
  The
        Company's cancer drug research and development programs focus primarily on
        the
        following technology platforms:
  (a)
              Immunotherapy**:**
  This
        clinical approach stimulates the body's natural defences against
        cancer.  The Company's lead immunotherapeutic drug, Virulizin®, completed
        a global
        Phase III clinical trial for the treatment of pancreatic cancer during
        2005.
  (b)
              Antisense**:**
  Antisense
        drugs are genetic molecules that inhibit the production of disease-causing
        proteins.  GTI-2040 and GTI-2501, the Company's lead antisense drugs,
        have shown preclinical anticancer activity across a broad range of cancers
        and
        are currently in various Phase II trials.
  (c)
              Small
                  molecules**:**
  Anticancer
        activity was discovered with an antifungal agent, Clotrimazole
        ("CLT").  Based on the structural feature found to be responsible for
        the anticancer effect of CLT, chemical analogues of CLT have been designed
        and
        tested.  The Company's library of CLT analogues has been licensed to
        Cyclacel Limited under a licensing agreement.
  Lorus
        scientists have discovered novel low molecular weight compounds with anticancer
        and anti-bacterial activity in pre-clinical investigations.  Of
        particular interest to the Company are compounds that inhibit the growth
        of
        human tumor cell lines, including hepatocellular carcinoma, pancreatic
        carcinoma, ovarian carcinoma, breast adenocarcinoma and metastatic
        melanoma.
  F-28
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **10.**
              **Research
                  and development programs
                  (continued):**
  In
        addition to the above, Lorus has a number of other technologies under
        pre-clinical development, including a tumor suppressor or gene therapy approach
        to inhibiting the growth of tumors.
 Period
from
                      inception
                      September 5,1986 toYears
                      ended May
                      31,
                  
                  
                  May
                      31,2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2007Immunotherapy:Expensed
                  
                  $
                  87
                  
                  
                  $
                  6,202
                  
                  
                  $
                  11,891
                  
                  
                  $
                  75,046Acquired
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –Antisense:Expensed
                  
                  
                  1,676
                  
                  
                  
                  2,550
                  
                  
                  
                  2,384
                  
                  
                  
                  31,485Acquired
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  11,000Small
                      molecules:Expensed
                  
                  
                  1,621
                  
                  
                  
                  1,485
                  
                  
                  
                  119
                  
                  
                  
                  7,328Acquired
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  1,228Total
                      expensed
                  
                  $
                  3,384
                  
                  
                  $
                  10,237
                  
                  
                  $
                  14,394
                  
                  
                  $
                  113,859Total
                      acquired
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  12,228
 Amortization
        of the acquired patents and licenses is included in the "Expensed" line of
        the
        table.
  **11.**
              **Supplemental
                  cash flow information:**
  Cash
        and cash equivalents consists of:
  2007
              
              
              2006Cash
                  on
                  hand
              
              $
              495
              
              
              $
              74Term
                  deposits and guaranteed
                  investment certificates
              
              
              910
              
              
              
              2,618$
              1,405
              
              
              $
              2,692
 
  F-29
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **11.**
              **Supplemental
                  cash flow information
                  (continued):**
  Change
        in non-cash operating working capital is summarized as follows:
  Periodfrom
                  inceptionSeptember
                  5,1986
                  toYears
                  ended May
                  31,
              
              May
                  31,2007
              
              2006
              
              2005
              
              2007Prepaid
                  expenses and other
                  assets
              
              
              $
              180
              
              
              
              $
              611
              
              
              
              $
              571
              
              
              $
              241Accounts
                  payable
              
              
              
              549
              
              
              
              
              (514
              )
              
              
              
              (1,360
              )
              
              
              (140
              )Accrued
                  liabilities
              
              
              
              (1,039
              )
              
              
              
              (559
              )
              
              
              
              (377
              )
              
              
              1,181$
              (310
              )
              
              
              $
              (462
              )
              
              
              $
              (1,166
              )
              
