---

As filed with the Securities and Exchange Commission on
January 2, 2013

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 20-F

[   ] Registration statement pursuant to Section 12(b)
or 12(g) of the Securities Exchange Act of 1934 OR

[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the fiscal year ended September 30, 2012

OR

[   ] Transition report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 OR

[   ] 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_____________

Commission file number 000-30082

MERUS LABS INTERNATIONAL INC.(Exact name of Registrant as specified in its charter)
(Translation of Registrants name into English)

British Columbia, Canada(Jurisdiction of
incorporation or organization)

30 St. Patrick St., Ste. 301, Toronto, Ontario, Canada M5T
3A3(Address of principal executive offices)

Andrew Patient, Tel. 416-593-3725 Fax
416-593-4434,30 St. Patrick St., Ste.301, Toronto Ontario, Canada
M5T 3A3(Name, Telephone, Email and/or Facsimile number and Address
of Company Contact Person)

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

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

COMMON SHARES(Title of Class)

The Nasdaq Capital Market(Name of each exchange
on which registered)

---

Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act.

NONE(Title of Class)

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: As at September 30, 2012, there were
30,708,478 commonshares outstanding.

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

[ 
 ] YES     [X] NO

If this report 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.

[X]
YES     [   ] NO

Note  Checking the box above will not relieve any registrant
required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 from their obligations under those Sections.

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 for 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.

[X] YES    
[   ] NO

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).

[   ] YES     [   ] NO

(Not
applicable)

Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non accelerated filer:

|Large accelerated filer [   ] | Accelerated filer [   ] | Non-accelerated filer [X]
|----------------------------- | ----------------------- | -------------------------

Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:

|U.S. GAAP [   ] | International Financial Reporting
      Standards as issued by the International | Other [   ]
|--------------- | -------------------------------------------------------------------------------- | -----------
|                | Accounting Standards Board [X]                                                   |            

If Other has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant
has elected to follow.

[   ] Item 17    
 [   ] Item 18

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      [X] NO

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.

[   ]
YES      [   ] NO

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TABLE OF CONTENTS

PART
      I
    3ITEM
      1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    3ITEM
      2: OFFER STATISTICS AND EXPECTED TIMETABLE
    3ITEM
      3: KEY INFORMATION
    3ITEM
      4: INFORMATION ON THE COMPANY
    11ITEM
      4A: UNRESOLVED STAFF COMMENTS
    17ITEM
      5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    17ITEM
      6: DIRECTORS AND SENIOR MANAGEMENT AND EMPLOYEES
    33ITEM
      7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    43ITEM
      8: FINANCIAL INFORMATION
    45ITEM
      9: THE OFFER AND LISTING
    46ITEM
      10: ADDITIONAL INFORMATION
    48ITEM
      11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    56ITEM
      12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    57PART
      II
    57ITEM
      13: DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES
    57ITEM
      14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
    57ITEM
      15: CONTROLS AND PROCEDURES
    58ITEM
      16A: AUDIT COMMITTEE FINANCIAL EXPERT
    58ITEM
      16B: CODE OF BUSINESS CONDUCT
    59ITEM
      16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES
    59ITEM
      16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    60ITEM
      16F: CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT.
    60ITEM
      16G. CORPORATE GOVERNANCE.
    60ITEM 16H. MINE SAFEY DISCLOSURE
    60PART
      III
    61ITEM
      17: FINANCIAL STATEMENTS
    61ITEM
      18: FINANCIAL STATEMENTS
    61ITEM
      19: EXHIBITS
    62


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Merus Labs International Inc. (Merus, the Company we,
us, or our) was formed on December 19, 2011 by the amalgamation of Merus
Labs International Inc. and Envoy Capital Group Inc. (Envoy). Results prior to
December 19, 2011 reflect the operations of our former business as Envoy.

All information contained in this Annual Report is as of
September 30, 2012, unless otherwise indicated. All references to Common Shares
are to the common shares of Merus.

About Forward-Looking Information

This Annual Report and the documents incorporated by reference
herein contain certain statements or disclosures that may constitute
forward-looking information or statements (collectively, forward-looking
information) under applicable securities laws. All statements and disclosures,
other than those of historical fact, which address activities, events, outcomes,
results or developments that management of our company, as applicable,
anticipates or expects may or will occur in the future (in whole or in part)
should be considered forward-looking information. In some cases, forward-looking
information can be identified by terms such as forecast, future, may,
will, expect, anticipate, believe, could, potential, enable,
plan, continue, contemplate, pro forma or other comparable terminology.
Forward-looking information presented in such statements or disclosures may,
among other things include: sources of income; forecasts of sales and associated
expenditures, including general and administrative expenses, and the sources of
the financing thereof; expectations regarding the ability to raise capital;
movements in currency exchange rates; anticipated income taxes; our business
outlook; plans and objectives of management for future operations; forecast
business results; and anticipated financial performance.

Various assumptions or factors are typically applied in drawing
conclusions or making the forecasts or projections set out in forward-looking
information. Those assumptions and factors are based on information currently
available to our company, including information obtained from third-party
industry analysts and other third party sources. In some instances, material
assumptions and factors are presented or discussed elsewhere in this Annual
Report in connection with the statements or disclosure containing the
forward-looking information.

You are cautioned that the following list of material factors
and assumptions is not exhaustive. The factors and assumptions include, but are
not limited to:

- no unforeseen changes in the legislative and operating framework for the
  business of our company;
- a stable competitive environment; and
- no significant event occurring outside the ordinary course of business
  such as a natural disaster or other calamity.

The forward-looking information in statements or disclosures in
this Annual Report is based (in whole or in part) upon factors which may cause
actual results, performance or achievements of our company to differ materially
from those contemplated (whether expressly or by implication) in the
forward-looking information. Those factors are based on information currently
available to our company including information obtained from third-party
industry analysts and other third party sources. Actual results or outcomes may
differ materially from those predicted by such statements or disclosures. While
we do not know what impact any of those differences may have, their business,
results of operations, financial condition and credit stability may be
materially adversely affected. Factors that could cause actual results or
outcomes to differ materially from the results expressed or implied by
forward-looking information include, among other things:

- the acceptance of our products by provincial drug benefit formularies,
  hospital formularies and pharmacies, physicians and patients in the
  marketplace;
- our ability to successfully market and sell our products;
- delays or setbacks with respect to governmental approvals, or
  manufacturing or commercial activities;
- the timing and unpredictability of regulatory actions;
- the patient health, legal, and commercial risks associated with patient
  adverse events or side effects resulting from the use of our products;
- the ability to source, develop and commercialize new products effectively;

---

- unanticipated cash requirements to support current operations, to expand
  our business or for capital expenditures;
- the inability to adequately protect our key intellectual property rights;
- the inability to make royalty payments as they become due;
- the loss of key management or scientific personnel;
- the inability to meet the obligations contained in our credit facilities;
- the activities of our competitors and specifically the commercialization
  of innovative or generic products that compete in the same category as our
  products;
- core patent protection for our initial portfolio has expired or will
  expire in the future, which could result in significant competition from
  generic products resulting in a significant reduction in sales;
- regulatory, legal or other setbacks with respect to its operations or
  business;
- market conditions in the capital markets and the biopharmaceutical
  industry that make raising capital or consummating acquisitions difficult,
  expensive or both;
- enactment of new government laws, regulations, court decisions, regulatory
  interpretations or other initiatives that are adverse to our company or our
  interests;
- the risk that we are not able to arrange sufficient, cost-effective
  financing to repay maturing debt and to fund expenditures, future operational
  activities and acquisitions, and other obligations; and
- the risks associated with legislative and regulatory developments that may
  affect costs, revenues, the speed and degree of competition entering the
  market, global capital markets activity and general economic conditions in
  geographic areas where we operate.

We are not obligated to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as required by applicable securities laws. Because of the risks,
uncertainties and assumptions contained herein, security holders should not
place undue reliance on forward-looking statements or disclosures. The foregoing
statements expressly qualify any forward-looking information contained herein.

The reader is further cautioned that the preparation of
financial statements in accordance with Canadian Generally Accepted Accounting
Principles (Canadian GAAP) or International Financial Reporting Standards as
issuable by the International Accounting Standards Board (IFRS) requires
management to make certain judgments and estimates that affect the reported
amounts of assets, liabilities, revenues and expenses. These estimates may
change, having either a negative or positive effect on net earnings as further
information becomes available, and as the economic environment changes.

We caution you that the above list of risk factors is not
exhaustive. Other factors which could cause actual results, performance or
achievements of our company as applicable, to differ materially from those
contemplated (whether expressly or by implication) in the forward-looking
statements or other forward-looking information are disclosed in our publicly
filed disclosure documents, including those disclosed under Risk Factors in
this Annual Report on Form 20-F (the Annual Report).

Currency

We present our consolidated financial statements in Canadian
  dollars. In this Annual Report, except where otherwise indicated, all dollar
  amounts are expressed in Canadian dollars. References to $ are to
  Canadian dollars, references to U.S.$ are to United States dollars.
  See Selected Financial Data in Item 3 of this Form 20-F.

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PART I

Item 1: Identity of Directors, Senior Management and
Advisers

Not applicable.

Item 2: Offer Statistics and Expected
Timetable

Not applicable.

Item 3: Key Information

A.          Selected Financial Data

The following tables sets forth selected financial data for our
company for the fiscal years indicated below and should be read in conjunction
with the more detailed audited consolidated financial statements and the related
notes thereto (the Consolidated Financial Statements) appearing under Item 17
in this Form 20-F and the discussion under Item 5 Operating and Financial
Review and Prospects herein. The selected consolidated financial data does not
include statements of operations data or balance sheet data of any acquired
operations prior to their respective acquisition effective dates. Our historical
results are not necessarily indicative of the results that may be expected for
any future period. The Consolidated Financial Statements have been prepared by
management in accordance with IFRS for fiscal years 2012 and 2011. Prior year
financial statements were prepared under Canadian GAAP, which vary in certain
significant respects from U.S. Generally Accepted Accounting Principles (U.S.
GAAP).

Fiscal Years EndedSeptember 30
    
    2012
    
    
    2011(all amounts in thousands exceptper share data)Revenue
    $
    10,421
    
    $
    -Loss From Continuing Operations
    
    (20,721
    )
    
    (6,795
    )(Loss) Earnings From Discontinued
      Operations
    
    -
    
    
    (766
    )Loss From Continuing Operations Basic
      Earnings Per Share
    
    (0.90
    )
    
    (0.85
    )Loss From Continuing Operations Diluted
      Earnings Per Share
    
    (0.90
    )
    
    (0.85
    )Net Loss
    
    (20,721
    )
    
    (7,561
    )Net Loss Per Share Basic
    
    (0.90
    )
    
    (0.94
    )Net Loss Per Share Diluted
    
    (0.90
    )
    
    (0.94
    )


3

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As at September 30
    
    2012
    
    
    2011(all amounts in thousands)Current Assets
    $
    13,060
    
    $
    9,891Total Assets
    
    92,379
    
    
    11,019Total Debt(1)
    
    54,087
    
    
    -Shareholders Equity
    
    35,264
    
    
    10,333Deficit
    
    (49,870
    )
    
    (29,149
    )


1      Total debt
includes both the current and long term portion of debt.

We have never paid any dividends on our Common Shares and do
not anticipate that it will pay any cash dividends on our Common Shares in the
foreseeable future. Any decision to pay dividends in the future will be at the
discretion of our board of directors, after taking into account such factors as
our financial condition, operating results, current and anticipated cash needs
and plans for expansion.

Exchange Rates:

On December 14, the noon buying rate for Canadian dollars as
certified for customs purposes by the Federal Reserve was $1.00 U.S. to $0.9860.
The following table sets forth for the periods indicated certain information
regarding the exchange rates of Canadian dollars into U.S. currency. The rate of
exchange means the noon buying rate in New York City for cable transfers in
foreign currencies as certified for customs purposes by the Federal Reserve.

Fiscal Year Ended September 30,2012
      2011Average(1)
      1.0029
      0.9872


|1. | The Average rate means the average rates each period,
      calculated by using the average of the exchange rates on the last day of
      each month during the fiscal period.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the Month EndedNovember, 2012
      October, 2012
      September, 2012
      August, 2012
      July, 2012
      June, 2012High
      $1.0029
      $1.0003
      $0.9901
      $1.0061
      $1.0215
      $1.0417Low
      $0.9927
      $0.9763
      $0.9710
      $0.9862
      $1.0014
      $1.0177


B.          Capitalization and Indebtedness

Not applicable.

C.          Reasons for the Offer and Use of Proceeds

Not applicable.

4

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D.          Risk Factors

Our business, financial condition and results of operations
could be materially adversely affected by any of the following risks. In
addition, risk and uncertainties not currently known to us or that we currently
deem to be immaterial may also materially and adversely affect its business.

Risk Factors Associated with the our Business

We may not be able to implement our strategy to grow our
business.

We have historically increased sales and net income through
strategic acquisitions, licensing and related internal growth initiatives
intended to develop marketing opportunities with respect to acquired product
lines. Our strategy is focused on increasing sales and enhancing our competitive
standing and enabling us to promote and sell new products through existing and
new marketing and distribution channels. Since we engage in limited proprietary
research activity with respect to product development, we rely heavily on
purchasing product lines from other companies. Other companies, many of which
have substantially greater financial, marketing and sales resources than us, may
compete for the acquisition of products. We may not be able to acquire rights to
additional products on acceptable terms, if at all, or be able to obtain future
financing for acquisition on acceptable terms, if at all. The inability to
effect acquisitions of additional branded products could limit the overall
growth of our business. Furthermore, even if we are able to obtain rights to
pharmaceutical products, we may not generate sales sufficient to create a profit
or otherwise avoid a loss. For example, the marketing strategy, distribution
channels and levels of competition with respect to acquired products may be
different than those of our current products, limiting our ability to compete
favourably in those product categories.

We may not be able to acquire the license rights to new
products.

We depend on acquisition of rights to products from other
companies as the primary source for new products. Risks in acquiring new
products include: (a) the ability to locate new products that are attractive and
complement our business, and (b) the price to acquire or obtain the license for
these products may be too costly to justify the acquisition. We also face
competition from other pharmaceutical companies in acquiring rights to products,
which makes it more difficult to find attractive products on acceptable
terms.

The pharmaceutical industry is highly competitive and is
subject to rapid and significant technological change, which could render
technologies and products obsolete or uncompetitive.

Our products will face competition from new pharmaceutical and biotech products that treat some of the same diseases and conditions as our products. Many of our competitors have greater financial resources and selling and marketing capabilities. We will face further competition from drug development companies that focus their efforts on developing and marketing products that are similar in nature to our products, but that in some instances offer improvements over our products, such as less frequent dosing, more pleasant taste, new dosage formats and other novel approaches to improve existing products. Our competitors may succeed in developing technologies and products that are more effective or less expensive to use than any that we may license or acquire. These developments could render our products obsolete or uncompetitive, which would have a material adverse effect on our business, financial condition and operating results.

Recently, Optimer announced that Health Canada awarded Optimer
priority review for its product: DIFICID®. DIFICID® is another method for the
treatment of C. Difficile infection. Optimer asserts that DIFICID® has a
slightly lower recurrence rate than Vancocin®. If Optimer is able to demonstrate
that DIFICID® is preferable to Vancocin®, our business could be adversely
affected.

Core patent protection for our initial portfolio has expired
or will expire in the future, which could result in significant competition from
generic products resulting in a significant reduction in sales.

The core patents protecting our Vancocin® products expired on July 13, 2010 and the core patents protecting our FACTIVE® and ENABLEX products expire on June 15, 2015 and August 2016, respectively, which could result in significant competition from generic products and could result in a significant reduction in sales. In such situations, in order to continue to obtain commercial benefits from our products, we will rely on product manufacturing trade secrets, know-how and related non-patent intellectual property. The effect of this patent expiration depends, among other things, upon the nature of the market and the position of our products in the market from time to time, the growth of the market, the complexities and economics of manufacture of a competitive product and regulatory approval requirements of generic drug laws. In the event that competition develops from generic products, this competition could have a material adverse effect on our business, financial condition and operating results. The entrance into the market of a generic pharmaceutical product may erode the branded product’s market share which may have a material adverse effect on our business, financial condition and results of operations.  In December 2011, Health Canada granted a NOC to PPC, which allows PPC the authority to market their generic version of Vancocin® capsules in the Canadian market. In July 2012, PPC confirmed its intentions to market a generic Vancomycin capsule product and in November 2012 gained reimbursement listing status in a number of provinces. The entry of this generic product may have a material adverse effect on the sales of Merus' branded Vancocin capsules.

5

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We may not be able to protect and maintain our intellectual
property and licensing arrangements.

Our success will depend in part on our ability to protect and
maintain intellectual property rights and licensing arrangements for our
products. No assurance can be given that the licenses or rights used by our
company will not be challenged, invalidated, infringed or circumvented, or that
the rights granted thereunder will provide competitive advantages to our
company. Any loss of intellectual property protection is likely to adversely
affect our operating results. Our commercial success will also depend in part on
us not infringing patents or proprietary rights of others and not breaching the
licenses granted to us. There can be no assurance that we will be able to obtain
a license to any third party technology that it may be required to conduct our
business or that such technology can be licensed at a reasonable cost. There is
no certainty that we will not be challenged by our partners for non-compliance
with our existing or future licensing arrangements. Consequently, there may be a
risk that licensing arrangements are withdrawn with no compensation or penalties
to us.

We are required to make royalty payments in connection with
the acquisition of FACTIVE®.

In connection with the acquisition of FACTIVE®, we are required to make royalty payments to LG Life Sciences, Ltd. of 16% on the first $100 million in net sales with variable royalty payment rates beyond $100 million in net sales. Cornerstone must pay half of these royalty payments to LG Life Sciences, Ltd. until September 30, 2014, subsequent to that date Merus will be responsible for the  full royalty payment.  These payments are expected to be funded out of revenues that we expect to realize prior to the relevant royalty payments coming due.  In the event that we do not earn enough revenues to cover these royalty payments before they come due, our ability to maintain these royalty payments may be adversely affected.

We may be subject to product liability claims, which can be
expensive, difficult to defend and may result in large judgments or settlements.

The administration of drugs to humans, whether in clinical
trials or after marketing clearance is obtained, can result in product liability
claims. Product liability claims can be expensive, difficult to defend and may
result in large judgments or settlements against our company. In addition, third
party collaborators and licensees may not protect us from product liability
claims.

We will maintain product liability insurance in connection with
the marketing of our products. Merus may not be able to obtain or maintain
adequate protection against potential liabilities arising from product sales. If
Merus is unable to obtain sufficient levels of insurance at acceptable cost or
otherwise protect against potential product liability claims Merus will be
exposed to product liability claims. A successful product liability claim in
excess of its insurance coverage could harm its financial condition, results of
operations and prevent or interfere with its product commercialization efforts.
In addition, any successful claim may prevent Merus from obtaining adequate
product liability insurance in the future on commercially desirable terms. Even
if a claim is not successful, defending such a claim may be time-consuming and
expensive and would result in Merus needing to divert resources which could
otherwise be used in developing its business.

6

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Unexpected products safety or efficacy concerns may arise.

Unexpected safety or efficacy concerns can arise with respect
to marketed products, whether or not scientifically justified, leading to
product recalls, withdrawals or declining sales, as well as product liability,
consumer fraud and/or other claims. This could have a material adverse effect on
our business, financial results and operating results.

Uncertainty can arise regarding the applicability of our
proprietary information.

We will rely on trade secrets, know-how and other proprietary
information as well as requiring employees, suppliers and other third-party
service providers to sign confidentiality agreements. However, these
confidentiality agreements may be breached, and we may not have adequate
remedies for such breaches. Others may independently develop substantially
equivalent proprietary information without infringing upon any proprietary
technology. Third parties may otherwise gain access to our proprietary
information and adopt it in a competitive manner. If a third party obtains our
proprietary information and adopts it in a competitive manner, it may have a
material effect on our business, financial condition and operating results.

We may not be able to secure additional financing.

There can be no assurance that we will be able to raise the additional funding that we need to carry out our business objectives. The development of our business depends upon prevailing capital market conditions, our business performance and our ability to obtain financing through joint ventures, debt financing, equity financing or other means. There is no assurance that we will be successful in obtaining required financing as and when needed or at all. If additional financing is raised by the issuance of shares from treasury, control of our company may change and shareholders may suffer additional dilution.

We may not be able to continue to meet certain covenants under our existing credit facilities.

There can be no assurance that we will be able to continue to meet certain covenants under our existing credit facilities. A failure to meet such covenants could result in our lenders seeking to enforce their security under such credit facilities. This may negatively affect our financial condition, business and operating results.