              $
              1,282
  During
        the year ended May 31, 2007, the Company received interest of $767 thousand
        (2006 -$627 thousand; 2005 - $679 thousand).
  Supplementary
        disclosure relating to non-cash financing activities consists of $252 thousand
        related to the liability to repurchase warrants.
  F-30
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **12.**
              **Convertible
                  debentures:**
  On
        October 6, 2004, the Company entered into a Subscription Agreement (the
        "Agreement") to issue an aggregate of $15.0 million of secured convertible
        debentures (the "debentures").  The debentures are secured by a first
        charge over all of the assets of the Company.
  The
        Company received $4.4 million on October 6, 2004 (representing a $5.0 million
        debenture less an investor fee representing 4% of the $15.0 million to be
        received under the Agreement), and $5.0 million on each of January 14 and
        April
        15, 2005.  All debentures issued under this Agreement are due on
        October 6, 2009 and are subject to interest payable monthly at a rate of
        prime
        plus 1% until such time as the Company's share price reaches $1.75 for 60
        consecutive trading days, at which time, interest will no longer be
        charged.  Interest is payable in common shares of Lorus until Lorus'
        shares trade at a price of $1.00 or more after which interest will be payable
        in
        cash or common shares at the option of the debenture holder.  Common
        shares issued in payment of interest will be issued at a price equal to the
        weighted average trading price of such shares for the 10 trading days
        immediately preceding their issue in respect of each interest
        payment.  For the year ended May 31, 2007, the Company issued
        3,726,000 (2006 - 2,153,000; 2005 - 421,000) shares in settlement of
        approximately $1.0 million (2006 - $882 thousand; 2005 - $300
        thousand) in interest.
  The
        $15.0 million principal amount of debentures issued on October 6, 2004, January
        14, 2005 and April 15, 2005 is convertible at the holder's option at any
        time into common shares of the Company with a conversion price per share
        of
        $1.00.
  With
        the issuance of each $5.0 million debenture, the Company issued to the debenture
        holder from escrow 1,000,000 purchase warrants expiring October 6, 2009 to
        buy
        common shares of the Company at a price per share equal to
        $1.00.
  F-31
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **12.**
              **Convertible
                  debentures (continued):**
  The
        debentures contain both a liability and an equity element, represented by
        the
        conversion option and, therefore, under Canadian GAAP, these two elements
        must
        be split and classified separately as debt and equity.  In addition,
        as noted above, the debenture holder received 1,000,000 purchase warrants
        on the
        issuance of each tranche of convertible debt.  The Company allocated
        the total proceeds received from the issuance of the debentures to these
        three
        elements based on their relative fair values.  The fair value of the
        purchase warrants has been determined based on an option pricing
        model.  The fair value of the debt has been based on the discounted
        cash flows using an estimated cost of borrowing of 15% to represent an estimate
        of what the Company may borrow secured debt without a conversion option or
        purchase warrant.  The debentures conversion option was valued using a
        trinomial model.  The resulting allocation based on relative fair
        values resulted in the allocation of $9.8 million to the debt instrument,
        $4.1
        million to the conversion option and $1.1 million to the purchase
        warrants.  The financing fees totalling $1.1 million related to the
        issuance of the convertible debentures have been allocated pro rata between
        deferred financing charges of $652 thousand, against the equity portion of
        the
        convertible debentures of $322 thousand and against the purchase warrants
        of $87
        thousand.  This allocation resulted in net amounts allocated to the
        equity portion of the debentures and warrants of $3.8 million and $991 thousand,
        respectively.  The financing charges are being amortized over the
        five-year life of the Agreement.  For the year ended May 31,
        2007, the Company has recognized $110 thousand (2006 - $87 thousand; 2005
        -
        $84 thousand) in amortization expense.  This amortization expense
        has reduced the value of the deferred financing charges to $371 thousand
        at May
        31, 2007 (2006 - $481 thousand).
  Each
        reporting period, the Company is required to accrete the carrying value of
        the
        convertible debentures such that at maturity on October 6, 2009 the carrying
        value of the debentures will be their face value of $15.0
        million.  For the year ended May 31, 2007, the Company has recognized
        $935 thousand (2006 - $790 thousand; 2005 - $426 thousand) in accretion
        expense.  This accretion expense has increased the carrying value of
        the convertible debentures to $11.9 million at May 31, 2007 (2006 -
        $11.0 million).
  The
        lender has the option to demand repayment in the event of default, including
        the
        failure to maintain certain subjective covenants, representations and
        warranties.  Management assesses on a quarterly basis whether or not
        events during the quarter could be considered an event of
        default.  This assessment was performed and management believes that
        there has not been an event of default and that, at May 31, 2007, the term
        of
        the debt remains unchanged.
  F-32
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **13.**
              **Commitments
                  and guarantees:**
  (a)
              Operating
                  lease commitments:
  The
        Company has entered into operating leases for premises and equipment under
        which
        it is obligated to make minimum annual payments of approximately $118 thousand
        in 2008 and $8 thousand in 2009.
  During
        the year ended May 31, 2007, operating lease expenses were $139 thousand
        (2006 - $130 thousand; 2005 - $136 thousand).
  (b)
              Other
                  contractual commitments:
  In
        December 1997, the Company acquired certain patent rights and a sub-license
        to
        develop and commercialize the anticancer application of certain compounds
        in
        exchange for:
  (i)
              A
                  20% share interest in NuChem;
  (ii)
              A
                  payment of U.S. $350 thousand in shares of Lorus;
                  and
  (iii)
              Up
                  to U.S. $3.5 million in cash.
  To
        date, the Company has made cash payments of U.S. $500 thousand.  The
        remaining balance of up to U.S. $3.0 million remains payable upon the
        achievement of certain milestones based on the commencement and completion
        of
        clinical trials.  Additional amounts paid will be classified as
        acquired patents and licenses and will be amortized over the estimated useful
        life of the licensed asset.
  The
        Company does not currently expect to achieve any of the above milestones
        in
        fiscal years ended May 31, 2008 or 2009 and cannot reasonably predict when
        such
        milestones will be achieved, if at all.
  F-33
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **13.**
              **Commitments
                  and guarantees
                  (continued):**
  The
        Company holds an exclusive world-wide license from the University of Manitoba
        (the "University") and Cancer Care Manitoba ("CCM") to certain patent
        rights to develop and sub-license certain oligonucleotide
        technologies.  In consideration for the exclusive license of the
        patent rights, the University and CCM are entitled to an aggregate of 1.67%
        of
        the net sales received by the Company from the sale of products or processes
        derived from the patent rights and 1.67% of all monies received by the Company
        from sub-licenses of the patent rights.  Any and all improvements to
        any of the patent rights derived in whole or in part by the Company after
        the
        date of the license agreement, being June 20, 1997, are not included within
        the
        scope of the agreement and do not trigger any payment of royalties.
  The
        Company has not yet earned any revenue from the products covered under this
        agreement and, therefore, has not paid any royalties thereunder and cannot
        reasonably predict the timing and amount of any future payment.  The
        Company does not expect to make any royalty payments under this agreement
        in
        fiscal years ended May 31, 2008 or 2009, and cannot reasonably predict when
        such
        royalties will become payable, if at all.
  (c)
              Guarantees:
  The
        Company entered into various contracts, whereby contractors perform certain
        services for the Company.  The Company indemnifies the contractors
        against costs, charges and expenses in respect of legal actions or proceedings
        against the contractors in their capacity of servicing the