We rely on third parties to manufacture our products.

We do not have the internal capability to manufacture
pharmaceutical products and rely on third parties to manufacture our products.
We cannot be certain that manufacturing sources will continue to be available or
that we will be able to continue to outsource the manufacturing of our products
on reasonable or acceptable terms. In addition, outsourcing manufacturing
exposes us to a number of risks which are outside our control, including: our
suppliers may fail to comply with government mandated current good manufacturing
practices which include quality control and quality assurance requirements, and
the corresponding maintenance of records and documentation and manufacture of
products according to the specifications contained in the applicable regulatory
file resulting in mandated production halts or limitations; or our suppliers may
experience manufacturing quality, control or yield issues which would require
the supplier to halt or limit production of our products.

If we encounter delays or difficulties with contract
manufacturers, packagers or distributors, sales of our products could be
delayed. If we change the source or location of supply or modify the
manufacturing process, regulatory authorities will require us to demonstrate
that the product produced by the new source or from the modified process is
equivalent to the product used in any clinical trials that were conducted. If we
are unable to demonstrate this equivalence, we will be unable to manufacture
products from the new source or location of supply, or use the modified process.
We may incur substantial expenses in order to ensure equivalence. This may
negatively affect our business, financial condition and operating results.

If our supply of finished products is interrupted, our
ability to maintain inventory levels could suffer and future revenues could be
delayed.

Supply interruptions may occur and our inventory of finished
products may not always be adequate to satisfy demand. Numerous factors could
cause interruptions in the supply of our finished products, including failure to
have a third party supply chain validated in a timely manner, shortages in raw
material and packaging components required by our manufacturers, changes in our
sources for manufacturing or packaging, our failure to timely locate and obtain
replacement manufacturers as needed and conditions affecting the cost and
availability of raw materials.

7

---

There can be no assurances that our other products will not be
interrupted in the future. This may have an adverse effect on our business,
financial results and operations.

We will rely on third parties to perform distribution,
logistics, regulatory and sales services for our products.

We will rely on third parties to provide distribution,
logistics, regulatory and sales services including warehousing of finished
product, accounts receivable management, billing, collection and record keeping.
If the third parties cease to be able to provide us with these services, or do
not provide these services in a timely or professional manner we may not be able
to successfully manage the product revenues or integrate new products into its
business, which may result in decreases in sales. Additionally, any delay or
interruption in the process or in payment could result in a delay delivering
product to our customers, which could have a material effect on our business,
financial condition and operating results.

The publication of negative results of studies or clinical
trials may adversely impact our products.

From time-to-time, studies or clinical trials on various
aspects of pharmaceutical products are conducted by academics or others,
including government agencies. The results of these studies or trials, when
published, may have a dramatic effect on the market for the pharmaceutical
product that is the subject of the study. The publication of negative results of
studies or clinical trials related to our products or the therapeutic areas in
which our products compete could adversely affect our sales, the prescription
trends for our products and the reputation of our products. In the event of the
publication of negative results of studies or clinical trials related to our
products or the therapeutic areas in which Merus products compete, Merus
business, financial condition, and operating results could be materially
adversely affected.

We must successfully integrate any products that we acquired
or will acquire in the future.

We will pursue additional products that could complement or
expand our business. However, there can be no assurance that we will be able to
identify appropriate acquisition candidates in the future. If an acquisition
candidate is identified, there can be no assurance that we will be able to
successfully negotiate the terms of any such acquisition, finance such
acquisition or integrate such acquired product or business into its existing
products and business. Furthermore, the negotiation of potential acquisitions
and integration of acquired product lines could divert managements time and
resources, and require significant resources to consummate. If we consummate one
or more significant acquisitions through the issuance of Common Shares, our
shareholders could suffer significant dilution of their ownership interests.

We depend on key managerial personnel for our success.

We are highly dependent on qualified managerial personnel. Our
anticipated growth will require additional expertise and the addition of new
qualified personnel. There is intense competition for qualified personnel in the
pharmaceutical field. Therefore, we may not be able to attract and retain the
qualified personnel necessary for the development of our business. The loss of
the services of existing personnel, as well as the failure to recruit additional
key managerial personnel in a timely manner, would harm its business development
programs, and our ability to manage day-to-day operations, attract collaboration
partners, attract and retain other employees and generate revenues. We may not
maintain key person life insurance on any of its employees.

Increases in sales may attract generic competition.

If sales of any of our products that no longer enjoy market
exclusivity or are not sufficiently protected by associated intellectual
property were to increase substantially, competitors may be more likely to
develop generic formulations that compete directly with our products. Increased
generic competition would have a material adverse effect on our business and
financial results.

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Our business will be subject to limitations imposed by
government regulations.

In both domestic and foreign markets, the formulation,
manufacturing, packaging, labelling, handling, distribution, importation,
exportation, licensing, sale and storage of our products are affected by
extensive laws, governmental regulations, administrative determinations, court
decisions and similar constraints which are beyond our control. Such laws,
regulations and other constraints may exist at all levels of government. There
can be no assurance that we will be in compliance with all of these laws,
regulations and other constraints. Failure to comply with these laws,
regulations and other constraints or new laws, regulations or constraints could
lead to the imposition of significant penalties or claims and could negatively
impact our business. In addition, the adoption of new laws, regulations or other
constraints or changes in the interpretations of such requirements may result in
significant compliance costs or lead us to discontinue product sales and may
have an adverse effect on the marketing of our products, resulting in
significant loss of sales.

In the United States, the FDA perceives any written or verbal
statement used to promote or sell a product that associates an unapproved
nutrient with a disease (whether written by us, the content of a testimonial
endorsement or contained within a scientific publication) to be evidence of
intent to sell an unapproved new drug. If any such evidence is found with
respect to our products, the FDA may take adverse action against us, ranging
from a warning letter necessitating cessation of use of the statement to
injunctions against product sale, seizures of products promoted with the
statements, and civil and criminal prosecution of our executives. Such actions
could have a detrimental effect on sales.

Our policies regarding returns, allowances and chargebacks
may reduce revenues in future fiscal periods.

We cannot ensure that our estimated reserves are adequate or
that actual product returns, allowances and chargebacks will not exceed the
estimates, which could have a material adverse effect on our results of
operations, financial condition, and cash flows

We may be subject to the risks of foreign exchange rate
fluctuation.

We may be exposed to fluctuations of the Canadian dollar
against certain other currencies because we publishes our financial statements
in Canadian dollars, while a portion of our assets, liabilities, revenues and
costs are or will be denominated in other currencies, such as the euro and the
U.S. dollar. Exchange rates for currencies of the countries in which we operate
may fluctuate in relation to the Canadian dollar, and such fluctuations,
especially as between the Canadian dollar, U.S. dollar and the euro, may have a
material adverse effect on its earnings or assets when translating foreign
currency into Canadian dollars. In order to mitigate the risk, we have used, in
the past, forward contracts and other derivative instruments to reduce our
exposure to foreign currency risk and may or may not do so in the future.
Dependent on the nature, amount and timing of foreign currency receipts and
payments, we may from time-to-time enter into foreign currency contracts.
Accordingly, we may experience economic loss and a negative impact on earnings
solely as a result of foreign exchange rate fluctuations, which include foreign
currency devaluations against the Canadian dollar. We do not typically carry
currency convertibility risk insurance.

We may be unsuccessful in evaluating material risks involved
in completed and future investments.

We will regularly review investment opportunities and as part of the review, conduct business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in any particular transaction. Despite our efforts, we may be unsuccessful in ascertaining or evaluating all such risks. As a result, we may not realize the intended advantages of any given investment and may not identify all of the risks relating to the investment. If we fail to realize the expected benefits from one or more investments, or do not identify all of the risks associated with a particular investment, our business, results of operations and financial condition could be adversely affected.

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Merus may be subject to certain regulations that could
restrict Merus activities.

From time-to-time, governments, government agencies and
industry self- regulatory bodies in Canada, the United States, the European
Union and other countries in which we will operate have adopted statutes,
regulations and rulings that directly or indirectly affect the activities of our
company and our future clients.

Risks Relating to our Common Shares

There are a large number of unexercised share purchase
warrants and stock options outstanding. If these are exercised, the investors
interest in our Common Shares will be diluted.

As of November 30, 2012, there were 30,708,478 Common Shares
issued. If all of the share purchase warrants and options that were issued and
outstanding as of that date were to be exercised, including warrants and options
that are not yet exercisable, Merus would be required to issue up to an
additional 6,797,387 Common Shares, or approximately 22% of Merus issued and
outstanding Common Shares as of November 30, 2012. This would substantially
decrease the proportionate ownership and voting power of all other stockholders.
This dilution could cause the price of our Common Shares to decline and it could
result in the creation of new control persons. In addition, our stockholders
could suffer dilution in the net book value per share.

A decline in the price of the Common Shares could affect our
ability to raise further working capital and adversely impact its ability to
continue operations.

A prolonged decline in the price of the Common Shares could result in a reduction in the liquidity of our Common Shares and a reduction in our ability to raise capital. Because a significant portion of our operations have been and will be financed through the sale of equity securities, a decline in the price of our Common Shares could be especially detrimental to our liquidity and our operations. Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plan and operations, including its ability to acquire new products and continue its current operations. If our stock price declines, we can offer no assurance that we will be able to raise additional capital on acceptable terms or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not have the resources to continue our normal operations.

Because we can issue additional Common Shares, holders of
our Common Shares may incur immediate dilution and may experience further
dilution.

We are authorized to issue an unlimited number of Common
Shares, of which 30,708,478 shares were issued and outstanding as of November
30, 2012 and an unlimited number of Preferred Shares, of which none were issued
and outstanding as of November 30, 2012. Our board of directors has the
authority to cause us to issue additional Common Shares without the consent of
any of our stockholders. Consequently, the stockholders may experience more
dilution in their ownership of the Common Shares in the future.

Because it is unlikely that we will pay dividends in the
foreseeable future, stockholders may only benefit from owning Common Shares if
the value of the Common Shares appreciates.

We have never paid dividends on our Common Shares and we do not
intend to do so in the foreseeable future. We intend to retain any future
earnings to finance our growth. Accordingly, any potential investor who
anticipates the need for current dividends from his or her investment should not
purchase Common Shares.

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Item 4: Information on the Company

A.          History and Development of the Company

Name

Our legal and commercial name is Merus Labs International
Inc.

Principal Office

Our head office is 30 St. Patrick St., Ste. 301, Toronto,
Canada M5T 3A3. We may be reached by telephone at (416) 593-3725 or facsimile at
(416) 593-4434. Our registered office is located at 800-885 West Georgia Street,
Vancouver, BC V6C 3H1; our website is www.meruslabs.com. Information contained
on our website does not constitute a part of this Annual Report.

Corporate Information

On December 19, 2011, our company was formed through the
amalgamation of Envoy Capital Group Inc. (Envoy) with Merus Labs International
Inc. (Old Merus). On October 1, 2012, we amalgamated with our wholly owned
subsidiary, Merus Labs Inc. and continued under the name Merus Labs
International Inc.

Old Merus was incorporated under the laws of the Province of
British Columbia on November 2, 2009 as a numbered company, 0865346 B.C. Ltd. On
January 22, 2010, Old Merus changed its name to Merus Labs International Inc. in
connection with a plan of arrangement with Range Gold Corp.

The Common Shares are publicly traded on the Toronto Stock
Exchange (TSX) under the symbol MSL and on NASDAQ under the symbol
MSLI.

Important Events

On September 30, 2011, Envoy announced that it had completed
the divestiture of its wholly-owned subsidiary, Watt International Inc. The sale
of Watt completed the plan to restructure the business through divestiture of
all non-merchant banking assets.

On May 13, 2011, Merus Labs Inc. (Merus Labs), a subsidiary
of Merus, acquired all right, title and interest in and to the pharmaceutical
product Vancocin® (vancomycin hydrochloride) capsules (Vancocin®), including
the right to manufacture, market and sell Vancocin® in Canada, from Iroko. Merus
Labs acquired Vancocin® for total consideration of approximately US$20 million,
in line with an acquisition of a pharmaceutical brand, which is typically
divested at a price ranging from a multiple of 2.5 to 3.5 times the net annual
sales of the product. Vancocin® capsules are indicated for the treatment of:

- Enterocolitiscaused by Staphylococcus aureus (including
  methicillin-resistant strains); and
- Antibiotic-associated pseudomembranous colitiscaused by Clostridium
  difficile.

On July 5, 2011, Old Merus announced it has entered into a
support services agreement (the "Methapharm Agreement) with Methapharm. Under
the terms of the Methapharm Agreement, Methapharm has agreed to provide Old
Merus with $500,000 in working capital in consideration for:

- being appointed the exclusive provider of certain distribution services of
  Merus products in Canada; and
- payment of certain fees based on net sales of Merus products, and service
  fees in line with market rates customary to such services.

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The Methapharm Agreement is for a term of five years with
automatic renewal terms of two years until terminated.

On March 7, 2012, we announced that we had completed the acquisition of the North American product rights for FACTIVE® (Gemifloxacin Mesylate) tablets from Cornerstone Therapeutics Inc. (“Cornerstone”). Cornerstone recorded FACTIVE® 320mg tablet net sales of approximately US$6.3 million in the United States for 2011. Factive has not been commercialized in Canada. Merus acquired FACTIVE® for total consideration, as a multiple of product cash flow, fully paid at closing. Pursuant to the acquisition, Merus acquired the license to the FACTIVE® trademark and patent, inventory on hand, and certain related intellectual property and other information and materials required to continue marketing the brand in the North American market. We have also entered into a sales and promotion agreement for FACTIVE® with Vansen Pharma Inc. to market the product in the United States.

On May 29, 2011, we announced the closing of a financing
pursuant to a short form prospectus, 5,556,000 Common Shares at a price of
CAD$1.80 per Common Share for gross proceeds of CAD$10,000,800.

On July 11, 2012, we announced that we had acquired the Canadian and European rights (excluding France, Spain and Italy) to manufacture, market, and sell the branded prescription medicine product Emselex®/Enablex® (darifenacin) extended release tablets. In calendar year 2011, the product had net sales of approximately US$23 million in the territories acquired.  Pursuant to the acquisition, we acquired the Emselex®/Enablex® trademark and patent, certain related intellectual property, and other information and materials required to continue marketing the brand in the territories acquired.

We funded the Emselex®/Enablex® acquisition with cash on hand
and a debt facility provided to us by PDL BioPharma, Inc., a company supporting
the healthcare industry with creative financing solutions.

The acquisition was financed in part through a credit facility
of up to US$55 million provided by PDL BioPharma, Inc. US$35 million of this
amount was drawn down upon acquisition of the asset with a further US$20 million
guaranteed through a letter of credit facility. We paid the balance of the
purchase price from cash on hand, of which, US$4 million had been paid as a
deposit at June 30, 2012. The loan bears interest at 13.5% per annum, with
monthly interest payments and periodic principal repayments until the loan
matures March 31, 2015.

B.          Business Overview

During 2011, we made a decision to deploy our capital through
an amalgamation with Old Merus. We now operate as just one segment relating to
our specialty pharma business, under the name Merus Labs International Inc.

Merus is a specialty pharmaceutical company that acquires prescription medicines in the following categories:

- On patent but at maturity stage of product life cycle
- Branded generics
- Under promoted products
- Niche market pharmaceuticals
- Products with annual sales below critical threshold for large pharma

Once a product is acquired, our experienced team implements a focused sales and marketing plan to promote the product with the goal of increasing sales and market share. The Merus corporate growth strategy is driven by a product acquisition plan which employs an opportunistic approach to source product acquisition candidates. This approach allows Merus to source pharmaceutical products across broad therapeutic classes which provides access to acquisition targets not available to other players and creates a diversified strategy. Although Merus has a broad therapeutic focus, opportunities will be pursued if the application of a dedicated small scale sales force can deliver incremental product sales growth. The geographic focus will be the United States, Canada, and Europe. The Merus corporate strategy results in a diversified product portfolio approach. To manage such a product portfolio, a low cost operating model has been implemented in which there is a light infrastructure footprint. Merus has partnered with third party contract manufacturing and regulatory service providers to leverage their expertise but still maintain maximum flexibility for Merus.

Superior Business Model for Acquisition of Diversified
Legacy Products

We believe that we have a unique strategy in seeking to acquire
legacy products primarily for the purpose of generating a stream of stable
revenues and cash flow. We believe that this strategy will provide us with the
flexibility to consider a broad range of acquisition targets from a variety of
therapeutic areas. Therefore, the potential number of product acquisition
candidates may be much larger for us than for our competitors. Management
believes that our approach to product acquisition and our return objectives
provide us with a competitive advantage in acquiring products as we can often
purchase diversified bundles of products from a single vendor. In contrast, our competitors, such as niche pharmaceutical companies, are more
likely to focus on individual product acquisition within the same therapeutic
area. As a result, certain vendors may view us as a preferred purchasing
candidate.

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Predictable Cost Structure

Our plan to establish a predictable cost structure by relying
on a small employee base and outsourcing more of the operational functions
associated with its business, including warehousing, distribution, customer
service, invoicing, collections, regulatory affairs, medical and drug
information, human resources and informational technology. Wherever possible, we
will achieve cost controls by entering into contractual supply and/or service
agreements that dictate fixed or percentage fixed costs with annual adjustments
for inflation. In the case of its manufacturing supply agreements, our cost of
goods will be based on a fixed, per unit cost with annual inflationary
adjustments. Management believes the predictability, flexibility and efficiency
gained by contracting with established, experienced service organizations will
assist us in maintaining our margins and maximizing distributable cash.

Partnership with Leading Service Providers

Related to the above, we will enter into outsourcing relationships with leading providers of pharmaceutical contract services for many of the operational functions associated with our business and intend to pursue this strategy in the future.

Competitors of Merus

Competitors in the pharmaceutical market range from large multinational pharmaceutical development corporations to small, single product companies that may limit their activities to a particular therapeutic area or region or territory. Competition also comes from generic companies, which develop and commercialize formulations that are identical to marketed brands. Merus expects to compete with a variety of drug companies. However, the initial portfolio is comprised of products with several years of remaining patent life or established brands.

With respect to its acquisition strategy, Merus expects to
compete principally with other pharmaceutical companies who seek to acquire
mature pharmaceutical products as part of their growth strategy. These
companies, however, typically focus on under-promoted products in specific
therapeutic niches that offer growth potential through synergistic sales and
marketing efforts. To Merus knowledge, few, if any, companies are currently
seeking to acquire legacy products solely for the purpose of generating a stream
of consistent cash flow. In addition, since Merus is not focused on specific
therapeutic classes, it will have the ability to purchase diversified products
and product bundles.

Changes in the Competitive Landscape

Although there are a number of barriers to entry, in December
2011, Health Canada granted a notice of compliance (NOC) to Pharmaceutical
Partners of Canada Inc. (PPC), which grants PPC the authority to market their
generic version of Vancocin capsules in the Canadian market. In July 2012, PPC
confirmed its intentions to market a generic Vancomycin capsule product and in
November 2012 gained reimbursement listing status in a number of provinces. The
entry of this generic product may have a material adverse effect on the sales of
our branded Vancocin capsules.

Also, the future of Vancocin may be affected by new therapies such as Fidaxomicin, a macrocyclic antibiotic, which may replace the use of Vancocin.  Fidaxomicin was found to be non-inferior to vancomycin against C. Difficile in a phase III non-inferiority study reported in the February 3, 2011 issue of the New England Journal of Medicine. However, we expect Fidaxomicin to be sold in Canada at a much higher price than that of Oral Vancocin® based on the existing Fidaxomicin pricing in the U.S. market.

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Description of Products and Services

We currently have products in the area of urology/women's
health, and anti-infectives.

Urology / Women's Health

Over Active Bladder

Overactive bladder occurs when a large muscle in the bladder
known as the detrusor contracts more often than normal. This causes a person to
feel a sudden and sometimes overwhelming urge to urinate even when the bladder
is not full. Urgency, incontinence, and urinary frequency can also be caused by
urinary-tract infections, kidney stones, prostate infection or enlargement, or
medicine taken to treat other conditions such as high blood pressure. Though not
life-threatening, overactive bladder is inconvenient, can be embarrassing, and
can markedly reduce quality of life.

According to an article published in the Reviews of Urology by
the Department of Urology, New York University School of Medicine, in women,
moderate and severe bother have a prevalence ranging from about 3% to 17%.
Severe incontinence has a low prevalence in young women, but rapidly increases
at ages 70 through 80. In men, the prevalence of incontinence is much lower than
in women, about 3% to 11% overall, with urge incontinence accounting for 40% to
80% of all male patients. Incontinence in men also increases with age, but
severe incontinence in 70- to 80-year-old men is about half of that in women.