        Company.  The maximum amounts payable from these guarantees cannot be
        reasonably estimated.  Historically, the Company has not made
        significant payments related to these guarantees.
  F-34
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **14.**
              **Financial
                  instruments:**
  The
        carrying values of cash and cash equivalents, short-term marketable securities
        and other investments, amounts receivable, other assets, accounts payable
        and
        accrued liabilities approximate their fair values due to the short-term nature
        of these financial instruments.  Long-term marketable securities and
        other investments are valued at carrying value that, by virtue of the nature
        of
        the investments, primarily interest-bearing instruments, approximates their
        quoted market value.
  Fair
        value estimates are made at a specific point in time, based on relevant market
        information and information about the financial instrument.  These
        estimates are subjective in nature and involve uncertainties and matters
        of
        significant judgment and, therefore, cannot be determined with
        precision.  Changes in assumptions could significantly affect the
        estimates.
  Financial
        instruments potentially exposing the Company to a concentration of credit
        risk
        consist principally of cash equivalents and short-term
        investments.  The Company mitigates this risk by investing in high
        grade fixed income securities.
  The
        Company is exposed to interest rate risk due to the convertible debentures
        that
        require interest payments at a variable rate of interest.
  The
        fair value of the convertible debentures at May 31, 2007 is $13.6
        million.
  **15.**
              **Comparative
                  figures:**
  Certain
        of the comparative figures have been reclassified to conform to the current
        year's method of presentation.
  F-35
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **16.**
              **Subsequent
                  events:**
  On
        July
        10, 2007 (the "Effective Date"), the Company completed a corporate
        reorganization by way of a plan of arrangement (the "Reorganization") with
        unrelated parties, 6707157 Canada Inc. ("Investor") and its affiliate, Pinnacle
        International Lands, Inc., to reorganize Lorus' business.  The
        Reorganization was effected pursuant to an arrangement agreement dated as
        of May
        1, 2007 and was approved by Lours' shareholders on June 25, 2007.
  Pursuant
        to the Reorganization, Lorus transferred all of its assets (with the exception
        of certain future tax assets) and liabilities to New Lorus and/or one of
        its
        wholly owned subsidiaries and New Lorus assumed those
        liabilities.  Under the reorganization, the share capital of Lorus was
        reorganized into voting and non-voting common shares and securityholders
        in
        Lorus exchanged their securities in Lorus for equivalent securities in New
        Lorus
        (the "Exchange").  As part of the Reorganization, Lorus changed its
        name to 4325231 Canada Inc. and New Lorus changed its name from 6650309 Canada
        Inc. to Lorus Therapeutics Inc.  The common shares of Lorus were
        de-listed from both the TSX and the AMEX.  As a result of the
        Reorganization, Lorus ceased carrying on the business of the research and
        development of pharmaceutical products and technologies that was previously
        carried on by Lorus.  As part of and upon completion of the
        Reorganization, the nature of Lorus' business underwent a fundamental change
        and, since the Effective Date, has been focused entirely on real estate
        development.  After completion of the Reorganization, New Lorus was
        not related to Lorus.
  As
        part
        of the Reorganization, the Investor acquired from New Lorus and Selling
        Shareholders (as defined below) approximately 41% of the voting common shares
        and all of the non-voting common shares for cash consideration of approximately
        $8.5 million less an escrowed amount of $600 thousand, subject to certain
        post-closing adjustments before transaction costs.  The remaining 59%
        of the voting common shares of Lorus were distributed to the New Lorus
        shareholders who are not residents of the United States on a pro-rata basis,
        and
        the New Lorus shareholders who were residents of the United States received
        a
        nominal cash payment instead of the voting common shares.  As part of
        the Reorganization, HighTech and certain other shareholders of Lorus (the
        "Selling Shareholders"), sold to the Investor the voting common shares of
        Lorus
        received under the Reorganization at the same price per share as was paid
        to
        shareholders who are residents of the United States.  The proceeds
        received by the Selling Shareholders were nominal.
  F-36
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **16.**
              **Subsequent
                  events (continued):**
  New
        Lorus and its subsidiaries have agreed to indemnify Lorus and its directors,
        officers and employees from and against all damages, losses, expenses (including
        fines and penalties),  other third party costs and legal expenses, to
        which any of them may be subject arising out of any matter occurring (i)
        prior
        to, at or after the effective time of the Reorganization (the "Effective
        Time") and directly or indirectly relating to any of the assets of Lorus
        transferred to New Lorus pursuant to the Reorganization (including losses
        for
        income, sales, excise and other taxes arising in connection with the transfer
        of
        any such asset) or conduct of the business prior to the Effective Time; (ii)
        prior to, at or after the Effective Time as a result of any and all interests,
        rights, liabilities and other matters relating to the assets transferred
        by
        Lorus to New Lorus pursuant to the Reorganization; and (iii) prior to or
        at the
        Effective Time and directly or indirectly relating to, with certain exceptions,
        any of the activities of Lorus or the Reorganization.
  Certain
        of the transactions associated with the Reorganization are taxable and would
        result in income taxes otherwise payable of approximately $4.1
        million.  Lorus will utilize tax loss carryforwards of $11.5 million
        to offset income taxes otherwise payable.  Accordingly, the future tax
        assets would be reduced by $4.1 million.  There would be a
        corresponding reduction of the valuation allowance.  Future tax assets
        relating to income tax attributes of Lorus Therapeutics Inc. (but not those
        of
        its subsidiaries) of $39.8 million will not be available to New Lorus in
        the
        future.  These future tax assets have been fully reserved through the
        valuation allowance and will not otherwise impact the Company's
        loss.
  During
        the year ended May 31, 2007, the Company incurred approximately $1.3 million
        in
        deferred arrangement costs associated with negotiating the above arrangement,
        consisting primarily of professional fees.  These costs were
        transferred to New Lorus as part of the arrangement and will be offset against
        proceeds from the transaction in the first quarter of 2008 in the New Lorus
        consolidated financial statements.
  F-37
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **16.**
              **Subsequent
                  events (continued):**
  As
        part
        of the Reorganization, on July 10, 2007, the following transactions ensued
        between 4325231 Canada Inc., the successor shell company of Lorus and the
        Investor.  These transactions are not part of Lorus as a continuing
        entity.
  (a)
              4325231
                  Canada Inc. issued 294,296,851 additional non-voting common shares
                  to the
                  Investor for gross proceeds of $1.2 million
                  and;
  (b)
              4325231
                  Canada Inc. acquired all of the limited partnership units (the
                  "LP Units")
                  in Pinnacle Centre Three Limited Partnership and Pinnacle Centre
                  Four
                  Limited Partnership ("Pinnacle Partnerships"), each of which has
                  an
                  interest in a real estate development project located in downtown
                  Toronto,
                  Ontario, for a total purchase price of $1.2 million (the "Purchase
                  Price")
                  from an entity related to the Investor.  The Purchase Price was
                  satisfied by the issuance of interest bearing demand promissory
                  notes
                  aggregating to $500 thousand, and the balance $700 thousand will
                  be paid
                  in cash.  These transactions have occurred between two commonly
                  controlled entities.  Since these transactions do not result in
                  a substantive change in ownership, the transactions will be accounted
                  for
                  at carrying value.
  As
        at
        the date of the acquisition, the Pinnacle Partnerships had the following
        combined assets and liabilities:
  (Unaudited)**Assets**Property
                  under
                  development
              