Decision Resources, an advisory firm for pharmaceutical and
healthcare issues, finds that although more than 50 percent of people with
overactive bladder in the worlds major pharmaceutical markets are undiagnosed,
the sizeable prevalent population fuels significant sales for the indication. As
a result, the overactive bladder drug market will increase from approximately $3
billion in 2009 to nearly $4 billion in 2019 in the United States, France,
Germany, Italy, Spain, United Kingdom and Japan.

Emselex®/Enablex®

In 2003, Novartis Pharma AG (Novartis) acquired the
Emselex®/Enablex® (darifenacin) product from Pfizer Inc. and the product was
approved for sale in Europe and the United States in 2004. As the global sales
of Emselex®/Enablex® were below the critical sales threshold for Novartis, the
company decided to reduce its marketing and sales efforts in the majority of
territories where the product was marketed. In 2010, Novartis divested the
product rights for the United States to Warner Chilcott Plc.

In July 2012, we acquired from Novartis, the Canadian and
European rights (excluding France, Spain and Italy) to manufacture, market, and
sell the branded prescription medicine product Emselex®/Enablex® (darifenacin)
extended release tablets. Darifenacin is a muscarinic antagonist indicated for
the treatment of overactive bladder with symptoms of urge urinary incontinence,
urgency and frequency. The products specific mechanism of action is the
blocking of the M3 muscarinic receptor, which is primarily responsible for
bladder muscle contractions. As over active bladder is a chronic condition,
Emselex®/Enablex® is prescribed as a medication to be taken once daily and the
extended release tablet format is produced in 7.5mg and 15mg dosage
strengths.

As we have acquired the product rights in a number of European
countries in which the product is not being actively marketed, we are currently
pursuing discussions with potential marketing partners with the goal of
incrementally increasing sales in those regions.

Anti-infective Franchise

The global market for anti-infective drugs, which mainly
includes antibacterials, antivirals, antifungals, and vaccines, is projected to
exceed $103 billion by the year 2015. Antibacterials represent the largest
segment of the anti-infectives market globally. The global anti-infective
market is forecast to expand at a compound annual growth rate of 5.7% between
2008 and 2013. The competitive landscape remains highly fragmented, with market
leaders Merck and GSK controlling a combined market share of only 21.4% .
Antibacterials accrued sales of $36.3 billion in 2007, accounting for 52.3% of
total anti-infective market revenues.

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Vancocin

In May 2011, Old Merus acquired Vancocin (vancomycin
hydrochloride) capsules from Iroko International LP. a subsidiary of Iroko
Pharmaceuticals, LLC. According to IMS Canada, Vancocin® 125mg and 250mg
capsules had combined total sales of approximately $7.8 million in 2010.

Vancomycin was first isolated by Eli Lilly. The original
indication for vancomycin was for the treatment of penicillin-resistant
staphylococcus aureus. One advantage that was quickly apparent is that
staphylococci did not develop significant resistance despite serial passage in
culture media containing vancomycin. The rapid development of penicillin
resistance by staphylococci led to the compounds being fast-tracked for approval
by the US Food and Drug Administration (FDA). Eli Lilly first marketed
vancomycin hydrochloride under the trade name Vancocin. Vancocin is a powerful
antibiotic used to treat a life-threatening disease resulting from the infection
of Clostridium Difficile (C. Difficile). C. Difficile is on the increase with
higher mortality and severity. Due to the nature of the disease, intravenous
(systemic) solutions are regarded as ineffective. To be effective against C.
Difficile, drugs must act locally on the flora of the gastro intestinal track.
Intravenous solutions by definition do not act locally.

Recent Clinical Practice Guidelines (Clinical Practice
Guidelines for Clostridium difficile Infection in Adults: 2010 Update by the
Society for Healthcare Epidemiology of America (SHEA) and the Infectious
Diseases Society of America (IDSA)) state that oral Vancocin should be used as
first line therapy in severe cases of C. Difficile. The guidelines state that
vancomycin is the drug of choice for an initial episode of severe C. Difficile.
The dosage is 125 mg orally four times per day for 1014 days. Vancomycin
administered orally (and per rectum, if ileus is present) is the regimen of
choice for the treatment of severe, complicated C. Difficile.

Factive

On March 7, 2012, we acquired the North American product rights
for FACTIVE® (Gemifloxacin Mesylate) tablets from Cornerstone. FACTIVE® is the
only FDA-approved quinolone with 5-day oral dosing indicated for the treatment
of both acute bacterial exacerbation of chronic bronchitis and mild to moderate
community-acquired pneumonia. Cornerstone recorded FACTIVE® 320mg tablet net
sales of approximately US$6.3 million in the United States for 2011. FACTIVE®
has not been commercialized in Canada.

We acquired the license to the FACTIVE® trademark and patent,
inventory on hand, and certain related intellectual property and other
information and materials required to continue marketing the brand in the North
American market. We have also entered into a sales and promotion agreement for
FACTIVE® with Vansen Pharma Inc. to market the product in the United States.

Wound Care Franchise

In September 2010, Old Merus entered into a definitive
agreement with Innocoll Pharmaceuticals Limited (Innocoll) to license in, on
an exclusive basis, three advanced wound care products for the Canadian market.
As of the date of this 20-F, the Company has not launched any of its wound care
products and has limited visibility with respect to the sales of this product
line due to the slower than expected product marketing authorization of a key
product in the portfolio and a refocusing of management priorities.

Customers

Management expects that we will generally sell between 80% and
90% of our products directly to three major wholesalers in Canada and United
States: AmerisourceBergen, McKesson Corporation and Matrix, which does business as Shoppers Drug Mart. Management believes that it is
common practice in Canada and the United States for pharmacies to have multiple
wholesale sources. Other direct buyers include additional smaller wholesalers
and distributors, in addition to certain pharmacy chains and food stores that
warehouse the products internally. Additional key customer groups include the
following:

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- Physicians and allied health professionals including nurses, physician
  assistants and pharmacists: While physicians and allied health
  professionals are not themselves direct buyers of our products, they are the
  key decision-makers in terms of recommending or prescribing our products to
  patients. These healthcare providers make prescribing decisions based on
  personal experience, influence of peers, medical/educational meetings/events,
  medical journals, and information obtained through various
  pharmaceutical-sponsored educational and promotional programs and sales
  representatives.
- Patients and their families/caregivers: In the United States,
  patients have to bear a greater share of the cost of healthcare. Therefore,
  the industry has increasingly turned to promotional and educational
  initiatives that directly target patients and their families. We will
  generally not engage in activities that directly target patients, except for
  the provision of various product and disease-specific patient education
  materials that may be passed along to patients by physicians.
- Third-party payors such as managed care organizations and group
  purchasing organizations: Third party payors, like certain insurance
  companies and employers, make purchasing and reimbursement decisions based on
  a number of health outcomes and economic variables. We will not attempt to
  influence the historical level of reimbursement for its products.
- State and federal government health agencies: Certain federal
  government agencies like the Department of Veteran Affairs, the Department of
  Defence, prison systems and Indian Health Services may purchase pharmaceutical
  products directly from us or provide third-party reimbursement to those that
  do purchase our products. In addition, Medicaid programs at the individual
  state level may also reimburse patients in the purchase of our products. The
  historical utilization/reimbursement activity of our products for these
  government agencies has been low and we anticipate this to continue. However,
  the 2006 adoption of Part D prescription drug coverage for patients aged 65
  and over may expand the potential market for certain legacy products.

Organizational Structure

We have the following wholly owned subsidiaries: Merus Labs Inc., governed by the laws of British Columbia, Canada; ECG Holdings Inc., governed by the laws of Delaware, US; Merus Labs Luxco S.a.r.L., governed by the laws of Luxembourg; Merus Labs Netherlands B.V., governed by the laws of Netherlands; and Orbis Pharma Inc., governed by the laws of Ontario.

**D.**         
**Property, Plants and Equipment**

We currently have offices in Toronto, Montreal and Vancouver,
Canada, as well as in Luxembourg. The terms of our leases are as follows:

Our head offices consist of approximately 1,600 square feet
located at 30 St. Patrick St., Ste. 301, Toronto, Ontario. These premises have
been leased pursuant to a lease with a term that commenced on April 1, 2009 and
expires in March 2014 at a current annual rent of $52,200. We have an option to
terminate the lease upon 60 days notice.

Our Vancouver office is located at 470 Granville St., Ste. 504,
Vancouver, BC and our Montreal office is located at 100 Alexis-Nihon, Ste. 910,
Montreal, PQ H4M 2P5. The Montreal office consists of approximately 1,000 square
feet at a current annual rent of $27,240. The current lease expires August 31,
2013. The Vancouver office consists of approximately 1,000 square feet at a
current annual rent of $24,432 and with an option to terminate on 60 days notice
after March 31, 2015.

The Luxembourg office consists of shared executive space in a
professional services facility. Monthly rent is approximately $1,600 and the
lease may be terminated upon 60 days notice.

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Item 4A: Unresolved Staff Comments

None.

Item 5: Operating and Financial Review and
Prospects

The following discussion should be read in conjunction
with, and is qualified in its entirety by, the Consolidated Financial Statements
of Merus and the Notes relating thereto, included as item 17 in this Form 20-F.
The information contained in this Item 5 refers to Financial Statements of
Merus, which are presented in Canadian dollars and are prepared in accordance
with International Financial Reporting Standards (IFRS).

IFRS differs in certain significant respects from U.S. GAAP.
Historical results of operations, percentage relationships and any trends that
may be inferred therefrom are not necessarily indicative of the operating
results of any future period.

On October 1, 2011, the Company adopted International Financial
  Reporting Standards (IFRS) for financial reporting purposes, with
  a transition date of October 1, 2010. The consolidated annual financial statements
  for the year ended September 30, 2012, including required comparative information,
  have been prepared in accordance with IFRS 1,First-time Adoption
  of International Financial Reporting Standards, and with International
  Accounting Standard (IAS) 1, Presentation of Financial Statements,
  as issued by the International Accounting Standards Board (IASB).
  Previously, the Company prepared its financial statements in accordance with
  Canadian GAAP.

IFRS are applied retrospectively, except in certain
circumstances as allowed or required under IFRS 1 First-time Adoption of
International Financial Reporting Standards (see below). Accordingly, the
Company has provided a reconciliation of previously disclosed comparative period
financial statements prepared in accordance with Canadian generally accepted
accounting principles (GAAP) to IFRS (See note 24 of the Financial
Statements).

The Company has identified a number of key accounting areas
where there are differences between IFRS and Canadian GAAP which have an impact
on the Companys financial results. These have been summarized below based on
the standards currently issued and applicable to the Company.

- Impairment of assets: Under Canadian GAAP, asset impairment is identified
  if the carrying value of the asset exceeds its recoverable amount. If the
  carrying value exceeds the recoverable amount, the asset is written down to
  its fair value. The impairment threshold under IFRS is defined as the higher
  of its fair value less costs to sell and its value in use. The Company has
  determined that this change has not affected the recorded amount of any of its
  assets. IFRS, unlike Canadian GAAP, also allows impairment provisions to be
  reversed in future periods if the recoverable amount exceeds the recorded
  value. The Company has determined that this change has not affected the
  carrying amount of any of its assets at transition date.
- Share-based payments: IFRS requires that share-based payments to employees
  with different vesting periods be treated as separate awards for the purpose
  of determining their fair value. In addition, IFRS requires that the number of
  anticipated forfeitures be estimated at the grant date and incorporated into
  the calculation of share-based compensation expense. Under Canadian GAAP,
  share-based payments with different vesting periods can be treated as a single
  award and forfeitures recorded as they occur. The Companys IFRS charges at
  October 1, 2010 are consistent with its Canadian GAAP charges for the same
  date.
- The effects of changes in foreign exchange rates: Under Canadian GAAP,
  foreign currency translation of a subsidiary was based upon the determination
  of whether the subsidiary is integrated or self-sustaining. IFRS requires the
  functional currency of subsidiaries to be determined, which then determines
  how subsidiaries are translated. The Company has determined that there is no
  material impact of this difference at transition date.

Initial adoption of IFRS requires retroactive application as at
the transition date, with adjustments arising on the conversion to IFRS from Canadian GAAP recognized in opening
retained earnings. However, to assist with the difficulties associated with
reformulating historical accounting information, IFRS 1 First-time Adoption of
International Financial Reporting Standards provides for a number of optional
exemptions and mandatory exceptions which generally allow prospective rather
than retrospective treatment under certain conditions. The following summarizes
the most significant of these as they apply to Merus:

17

---

- Business combinations: IFRS 1 indicates that a first-time adopter may elect
  not to apply IFRS 3 Business Combinationsretrospectively to
  business combinations that occurred before the date of transition to IFRS. The
  Company has taken advantage of this election and has applied IFRS 3 to
  business combinations that occurred on or after October 1, 2010.
- Share-based payment transactions: IFRS 1 encourages, but does not require,
  first-time adopters to apply IFRS 2 Share-based Paymentto equity
  instruments that were granted on or before November 7, 2002, or equity
  instruments that were granted subsequent to November 7, 2002 and vested before
  the later of the date of transition to IFRS and January 1, 2005. The Company
  has elected not to apply IFRS 2 to awards that vested prior to October 1,
  2010, which has been accounted for in accordance with Canadian GAAP.

IFRS 1 also outlines guidelines that a first-time adopter must
adhere to under certain circumstances. The Company has applied the following
guidelines to its opening consolidated balance sheet dated October 1, 2010:

- Estimates: In accordance with IFRS 1, an entitys estimates in accordance
  with IFRS at the date of transition to IFRS must be consistent with estimates
  made for the same date in accordance with previous GAAP, unless there is
  objective evidence that those estimates were made in error. The Companys IFRS
  estimates at October 1, 2010 are consistent with its Canadian GAAP estimates
  for the same date.
- Derecognition of financial assets
  and liabilities:  The derecognition requirements in IAS 39 were applied
  prospectively for transactions occurring on or after January 1, 2004.
- Hedge accounting:  Hedge
  accounting can only be applied prospectively from the transition date to
  transactions that satisfy the hedge accounting criteria in IAS 39 at that
  date. Hedging relationships cannot be designated retrospectively and the
  supporting documentation cannot be created retrospectively. The Company had no
  hedging relationships as of the transition date.
- Non-controlling interests: 
  This exception stipulates that the following requirements of IAS 27 be applied
  prospectively from the date of transition to IFRS:

> The requirement that total
>     comprehensive income be attributed to the owners of the parent and to the
>     non-controlling interests even if this results in the non-controlling
>     interests having a deficit balance;
>     Requirements regarding the
>     accounting for changes in the parent's ownership interest in a subsidiary
>     that do not result in a loss of control; and
>     The requirements regarding the
>     accounting for a loss of control over a subsidiary, and the related
>     requirements in IFRS 5, Non-current Assets Held for Sale and Discontinued
>     Operations.

The Company held no non-controlling interests as of the date of transition.

A.          Operating Results

For the year ended September 30, 2012, the Company incurred a
net loss of $20,720,548 compared to a net loss of $7,553,936 for the year ended
September 30, 2011. For the year ended September 30, 2012, the earnings before
interest, taxes, depreciation and amortization (EBITDA) was $3,383,219 and the
adjusted EBITDA which adds back non-cash share based compensation expense and
acquisition costs was $6,116,459. As at September 30, 2012, the Company had an
accumulated deficit of $49,869,908.

Excluding one-time restructuring costs, the result for the year
ended September 30, 2011 was a net loss of $1,492,523. The Companys 2011
results were related to the Companys previous merchant banking business and
included gains on investments net of operating expenses. Upon the amalgamation
of Old Merus and Envoy, the Company ceased its merchant banking business and
continued on with the business of Old Merus, which included acquiring, selling
and distributing specialty pharmaceutical products. Therefore, the Companys
results for the year ended September 30, 2012 include net sales of prescription
drugs from December 20, 2011 (amalgamation) to September 30, 2012 less operating
expenses.

Operating risks include but are not limited to: the Companys
ability to attract and retain key personnel, effectively manage growth, and
smoothly integrate newly acquired pharmaceutical products and businesses; impact
of new or existing generic and innovative competing products, regulatory issues
and risk that the Company may not be able to adequately protect the intellectual
property surrounding its products, conflicts of interest among the Companys
directors, officers, promoters and members of management; unanticipated
expenses; changes in business strategy; impact of any negative publicity;
general political and economic conditions; and acts of god and other
unforeseeable events, natural or human-caused. Financial risks include but are
not limited to the availability of capital to finance the Companys activities.

The Company cannot anticipate or prevent all of the potential
risks to its success, nor predict the impact of any such risk. To the extent
possible, management implements strategies aimed at reducing or mitigating risks
and uncertainties associated with its business.

18

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Selected Annual Information

|                                    | In the fiscal year ended September 30
|----------------------------------- | -------------------------------------
|                                    | 2012                                 
|                                    |                                      
|Revenue                             | $10.4million                         
|                                    |                                      
|Gross margin                        | $9.2 million                         
|                                    |                                      
|Net (loss) earnings:                |                                      
|From continuing operations          | ($20.7) million                      
|From
      discontinued operations  | $nil                                 
|                                    |                                      
|Total                               | ($20.7) million                      
|                                    |                                      
|Net (loss) earnings per
      share |                                      
|Total                               |                                      
|Basic                               | ($0.90)                              
|Diluted                             | ($0.90)                              
|                                    |                                      
|From continuing
      operations    |                                      
|Basic                               | ($0.90)                              
|Diluted                             | ($0.90)                              
|                                    |                                      
|From discontinued
      operations  |                                      
|Basic                               | $nil                                 
|Diluted                             | $nil                                 

|                                            | As of September 30
|------------------------------------------- | ------------------
|                                            | 2012              
|                                            |                   
|Total assets                                | $92.4 million     
|                                            |                   
|Total long-term financial
      liabilities | $22.2 million     
|                                            |                   
|Cash dividends
      declared               | $nil              

19

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Results of Operations for the Year Ended September 30, 2012
and 2011

The Company had a net loss of $20,720,548 (or $0.90 basic loss
per share) for the year ended September 30, 2012 compared to a net loss of
$7,553,936 (or $0.94 basic loss per share) for the year ended September 30,
2011.

The 2012 period included sales of Vancocin from December 20,
2011, the first day after amalgamation, to September 30, 2012. As this is not
reflective of the revenues earned by the product during the annual period, the
Company has prepared the following pro-forma statement of operations to
illustrate what the Companys results would have been if it had owned Vancocin
from October 1, 2011 to September 30, 2012:

|                                          |   | As
      reported in |   |   | Old
      Merus |   |   | Pro-forma    |  
|----------------------------------------- | - | -------------------- | - | - | --------------- | - | - | ------------ | -
|                                          |   | the Statement of     |   |   | results from    |   |   | Statement of |  
|                                          |   | Operations           |   |   | October 1 to    |   |   | Operations   |  
|                                          |   |                      |   |   | amalgamation    |   |   |              |  
|                                          |   |                      |   |   |                 |   |   |              |  
|Revenues                                  | $ | 10,421,034           |   | $ | 2,483,176       |   | $ | 12,904,210   |  
|Cost of goods sold                        |   | 1,189,253            |   |   | 306,202         |   |   | 1,495,455    |  
|Gross margin                              |   | 9,231,781            |   |   | 2,176,974       |   |   | 11,408,755   |  
|                                          |   |                      |   |   |                 |   |   |              |  
|Operating expenses:                       |   |                      |   |   |                 |   |   |              |  
|Sales and marketing                       |   | 281,272              |   |   | 66,711          |   |   | 347,983      |  
|General and
      administrative          |   | 5,048,471            |   |   | 165,745         |   |   | 5,214,216    |  
|Acquisition costs                         |   | 518,819              |   |   | --              |   |   | 518,819      |  
|                                          |   | 5,848,562            |   |   | 232,456         |   |   | 6,081,018    |  
|Earnings before depreciation,             |   |                      |   |   |                 |   |   |              |  
|amortization, interest
      expense and  |   |                      |   |   |                 |   |   |              |  
|investment income                         |   | 3,383,219            |   |   | 1,944,518       |   |   | 5,327,737    |  
|                                          |   |                      |   |   |                 |   |   |              |  
|Amortization of intangible assets         |   | 4,324,845            |   |   | 299,970         |   |   | 4,624,815    |  
|Depreciation                              |   | 5,015                |   |   | --              |   |   | 5,015        |  
|Interest expense                          |   | 1,466,151            |   |   | 64,961          |   |   | 1,531,112    |  
|Foreign exchange (gains)
      losses     |   | (1,825,206           | ) |   | --              |   |   | (1,825,206   | )
|Investment income                         |   | (467,001             | ) |   | (2,892          | ) |   | (469,893     | )
|Impairment expense                        |   | 22,208,721           |   |   | --              |   |   | 22,208,721   |  
|                                          |   |                      |   |   |                 |   |   |              |  
|Earnings (loss) before income
      taxes | $ | (22,329,306          | ) | $ | 1,582,479       |   | $ | (20,746,827  | )

Revenues and Gross Margin

If the Company had amalgamated with Old Merus on October 1,
2011 and owned Vancocin during the full twelve month period, gross margin would
have been $11,408,755 (or 88%), consisting of net sales of Vancocin and Factive
and revenue from Enablex totalling $12,904,210 less cost of goods sold of
$1,495,455. Sales of Vancocin from October 1 through December 31 were strong
given the outbreak of C. Difficile throughout Canada during 2011 and as
hospitals increased their supply of Vancocin for the approaching winter flu
season. The Company records revenues relating to Enablex net of cost of goods
and marketing and selling expenses in a single line, revenues, in the statements
of operations during the current period of transition from Novartis to Merus.