              $
              11,368Cash
                  held in
                  trust
              
              
              3,430Other
                  current
                  assets
              
              
              226Due
                  from related
                  party
              
              
              1,934$
              16,958**Liabilities
                  and Partners'
                  Equity**Due
                  to related
                  parties
              
              $
              13,547Sales
                  deposits
              
              
              3,397Accrued
                  liabilities
              
              
              1216,956Partners'
                  equity
              
              
              2$
              16,958
 
 
  F-38
  **LORUS
        THERAPEUTICS INC.**
 Notes
        to Consolidated Financial Statements (continued)
 (Tabular
        amounts thousands of Canadian dollars, except per share amounts)
 
 Years
        ended May 31, 2007, 2006 and 2005
 **16.**
              **Subsequent
                  events (continued):**
  Prior
        to the acquisition of the LP Units, the Pinnacle Partnerships each entered
        into
        a revolving demand loan agreement with Pinnacle International Realty Group
        Inc.,
        an entity with common ownership to the Investor, whereby each of the Pinnacle
        Partnerships may borrow up to $60 million with interest at prime plus 2% in
        order to finance construction costs until conventional construction financing
        is
        secured.
  F-39
 **AUDITORS'
            REPORT ON SUPPLEMENTARY INFORMATION**
   To
            the
            Board of Directors of Lorus Therapeutics Inc.
 
  Under
            date of August 7, 2007, we reported on the consolidated balance sheets
            of Lorus
            Therapeutics Inc. (the "Company") as at May 31, 2007 and 2006 and the
            consolidated statements of operations and deficit and cash flows for
            each of the
            years in the three-year period ended May 31, 2007, included in the Annual
            Report
            on Form 20-F.  In connection with our audits of the aforementioned
            consolidated financial statements, we also have audited the related supplemental
            note entitled "Reconciliation of Canadian and United States Generally
            Accepted
            Accounting Principles" as included in Form 20-F in accordance with Canadian
            generally accepted auditing standards and the standards of the Public
            Company
            Accounting Oversight Board (United States) except that the consolidated
            statement of shareholders' equity (deficiency) for the period from June
            1, 1998
            to May 31, 2003 was not audited in accordance with the standards of the
            Public
            Company Accounting Oversight Board (United States).  This supplemental
            note is the responsibility of the Company's management.  Our
            responsibility is to express an opinion on this supplemental note based
            on our
            audits.
  In
            our
            opinion, such supplemental note, when considered in relation to the basic
            consolidated financial statements taken as a whole, presents fairly,
            in all
            material respects, the information set forth therein as at May 31, 2007 and
            2006 and for each of the years in the three-year period ended May 31,
            2007.
   /s/
            KPMG
            LLP
 Chartered
            Accountants, Licensed Public Accountants
  
  Toronto,
            Canada
  November
            16, 2007
 
 F-40
 **LORUS
              THERAPEUTICS INC.** Supplementary
                Information
  Reconciliation
                of Canadian and United States Generally Accepted Accounting Principles (Tabular
                  amounts in thousands of Canadian dollars, except per share amounts)
  Years
                  ended May 31, 2007, 2006 and 2005 
 The
                  consolidated financial statements as at May 31, 2007 and 2006 and
                  for each of
                  the years in the three-year period ended May 31, 2007 have been
                  prepared in
                  accordance with Canadian generally accepted accounting principles
                  ("GAAP") which
                  differ in some respects from accounting principles generally accepted
                  in the
                  United States ("U.S. GAAP").  The following reconciliation identifies
                  material differences in the Company's consolidated statements of
                  operations and
                  deficit and consolidated balance sheets.
  (a)
                  Consolidated
                      statements of operations and
                      deficit:
  
 2007
                  
                  
                  2006
                  
                  
                  2005Loss
                      per Canadian GAAP
                  
                  $
                  (9,638
                  )
                  
                  $
                  (17,909
                  )
                  
                  $
                  (22,062
                  )Accretion
                      of convertible debentures (b)(i)
                  
                  
                  741
                  
                  
                  
                  480
                  
                  
                  
                  329Amortization
                      of debt issue costs (b)(i)
                  
                  
                  (59
                  )
                  
                  
                  (108
                  )
                  
                  
                  (40
                  )Stock-based
                      compensation expense (b)(ii)
                  
                  
                  (194
                  )
                  
                  
                  1,149
                  
                  
                  
                  1,475Loss
                      and comprehensive loss per U.S. GAAP
                  
                  $
                  (9,150
                  )
                  
                  $
                  (16,388
                  )
                  
                  $
                  (20,298
                  )Basic
                      and diluted loss per share per U.S. GAAP
                  
                  $
                  (0.05
                  )
                  
                  $
                  (0.09
                  )
                  
                  $
                  (0.12
                  )
  Under
            U.S. GAAP, the number of weighted average common shares outstanding for
            basic
            and diluted loss per share are the same as under Canadian GAAP.
  (b)
                  Consolidated
                      balance sheets:
  
 AdjustmentsCanadian
                  
                  
                  Convertible
                  
                  
                  Stock
                  
                  
                  U.S.2007
                  
                  GAAP
                  
                  
                  debentures
                  
                  
                  options
                  
                  
                  GAAP(i)
                  
                  
                  (ii)Deferred
                      financing charges
                  
                  $
                  371
                  
                  
                  $
                  104
                  
                  
                  $
                  -
                  
                  
                  $
                  475Secured
                      convertible debentures
                  
                  
                  (11,937
                  )
                  
                  
                  (2,518
                  )
                  
                  
                  -
                  
                  
                  
                  (14,455
                  )Equity
                        portion of securedconvertible debentures
                  
                  
                  (3,814
                  )
                  
                  
                  3,814
                  
                  
                  
                  -
                  
                  
                  
                  -Stock
                      options
                  
                  
                  (4,898
                  )
                  
                  
                  -
                  
                  
                  
                  4,898
                  
                  
                  
                  -Contributed
                        surplus/Additional paid-in capital ("APIC")
                  
                  
                  (8,525
                  )
                  
                  
                  (57
                  )
                  
                  
                  309
                  
                  
                  
                  (8,273
                  )Deficit
                        accumulated during the development stage
                  
                  
                  174,190
                  
                  
                  
                  (1,343
                  )
                  
                  
                  (5,207
                  )
                  