For the comparative period ended September 30, 2011, results
included the Companys former operating subsidiary, Watt International Inc.
(Watt). The Company made a decision to divest of its consumer and retail
branding unit in the third quarter of fiscal 2011. Thus, Watts results for
fiscal 2011 are presented as discontinued operations.

20

---

Operating Expenses

Operating expenses for the year ended September 30, 2012 were
$5,848,462 compared to $2,587,633 in 2011. This was due primarily to an increase
in general and administrative expenses from active operations as a specialty
pharmaceutical company and non-cash charges for share based compensation as a
result of the granting of equity compensation to the Companys management team.
Acquisition costs of $518,819 related to the acquisition of Factive
and costs relating to the amalgamation of Old Merus and Envoy that were also
incurred during 2012. While acquisition costs related to the amalgamation are
not expected to recur, there will be additional acquisition costs going forward
related to the acquisition of new products and revenue streams. In addition, the
Company incurred sales and marketing expenses of $281,272 related to Vancocin
and Factive. Sales and marketing costs for Enablex are currently netted against
revenue as the Company completes a transition stage whereby Novartis continues
to manufacture, distribute, and promote the product until the Company can obtain
the necessary marketing authorizations to allow it to take over these functions
from a regulatory standpoint. On a proforma basis, including the operating
expenses of Old Merus from October 1 to December 19, 2011, general and
administrative expenses would have been higher by $232,456, relating to
professional fees, wages and salaries and other expenses.

Amortization of Intangible Assets and Impairment Charge

The 2012 period included amortization expense of $4,324,845
related to the licensing and distribution agreement, Vancocin product rights,
Factive product rights and patent, and Enablex product rights and patent, all of
which were not owned by the Company during the 2011 period.

An impairment charge of $22,208,721 was recognized at September
30, 2012 in relation to the Companys Vancocin and WoundCare products and
associated goodwill. $5,532,624 of the charge related to the Vancocin and
WoundCare product intangible assets as discussed in the Product Summary section
of the MD&A. In connection with the impairment of the Vancocin product
rights, management also tested the Companys goodwill for impairment. The
recoverable amount of the cash-generating unit (CGU) to which goodwill had
been allocated was assessed to be less than its carrying amount. Based on this
analysis, the carrying amount of goodwill was reduced to its recoverable amount
through recognition of an impairment charge of $16,676,097 against the goodwill.

Interest Expense and Foreign Exchange Gains

Interest expense of $1,466,151 was incurred during fiscal 2012
primarily as a result of the credit facility entered into with PDL BioPharma,
Inc. in connection with the acquisition of Enablex, which was not owned by the
Company during the 2011 period.

A foreign exchange gain of $1,825,206 was recorded primarily in
relation to US dollar denominated debt outstanding as at September 30, 2012 in
connection with the acquisition of Enablex, none of which was outstanding by the
Company during the 2011 period.

Discontinued Operations

During the year ended September 30, 2011, the Company incurred
a net loss from discontinued operations of $766,328 related to its consumer and
retail branding group which was divested in September 2011.

Prospectus offering

On May 4, 2012, the Company announced a bought deal common
share financing with a syndicate of underwriters, pursuant to which the Company
sold 5,556,000 common shares at a price of $1.80 per share. The arrangement
closed on May 29, 2012. In the prospectus filed in connection with the offering,
net proceeds were expected to be $9,200,752 after deducting estimated costs of
$800,048. Actual net proceeds were $9,206,711. The expected uses of proceeds
were $7,800,000 for acquisitions with the balance allocated to working capital.
Actual use of proceeds were very close to the anticipated amounts, with US$8
million being applied against the purchase of Emselex®/Enablex®. The remaining
proceeds were used for general corporate purposes and to fund costs associated
with the acquisition.

21

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Summary of Quarterly Results

Prior period financial results

As the Company completed its amalgamation on December 19, 2011,
results related to the pharmaceutical operations are included in the financial
results beginning December 20, 2011. Results prior to that date reflect the
operations of the Companys former business as Envoy. As such, revenues
generated from its merchant banking business were reclassified as ancillary
income in the comparative periods, resulting in nil gross margins for the
quarters ended September 30, 2011, June 30, 2011, March 31, 2011 and December
31, 2010. In addition, certain one-time costs were incurred as the Company
restructured its management team. In the three months ended March 31, 2011, the
Company incurred approximately $6.1 million in restructuring costs relating to
severance and office closure. The Company also disposed of its former operating
subsidiary, Watt International Inc., at the end of fiscal 2011 and, as such,
results of this business have been reflected as discontinued operations.

Seasonality

Merus Vanconin® and Enablex product lines are generally not
susceptible to fluctuations as a result of seasonal variations. Historic
revenues for Vanconin® have not indicated that such product will have seasonal
variations which would materially impact revenue. The FACTIVE® product line may
have seasonal variations as it is used to treat illnesses such as bronchitis or
pneumonia, which tend to occur more frequently in the fall and winter months.
Due to the recent acquisition of FACTIVE®, Merus cannot determine the exact
impact this seasonality will have on its revenues.

Financial data for the quarters beginning October 1, 2010
presented below are in accordance with IFRS. Quarters prior to the quarter ended
December 31, 2010 (Q1 2011) are not required to be presented under IFRS.

22

---

Q4 2012
    Q3 2012
    Q2 2012
    Q1 2012Gross margin
    $4.57 million
    $2.49 million
    $1.91 million
    $0.26 millionNet earnings (loss):From continuing operations
    ($20.77 million)
    $0.67 million
    ($0.36) million
    ($0.26) millionIncluding discontinued
      operations
    ($20.77 million)
    $0.67 million
    ($0.36) million
    ($0.26) millionNet earnings (loss) per share:From continuing
      operations:Basic
    ($0.68)
    $0.03
    ($0.01)
    ($0.03)Diluted
    ($0.68)
    $0.03
    ($0.01)
    ($0.03)Including discontinued
      operations:Basic
    ($0.68)
    $0.03
    ($0.01)
    ($0.03)Diluted
    ($0.68)
    $0.03
    ($0.01)
    ($0.03)


Q4 2011
    Q3 2011
    Q2 2011
    Q1 2011Gross margin
    $nil
    $nil
    $nil
    $nilNet earnings (loss):From continuing operations
    ($1.55) million
    $0.07 million
    ($6.28) million
    $0.96 millionIncluding discontinued
      operations
    ($1.38) million
    $0.14 million
    ($6.53) million
    $0.76 millionNet earnings (loss) per share:From continuing
      operations:Basic
    ($0.20)
    $0.01
    ($0.77)
    $0.12Diluted
    ($0.20)
    $0.01
    ($0.77)
    $0.12Including discontinued
      operations:Basic
    ($0.22)
    $0.02
    ($0.80)
    $0.09Diluted
    ($0.22)
    $0.02
    ($0.80)
    $0.09


Liquidity and Capital Resources

The Company currently manages its capital structure and makes
adjustments to it, based on cash resources expected to be available to the
Company, in order to support its future business plans. As at September 30,
2012, the Company had working capital of $10,762,661 compared to $9,204,362 at
September 30, 2011. The increase in working capital was primarily due to active
operations as a specialty pharmaceutical company, funds raised through equity
financing, and cash generated from operations offset by the divesture of the
Companys consumer and retail branding operations and cash outlays for the
deposit provided for the Emselex®/Enablex® acquisition, as well as, the purchase
of the Factive product.

The Companys plan of operations in the next twelve months is
to satisfy short-term debt obligations and raise financing, if required, to
pursue the acquisition of other prescription and pharmaceutical products.
Management reviews the capital management approach on an ongoing basis and
believes that this approach is reasonable given the current state of financial
markets. In the case of uncertainty over the ability to raise funds in current
or future economic conditions, the Company would manage capital by minimizing
ongoing expenses.

23

---

Cash provided by operations of the Company was $1,770,522 for
the year ended September 30, 2012 compared to cash used in operations of
$2,514,012 in the prior year period. The main source of cash in the current
period related to active operations as a specialty pharmaceutical company.

Cash provided by financing activities for the year ended
September 30, 2012 was $62,293,179 of which $7,945,633 was net proceeds received
from a private placement, $9,206,711 was net proceeds received from a prospectus
offering, and $55,713,186 was related to the acquisition of Enablex. This was
offset by the repayment and settlement of other debt totaling $10,897,943.

Cash used in investing activities was $65,660,432 for the year
ended September 30, 2012 and cash provided by investing activities was $81,802
for the year ended September 30, 2011. The main use of cash in the current
period related to the purchase of the Factive product and related inventory for
$3,969,644 and the acquisition of Enablex for $64,664,491.

Transactions with Related Parties

In January, 2011 Envoy sold its approximate 21% interest in
Sereno Capital Corporation (Sereno), a Capital Pool Company. Members of the
Companys management group were also officers and directors of Sereno and
exercised significant influence. The investment in Sereno was accounted for
using the equity method.

As part of the amalgamation, the Company acquired an amount due
to its then Chief Executive Officer, Ahmad Doroudian, of $2,000. The amount
owing was unsecured, non-interest bearing, and due on demand. The amount was
repaid in early 2012.

These transactions were recorded at the exchange amount, being
the amount agreed to by the related parties, as the transactions were considered
to be in the ordinary course of business.

Critical Accounting Policies and Estimates

The significant accounting policies used by the Company in
preparing its Financial Statements are described in Note 2 to the Financial
Statements and should be read to ensure a proper understanding and evaluation of
the estimates and judgements made by management in preparing those Financial
Statements. The Companys Financial Statements are prepared in accordance with
IFRS. Although all of the policies identified in Note 2 to the Financial
Statements are important in understanding the Financial Statements, the policies
discussed below are considered by management to be central to understanding the
Financial Statements, because of the higher level of measurement uncertainties
involved in their application.

|(a) | Accounting judgments, estimates, and
  uncertainties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Critical judgements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The following are the critical judgements, apart from
      those involving estimations (see below), that have been made in the
      process of applying the Company's accounting policies and that have the
      most significant effect on the amounts recognised in the consolidated
      financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Acquisition accounting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Management exercised judgement in determining the
      accounting treatment for the amalgamation transaction of Envoy and Old
      Merus as described in note 3. In addition, judgement was exercised in
      determining that the product acquisitions of Factive and Enablex, as
      described in Note 3, were business combinations accounted for under the
      acquisition method of accounting. Management considered the guidance and
      definitions per IFRS 3 and industry practice based on comparable companies
      in making this determination. These transactions have been recorded in the
      consolidated financial statements based on managements assessment of fair
      value for the acquired assets and liabilities.

24

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Functional currency

Management has exercised judgement in selecting the functional
currency of each of the entities that it consolidates based on the primary
economic environment in which the entity operates and in reference to the
various indicators as provided by IAS 21  The effects of changes in foreign
exchange rates. The consolidated financial statements of the Company are
presented in Canadian dollars (CAD), which is the parent Companys functional
and presentation currency.

Use of estimates

In preparation of the Companys consolidated financial
statements in accordance with IFRS, management is required to make estimates and
assumptions that affect the reported amount of assets, liabilities, and the
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates used in the Companys
consolidated financial statements and such differences could be material.
Significant estimates include:

| |  | the allowance for doubtful
      accounts;                                                                 
| | - | -----------------------------------------------------------------------------------------------------------
| |  | the allowance for inventory
      obsolescence;                                                            
| |  | estimate for product returns;                                                                              
| |  | allocation of the purchase price
      and estimates of fair value for the acquired assets and liabilities;
| |  | the estimated useful lives of
      property and equipment and intangible assets;                          
| |  | impairment of assets;                                                                                      
| |  | the valuation of deferred tax
      assets and liabilities; and                                            
| |  | the valuation of warrants and
      share-based compensation expense                                       

Significant estimates

The following are the key assumptions concerning the future,
and other key sources of estimation uncertainty at the end of the reporting
period, that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial year:

(i)           Allowance
for doubtful accounts

The Company reviews its sales and accounts receivable aging and
determines the balance for the allowance for doubtful accounts. The Company has
minimal overdue accounts and has determined that no allowance for doubtful
accounts is required as at September 30, 2012.

(ii)           Inventory
obsolescence

The Company reviews the net realizable value of its inventory.
The Company has recorded a write-down of $21,000 relating to inventory that
expires within one year from September 30, 2012. The Company has determined that
there are adequate sales to support the carrying amount for all other inventory
as at September 30, 2012. In addition, management reviews specific product and
industry experience with returns in assessing if a write-down is required.

(iii)         Estimated
product returns

Revenue from product sales is recognized net of estimated sales
discounts, credits, returns, rebates and allowances. The Companys return policy
is limited to damaged or expired product. The return allowance is determined
based on analysis of the historical rate of returns and current market
conditions, which is applied directly against sales.

(iv)          Allocation
of the purchase price and estimates of fair value for the acquired assets and
liabilities

25

---

The Company as part of its business combinations and product
acquisitions performs a preliminary assessment of the fair value of all assets
and liabilities acquired based on all current available information.

As part of the measurement period to finalize the purchase
price allocation, management updates the estimated fair values as information
becomes available, support from third party market data becomes available, and
where necessary, third party independent valuations are obtained. Management is
ultimately responsible for concluding on the allocation of purchase price and
estimates of fair value for the acquired assets and liabilities. As at September
30, 2012, the purchase price allocations for acquisitions completed during
fiscal 2012 are considered to be finalized.

(v)         
 Impairment of non-financial assets

Determining whether goodwill is impaired requires an estimation
of the recoverable amount of the cash generating units (CGUs) or groups of
CGUs to which goodwill has been allocated. The determination of recoverable
amount requires the Company to estimate the future cash flows expected to arise
from these CGUs and a suitable discount rate in order to calculate the
recoverable amount of the CGUs. If the recoverable amount of the CGUs is less
than its carrying amount, an impairment loss is recorded.

Property and equipment and intangible assets are reviewed each
reporting period for impairment when events or changes in circumstances indicate
that the carrying amount of an asset exceeds its recoverable amount. The
recoverable amount is determined with reference to fair value less costs to sell
or value-in-use calculations. An impairment loss is measured as the difference
between the asset's carrying amount and its recoverable amount. Where
recoverable amount is determined to be less than the carrying amount, an
impairment loss may arise.

(vi)         
Useful lives of property, equipment and intangible assets

The Company reviews the estimated useful lives of property,
equipment and intangible assets at the end of each year, based on estimates of
fair value and expected market data of future cash inflows on products sales of
acquired patents/product rights.

Depreciation on property, equipment, and intangible assets is
calculated using the straight-line method to allocate their cost to their
residual values over their estimated useful lives, as follows:

| |  | Furniture, fittings and equipment | 3  5 years                      
| | - | --------------------------------- | ---------------------------------
| |  | Leasehold improvements            | Over the term of the lease       
| |  | Product rights                    | 2  10 years                     
| |  | Product patents                   | Remaining economic life of patent

During the year ended September 30, 2012, the useful lives were
considered reasonable.

(vii)         Valuation
of deferred tax assets and liabilities

The Company estimates the probability that taxable profits will
be available against deductible temporary differences can be utilized and thus
give rise to deferred tax assets. The Company has reviewed the expected
profitability and determined that no deferred tax asset should be recognized at
this time.

(viii)        Valuation
of warrants and share-based compensation expense

The Company estimates the fair value of warrants and share
options issued for employment services based on the Black Scholes option-pricing
model for warrants and share options with a service condition. The Company has
judged that the fair value of the services could not be determined; therefore
the fair value of the shares, share options and warrants was used in the
measurement of the transactions. These methods of valuation were applied to the
equity transactions during the year.

26

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|(b) | Financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Company classifies all financial instruments as
      either fair value through profit or loss (FVTPL), available-for-sale
      (AFS), held-to-maturity (HTM), loans and receivables or other
      financial liabilities. Financial instruments are required to be measured
      at fair value on initial recognition. Measurement in subsequent periods
      depends on the financial instruments classification. Financial
      instruments classified as FVTPL are measured at fair value with unrealized
      gains and losses recognized in the results of operations. AFS instruments
      are measured at fair value with unrealized gains and losses recognized in
      other comprehensive income. HTM instruments, loans and receivables, and
      other financial liabilities are measured at amortized cost. Transaction
      costs for FVTPL financial instruments are expensed as incurred, whereas
      transaction costs for AFS, HTM, and other financial liability instruments
      are capitalized upon initial recognition of the instrument.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Company has classified its financial instruments as
      follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Cash and cash equivalents
    Loans and receivablesPublicly-traded investments
    Fair value through profit or lossPrivately-held investments
    Available-for-sale at costTrade and other receivables
    Loans and receivablesLoans receivable
    Loans and receivablesBank indebtedness
    Other financial liabilityAccounts payable and accrued liabilities
    Other financial liabilityDerivative liabilities
    Fair value through profit or lossLong term debt
    Other financial liability


At each financial reporting period, the
Companys management estimates the fair value of investments based on the
criteria below and reflects such valuations in the consolidated financial
statements.

(i)           Publicly-traded investments:

Securities which are traded on a
recognized securities exchange and for which no sales restrictions apply are
recorded at fair values based on quoted market prices at the consolidated
balance sheet dates or the closing price on the last day the security traded if
there were no trades at the consolidated balance sheet dates.

Securities which are traded on a
recognized securities exchange but which are escrowed or otherwise restricted as
to sale or transfer may be recorded at amounts discounted from market value. In
determining whether a discount is appropriate for such investments, the Company
considers the nature and length of the restriction, the business risk of the
investee company, its stage of development, market potential, relative trading
volume and price volatility and any other factors that may be relevant to the
ongoing and realizable value of the investments.

(ii)          Privately-held investments:

Securities in privately-held companies
are designated as AFS and are recorded at fair value upon acquisition. These
securities are subsequently measured at their initial cost less impairment.

(iii)         Other financial liabilities

Other financial liabilities (including
debt and trade and other payables) are subsequently measured at amortized costs
using the effective interest method. The effective interest method is a method
of calculating the amortized cost of a financial liability and of allocating
interest expense over the relevant period. The effective interest rate is the
rate that exactly discounts estimated future cash payments (including all fees
and points paid or received that form an integral part of the effective interest
rate, transaction cost and other premiums or discounts) through the expected
life of the financial liability, or (where appropriate) a shorter period, to the
net carrying amount on initial recognition.

27

---

|(c) | Derivative financial instruments and hedging
      activities                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Derivatives are initially recognized at fair value on the
      date a derivative contract is entered into and are subsequently
      re-measured at their fair value. The method of recognizing the resulting
      gain or loss depends on whether the derivative is designated as a hedging
      instrument, and if so, the nature of the item being hedged. The Company
      designates certain derivatives as one of the following:
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | i)                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | ii)                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | iii)                                                                                                                                                                                                                                                                                                                                                                                                                                      

|    | The effective portion of changes in the fair value of
      derivatives that are designated and qualify as cash flow hedges is
      recognized in other comprehensive income. The gain or loss relating to the
      ineffective portion is recognized immediately in the statement of
      operations.                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Amounts accumulated in equity are reclassified to profit
      or loss in the periods when the hedged item affects profit or
  loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | When a hedging instrument expires or is sold, or when a
      hedge no longer meets the criteria for hedge accounting, any cumulative
      gain or loss existing in equity at that time remains in equity and is
      recognized when the forecast transaction is ultimately recognized in the
      statement of operations. When a forecast transaction is no longer expected
      to occur, the cumulative gain or loss that was reported in equity is
      immediately transferred to the statement of operations within foreign
      exchange (gains) losses.                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The Company has not designated any of its derivatives as
      hedges as at September 30, 2012 and 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(d) | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Cash includes demand deposits with financial institutions
      of $3,174,863, $5,059,650 and $8,710,990 at September 30, 2012, September
      30, 2011 and October 1, 2010, respectively. Cash equivalents consist of
      short-term, highly liquid investments purchased with original maturities
      of three months or less and were $288,056, $nil and $nil at September 30,
      2012, September 30, 2011 and October 1, 2010, respectively. Interest
      earned on cash and cash equivalents for the year-ended September 30, 2012
      $21,977 ($nil).                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(e) | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Inventories are comprised of raw materials and finished
      goods of pharmaceutical product and are recorded at the lower of cost and
      net realizable value on a first-in first-out basis. Costs are comprised of
      raw materials (active pharmaceutical ingredient), conversion costs
      (contract manufacturing), and batch-specific regulatory testing. Net
      realizable value is the estimated selling price in the ordinary course of
      business less estimated costs of completion and applicable selling
      expenses. The Company writes down inventory to its estimated net
      realizable value based upon assumptions about future and market conditions
      when necessary.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(f) | Trade and other receivables                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Trade and other receivables are stated at their amortized
      cost and are non-interest bearing and unsecured. Management conducts a
      periodic review of the collectability of trade receivables. The Company
      records an allowance for doubtful accounts if any uncertainty exists with
      respect to the recoverability of certain amounts based on historical
      experience or economic climate.                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(g) | Intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Intangible assets include all costs incurred to acquire
      licensing and distribution agreements, product rights and patents.
      Intangible assets are recorded at cost and amortized on a straight-line
      basis over their estimated useful life of 2 to 10 years. Management has
      estimated the useful life based on industry data of similar products and
      patents. The Company conducts an annual assessment of the residual
      balances, useful lives and depreciation methods being used for intangible
      assets and any changes arising from the assessment are applied by the
      Company prospectively.                                                                      

28

---

|(h) | Business combinations and goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Business combinations are accounted for using the
      acquisition method. The cost of an acquisition is measured as the
      aggregate of the consideration transferred, measured at the acquisition
      date fair value. Acquisition costs incurred are expensed and included in
      acquisition costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Goodwill represents the price paid for acquisitions in
      excess of the fair market value of net tangible and identifiable
      intangible assets acquired. Goodwill is carried at cost, less impairment
      losses if any. Goodwill is tested for impairment at the end of each fiscal
      year or if events or changes in circumstances indicate a potential
      impairment. Determining whether goodwill is impaired requires an
      estimation of the recoverable amount of the cash generating units (CGUs)
      to which goodwill has been allocated.                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | For the purpose of impairment testing, goodwill acquired
      in a business combination is allocated to each of the CGUs, or groups of
      CGUs, that is expected to benefit from the synergies of the combination.
      Each unit or group of units to which the goodwill is allocated represents
      the lowest level within the entity at which the goodwill is monitored for
      internal management purposes.                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(i) | Impairment of non-financial assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | At the end of each reporting period, the Company reviews
      the carrying amounts of its property and equipment, intangible assets and
      goodwill to determine whether there is an indication that those assets
      have suffered an impairment loss. If any such indication exists, the
      recoverable amount of the asset is estimated in order to determine the
      extent of the impairment loss. In addition, goodwill, intangible assets
      with indefinite useful lives and intangible assets not yet available for
      use, if any, are tested for impairment annually.                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | An impairment loss is recognized when the carrying amount
      of an asset, or its CGU, exceeds its recoverable amount. A CGU is the
      smallest identifiable group of assets that generates cash inflows that are
      largely independent of the cash inflows from other assets or groups of
      assets. Determining whether goodwill is impaired requires an estimation of
      the recoverable amount of the CGUs to which goodwill has been
      allocated.                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The recoverable amount is the greater of the assets or
      CGUs fair value less costs to sell (FVLCTS) and value in use (VIU).
      In assessing VIU, the estimated future cash flows are discounted to their
      present value using a pre-tax discount rate that reflects current market
      assessments of the time value of money and the risks specific to the asset
      or CGU. In determining FVLCTS, a post-tax discounted cash flow model is
      used. For an asset that does not generate largely independent cash
      inflows, the recoverable amount is determined for the CGU to which the
      asset belongs. If the recoverable amount of the asset or CGU is less than
      its carrying amount, an impairment loss is recognized immediately in the
      statement of operations.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Other than goodwill, where an impairment loss
      subsequently reverses, the carrying amount of the asset is increased to
      the revised estimate of its recoverable amount to the extent that the
      increased carrying amount does not exceed the carrying amount that would
      have been determined had no impairment loss been recognized for the asset
      in prior years. Goodwill impairment losses are not reversed.                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(j) | Provisions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Provisions are recorded when a present legal or
      constructive obligation exists as a result of past events where it is
      probable that an outflow of resources embodying economic benefits will be
      required to settle the obligation, and a reliable estimate of the amount
      of the obligation can be made.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The amount recognized as a provision is the best estimate
      of the consideration required to settle the present obligation at the
      balance sheet date, taking into account the risks and uncertainties
      surrounding the obligation. Where a provision is measured using the cash
      flows estimated to settle the present obligation, its carrying amount is
      the present value of those cash flows. When some or all of the economic
      benefits required to settle a provision are expected to be recovered from
      a third party, the receivable is recognized as an asset if it is virtually
      certain that reimbursement will be received and the amount receivable can
      be measured reliably.                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(k) | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Provision for income taxes consists of current and
      deferred income tax expense. Tax is recognized in the statement of
      operations, except to the extent that it relates to items recognized in
      other comprehensive income or directly in equity. In this case, the tax is also
      recognized in other comprehensive income or directly in equity,
      respectively.                                                                                                                                                                                                                                                                                                                                                                                                                               

29

---

|    | Current income tax expense is the expected tax payable on
      the taxable income for the year, using tax rates enacted or substantively
      enacted at period end in the countries where the Company and its
      subsidiaries operate and generate taxable income, adjusted for amendments
      to tax payable with regards to previous years.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Deferred income tax is recognized, using the liability
      method, on temporary differences between the carrying amounts of assets
      and liabilities on the balance sheet and their corresponding tax values,
      using the enacted or substantively enacted, as applicable, income tax
      rates at each balance sheet date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Deferred tax assets also result from unused losses and
      other deductions carried forward. An assessment of the probability that a
      deferred tax asset will be recovered is made prior to any deferred tax
      asset being recognized. The valuation of deferred tax assets is reviewed
      on a quarterly basis and adjusted, if necessary, to reflect the estimated
      realizable amount.                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Deferred income tax assets and liabilities are offset
      when there is a legally enforceable right to offset current tax assets
      against current tax liabilities and when the deferred income tax assets
      and liabilities relate to income taxes levied by the same taxation
      authority on either the same taxable entity or different taxable entities
      where there is an intention to settle the balances on a net
  basis.                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(l) | Foreign currency translation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | (i)           Functional and presentation currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Items included in the financial statements of each of the
      Companys entities are measured using the currency of the primary economic
      environment in which the entity operates (the functional currency). The
      consolidated financial statements of the Company are presented in Canadian
      dollars (CAD), which is the parent Companys functional and presentation
      currency.                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | (ii)          Transactions and balances                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Foreign currency transactions are initiated by the
      Companys entities at their respective functional currency using the
      exchange rates prevailing at the date of the transaction. At each balance
      sheet date, monetary assets and liabilities are translated using the
      period-end foreign exchange rate. Non-monetary items that are measured in
      terms of historical cost in a foreign currency are translated using
      exchange rates as at the dates of the initial transactions. Non-monetary
      items measured at fair value in a foreign currency are translated using
      the exchange rates at the date when acquired. All gains and losses on
      translation of these foreign currency transactions are included in the
      statement of operations.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | (iii)         Companys subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | On consolidation the assets and liabilities of foreign
      operations are translated into CAD at the rate of exchange prevailing at
      the reporting date and their statement of operations are translated at the
      average exchange rates prevailing during the period. The exchange
      differences arising on translation for consolidation are recognized in
      other comprehensive income. On disposal of a foreign operation, the
      component of other comprehensive income relating to that particular
      foreign operation is recognized in the consolidated statement of
      income.                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(m) | Revenue recognition and estimated product
  returns                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Revenue from product sales (excluding Enablex as
      described below), including shipments to distributors, is recognized when
      the product is delivered to the Companys customers, provided the Company
      has not retained any significant risks of ownership or future obligations
      with respect to the product, it is probable that the economic benefits
      associated with the transaction will flow to the Company and the amount of
      revenue can be measured reliably. Revenue from product sales is recognized
      net of estimated sales discounts, credits, returns, rebates and
      allowances.                                                                                                                                                                

30

---

|    | In connection with its acquisition of Enablex (note 3),
      the Company entered into a transition services and supply agreement with
      the vendor (Novartis Pharma AG, or Novartis) to facilitate the seamless
      and efficient transfer of the product to the Company. The agreement
      requires that Novartis continue to manufacture, distribute, and promote
      the product until the Company can obtain the necessary marketing
      authorizations to allow it to take over these functions from a regulatory
      standpoint. As a result, Novartis currently provides the Company with a
      monthly reconciliation of revenues, cost of goods, and marketing and
      selling expenses for which the Company then bills Novartis for the net
      amount receivable. The Company relies on the financial information
      provided by Novartis to estimate the amounts due under this agreement. Based on this current arrangement and the guidance per IAS 18 regarding agency relationships, for the period ended September 30,
      2012 management recorded revenues relating to Enablex net of cost of goods
      and marketing and selling expense in a single line, revenue, in the
      statements of operations. This presentation has no impact on net income.
      This accounting presentation will be reassessed in future periods as the
      Company takes over the day-to-day functions of operating this
    product.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | The Companys return policy is limited to damaged or
      expired product. The return allowance is determined based on analysis of
      the historical rate of returns and current market conditions, which is
      applied directly against sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(n) | Share-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | From time to time, the Company grants options to
      directors, officers, employees and non-employees to purchase common
      shares. The Company accounts for its stock options using the fair-value
      method. Share- based payments, equal to the fair value of the options on
      the date of grant, are recognized in operations, with an offsetting credit
      to equity reserves, for stock options granted to employees, officers and
      directors over the period during which the related options vest.
      Share-based payments are recognized in operations, with an offsetting
      credit to equity reserves, for options granted to non-employees based on
      the fair value of the services received. Consideration paid upon exercise
      of stock options, along with the applicable amount of equity reserves, is
      credited to share capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(o) | Comprehensive income or loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Comprehensive income or loss is the change in net assets
      arising from transactions and other events and circumstances from
      non-owner sources, and comprises net income or loss and other
      comprehensive income or loss. Financial assets that are classified as
      available for sale will have revaluation gains and losses included in
      other comprehensive income or loss until the asset is removed from the
      balance sheet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(p) | Basic and diluted net earnings per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Basic earnings per share are computed using the weighted
      average number of common shares outstanding during the period. The
      treasury stock method is used to compute the dilutive effect of equity
      instruments. Stock options, share purchase warrants, and other equity
      instruments are dilutive when the average market price of the common
      shares during the period exceeds the exercise price of the options,
      warrants and other equity instruments. The diluted earnings per share is
      equal to the basic earnings per share if the effects of the outstanding
      options and warrants are anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(q) | Related parties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Parties are considered to be related if one party has the
      ability, directly or indirectly, to control the other party or exercise
      significant influence over the other party in making financial and
      operating decisions. Parties are also considered to be related if they are
      subject to common control. Related parties may be individuals or corporate
      entities. A transaction is considered to be a related party transaction
      when there is a transfer of resources or obligations between related
      parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(r) | Future changes in accounting standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | During the year ended September 30, 2012 the following
      new or amended standards were issued effective for annual periods
      beginning on or after January 1, 2013 (October 1, 2013 for the
      Company).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

31

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| |  | IAS 12 Income Taxes: Amendments to IAS 12 provide an
      exception to the general principles in IAS 12 that the measurement of
      deferred tax assets and deferred tax liabilities should reflect the tax
      consequences that would follow from the manner in which the entity expects
      to recover the carrying amount of an asset.                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | IAS 27 Separate Financial Statements: IAS 27 outlines the
      accounting principles to be applied with regards to investments in
      subsidiaries, joint ventures and associates when an entity elects or is
      required by local regulations to present separate, non-consolidated,
      financial statements. The previous standard was titled IAS 27 Consolidated
      and Separate Financial Statements.          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | IAS 28 Investments in Associates and Joint Ventures: IAS
      28 outlines the accounting treatment and corresponding application of the
      equity method of accounting in investments in associates and joint
      ventures. The previous standard was titled IAS 28 Investments in
      Associates.                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | IFRS 10 Consolidated Financial Statements: IFRS 10
      outlines the principles for the presentation and preparation of
      consolidated financial statements.                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | IFRS 11 Joint Arrangements: IFRS 11 defines the two types
      of joint arrangements (joint operations and joint ventures) and outlines
      how to determine the type of joint arrangement entered into and the
      principles for accounting for each type of joint arrangement.                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | IFRS 12 Disclosure of Interests in Other Entities: IFRS
      12 outlines the disclosures required in order to provide users of
      financial statements with the information necessary to evaluate an
      entitys interest in other entities, the corresponding risks related to
      those interests and the effects of those interests on the entitys
      financial position, financial performance and cash flows.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | IFRS 13 Fair Value Measurement: IFRS 13 defines fair
      value, summarizes the methods of determining fair value and outlines the
      required fair value disclosures. IFRS 13 is utilized when another IFRS
      standard requires or allows fair value measurements or disclosures about
      fair value measurements.                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | IFRS 7 Financial Instruments Disclosures  Offsetting
      Financial Assets and Liabilities. IFRS 7 provides new disclosures
      requiring entities to disclose gross amounts subject to rights of set off,
      amounts set off, and the related net credit exposure.                                                                                                                                                     

Accounting standards that have been amended but are not yet
effective include:

| |  | IFRS 7 Financial Instruments: Disclosures: The IASB
      published new disclosures requirements jointly with the Financial
      Accounting Standards Board (FASB) that enable users of the financial
      statements to better compare financial statements prepared in accordance
      with IFRS and US GAAP.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | IFRS 9 Financial Instruments. IFRS 9 will replace IAS 39,
      Financial Instruments Recognition and Measurements, on classification and
      measurement of financial assets and financial liabilities.                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | IAS 32 Financial Instruments: Presentation: The IASB
      published amendments to IAS 32 to clarify the application of the
      offsetting requirements.The Company is currently evaluating the impact
      that these standards will have on its financial statements.                                          

The Company is currently evaluating the impact that these
standards will have on its financial statements.

**C.**         
**Research and Development, Patents and Licenses, etc.**

Not applicable.

32

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**D.**          **Trend Information**

Not applicable.

**E.**          **Off-Balance Sheet Arrangements**

None.

F.        ****Commitments and
Contractual Commitments

Set out below is a summary of the amounts due and committed
under contractual cash obligations at September 30, 2012:

Total
    Due in
      year 1
    Due in
      year 2
    Due in year 3Operating leases
    $109,691
    $ 61,594
    $ 25,408
    $ 22,689Long
      term debt
    -
    -
    -
    -Total contractual cash
      obligations
    $109,691
    $ 61,594
    $ 25,408
    $ 22,689


G.        ****Safe Harbor

See About Forward-Looking Information in the
introduction to this Annual Report.

Item 6: Directors and Senior Management and Employees

**A.**         
**Directors and Senior Management**

The current directors and officers of our Company are as
follows:

Name Province/State Country of Residence
      and Position(s) with Merus(1)
    Periods during which
      Individual has Served as a Director or OfficerElie Farah Ontario, Canada President, Chief
      Executive Officer and Director
    January 12, 2012  PresentAhmad Doroudian Vancouver, BC Canada Executive Vice
      Chairman and Director
    December 19, 2011  PresentAndrew Patient Ontario, Canada Chief Financial
      Officer
    December 19, 2011 
      PresentUlrich Schoeberl Luxembourg Managing Director,
      European Operations
    July 26, 2012  Present


33

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Name Province/State Country of Residence
      and Position(s) with Merus(1)
    Periods during which
      Individual has Served as a Director or OfficerMoira Ong British Columbia, Canada Vice President,
      Finance and Secretary
    December 19, 2011 
      PresentAli Moghaddam Quebec, Canada Vice President
      Business Development & Commercial Operations
    December 19, 2011 
      PresentDavid Guebert(2)(3) Ontario, Canada Director
    December 19, 2011  PresentRobert Pollock(3) Ontario, Canada Director
    December 19, 2011 
      PresentJoseph Rus(2)(3) Ontario, Canada Director
    December 19, 2011  PresentTimothy Sorensen(2)(3) Ontario, Canada Director
    December 19, 2011  Present


| | (1) | Information has been furnished by the respective
      individuals.
| | --- | -------------------------------------------------------------------
| | (2) | Denotes a member of the Audit Committee of our
      company.      
| | (3) | Denotes an independent director.                                   

Elie Farah  President, Chief Executive Officer and
Director

Mr. Farah was appointed as the Companys President in January
  2012 and Chief Executive Officer in July 2012. Mr. Farah previously headed the
  global mergers and acquisitions initiative with Boehringer Ingelheim GmbH, an
  international pharmaceutical company based in Germany. Mr. Farah executed and
  oversaw strategic transactions across Europe and the Americas while working
  at the North American holding company in Canada and subsequently at the global
  headquarters in Germany. Most recently, Mr. Farah was the President and CFO
  of Transition Therapeutics Inc. During his time at Transition Mr. Farah played
  an instrumental role in the company listing on NASDAQ, completing equity financings,
  managing and executing multiple company acquisitions as well as licensing agreements
  with large pharmaceutical companies. He holds an MBA and an MAcc in addition
  to the following designations; Chartered Financial Analyst (CFA) and Chartered
  Accountant (CA).

Ahmad Doroudian  Executive Vice Chairman and Director

Dr. Doroudian was appointed as the President, Chief Executive
Officer and director of Old Merus on March 15, 2010 and served as CEO through July
2012. Since May 2009, Dr. Doroudian has been the President, Chief Executive
Officer and a director of Merus subsidiary, Merus Labs Inc. He is also a
director of Neurokine Pharmaceuticals Inc., a private pharmaceutical company
that develops new uses for existing drugs, since April of 2007. He was the Chief
Executive Officer of Neurokine Pharmaceuticals Inc. from May 2009 to September
2011. He was the President of Rayan Pharma Inc., an exporter of pharmaceuticals
to Eastern Europe, from March 2003 to April 2007. From November 2003 to March
2004, Dr. Doroudian was the Vice Chairman of the board of PanGeo Pharma Inc., a
TSX listed company (now PendoPharm, a division of Pharmascience Inc.) and he
served as Chief Executive Officer, Chairman and Director of PanGeo from April
1996 to November 2003. Dr. Doroudian has been involved with early stage
financing and management of private and publicly listed companies since 1996.
Dr. Doroudian holds a Bachelors Degree in Biochemistry and a Masters Degree and Ph.D.
in Biopharmaceutics from the University of British Columbia. Dr. Doroudian is 49
years old and is a Canadian citizen resident in Vancouver, British Columbia.

34

---

Andrew Patient  Chief Financial Officer

Mr. Patient began serving as Envoys Chief Financial Officer in
2008. Mr. Patient joined Envoy in 2001, initially serving as controller at its
former wholly-owned subsidiary, Watt International Inc. In February 2006, Mr.
Patient moved to the corporate head office in the role of Director of Finance,
responsible for all aspects of Envoys financial reporting. Prior to joining
Envoy, Mr. Patient spent six years at BDO Dunwoody LLP in Canada and five years
in financial roles at early stage technology companies in San Diego, California.
Mr. Patient was appointed President and Chief Executive Officer of Envoy on
December 22, 2009. Mr. Patient ceased to serve as President and Chief Executive
Officer of Envoy on February 10, 2011 and was reappointed as Envoys Chief
Financial Officer. Mr. Patient holds a Bachelor of Accounting degree from Brock
University and obtained his CA designation in 1995.

Dr. Ulrich Schoeberl  Managing Director, European
Operations

Since 1997, Dr. Schoeberl has worked for Boehringer Ingelheim,
a multinational European based pharmaceutical company, in various management and
corporate development positions both in Europe and in North America. His most
recent position was that of Managing Director of Boehringer Ingelheim
Switzerland and he previously headed Strategic Planning and M&A at the world
headquarters of Boehringer Ingelheim in Germany. Prior to joining Boehringer
Ingelheim, he was a management consultant at McKinsey & Co. within their
health care practice. Dr. Schoeberl obtained his Ph.D. in Chemistry at the
University of Regensburg and worked as a post-doctoral fellow at the University
of Colorado in Boulder.