                  
                  167,640
 
 
 F-41
 **LORUS
                THERAPEUTICS INC.** Supplementary
                  Information (continued)
  Reconciliation
                  of Canadian and United States Generally Accepted Accounting Principles (Tabular
                    amounts in thousands of Canadian dollars, except per share amounts)
  Years
                    ended May 31, 2007, 2006 and 2005
 AdjustmentsCanadian
                  
                  
                  Convertible
                  
                  
                  Stock
                  
                  
                  U.S.2006
                  
                  GAAP
                  
                  
                  debentures
                  
                  
                  options
                  
                  
                  GAAP(i)
                  
                  
                  (ii)Deferred
                      financing charges
                  
                  $
                  481
                  
                  
                  $
                  164
                  
                  
                  $
                  -
                  
                  
                  $
                  645Secured
                      convertible debentures
                  
                  
                  (11,002
                  )
                  
                  
                  (3,260
                  )
                  
                  
                  -
                  
                  
                  
                  (14,262
                  )Equity
                        portion of secured convertible debentures
                  
                  
                  (3,814
                  )
                  
                  
                  3,814
                  
                  
                  
                  -
                  
                  
                  
                  -Stock
                      options
                  
                  
                  (4,525
                  )
                  
                  
                  -
                  
                  
                  
                  4,525
                  
                  
                  
                  -Contributed
                      surplus/APIC
                  
                  
                  (7,665
                  )
                  
                  
                  (1,048
                  )
                  
                  
                  876
                  
                  
                  
                  (7,837
                  )Warrants
                  
                  
                  (991
                  )
                  
                  
                  991
                  
                  
                  
                  -
                  
                  
                  
                  -Deficit
                        accumulated during the development stage
                  
                  
                  164,552
                  
                  
                  
                  (661
                  )
                  
                  
                  (5,401
                  )
                  
                  
                  158,490
 
  (i)
                  Convertible
                      debentures:
  Under
            Canadian GAAP, the conversion option embedded in the convertible debentures
            is
            presented separately as a component of shareholders' equity
            (deficiency).  Under U.S. GAAP, the embedded conversion option is not
            subject to bifurcation in accordance with Emerging Issues Task Force
            Abstract
            No. 00-19 ("EITF 00-19") since, as a conventional convertible debt, the
            holder
            of the debentures may only realize the value of the conversion option
            by
            exercising the option and receiving the entire proceeds in a fixed number
            of
            shares.  Accordingly, the conversion option is included in the
            carrying amount of the secured convertible debentures, presented as a
            long-term
            liability.  In accordance with U.S. GAAP, EITF 00-19 and APB Opinion
            No. 14, the warrants issued in connection with the convertible debentures
            financing were recorded as additional paid-in capital and a reduction
            to the
            proceeds from the issuance of convertible debentures.  The warrants
            have been presented as a separate component of shareholders' equity (deficiency)
            for Canadian GAAP purposes.  Under U.S. GAAP, the Company allocated
            the total proceeds received from the issuance of the convertible debentures
            to
            the debt and warrant portions based on their relative fair
            values.  The fair value of the purchase warrants was determined based
            on an option pricing model.  The resulting allocation based on
            relative fair values resulted in the allocation of $13.9 million to the
            debt
            instrument and $1.1 million to the purchase warrants.  The financing
            costs totaling $1.1 million related to the issuance of the convertible
            debentures were allocated on a pro rata basis to deferred financing charges
            of
            $964 thousand and to the purchase warrants of $97 thousand.  This
            allocation resulted in the net amount allocated to the warrants of $1.0
            million.  The deferred financing charges are amortized over the
            five-year life of the convertible debentures agreement.
  F-42
 
 **LORUS
                THERAPEUTICS INC.** Supplementary
                  Information
  Reconciliation
                  of Canadian and United States Generally Accepted Accounting Principles (Tabular
                    amounts in thousands of Canadian dollars, except per share amounts)
  Years
                    ended May 31, 2007, 2006 and 2005
 Each
            reporting period, the Company is required to accrete the carrying value
            of the
            convertible debentures such that at maturity on October 6, 2009, the
            carrying
            value of the debentures will be their face value of $15.0 million.  To
            date, the Company has recognized $600 thousand in accretion
            expense.  This accretion expense has increased the value of the
            convertible debentures from $13.9 million to $14.5 million at May 31,
            2007.
  In
            May
            2007, the Company entered into an agreement with the holder of the Lorus
            $15.0 million secured convertible debenture to the repurchase of its
            outstanding 3,000,000 common shares at a purchase price of $252 thousand
            in
            connection with the reorganization.  The difference between the
            repurchase liability and the carrying amount of the warrants has been
            recorded
            as additional paid-in capital.
  (ii)
                  Stock-based
                      compensation:
  Under
            Canadian GAAP, effective June 1, 2004, the Company adopted the fair value-based
            method of accounting for employee stock options granted on or after June
            1,
            2002, retroactively without restatement as allowed under the transitional
            provisions of The Canadian Institute of Chartered Accountants' Handbook
            Section
            3870.  As a result, the opening balances of deficit and stock options
            were increased by $2.8 million at June 1, 2004.
  Under
            U.S. GAAP, on June 1, 2006, the Company adopted Statement of Financial
            Accounting Standards No. 123 (revised 2004), Share-Based Payment ("SFAS
            123(R)"), which requires companies to recognize in the statement of operations
            all share-based payments to employees, including grants of employee stock
            options, based on their fair values.  The statement eliminates the
            ability to account for share-based compensation transactions, as the
            Company
            formerly did, using the intrinsic value method as prescribed by Accounting
            Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
            to
            Employees.
  The
            Company adopted SFAS 123(R) using the modified prospective method, which
            requires the application of the accounting standards as of June 1,
            2006.  The consolidated financial statements as of and for fiscal 2007
            reflect the impact of adopting SFAS 123(R).  In accordance with the
            modified prospective method, the consolidated financial statements for
            prior
            periods have not been restated to reflect, and do not include, the impact
            of
            SFAS 123(R).
  F-43
 