Moira Ong  Vice President Finance and Secretary

Ms. Ong was appointed as Old Merus Chief Financial Officer on
March 30, 2010 and has served as VP Finance since Old Merus and Envoys
amalgamation. Ms. Ong has more than 10 years experience in public accounting
and audit reporting. From 2005 until 2010, Ms. Ong was the senior manager at
Grant Thornton LLP in charge of completion of financial statements for Canadian
publicly listed companies in addition to serving as financial consultant for
Strategic Income Security Services from 2003 to 2005. Ms. Ong was an audit
manager in the Banking and Securities group at Deloitte & Touche LLP in New
York from 2000 to 2003 and served as the senior accountant for Grant Thornton
LLP from 1996 to 2000. Ms. Ong obtained her CA designation in 1999 and her CFA
designation in 2003.

Ali Moghaddam  Vice President Business Development &
Commercial Operations

Mr. Moghaddam was appointed as Vice President of Old Merus on
March 1, 2011, he was appointed as a director of Old Merus on March 15, 2010.
Since May 21 2009 he has been a director of Merus Labs. Mr. Moghaddam was a
general manager of Corporation Bioheel Inc. (Canada)/Nuvovie Inc. (U.S.A.), a
North American specialty healthcare company focused on health and nutrition,
which he joined in 2008. He was the President, Chief Executive Officer and
founder of Arura Pharma Inc., an integrated specialty healthcare company from
2005 to January 2008. Mr. Moghaddam acted as the President and Chief Executive
Officer of Chaichem Pharmaceutical Inc., focusing on commercialization of the
companys products in the area of Oncology API, from 2002 to 2004. Before being
appointed to these positions, he acted as a senior director of corporate
business development of E-Z-EM Inc., a major manufacturer of contrast agents for
gastrointestinal radiology, subsequently acquired by Bracco Diagnostics, Inc.
Mr. Moghaddam holds a Bachelor of Commerce with Major in Finance & Marketing
from Concordia University. He also has a CMA designation of McGill University.

Robert S. Pollock  Director

Mr. Pollock is Director, President of Primary Corp. (TSX: PYC), a natural resources lending company, and Director and Chief Executive Officer of Primary Capital Inc., an exempt market dealer. He served as Senior Vice President of Quest Capital Corp. from September 2003 to October 2006.  He was formerly Vice President – Investment Banking at Dundee Securities Corporation and has 15 years of experience in the Canadian capital markets with specific experience in merchant banking, institutional sales and investment banking. Mr. Pollock holds an MBA from St. Mary’s University (1993) and a BA from Queen’s University (1991).

35

---

Mr. Pollocks principal occupations during the five preceding
years are as follows: from February 10, 2011 to January 12, 2012, he was the
Chief Executive Officer and a Director of Envoy and our company. Since August
2008, he has been the Director and Chief Executive Officer of Primary Corp. and
since July 2008 he has been Director and Chief Executive Officer of Primary
Capital Inc. From September 2003 to October 2006 he served as Senior Vice
President of Quest Capital Corp.

David D. Guebert  Director

Mr. Guebert is a chartered accountant and certified public
accountant with over 30 years of experience in finance and accounting, 20 of
which were served as chief financial officer of public and private companies in
the resource and technology sectors. He is currently the Chief Financial Officer
of Primary Corp., a merchant banking company. He is also is the Chief Financial
Officer of Cell-Loc Location Technologies Inc., a wireless location technology
company. Mr. Guebert holds a B.Comm. from the University of Saskatchewan
(1979).

Mr. Gueberts principal occupations during the five preceding
years are as follows: Since 2007 he has been Chief Financial Officer of Primary
Corp. and since 2004 has been Chief Financial Officer of Cell-Loc Location
Technologies Inc. Since 2010 he has also been a director of Advitech Inc., a
biotech company.

Timothy G. Sorensen  Director

Mr. Sorensen is a Director and the President of Primary Capital
Inc., an exempt market dealer. He recently joined Primary Capital from Macquarie
Capital Markets Canada where he served as Divisional 7 Director Head of
Institutional Sales. Mr. Sorensen has over 14 years of capital markets
experience in institutional sales and equity analysis. He has a CFA designation
and holds an MBA (1996) and B.Comm (1995) both from the University of
Windsor.

Mr. Sorensens principal occupation during the five preceding
years is as follows: he has been President of Primary Capital Inc. since
November 2010. From January 2008 until September 2010, he was the Divisional
Director Head of Institutional Sales of Macquarie Capital Markets Canada and
prior to that, he was an institutional sales person from 2004 to 2008 with Orion
Financial Inc., which became Macquarie Group in 2007.

Joseph Rus  Director

Mr. Joseph Rus was appointed Director of Old Merus on October 31,
2011. Prior to his appointment, Mr. Rus joined Shire Pharmaceuticals in 1999,
following 25 years of experience with two major Pharmaceutical Companies (Warner
Lambert & Hoffmann-la Roche) in both Canadian and Global assignments. In
2002, Mr. Rus returned to the U.K. as head of Shires International Operations
(all countries except the USA). Since that time Mr. Rus also served on Shires
Executive Committee as well as the Portfolio Review Committee. In 2006, Mr. Rus
was charged with the responsibility of establishing affiliates in the
increasingly important emerging markets, and by 2009 affiliates were open in
Brazil, Mexico, Argentina, Russia, Australia and Japan. Mr. Rus is a Canadian
citizen who received his education in Romania and is a graduate of the Executive
Marketing Program at the University of Western Ontario in London, Ontario, as
well as the International Program at the Institute of Management and Development
of the University of Lausanne in Switzerland.

Selection of Directors and OfficersThere are no
arrangements or understandings between any director or executive officer of our
company with major shareholders, customers or others, pursuant to which he or
she was selected as such.

Family Relationship

There are no family relationships between any of the persons
named above.

36

---

**B.**         
**Compensation**

The following table sets forth in, Canadian dollars all
compensation for the fiscal year ended September 30, 2012 paid to the principal
executive officer of Merus, the principal financial officer of our company and
the three other most highly compensated officers who served as executive
officers of the Company (the Named Executive Officers):

Long-Term CompensationAnnual Compensation
    Awards
    **Payouts**Name and
        Principal Position
    Salary
        ($)
    Bonus ($)
    Other Annual ($)
    Securities Under
        Option/SARs Granted (#)
    Restricted Shares
        or Restricted Share Units ($)
    LTIP Payouts
        ($)
    All Other Compensation
        ($)Elie Farah, President and Chief Executive Officer
    $187,977
    ---
    ---
    400,000
    ---
    ---
    ---Andrew Patient, Chief Financial Officer
    $217,248
    ---
    ---
    200,000
    ---
    ---
    ---Ahmad Doroudian, Executive Vice Chairman
    $191,864
    ---
    ---
    640,000
    ---
    ---
    ---Ali Moghaddam Vice President Business Development
    $123,600
    ---
    $5,400(1)
    200,000
    ---
    ---
    ---Moira Ong Vice President Finance
    $53,250
    ---
    ---
    ---
    ---
    ---
    ---


| | 1. | Amounts received in respect of car
  allowance.
| | -- | -----------------------------------------------

37

---

The following table sets forth options granted under the Stock
Option Plan to the Named Executive Officers of the Company in the most recently
completed fiscal year and the value of unexercised options held by them as at
the most recent fiscal year:

Stock Option Awards During 2012 Fiscal Year

Name
    Number of securities
      underlying unexercised options
      (#)
    Option exercise
      price ($)
    Option expiration date
    Number of options at
      FY-End Vested/Unvested (#)Elie Farah
    400,000
    2.05
    January 5, 2017
    100,000/300,000Ahmad Doroudian
    640,000
    2.02
    January 18, 2017
    640,000/nilAndrew Patient
    200,000
    2.02
    January 18, 2017
    50,000/150,000Ali Moghaddam
    200,000
    2.05
    January 5, 2017
    50,000/150,000Moira Ong
    nil
    n/a
    nil/nil
    5,000/nil


The following table sets forth options exercised under the
Stock Option Plan to the Named Executive Officers of the Company in the most
recently completed fiscal year and the value of unexercised options held by them
as at the most recent fiscal year:

Stock Options Exercised During 2012 Fiscal Year

Name
    Number of Shares
      Acquired on Exercise
    Aggregate Value
      Realized ($)
    Unexercised Options at
      FY-End Exercisable/ Unexercisable
      (#)
    Value of Unexercised In the
      Money Options at FY-End
      Exercisable/Unexercisable ($)Elie Farah
    Nil
    Nil
    nil/nil
    nil/nilAndrew Patient
    Nil
    Nil
    nil/nil
    nil/nilAhmad Doroudian
    50,000
    $76,000
    640,000/nil
    nil/nilAli Moghaddam
    50,000
    $63,000
    50,000/150,000
    nil/nilMoira Ong
    12,500
    $19,000
    5,000/nil
    nil/nil


The Company does not provide any pension, retirement plan or
other remuneration to its directors or officers that constitutes an expense to
the Company.

Compensation of Directors

All directors of the Company or any of its affiliates are
compensated for their services as directors and members of a committee through a
combination of monthly fees and share-based awards. In addition, Directors are
entitled to participate in the Companys Stock Option Plan.

38

---

Directors Compensation During 2012 Fiscal Year

Name
    Feesearned($)
    Share-basedawards($)
    Option-basedawards(#)
    Option exerciseprice($)
    OptionexpirationDate
    All othercompensation($)Robert Pollock
    $29,250
    $nil
    nil
    n/a
    n/a
    $nilTim Sorensen
    $31,750
    $nil
    nil
    n/a
    n/a
    $nilDavid Guebert
    $31,750
    $nil
    nil
    n/a
    n/a
    $nilJoseph Rus
    $33,750
    $nil
    150,000(1)
    $2.00
    October 31, 2016
    $nilJohn Campbell
    $3,000
    $nil
    nil
    n/a
    n/a
    $nil


Notes:

1.  Options vest one-third immediately, one-third on October 31, 2012 and one-third on October 31, 2014.

Directors and Officers Liability Insurance

The Company maintains liability insurance for the benefit of
the directors and officers of the Company and its subsidiaries against liability
incurred by them in their respective capacities. The current annual policy limit
is $10,000,000. Under the policy, individual directors and officers are
reimbursed for losses incurred in their capacities as such, subject to a
deductible of $50,000 for securities or employment practices claims and no
deductible for all other claims. The deductible is the responsibility of the
Company. The Company paid the annual premium of $93,500.

C.          
Board Practices

Our directors are re-elected and our officers are re-appointed
at the annual general meeting of our shareholders. Each of our current directors
and officers will continue to hold his respective office until his successor is
elected or appointed, unless his office is earlier vacated under any of the
relevant provisions of our Articles or of the British Columbia Business
Corporations Act.

All of our directors, except Mr. Farah, became directors of our
company on December 19, 2011 in connection with the amalgamation of Old Merus
and Envoy. Mr. Farah became a director on January 12, 2012.

There are no directors service contracts with the company or
any of its subsidiaries providing for benefits upon termination of
employment.

The members of the Companys Audit Committee are:

Member
    Independent(1)
    Financially Literate(2)David Guebert(3)
    Yes
    YesTimothy Sorensen
    Yes
    YesJoseph Rus
    Yes
    Yes


|1. | A member of an audit committee is independent if the
      member has no direct or indirect material relationship with the Company,
      which could, in the view of the Board, reasonably interfere with the
      exercise of a members independent judgment.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

39

---

|2. | An individual is financially literate if he has the
      ability to read and understand a set of financial statements that present
      a breadth of complexity of accounting issues that are generally comparable
      to the breadth and complexity of the issues that can reasonably be
      expected to be raised by the Companys financial statements.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. | Mr. Guebert is the chair of the Audit
  Committee.                                                                                                                                                                                                                                                                                                              

The audit committee reviews and approves the scope of the audit
procedures employed by our independent auditors, reviews the results of the
auditors examination, the scope of audits. The audit committee also recommends
the selection of independent auditors.

Board Committees

The directors have established the Audit Committee, the
Compensation Committee and the Nominating and Corporate Governance Committee to
focus resources and expertise in certain areas of the Boards mandate.

(a) Audit Committee

The Audit Committee is comprised of three directors, David
Guebert (Chair), Tim Sorensen and Joseph Rus. All three members of the Audit
Committee are independent directors of the Company. Among other things, the
Audit Committee is responsible for reviewing the Companys annual and quarterly
consolidated financial statements and reporting to the Board in connection
therewith. On September 22, 2004 (amended on December 4, 2009), the Audit
Committee adopted a new Audit Committee Charter, which specifies the auditors
accountability to the Board and the authority and responsibilities of the Audit
Committee in compliance with National Instrument 52-110  Audit Committees. A
copy of the Audit Committee Charter is incorporated by reference herein as
Exhibit 15.1 to this Form 20-F.

(b) Compensation Committee

The purpose of the Compensation Committee is to assist the
Board in its oversight responsibilities relating to the compensation,
nomination, evaluation and succession of the executive officers of the Company;
the administration of the Companys Stock Option/Stock Appreciation Right Plan;
and the review of executive compensation disclosure. The Compensation Committee
is comprised of three directors, Tim Sorensen (Chair), Rob Pollock and David
Guebert, all of whom are independent directors. A copy of the Compensation
Committee Charter is incorporated by reference herein as Exhibit 15.2 to this
Form 20-F.

(c) Nominating and Corporate Governance Committee

The Board has delegated to the Nominating and Corporate
Governance Committee of the Board responsibility for co-coordinating and
managing the process of recruiting, interviewing and recommending candidates to
the Board; developing and recommending standards of performance of the Board as
a whole, its committees and individual directors; assessing the effectiveness of
the Board as a whole and its committees and the contribution of individual
directors; making recommendations to the Board regarding the composition of
committees of the Board; providing new directors with an orientation program
through a review of past Board materials and other public and private documents
concerning the Company; reviewing and making recommendations to the Board with
respect to developments in the area of corporate governance and the structure
and practices of the Board; and reviewing and assessing compliance by the
Company with applicable corporate governance rules and guidelines established by
securities regulators and stock exchanges. The Nominating and Corporate
Governance Committee is comprised of three independent directors, Tim Sorensen
(Chair), David Guebert and Robert Pollock. A copy of the Nominating and
Corporate Governance Committee Charter is incorporated by reference herein as
Exhibit 15.3 to this Form 20-F.

Position Descriptions

The Board has a broad responsibility for supervising the
management of the business and affairs of the Company. The Chairman of the Board
is responsible for establishing the Agenda for each Board meeting and ensuring
agenda items are dealt with. The Board has not found it necessary to develop
specific position descriptions for the Chair of Board committees. The Board is
currently of the view that the general mandates of committees on which such
directors may sit are sufficient to delineate the role and responsibilities of
the Chair of each committee.

40

---

The Companys articles state that the Chief Executive Officer
of the Company shall exercise general supervision over the affairs of the
Company. The Board has not found it necessary to develop a specific position
description for the Chief Executive Officer beyond this description.

Orientation and Continuing Education

New directors are given the opportunity to individually meet
with members of senior management to improve their understanding of the
Companys business. All directors have regular access to senior management to
discuss Board presentations and other matters of interest.

The Company also gives directors a reference manual, which
contains information about the Companys history and current status, corporate
governance materials, its investments and its shareholders. This reference
manual is updated regularly. It includes the Companys Code of Business Conduct,
which also applies to the directors, as well as governance and responsibilities
of the Board and its committees, and a description of the duties and obligations
of directors. As part of its mandate, the Nominating and Corporate Governance
Committee is also responsible for providing orientation and continuing education
for all board members, including reimbursing costs of attending certain outside
director education programs. During their regular scheduled Board meetings,
directors are given presentations on various aspects of the Companys
business.

Nomination of Directors

The members of the Companys Nominating and Corporate
Governance Committee are all independent directors. The Nominating and Corporate
Governance Committee has the responsibility for assessing potential Board
nominees, screening their qualifications and making recommendations for approval
by the Board of nominees for election or appointment to the Board. To help
achieve this task, the Nominating and Corporate Governance Committee develops
qualifications and criteria for the selection of directors.

The Board aims to have a sufficient range of skills, expertise
and experience to ensure that it can carry out its responsibilities effectively.
Directors are chosen for their ability to contribute to the broad range of
issues that the Board must deal with. The Board reviews each directors
contribution through the Nominating and Corporate Governance Committee and
determines whether the Boards size allows it to function efficiently and
effectively. The Nominating and Corporate Governance Committee is mandated to
review the size of the Board from time to time and recommend changes in size
when appropriate.

Each year, the Nominating and Corporate Governance Committee
reviews how directors are compensated for serving on the Board and its
committees. It compares their compensation to that of similar companies and
recommends any changes to the Board. In 2012, the Board adopted a new
compensation structure to better align the goals of the Company and its senior
management. Directors are paid an annual fee of $20,000, an additional $5,000
for serving on a sub-committee and meeting fees of $1,000 or $750. Directors may
also participate in the Companys Stock Option Plan.

Other Board Committees

The Board has not established any committees other than the
Audit Committee, the Compensation Committee and the Nominating and Corporate
Governance Committee.

Assessments

As part of its charter, the Nominating and Corporate Governance
Committee is required to survey every year all directors on the effectiveness
and performance of the Board and the Boards committees, as well as individual
directors. This is done primarily by distributing questionnaires to each
director and will often include individual interviews with the Chair of the
Nominating and Corporate Governance Committee.

41

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The Companys Board Mandate states that the Nominating and
Corporate Governance Committee will report to the Board annually on the
evaluation of the performance of the Board, each of its committees and that of
individual directors, based on the results of the directors annual
questionnaire.

Shareholder Communication

The objective of the Companys shareholder communication policy
is to ensure open and timely exchange of information relating to the Companys
business, affairs and performance, subject to the requirements of applicable
securities legislation and other statutory and contractual obligations limiting
the disclosure of such information. Information material to the Companys
business is released through news wire services, the general media, telephone
conferences and shareholder mailings, thereby ensuring timely dissemination.
Additionally, individual queries, comments or suggestions can be made at any
time directly to the Companys secretarial department located at its head
office.

D.          
Employees

As at November 30, 2012, Merus had 3 employees based in
Toronto, Canada, 3 employees in Vancouver, Canada, 1 employee in Montreal,
Canada and 1 employee in Luxembourg.

E.          
Share Ownership

Options

The Company has established a Stock Option Plan pursuant to
which options to purchase common shares may be granted to directors, officers,
employees or certain consultants to the Company or any of its subsidiaries, as
determined by the Board. The Plan authorizes the Board or the Compensation
Committee, as applicable, to grant options to purchase shares on the following
terms and conditions:

- the aggregate number of shares which may be issued pursuant to options
  granted under the Plan will not exceed that number which is equal to ten
  percent of the issued and outstanding shares from time to time;
- any increase in the issued and outstanding shares will result in an
  increase in the available number of shares issuable under the Plan, and any
  exercises of options will make new grants available under the Plan effectively
  resulting in a re-loading of the number of options available to grant under
  the Plan;
- no single participant in the Plan and his, her or its associates may be
  granted options which could result in the issuance of shares exceeding five
  percent of the issued and outstanding Common Shares, within a one year period,
  to such participant and his, her or its associates, in the aggregate;
- the number of shares issuable to any single participant in the Plan
  pursuant to options, shall not exceed five percent of the issued and
  outstanding shares;
- the number of shares issuable to Insiders, at any time, under all share
  compensation arrangements, shall not exceed ten percent of the issued and
  outstanding shares;
- the exercise price of an option shall not be less than the closing price on
  the day prior to the date of grant of the option;
- options granted under the Plan will be granted for a term not to exceed ten
  years from the date of grant;
- in the event of the termination of a participants employment with for
  cause or as a result of the participants voluntary resignation prior to
  normal retirement, such participants options will terminate three months from
  the date of such termination, and in the event of the retirement, death,
  physical or mental disability or termination (other than for
  cause) by the Company, the participants options will terminate 12 months from
  the date employment ceased, provided in each case that no options will be
  extended past their term except as provided below;

42

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- the Board or Compensation Committee is entitled to extend the time during
  which a participant may exercise their options at its discretion provided that
  such extension does not extend past the maximum ten year term;
- during a participants lifetime, an option may not be assigned or
  transferred except to a participants trust; and

The maximum number of common shares currently reserved for
issuance upon exercise of options under the Stock Option Plan is 3,070,847
common shares. As at September 30, 2012 there were 2,320,000 outstanding options
to purchase common shares under the Stock Option Plan. The aggregate number of
common shares reserved for issuance to any one individual under the Stock Option
Plan may not exceed 5% of the issued and outstanding common shares.

The following table sets forth shares owned by the Named
Executive Officers and Directors as of September 30, 2012:

Percent ofNumber of Common Shares
    OutstandingIdentity of Person
    Owned
    ClassElie Farah
    863,535
    2.8%Ahmad Doroudian
    1,675,000
    5.5%Andrew Patient
    50,000
    0.2%Ulrich Schoeberl
    nil
    nilMoira Ong
    nil
    nilAli Moghaddam
    150,000
    0.5%Robert Pollock
    2,426,923
    7.9%Timothy Sorensen
    636,500
    2.1%David Guebert
    40,000
    0.5%Joseph Rus
    nil
    nil


See also Item 6.E Share Ownership for information regarding
outstanding stock options to purchase common shares.

Item 7: Major Shareholders And Related Party Transactions

A.          
Major Shareholders

Ownership of Merus securities are recorded on the books of its
transfer agent in registered form, however the majority of such shares are
registered in the name of intermediaries such as brokerage firms and clearing
houses on behalf of their respective clients and in general Merus does not have
knowledge of the beneficial owners thereof, except for the beneficial ownership
by officers and directors of Merus. Merus is not directly or indirectly owned or
controlled by another corporation or entity or by any foreign government.

The following table sets forth persons known to us to be the
beneficial owner of more than five percent (5%) of each class of our shares
issued and outstanding as of December 19, 2012:

43

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Name
    Number of Common
      Shares(1)
    Percentage of Common
      Shares(2)CIBC Global Asset Management Inc.
    3,506,500
    11.4%Robert Pollock
    2,426,923
    7.9%Pasquale DiCapo
    2,211,875
    7.2%Ahmad Doroudian
    1,675,000
    5.5%


|(1) | Does not include options to acquire common shares of our
      company held by the persons set forth in the table.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Based on 30,708,478 common shares issued and outstanding
      as of December 19, 2012. Beneficial ownership is determined in accordance
      with the rules of the SEC and generally includes voting or investment
      power with respect to securities. Except as otherwise indicated, we
      believe that the beneficial owners of the common stock listed above, based
      on information furnished by such owners, have sole investment and voting
      power with respect to such shares, subject to community property laws
      where applicable.

On February 10, 2011, Mr. Geoffrey B. Genovese, the Companys
former director and officer, sold 1,540,606 shares, representing approximately
19.12% of the outstanding shares in a private transaction, the majority of
which, 1,200,000 shares, were purchased by Robert Pollock.

On December 29, 2011, Mr. Pollock announced that, on December 19, 2011, he acquired ownership of 2,187,500 common shares of Merus and 606,250 common share purchase warrants of Merus (the “Warrants”) (each Warrant entitling the holder thereof to acquire one common share of Merus) which securities were acquired by Pollock directly or over which he has direction and control. In addition, Pollock is the holder of 150,000 stock options (the “Options”) (each Option entitling the holder thereof to acquire one common share of Merus). These securities represented approximately 9.0% of the current issued and outstanding common shares of Merus (the “Common Shares”) (or approximately 11.8% on a partially diluted basis, assuming exercise of the Warrants and Options only). In addition, on December 19, 2011, a joint actor of Pollock acquired ownership and control of 39,540 broker warrants of Merus (the “Broker Warrants”) (each Broker Warrant entitling the holder thereof to acquire one Common Share and one-half of one common share purchase warrant, with each whole common share purchase warrant entitling the holder thereof to acquire an additional Common Share), which (i) represented approximately 0.2% of the current issued and outstanding Common Shares on a partially diluted basis, assuming exercise of the Broker Warrants only; and (ii) when taken together with the securities acquired by Pollock, represented approximately 12.0% of the current issued and outstanding Common Shares on a partially diluted basis, assuming exercise of the Warrants, Options and Broker Warrants only.

On December 28, 2011, Mr. Pasquale DiCapo (“DiCapo”), announced that, on December 21, 2011, he acquired ownership of 1,900,000 common shares of Merus Labs International Inc. (“Merus”) and 406,250 common share purchase warrants of Merus (the “Warrants”) (each Warrant entitling the holder thereof to acquire one common share of Merus) which securities were acquired by DiCapo directly. These securities represented approximately 7.85% of the current issued and outstanding common shares of Merus (the “Common Shares”) (or approximately 9.37% on a partially diluted basis, assuming exercise of the Warrants only). In addition, on December 21, 2011, a joint actor of DiCapo acquired ownership and control of 523,750 Common Shares, 130,937 common share purchase warrants of Merus (the “Joint Actor Warrants”) (each Joint Actor Warrant entitling the holder thereof to acquire one Common Share) and 58,160 broker warrants of Merus (the “Broker Warrants”) (each Broker Warrant entitling the holder thereof to acquire one Common Share and one-half of one common share purchase warrant, with each whole common share purchase warrant entitling the holder thereof to acquire an additional Common Shares), which (i) represented approximately 2.16% of the then issued and outstanding Common Shares (or approximately 3.04% on a partially diluted basis, assuming exercise of the Joint Actor Warrants and Broker Warrants only); and (ii) when taken together with the securities acquired by DiCapo, represented approximately 10.01% of the current issued and outstanding Common Shares (or approximately 12.28% on a partially diluted basis, assuming exercise of the Warrants, Joint Actor Warrants and Broker Warrants only).

On June 29, 2012, CIBC Global Asset Management Inc. filed an Alternative Monthly Report announcing that as a result of transactions in the market in the ordinary course of business by one or more of its mutual fund, pension fund or other client accounts during the month of June 2012 and/or as a result of reorganization of capital structure of shares of Merus Labs International Inc. (the "Issuer"), the aggregate number of shares of the Issuer held by all of its client accounts as at June 29, 2012 was 3,506,500, representing, based on CIBC Global Asset Management Inc.'s understanding, approximately 11.68%, of all outstanding shares of that class. CIBC Global Asset Management Inc. specifically disclaimed any beneficial ownership of the reported securities but, as investment manager, it maintains exclusive power to exercise investment control or direction over 3,506,500 shares representing 11.68% of the outstanding shares for its client accounts as the beneficial owners.

44

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As of December 19, 2012, Olympia Trust Company, our registrar
and transfer agent, reported that the Common Shares are held as follows:

Number of RegisteredLocation
    Number of Shares
    Percentage of Shares
    Shareholders of RecordCanada
    25,268,479
    82.29%
    152United States
    5,420,816
    17.65%
    136Other
    19,183
    0.06%
    9Total
    30,708,478
    100%
    297


To the best of our knowledge, and with the exception of the
amalgamation transaction described above, no other significant change in the
percentage ownership of any major shareholder of the Company has taken place
during the past three years.

See also Item 6.E Share Ownership for information regarding
outstanding stock options to purchase common shares.

B.         
 Related Party Transactions

In January, 2011 Envoy sold its approximate 21% interest in
Sereno Capital Corporation (Sereno), a Capital Pool Company. Members of
Envoys management group were also officers and directors of Sereno and
exercised significant influence. The investment in Sereno was accounted for
using the equity method.

As part of the amalgamation, the Company acquired an amount due
to one of its officers of $2,000. The amount owing was unsecured, non-interest
bearing, and due on demand. The amount was repaid in early 2012.

These transactions were recorded at the exchange amount, being
the amount agreed to by the related parties, as the transactions were considered
to be in the ordinary course of business.

Except as disclosed above, no director or executive officer,
and no relative or spouse of the foregoing persons (or relative of such spouse)
who has the same house as such person or is an executive officer or director of
any parent or subsidiary of Merus has, or during the last fiscal year of Merus
had, any material interest, direct or indirect, in any transactions, or in any
proposed transaction, which in either such case has materially affected or will
materially affect Merus.

There are no outstanding loans currently owed to Merus by any
director or executive officer.

Interests of Experts and Counsel

Not applicable.

Item 8: Financial Information

The audited financial statements for the years ended September
30, 2012, and 2011 can be found under Item 17 Financial Statements.

Legal Proceedings

There are no pending legal proceedings to which we are a party
or of which any of our property is the subject. There are no legal proceedings
to which any director, officer or affiliate of our company or any associate of
any such director, officer or affiliate of our company is a party or has a
material interest adverse to us.

45

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Dividend Distributions

Holders of our common shares are entitled to receive such
dividends as may be declared from time to time by our board, in its discretion,
out of funds legally available for that purpose. We intend to retain future
earnings, if any, for use in the operation and expansion of our business and do
not intend to pay any cash dividends in the foreseeable future.

Significant Changes

None.

Item 9: The Offer and Listing

A.          
Price History

Merus common shares are listed on the TSX under the symbol
MSL and on NASDAQ under the symbol MSLI. Prior to December 19, 2011, Merus
common shares were listed for trading on the TSX under the symbol ECG and on
NASDAQ under the symbol ECGI. The common shares began trading on NASDAQ on
June 6, 2000 and on the TSX on September 3, 1997. From March 1984 until
September 2, 1997 Merus shares traded on the Vancouver Stock Exchange. Information prior to December 19, 2011 is for the common shares of Envoy.

The following table sets forth the reported high and low sale
prices in Canadian dollars for the common shares on the TSX for the fiscal,
quarterly and monthly periods indicated.

High
    LowFiscal 2008
    $ 3.24
    $ 2.00Fiscal 2009
    2.34
    1.10Fiscal 2010
    1.55
    0.88Fiscal 2011
    2.10
    0.76Fiscal 2012
    2.49
    1.36


High
    LowQuarterly 2012First Quarter
    2.38
    1.57Second Quarter
    2.49
    1.48Third Quarter
    2.35
    1.51Fourth Quarter
    1.90
    1.36


Quarterly 2011First Quarter
    1.05
    0.76Second Quarter
    1.89
    0.86Third Quarter
    2.05
    1.46Fourth Quarter
    2.10
    1.54


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For the month endedNovember 30, 2012
    1.55
    1.26October 31, 2012
    1.49
    0.85September 30, 2012
    1.60
    1.36August 31, 2012
    1.74
    1.46July 31, 2012
    1.90
    1.60June 30, 2012
    1.83
    1.64


The following table sets forth the reported high and low sale
prices in U.S. dollars of trading for the common shares as reported on NASDAQ
for the fiscal, quarterly and monthly periods indicated.

High
    LowFiscal 2008
    US$ 3.39
    US$ 1.90Fiscal 2009
    2.09
    0.82Fiscal 2010
    1.50
    0.75Fiscal 2011
    2.18
    0.10Fiscal 2012
    2.41
    1.26


High
    LowQuarterly 2012First Quarter
    2.31
    1.55Second Quarter
    2.41
    1.41Third Quarter
    2.41
    1.52Fourth Quarter
    1.98
    1.26Quarterly 2011First Quarter
    1.03
    0.70Second Quarter
    1.89
    0.86Third Quarter
    2.18
    1.55Fourth Quarter
    2.15
    0.10For the month endedNovember 30, 2012
    1.52
    1.23October 31, 2012
    1.67
    0.90September 30, 2012
    1.57
    1.26August 31, 2012
    1.73
    1.46July 31, 2012
    1.98
    1.58June 30, 2012
    1.78
    1.56


47

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On November 30, 2012 the closing price of the common shares as
reported on the TSX was $1.26 and on NASDAQ was US$1.25.

B.          
Plan of DistributionNot applicable.

C.          
MarketsOur common shares are exclusively traded
on the TSX and NASDAQ markets.

D.          Selling ShareholdersNot applicable.

E.          
DilutionNot applicable.

F.          
Expenses of the IssueNot applicable.

Item 10: Additional Information

A.          
Share CapitalNot applicable.

B.          
Memorandum and Articles of Association

Our Articles and Notice of Articles are filed as an exhibit to
this Annual Report.

Our Articles do not contain a description of our objects and
purposes.

Our Articles do not restrict a directors power to (a) vote on
a proposal, arrangement or contract in which the director is materially
interested, (b) to vote compensation to themselves or any other members of their
body in the absence of an independent quorum, or (c) exercise borrowing powers.
Under our Articles, there is no mandatory retirement age for our directors and
our directors are not required to own securities of our company in order to
serve as directors.

Our authorized capital consists of an unlimited number of
common shares without par value and an unlimited number of preferred shares
without par value.

Holders of our common shares are entitled to vote at all
meetings of shareholders, receive any dividend declared by our companys board
of directors and, subject to the rights, privileges, restrictions and conditions
attaching to any other class of shares, receive the remaining property of our
company upon dissolution.

Our Articles state that the rights attaching to our common
shares and preference shares may be altered, amended, repealed, suspended or
changed by the affirmative vote of the holders of not less than two-thirds of
our common and preference shares.

At each annual general meeting of our company, all of our
directors retire and the shareholders elect a new board of directors. Each
director holds office until our next annual general meeting, or until his office
is earlier vacated in accordance with our Articles or with the provisions of the
British Columbia Business Corporations Act. A director appointed or elected to
fill a vacancy on our board also holds office until our next annual general
meeting. Our Articles provide that our annual meetings of shareholders must be
held at such time in each calendar year and not more than 15 months after the last annual general meeting and
at such place as our board of directors may from time to time determine.

48

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Under our Articles, and subject to the special rights and
restrictions attached to the shares of any class or series of shares, the quorum
for the transaction of business at a meeting of our shareholders is two persons
who are present in person or by proxy who, in the aggregate, hold at least 5% of
the issued shares entitled to be voted at the meeting.

Our Articles state that our directors, the President, the
Secretary, and any lawyer or auditor of our company are entitled to attend any
meeting of our shareholders.

There are no provisions in our Articles that would have the
effect of delaying, deferring or preventing a change in control of our company,
and that would operate only with respect to a merger, acquisition or corporate
restructuring involving our company.

Our Articles do not contain any provisions governing the
ownership threshold above which shareholder ownership must be disclosed.
Securities legislation in Canada, however, requires that we disclose in our
annual general meeting proxy statement, holders who beneficially own more than
10% of our issued and outstanding shares, and United States Federal securities
laws require the disclosure in our annual report on Form 20-F of holders who own
more than 5% of our issued and outstanding shares.

C.          
Material Contracts

None.

D.          
Exchange Controls and Other Limitations Affecting Security Holders

In general, there is no governmental law, decree or regulation
in Canada that restricts the export or import of capital, or that affects the
remittance of dividends, interest or other payments to a non-resident holder of
common shares of Merus, other than withholding tax requirement. See Item l0.E.
Taxation.

Except as provided in the Investment Canada Act, there are no
limitations specific to the rights of non-Canadians to hold or vote our common
shares under the laws of Canada or British Columbia or in our charter documents.
The following summarizes the principal features of the Investment Canada Act for
non-Canadian residents proposing to acquire our common shares.

This summary is of a general nature only and is not intended to
be, and should not be construed to be, legal advice to any holder or prospective
holder of our common shares, and no opinion or representation to any holder or
prospective holder of our common shares is hereby made. Accordingly, holders and
prospective holders of our common shares should consult with their own legal
advisors with respect to the consequences of purchasing and owning our common
shares.

The Investment Canada Act governs the direct or indirect
acquisition of control of an existing Canadian business by non-Canadians. Under
the Investment Canada Act, non-Canadian persons or entities acquiring control
(as defined in the Investment Canada Act) of a corporation carrying on business
in Canada are required to either notify, or file an application for review with,
Industry Canada, unless a specific exemption, as set out in the Investment
Canada Act, applies. Industry Canada may review any transaction which results in
the direct or indirect acquisition of control of a Canadian business, where the
gross value of corporate assets exceeds certain threshold levels (which are
higher for investors from members of the World Trade Organization, including
United States residents, or World Trade Organization member-controlled
companies) or where the activity of the business is related to Canadas cultural
heritage or national identity. No change of voting control will be deemed to
have occurred, for purposes of the Investment Canada Act, if less than one-third
of the voting control of a Canadian corporation is acquired by an investor. In
addition, the Investment Canada Act permits the Canadian government to review
any investment where the responsible Minister has reasonable grounds to believe
that an investment by a non-Canadian could be injurious to national security. No
financial threshold applies to a national security review. The Minister may deny
the investment, ask for undertakings, provide terms or conditions for the
investment or, where the investment has already been made, require divestment.
Review can occur before or after closing and may apply to corporate
re-organizations where there is no change in ultimate control.

49

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If an investment is reviewable under the Investment Canada Act,
an application for review in the form prescribed is normally required to be
filed with Industry Canada prior to the investment taking place, and the
investment may not be implemented until the review has been completed and the
Minister responsible for the Investment Canada Act is satisfied that the
investment is likely to be of net benefit to Canada. If the Minister is not
satisfied that the investment is likely to be of net benefit to Canada, the
non-Canadian applicant must not implement the investment, or if the investment
has been implemented, may be required to divest itself of control of the
Canadian business that is the subject of the investment. The Minister is
required to provide reasons for a decision that an investment is not of net
benefit to Canada.

Certain transactions relating to our common shares will
generally be exempt from the Investment Canada Act, subject to the Ministers
prerogative to conduct a national security review, including:

| | (a) | the acquisition of our common shares by a person in the
      ordinary course of that persons business as a trader or dealer in
      securities;                                                                                                                                      
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                         
| | (b) | the acquisition of control of our company in connection
      with the realization of security granted for a loan or other financial
      assistance and not for a purpose related to the provisions of the
      Investment Canada Act; and                                           
| |     |                                                                                                                                                                                                                                                                                         
| | (c) | the acquisition of control of our company by reason of an
      amalgamation, merger, consolidation or corporate reorganization following
      which the ultimate direct or indirect control in fact of our company,
      through ownership of our common shares, remains
  unchanged.

E.          
Taxation

Certain Canadian Federal Income Tax Considerations

The following discussion is intended to be a general summary of
certain material Canadian federal income tax considerations applicable to
holders of common shares described below and is not intended to be, nor should
it be construed to be, legal or tax advice to any particular person, and no
opinion or representation with respect to income tax considerations is hereby
given or made. It does not take into account the particular circumstances of any
investor and does not address considerations applicable to an investor to whom
special provisions of Canadian income tax law apply. Each person should consult
their own tax advisors with respect to the tax consequences of an investment in
the common shares in their own particular circumstances.

The following summary is based upon the current provisions of
the Income Tax Act (Canada) (the ITA), and the regulations thereunder and the
Canada-United States Income Tax Convention (1980) as amended (the Convention),
all proposed amendments to the ITA and the regulations thereunder publicly
announced by the Department of Finance, Canada prior to the date hereof, and the
current published administrative policies and assessing practices of the Canada
Revenue Agency. Except for the foregoing, this summary does not take into
account or anticipate any changes in the law or the Convention or the
administrative policies or assessing practices of the Canada Revenue Agency
whether by legislative, governmental or judicial action or decision, and does
not take into account or anticipate provincial, territorial or foreign tax
legislation or considerations, which may differ significantly from the Canadian
federal income tax considerations described herein.

The summary discusses the principal Canadian federal income tax
considerations under the ITA and the regulations thereunder generally applicable
to purchasers of common shares who at all times: (i) for purposes of the ITA,
are not, have not been and will not be or be deemed to be resident in Canada
while they held or hold common shares, deal at arms length with Merus, are not
affiliated with Merus, hold their common shares as capital property, do not use
or hold, and will not and will not be deemed to use or hold their common shares
in, or in the course of carrying on a business in Canada, and are not financial
institutions for the purposes of the mark-to-market rules; and (ii) for
purposes of the Convention, are residents of the U.S. and not residents of
Canada, are qualifying persons entitled to the benefits of the Convention, and
will not hold their common shares as part of the business property of, or so
that their common shares are effectively connected with, a permanent
establishment in Canada or in connection with a fixed base in Canada (a U.S.
Holder). Special rules, which are not discussed in this summary, may apply to a
U.S. Holder that is an insurer carrying on a business in Canada and elsewhere.

50

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Amounts in respect of common shares paid or credited or deemed
to be paid or credited as, on account or in lieu of payment of, or in
satisfaction of, dividends to a U.S. Holder will generally be subject to
Canadian non-resident withholding tax. Such withholding tax is levied at a rate
of 25%, which may be reduced pursuant to the terms of the Convention. Under the
Convention, the rate of Canadian non-resident withholding tax on the gross
amount of dividends beneficially owned by a U.S. Holder is generally 15%.
However, in certain circumstances, the rate of such withholding is 5%.