 **LORUS
                THERAPEUTICS INC.** Supplementary
                  Information
  Reconciliation
                  of Canadian and United States Generally Accepted Accounting Principles (Tabular
                    amounts in thousands of Canadian dollars, except per share amounts)
  Years
                    ended May 31, 2007, 2006 and 2005
 Stock-based
            compensation expense recognized during the period is based on the value
            of the
            portion of stock-based payment awards that is ultimately expected to
            vest.  Stock-based compensation expense recognized in the consolidated
            statement of operations during fiscal 2007 included compensation expense
            for
            stock-based payment awarded prior to, but not yet vested as of June 1,
            2006
            based on the grant date fair value estimated in accordance with the pro
            forma
            provisions of SFAS No. 148, Accounting for Stock-Based Compensation -
            Transition
            and Disclosures  ("SFAS 148"), and compensation expense for the
            stock-based payment awards granted subsequent to May 31, 2006, based
            on the
            grant date fair value estimated in accordance with SFAS 123(R).  As
            stock-based compensation expense recognized in statement of operations
            for
            fiscal 2007 is based on awards ultimately expected to vest, it has been
            reduced
            for estimated forfeitures.  SFAS 123(R) requires forfeitures to be
            estimated at the time of grant and revised, if necessary, in subsequent
            periods
            if actual forfeitures differ from those estimates.  As a result of the
            adoption of SFAS 123(R) on June 1, 2006, the Company recorded stock-based
            compensation of $697 thousand for the year ended May 31,
            2007.   The Company used the Black-Scholes valuation model to
            determine the fair value of options granted in fiscal 2007 and valuation
            assumptions are consistent with those used under Canadian GAAP.  There
            was no material cumulative effect adjustment to additional paid-in capital
            relating to estimating forfeitures on recognized stock-based compensation
            cost
            in periods prior to the adoption of SFAS 123(R).
  As
            at
            May 31, 2007, the aggregate intrinsic values for options outstanding
            and options
            exercisable is nil as the common stock price as of May 31, 2007 was lower
            than
            the exercise prices of the stock options.
  Total
            unrecognized compensation cost relating to unvested stock options at
            May 31,
            2007, prior to the consideration of expected forfeitures, is approximately
            $502
            thousand and is expected to be recognized over a weighted average period
            of 1.8
            years.
  The
            total intrinsic value of options exercised during the years ended May
            31, 2007
            and 2006 was $2 thousand and nil, respectively.
  F-44
 
 **LORUS
                THERAPEUTICS INC.** Supplementary
                  Information
  Reconciliation
                  of Canadian and United States Generally Accepted Accounting Principles (Tabular
                    amounts in thousands of Canadian dollars, except per share amounts)
  Years
                    ended May 31, 2007, 2006 and 2005
 Had
            the
            Company adopted the fair value-based method for accounting for stock-based
            compensation in all prior periods presented, the pro-forma impact on
            net income
            and net income per share would be as follows:
  2006
                  
                  
                  2005Net
                      loss to common shareholders - U.S. GAAP
                  
                  $
                  (16,388
                  )
                  
                  $
                  (20,298
                  )Compensation
                      expense under fair value-based method
                  
                  
                  (1,149
                  )
                  
                  
                  (1,475
                  )Pro
                      forma net loss - U.S. GAAP
                  
                  $
                  (17,537
                  )
                  
                  $
                  (21,773
                  )Pro
                      forma basic and diluted loss per share - U.S. GAAP
                  
                  $
                  (0.10
                  )
                  
                  $
                  (0.13
                  )
  During
            fiscal 2006, employees of the Company (excluding Directors and Officers)
            were
            given the opportunity to choose between keeping 100% of their existing
            options
            at the existing exercise price and forfeiting 50% of the options held
            in
            exchange for having the remaining 50% of the exercise price of the options
            re-priced to $0.30 per share.  Employees holding 2,290,000 stock
            options opted for re-pricing their options, resulting in the amendment
            of the
            exercise price of the 1,145,000 stock options and the forfeiture of 1,145,000
            stock options.  Under Canadian GAAP, the accounting treatment of these
            options require that any incremental value resulting from the amendment
            be
            determined and recognized over the remaining vesting period.  Under
            U.S. GAAP, prior to the adoption of SFAS 123(R), the amended options were
            treated as a variable award and were revalued, using the intrinsic value
            method
            of accounting at the end of each reporting period until the date the
            options
            were exercised, forfeited or expired unexercised.  In fiscal 2006, the
            Company recorded stock-based compensation of $36 thousand under U.S.
            GAAP
            related to these amended stock options.
  In
            addition, in fiscal 2006, the Company granted performance-based stock
            options.  Under Canadian GAAP, the accounting treatment of these
            options is consistent with all other employee stock options.  Under
            U.S. GAAP, prior to the adoption of SFAS 123(R), the options were treated
            as a
            variable award and were revalued using the intrinsic value method of
            accounting
            at the end of each reporting period until the final measurement
            date.  At each reporting date, compensation cost was measured based on
            an estimate of the number of options that would vest considering the
            performance
            criteria and the difference between the market price of the underlying
            stock and
            the exercise price at such dates.  The compensation cost was being
            recognized over the estimated performance period.  For the year ended
            May 31, 2006, the Company recorded stock-based compensation expense of
            $20 thousand under U.S. GAAP for performance-based options.
  F-45
 
 **LORUS
                THERAPEUTICS INC.** Supplementary
                  Information
  Reconciliation
                  of Canadian and United States Generally Accepted Accounting Principles (Tabular
                    amounts in thousands of Canadian dollars, except per share amounts)
  Years
                    ended May 31, 2007, 2006 and 2005
 There
            are no measurement differences between Canadian GAAP and U.S. GAAP for
            these
            awards in fiscal 2007.
  For
            the
            year ended May 31, 2007, stock-based compensation expense of $697 thousand
            comprised $299 thousand related to research and development and $398
            thousand
            related to general and administrative.
  (c)
                  Consolidated
                      statements of cash flows:
  There
            are no differences between Canadian and U.S. GAAP that impact the consolidated
            statements of cash flows.
  (d)
                  Income
                      taxes:
  Under
            Canadian GAAP, investment tax credits and other research and development
            credits
            are deducted from research and development expense for items of a current
            nature, and deducted from property and equipment for items of a capital
            nature.  Under U.S. GAAP, these tax credits would be reclassified as a
            reduction of income tax expense.  The impact would be higher research
            and development expense and an income tax recovery of $212 thousand for
            the year
            ended May 31, 2007 (2006 - $205 thousand; 2005 - $400 thousand) with
            no net
            impact to loss for the year or loss per share.
  (e)
                  Effects
                      of prior year misstatements:
  In
            September 2006, the staff of the Securities and Exchange Commission ("SEC")
            issued Staff Accounting Bulletin No. 108, Considering the Effects of
            Prior Year
            Misstatements when Quantifying Misstatements in Current Year Financial
            Statements ("SAB 108"), which addresses staff's views on how uncorrected
            errors
            in previous years should be considered when quantifying errors in current
            year
            financial statements.  SAB 108 requires SEC registrants to consider
            the effect of all carryover and reversing effects of prior year misstatements
            when quantifying errors in current year financial statements.  SAB 108
            does not change the SEC staff's previous guidance on evaluating the materiality
            of errors.  The adoption of SAB 108, using the dual method approach
            for quantifying errors in financial statements effective June 1, 2006
            did not
            have an impact on the Company's reconciliation to U.S. GAAP for the year
            ended
            May 31, 2007.
  Canadian
            GAAP does not prescribe any particular method of evaluating uncorrected
            errors.
  F-46
 **LORUS
              THERAPEUTICS INC.** Supplementary
                Information (continued)
  Reconciliation
                of Canadian and United States Generally Accepted Accounting Principles (Tabular
                  amounts in thousands of Canadian dollars, except per share amounts)
  Years
                  ended May 31, 2007, 2006 and 2005
 (f)
                  New
                      accounting pronouncements not yet
                      adopted:
  In
            June
            2006, the FASB approved FASB Interpretation No. 48, Accounting for Uncertainty
            in Income Taxes - an interpretation of FASB Statement No. 109 ("FIN
            48").  FIN 48 clarifies the criteria for recognizing tax benefits
            under FASB Statement No. 109, Accounting for Income Taxes.  It also
            requires additional financial statement disclosures about uncertain tax
            positions.  FIN 48 is effective for fiscal years beginning after
            December 15, 2006, specifically July 1, 2007 for the Company.  The
            Company is evaluating the impact of this standard on its consolidated
            financial
            position and results of operations.
  In
            September 2006, the FASB issued FASB Statement No. 157 ("SFAS 157"),
            Fair Value
            Measurements, which defines fair value, establishes a framework for measuring
            fair value under GAAP, and expands disclosures about fair value
            measurements.  SFAS 157 applies to other accounting pronouncements
            that require or permit fair value measurements. The new statement is
            effective
            for financial statements issued for fiscal years beginning after November
            15,
            2007, and for interim periods within those fiscal years, specifically
            June 1,
            2008 for the Company.  The Company is currently evaluating the
            potential impact, if any, of the adoption of SFAS 157 on the consolidated
            financial position, results of operations and cash flows.
  In
            February 2007, the FASB issued FASB Statement No. 159 ("SFAS 159"), The
            Fair
            Value Options for Financial Assets and Financial Liabilities, which permits
            entities to choose to measure many financial instruments and certain
            warranty
            and insurance contracts at fair value on a contract-by-contract basis.
            SFAS 159
            applies to all reporting entities, including not-for-profit organizations,
            and
            contains financial statement presentation and disclosure requirements
            for assets
            and liabilities reported at fair value as a consequence of the
            election.  SFAS 159 is effective as of the beginning of an entity's
            first year that begins after November 15, 2007, specifically June 1,
            2008 for
            the Company.  Early adoption is permitted subject to certain
            conditions; however an early adopter must also adopt SFAS 157 at the
            same
            time.  The Company does not expect the adoption of SFAS 159 to have an
            impact on its consolidated financial position, results of operations
            or cash
            flows.
  F-47
 
 **LORUS
                THERAPEUTICS INC.** Supplementary
                  Information
  Reconciliation
                  of Canadian and United States Generally Accepted Accounting Principles (Tabular
                    amounts in thousands of Canadian dollars, except per share amounts)
  Years
                    ended May 31, 2007, 2006 and 2005
  (g)
                  Consolidated
                      statement of shareholders' equity (deficiency) for the period
                      from June 1,
                      1998 to May 31, 2007:
  
 ContributedNumber
                      of
                  
                  
                  
                  
                  
                  surplus/shares
                  
                  
                  Amount
                  
                  
                  APIC
                  
                  
                  Deficit
                  
                  
                  TotalBalance,
                      May 31, 1998
                  
                  
                  36,785
                  
                  
                  $
                  37,180
                  
                  
                  $
                  667
                  
                  
                  $
                  (32,946
                  )
                  
                  $
                  4,901Exercise
                      of special warrants
                  
                  
                  5,333
                  
                  
                  
                  1,004
                  
                  
                  
                  (1,217
                  )
                  
                  
                  -
                  
                  
                  
                  (213
                  )Exercise
                      of stock options
                  
                  
                  46
                  
                  
                  
                  48
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  48Issue
                      of warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,217
                  
                  
                  
                  -
                  
                  
                  
                  1,217Issue
                      of special warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  213
                  
                  
                  
                  -
                  
                  
                  
                  213Other
                      issuances
                  
                  
                  583
                  
                  
                  
                  379
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  379Deficit
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (4,623
                  )
                  
                  
                  (4,623
                  )Balance,
                      May 31, 1999
                  
                  
                  42,747
                  
                  
                  
                  38,611
                  
                  
                  
                  880
                  
                  
                  
                  (37,569
                  )
                  
                  
                  1,922Exercise
                      of warrants
                  
                  
                  12,591
                  
                  
                  
                  7,546
                  
                  
                  
                  (534
                  )
                  
                  
                  -
                  
                  
                  
                  7,012Issuance
                        of
                        special and purchase warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,853
                  
                  
                  
                  -
                  
                  
                  
                  8,853Issuance
                      of public offering
                  
                  
                  15,333
                  
                  
                  
                  41,952
                  
                  
                  
                  659
                  
                  
                  
                  -
                  
                  
                  
                  42,611Issued
                      of acquisition
                  
                  
                  36,050
                  
                  
                  
                  14,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  14,000Exercise
                      of units
                  
                  
                  893
                  
                  
                  
                  1,821
                  
                  
                  
                  (321
                  )
                  
                  
                  -
                  
                  
                  
                  1,500Issuance
                        under alternate compensation plan
                  
                  
                  18
                  
                  
                  
                  15
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  15Exercise
                      of special warrants
                  
                  
                  30,303
                  
                  
                  
                  8,438
                  
                  
                  
                  (8,438
                  )
                  
                  
                  -
                  
                  
                  
                  -Exercise
                      of stock options
                  
                  
                  1,730
                  
                  
                  
                  1,113
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,113Stock-based
                      compensation
                  
                  
                  -
                  
                  
                  
                  869
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  869Deficit
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (8,599
                  )
                  
                  
                  (8,599
                  )Balance,
                      May 31, 2000
                  
                  
                  139,665
                  
                  
                  
                  114,365
                  
                  
                  
                  1,099
                  
                  
                  
                  (46,168
                  )
                  
                  
                  69,296Exercise
                      of warrants
                  
                  
                  168
                  
                  
                  
                  93
                  
                  
                  
                  (25
                  )
                  
                  
                  -
                  
                  
                  
                  68Issuance
                        under alternate compensation plan
                  
                  
                  28
                  
                  
                  
                  49
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  49Exercise
                      of stock options
                  
                  
                  2,550
                  
                  
                  
                  1,866
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,866Stock-based
                      compensation
                  
                  
                  -
                  
                  
                  
                  351
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  351Deficit
                  
                  
                  -
                  
                  
                  
                  82
                  
                  
                  
                  -
                  
                  
                  
                  (15,213
                  )
                  
                  
                  (15,131
                  )Balance,
                      May 31, 2001
                  
                  
                  142,411
                  
                  
                  
                  116,806
                  
                  
                  
                  1,074
                  
                  
                  
                  (61,381
                  )
                  
                  
                  56,499Exercise
                        of
                        compensation warrants
                  
                  
                  476
                  
                  
                  
                  265
                  
                  
                  
                  (71
                  )
                  
                  
                  -
                  
                  
                  
                  194Exercise
                      of stock options
                  
                  
                  1,525
                  
                  
                  
                  1,194
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,194Stock-based
                      compensation
                  
                  
                  -
                  
                  
                  
                  (100
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (100
                  )Deficit
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (13,488
                  )
                  
                  
                  (13,488
                  )
 
 
 F-48
 
 **LORUS
                THERAPEUTICS INC.** Supplementary
                  Information
  Reconciliation
                  of Canadian and United States Generally Accepted Accounting Principles (Tabular
                    amounts in thousands of Canadian dollars, except per share amounts)
  Years
                    ended May 31, 2007, 2006 and 2005
 ContributedNumber
                      of
                  
                  
                  
                  
                  
                  surplus/shares
                  
                  
                  Amount
                  
                  
                  APIC
                  
                  
                  Deficit
                  
                  
                  TotalBalance,
                      May 31, 2002
                  
                  
                  144,412
                  
                  
                  
                  118,165
                  
                  
                  
                  1,003
                  
                  
                  
                  (74,869
                  )
                  
                  
                  44,299Exercise
                      of stock options
                  
                  
                  873
                  
                  
                  
                  715
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  715Stock-based
                      compensation
                  
                  
                  -
                  
                  
                  
                  558
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  558Deficit
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (16,634
                  )
                  
                  
                  (16,634
                  )Balance,
                      May 31, 2003
                  
                  
                  145,285
                  
                  
                  
                  119,438
                  
                  
                  
                  1,003
                  
                  
                  
                  (91,503
                  )
                  
                  
                  28,938Share
                      issuance
                  
                  
                  26,220
                  
                  
                  
                  24,121
                  
                  
                  
                  4,325
                  
                  
                  
                  -
                  
                  
                  
                  28,446Exercise
                      of stock options
                  
                  
                  289
                  
                  
                  
                  171
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  171Stock-based
                      compensation
                  
                  
                  -
                  
                  
                  
                  (88
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (88
                  )Other
                      issuances
                  
                  
                  -
                  
                  
                  
                  28
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  28Deficit
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (30,301
                  )
                  
                  
                  (30,301
                  )Balance,
                      May 31, 2004
                  
                  
                  171,794
                  
                  
                  
                  143,670
                  
                  
                  
                  5,328
                  
                  
                  
                  (121,804
                  )
                  
                  
                  27,194Interest
                      payment
                  
                  
                  421
                  
                  
                  
                  300
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  300Exercise
                      of stock options
                  
                  
                  276
                  
                  
                  
                  112
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  112Expiry
                      of compensation options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,405
                  
                  
                  
                  -
                  
                  
                  
                  1,405Issuance
                      under alternatecompensation
                      plan
                  
                  
                  50
                  
                  
                  
                  37
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  37Issuance
                      of warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,048
                  
                  
                  
                  -
                  
                  
                  
                  1,048Deficit
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (20,298
                  )
                  
                  
                  (20,298
                  )Balance,
                      May 31, 2005
                  
                  
                  172,541
                  
                  
                  
                  144,119
                  
                  
                  
                  7,781
                  
                  
                  
                  (142,102
                  )
                  
                  
                  9,798Interest
                      payment
                  
                  
                  2,153
                  
                  
                  
                  882
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  882Stock-based
                      compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  56
                  
                  
                  
                  -
                  
                  
                  
                  56Deficit
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (16,388
                  )
                  
                  
                  (16,388
                  )Balance,
                      May 31, 2006
                  
                  
                  174,694
                  
                  
                  
                  145,001
                  
                  
                  
                  7,837
                  
                  
                  
                  (158,490
                  )
                  
                  
                  (5,652
                  )Equity
                      issuance
                  
                  
                  33,800
                  
                  
                  
                  11,641
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  11,641Interest
                      payments
                  
                  
                  3,726
                  
                  
                  
                  1,050
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,050Exercise
                      of stock options
                  
                  
                  46
                  
                  
                  
                  22
                  
                  
                  
                  (9
                  )
                  
                  
                  -
                  
                  
                  
                  13Repurchase
                      of warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (252
                  )
                  
                  
                  -
                  
                  
                  
                  (252
                  )Stock-based
                      compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  697
                  
                  
                  
                  -
                  
                  
                  
                  697Deficit
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (9,150
                  )
                  
                  
                  (9,150
                  )Balance,
                      May 31, 2007
                  
                  
                  212,266
                  
                  
                  $
                  157,714
                  
                  
                  $
                  8,273
                  
                  
                  $
                  (167,640
                  )
                  
                  $
                  (1,653
                  )
 
 
 F-49