A U.S. Holder will not be subject to tax under the ITA in
respect of any disposition of common shares (other than a disposition to Merus)
unless at the time of such disposition such common shares constitute taxable
Canadian property of the holder for purposes of the ITA. If the common shares
are listed on a designated stock exchange for the purposes of the ITA, such as
the TSX, at the time they are disposed of, they will generally not constitute
taxable Canadian property of the U.S. Holder at the time of disposition of
such shares unless at any time during the 60-month period immediately preceding
the disposition of the common shares, 25% or more of the issued shares of any
class or series of Merus was owned by the U.S. Holder, by persons with whom the
U.S. Holder did not deal at arms length or by the U.S. Holder and persons with
whom the U.S. Holder did not deal at arms length. The common shares may also be
taxable Canadian property in certain other circumstances. Under the Convention,
gains derived by a U.S. Holder from the disposition of common shares will
generally not be taxable in Canada unless the value of the common shares is
derived principally from real property situated in Canada. If the common shares
are listed on a recognized stock exchange for the purposes of the ITA at the
time they are disposed of by a U.S. Holder, the U.S. Holder will generally not
be required to comply with the provisions of section 116 of the ITA, which
requires notification to be given to the Canada Revenue Agency when certain
property is disposed of.

Certain United States Federal Income Tax Considerations

The following is a general discussion of certain material
anticipated United States federal income tax considerations relevant to U.S.
Holders, defined below, of Merus common shares who hold such shares as capital
assets (as defined in Section 1221 of the United States Internal Revenue Code of
1986, as amended (the Code)). This discussion is based on the Code, U.S.
Treasury regulations thereunder (the Treasury Regulations), administrative
rulings, and court decisions, all as in effect as of the date hereof and all of
which are subject to differing interpretations and may change at any time
(possibly with retroactive effect). This discussion is intended to be a general
description of the United States federal income tax considerations material to a
purchase, ownership and a disposition of common shares. Readers are cautioned
that this discussion does not address all relevant tax consequences relating to
an investment in the common shares, nor does it take into account tax
consequences peculiar to persons subject to special provisions of United States
federal income tax law, such as financial institutions, tax-deferred accounts,
tax-exempt organizations, qualified retirements plans, real estate investment
trusts, regulated investment companies or brokers, dealers or traders in
securities, persons actually or constructively owning 10% or more of the voting
power of Merus stock, persons that hold common shares through a partnership or
other pass through entity, or persons that hold common shares that are a hedge
against, or that are hedged against, currency risk or that are part of a
straddle or conversion transaction, or persons whose functional currency is not
the United States dollar. Therefore, investors should consult a tax advisor
regarding the particular consequences of purchasing common shares.

U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT
TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR
PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE UNITED
STATES FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY STATE, LOCAL OR
FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

Except as otherwise described, this discussion applies to
investors that are (i) citizens or individual residents of the United States;
(ii) corporations (or other entities taxable as corporations), that are created
or organized in or under the laws of the United States, any state of the United
States or the District of Columbia; (iii) estates, the income of which is
subject to federal income taxation, regardless of its source; or (iv) trusts
(a), if a court within the United States is able to exercise primary supervision
over the administration of such trust and one or more United States persons as
described in Section 7701(a)(30) of the Code has the authority to control all
substantial decisions of such trust, or (b) that was in existence on August 20,
1996, was treated as a U.S. person under the code on the previous day and has a valid election in effect under applicable Treasury Regulations
to be treated as a United States person (a U.S. Holder).

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The United States federal income tax treatment of a holder of
common shares that is a partnership (or other entity taxable as a partnership
for United States federal tax purposes) generally will depend on the status of
the partner and the activities of the partnership. Partners in partnerships
holding common shares should consult their tax advisors about the United States
federal income tax consequences of the purchase, ownership and disposition of
common shares.

Passive Foreign Investment Company Rules

Special United States federal income tax rules apply to U.S.
Holders owning shares of a passive foreign investment company (a PFIC). A
non-United States corporation generally will be classified as a PFIC for United
States federal income tax purposes in any taxable year in which, after applying
relevant look-through rules with respect to the income and assets of
subsidiaries, either at least 75% of its gross income is passive income, (the
income test), or on average at least 50% of the gross value of its assets, as
determined on a quarterly average, is attributable to assets that produce
passive income or are held for the production of passive income (the asset
test). For this purpose, passive income generally includes, among other things,
dividends, interest, certain rents and royalties, and gains from the disposition
of passive assets. Merus believes that it was a PFIC for the taxable year ended
September 30, 2011, and has been a PFIC in prior tax years. Depending on its
income, assets and activities, Merus believes that it may be a PFIC in the
current taxable year and in subsequent taxable years.

If Merus is classified as a PFIC for any taxable year during
which a U.S. Holder holds common shares, Merus will continue to be treated as a
PFIC with respect to such U.S. holder in all succeeding years, regardless of
whether Merus continues to meet the income test or asset test described above in
such succeeding years. However, under the Treasury Regulations, such U.S. Holder
will not be treated as holding stock in a PFIC, if in a subsequent taxable year
in which Merus is not a PFIC, such holder elects to recognize any unrealized
gain in such common shares as of the last day of the last taxable year during
which Merus qualified as a PFIC (a deemed sale election). Any gain so
recognized will be subject to the adverse ordinary income and any special
interest charge consequences described below. Any loss realized on the deemed
sale is not recognized.

If a U.S. Holder holds common shares of Merus in any year in
which it is classified as a PFIC, unless a U.S. Holder has a valid qualified
electing fund (QEF) election or a mark-to-market election, described below,
in effect with respect to the common shares, the following income tax
consequences will result to the U.S. Holder:

1. Distributions with respect to Merus common shares made by
Merus during the taxable year to a U.S. Holder that are excess distributions
(generally distributions that exceed 125% of the average amount of distributions
in respect of such common shares received during the preceding three years or,
if shorter, during the U.S. Holder's holding period prior to the distribution
year) must be allocated ratably to each day of the U.S. Holders holding period.
The amounts allocated to the current taxable year and to taxable years prior to
the first year in which Merus was classified as a PFIC are included as ordinary
income in a U.S. Holders gross income for that year. The amount allocated to
each other prior taxable year is taxed as ordinary income at the highest tax
rate in effect for the U.S. Holder in that prior year and the tax is subject to
an interest charge at the rate applicable to deficiencies in income taxes (the
special interest charge), and

2. The entire amount of any gain realized upon the sale or
other disposition of Merus common shares will be treated as an excess
distribution made in the year of sale or other disposition and as a consequence
will be treated as ordinary income and, to the extent allocated to years prior
to the year of sale or disposition, will be subject to the interest charge
described above. No portion of any excess distribution will be eligible for the
favorable 15% United States federal income tax rate applicable to so-called
qualified dividend income.

QEF Election

A U.S. Holder that owns common shares may elect to have Merus
treated as a QEF, provided that Merus provides such person with certain
information. A QEF election must be made by a U.S. Holder before the due date
(with regard to extensions) for such persons U.S. federal income tax return for
the taxable year for which the election is made and once made, is effective for
all subsequent taxable years ofsuch U.S. Holder unless revoked with the consent of the IRS. A U.S. Holder that has a QEF election in
effect with respect to all years that such holder holds Merus stock and that
Merus is a PFIC is referred to herein as an Electing U.S. Holder. Merus has
made available to U.S. Holders, and expects to continue to make available to
U.S. Holders, in accordance with applicable procedures, the annual information
statement currently required by the IRS, which will include information as to
the allocation of Merus ordinary earnings and net capital gain among the common
shares and as to distributions on such common shares. Such statement may be used
by Electing U.S. Holders for purposes of complying with the reporting
requirements applicable to the QEF election.

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An Electing U.S. Holders gain or loss on the sale or other
disposition of such common shares generally will be a capital gain or loss. Such
capital gain or loss generally will be long-term if such Electing U.S. Holder
held the common shares for more than one year at the time of the disposition.
For non-corporate U.S. Holders, long-term capital gain is generally subject to a
maximum federal income tax rate (currently imposed at a rate of 15%) for taxable
years beginning on or before December 31, 2010 (and, possibly, a higher rate
thereafter).

A U.S. Holder holding common shares with respect to which a QEF
election is not in effect for any taxable year in which Merus is a PFIC may
avoid the adverse ordinary income and special interest charge consequences
(described above) upon any subsequent disposition of such common shares if such
person elects to recognize any unrealized gain in such common shares as of the
first day in the first year that the QEF election applies to such common shares
(a deemed sale election). Any gain so recognized, however, will be subject to
the adverse ordinary income and special interest charge consequences described
above.

In any year that Merus is treated as a PFIC, an Electing U.S.
Holder will be required to include currently in gross income such U.S. Holders
pro rata share of Merus annual ordinary earnings and annual net capital gains.
Such inclusion will be required whether or not such U.S. Holder owns common
shares for an entire year or at the end of Merus taxable year. The amount so
includable will be determined without regard to the amount of cash
distributions, if any, received from Merus. Electing U.S. Holders will be
required to pay United States federal income tax currently on such imputed
income, unless, as described below, an election is made to defer such payment.
The amount currently included in income will be treated as ordinary income to
the extent of the Electing U.S. Holders allocable share of Merus ordinary
earnings and generally will be treated as long-term capital gain to the extent
of such U.S. Holders allocable share of Merus net capital gains. Such net
capital gains ordinarily would be subject to a maximum 15% United States federal
income tax rate for taxable years beginning on or before December 31, 2010 (and,
possibly, a higher rate thereafter) in the case of non-corporate U.S. Holders,
unless Merus elects to treat the entire amount of its net capital gain as
ordinary income. No portion of such ordinary earnings will be eligible for the
favorable 15% United States federal income tax rate applicable to so-called
qualified dividend income.

If an Electing U.S. Holder demonstrates to the satisfaction of
the IRS that amounts actually distributed to him have been previously included
in income as described above by such U.S. Holder or a previous U.S. Holder, such
distributions generally will not be taxable. An Electing U.S. Holders adjusted
tax basis in his common shares will be increased by any amounts currently
included in income under the QEF rules and will be decreased by any subsequent
distributions from Merus that are treated as non-taxable distributions of
previously-included income (as described in the preceding sentence). For
purposes of determining the amounts includable in income by Electing U.S.
Holders, the tax bases of Merus assets, and Merus ordinary earnings and net
capital gains, will be computed on the basis of United States federal income tax
principles. Accordingly, it is anticipated that such tax bases and such ordinary
earnings and net capital gains may differ from the figures set forth in Merus
financial statements.

An Electing U.S. Holder who sells his common shares prior to
the end of Merus taxable year will be required to include in income, as of the
last day of Merus taxable year, a portion of Merus ordinary earnings and net
capital gains attributable on a pro rata basis to the period during which such
common shares were held during such taxable year. However, the amount of such
U.S. Holders taxable gain on the sale should be reduced, or the amount of his
taxable loss increased, by the amount of such income inclusion. If an Electing
U.S. Holder sells his common shares in a taxable year of such U.S. Holder ending
during Merus then current taxable year, such U.S. Holder may nevertheless have
to include his proportionate share of Merus ordinary earnings and net capital
gains in gross income for his taxable year which includes the last day of Merus
above referred taxable year. While the matter is unclear, such U.S. Holder
should be able to claim a loss in his subsequent taxable year equal to the
amount by which such holders adjusted tax basis in the common shares would
have increased to reflect the imputed income under the QEF rules.

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An Electing U.S. Holder may elect to defer, until the
occurrence of certain events, payment of the United States federal income tax
attributable to amounts includable in income for which no current distributions
are received, but will be required to pay interest on the deferred tax computed
by using the statutory rate of interest applicable to an extension of time for
payment of tax.

Under temporary Treasury Regulations, an individual is required
to include in income a proportionate share of the investment expenses of certain
pass-through entities. It is not clear under such Treasury Regulations whether
a PFIC for which a QEF election is in effect may be treated as a pass-through
entity. If these provisions were to apply to Merus, each individual Electing
U.S. Holder would be required to include in income an amount equal to a portion
of Merus investment expenses and would be permitted an offsetting deduction (if
otherwise allowable under the Code) to the extent that the amount of such
expenses included in income, plus certain other miscellaneous itemized
deductions of such U.S. Holder, exceed 2% of such U.S. Holders adjusted gross
income.

Generally, a QEF election that is made with respect to Merus
will remain in effect throughout an Electing U.S. Holders holding period for
Merus shares, even if Merus does not qualify as a PFIC in every taxable year
following the taxable year in which the election is made. In any year in which
Merus is not treated as a PFIC, an Electing U.S. Holder will have the tax
consequences described below, under the heading, Ownership and Disposition of
Common Shares if Merus is Not a PFIC.

Mark-to-Market Election

A U.S. Holder generally may make a mark-to-market election with
respect to shares of marketable stock of a PFIC. Under the Code and the
Treasury Regulations, the term marketable stock includes stock of a PFIC that
is regularly traded on a qualified exchange or other market. Because Merus
common shares are traded on a qualified exchange or other market, a
market-to-market election will be available with respect to the common
shares.

As a result of a mark-to-market election, a U.S. Holder will
generally be required to report gain annually in an amount equal to the excess
of the fair market value of such common shares at the end of the taxable year
over the adjusted tax basis of such common shares at that time and will
generally be required to report loss annually in an amount equal to the excess
of the adjusted tax basis of such common shares at the end of the taxable year
over the fair market value of the common shares at that time, but only to the
extent of any net market-to market gains for prior years. Any gain under this
computation and any gain on an actual sale or other disposition of the common
shares will be treated as ordinary income. Any loss under this computation will
be treated as ordinary loss. Any loss on an actual sale or other disposition
will be treated as an ordinary loss to the extent of the prior net
mark-to-market gain and thereafter will be considered capital loss. Thus, a U.S.
Holder that makes a mark-to-market election will be taxed on appreciation with
respect to the U.S. Holders common shares even though such U.S. Holder has no
corresponding receipt of cash. In addition, unlike the case of a QEF election, a
U.S. Holder that has made a mark-to-market election generally cannot obtain any
favorably-taxed long-term capital gains with respect to the common shares. The
U.S. Holders adjusted tax basis in the common shares is adjusted for any gain
or loss taken into account under the mark-to-market election. Under the Treasury
Regulations, if a U.S. Holder has made a QEF election and subsequently makes a
mark-to-market election with respect to the same stock, the mark-to-market
election will automatically terminate the QEF election, and such U.S. Holder may
not make another QEF election with respect to the stock before the sixth taxable
year thereafter. Unless either (i) the mark-to-market election is made as of the
first taxable year in which Merus is a PFIC during the U.S. Holders holding
period for the common shares, or (ii) a QEF election has been in effect with
respect to such U.S. holders common stock for all years in which Merus was a
PFIC during such U.S. holders holding period, any mark-to-market gain for the
election year generally will be subject to the excess distribution rules
applicable to dispositions described above.

U.S. Holders are urged to consult their tax advisors
concerning the United States federal income tax consequences of holding and
disposing of stock of a PFIC.

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Ownership and Disposition of Common Shares if Merus is Not a
PFIC

U.S. Holders who do not hold common shares during any taxable
year in which Merus is classified as a PFIC will not be subject to the rules
described above, under the heading Passive Foreign Investment Company Rules.
Instead, such U.S. Holders will be required to include the gross amount of any
distribution on common shares (without reduction for Canadian tax withheld) in
their gross income as a taxable dividend, to the extent such distribution is
paid out of Merus current or accumulated earnings and profits as determined
under United States federal income tax principles. U.S. Holders must include in
income an amount equal to the United States dollar value of such dividends on
the date of receipt, based on the exchange rate on such date. Provided that
Merus is not treated as a PFIC, described above, during any year in which a U.S.
Holder holds Merus common shares in the case of a non-corporate U.S. Holder,
including individuals, such dividends generally will be eligible for a maximum
rate of tax of 15% under current law for dividends received in a taxable year
beginning before January 1, 2011, provided certain conditions are satisfied. To
the extent that distributions paid by Merus exceed Merus current or accumulated
earnings and profits, they will be treated first as a return of capital up to
the U.S. Holders adjusted tax basis in the shares, and then as a gain from the
sale or exchange of the shares.

U.S. Holders will generally be entitled to a foreign tax
credit, or deduction, for United States federal income tax purposes, in an
amount equal to the Canadian tax withheld from a distribution on common shares.
For taxable years beginning on or before December 31, 2006, dividends paid by
Merus generally will constitute foreign source passive income or financial
services income for foreign tax credit purposes. For taxable years beginning
after December 31, 2006, such dividends generally will be treated as passive
category income or general category income, for United States foreign tax
credit purposes. The Code applies various limitations on the amount of foreign
tax credit that may be claimed by a United States taxpayer. Because of the
complexity of those limitations, U.S. Holders should consult their own tax
advisors with respect to the amount of foreign taxes they may claim as a credit.
Dividends paid by Merus on the common shares will not generally be eligible for
the dividends received deductions.

A U.S. Holder that sells common shares will generally recognize
a gain or loss in an amount equal to the difference, if any, between the amount
realized on the sale and the U.S. Holders adjusted tax basis in the shares.
Unless Merus is treated as a PFIC during any year in which the U.S. Holder holds
Merus common shares (described above), any gain or loss recognized upon the
sale of shares held as capital assets will be a long-term or short-term capital
gain or loss, depending on whether the common shares have been held for more
than one year. Such gain or loss generally will be treated as United States
source income or loss for United States foreign tax credit purposes.

Backup Withholding and Information Reporting

United States backup withholding tax and information reporting
requirements generally apply to certain payments to certain non-corporate
holders of the common shares. Information reporting generally will apply to
payments of dividends on, and to proceeds from the sale or disposition of,
common shares by a payor within the United States to a U.S. Holder (if such
person is other than an exempt recipient, including a corporation, not a United
States person that provides an appropriate certification or certain other
persons).

A payor within the United States will be required to withhold
tax (currently imposed at a rate of 28%) on any payments made to a common
shareholder (if that common shareholder is not an exempt recipient) consisting
of dividends on, or proceeds from the sale or disposition of, the common shares,
if the selling common shareholder fails to timely furnish a correct taxpayer
identification number on IRS Form W-9 or otherwise fails to comply with, or
establish an exemption from, such backup withholding tax requirements. Moreover,
a payor or middleman may rely on a certification provided by a payee that is not
a United States person only if such payor or middleman does not have actual
knowledge or a reason to know that any information or certification stated in
such certificate is incorrect. Investors will be allowed a refund or a credit
equal to any amounts withheld under the United States backup withholding tax
rules against their United States federal income tax liability, provided that
they furnish the required information to the IRS.

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F.          
Dividend and Paying AgentsNot applicable.

G.          
Statement by ExpertsNot applicable.

H.          
Documents on Display

Any statement in this Annual Report about any of our contracts
or other documents is not necessarily complete. If the contract or document is
filed as an exhibit to this Annual Report, the contract or document is deemed to
modify our description. You must review the exhibits themselves for a complete
description of the contract or document.

We are subject to the informational reporting requirement of
the Exchange Act and files reports and other information with the SEC. You may
examine all reports and other information filed by Merus with the SEC, including
the documents that are exhibits to this Annual Report, without charge, at the
public reference facilities maintained by the SEC at 100 F Street, N.E.,
Washington, D.C., 20549. For more information on the public reference rooms,
call the SEC at l.800.SEC.0330. our reports and other information filed with the
SEC are also available to the public from commercial document retrieval services
and the website maintained by the SEC at http://www.sec.gov.

I.          
Subsidiary Information

We have the following wholly owned subsidiaries: Merus Labs Inc., governed by the laws of British Columbia, Canada; ECG Holdings Inc., governed by the laws of Delaware, US; Merus Labs Luxco S.a.r.L., governed by the laws of Luxembourg; Merus Labs Netherlands B.V., governed by the laws of Netherlands; and Orbis Pharma Inc., governed by the laws of Ontario.

Item 11: Quantitative and Qualitative Disclosures about
Market Risk

Except as described below, the Company does not have a material
position or exposure with respect to any market risk sensitive instruments (as
defined in Item 11 in Form 20-F).

Until December 19, 2011, a major component of the Companys
strategy revolved around investment operations. The Companys business involved
the purchase and sale of securities and, accordingly, the majority of the
Companys assets were comprised of financial instruments. The use of financial
instruments can expose the Company to several risks, including market, credit
and liquidity risks. Apart from the risks listed below, management is of the
opinion that they are not exposed to any other significant risks. A discussion
of the Companys use of financial instruments and its risk management is
provided below.

(i) Liquidity risk

Liquidity risk is the risk that the
Company will have sufficient cash resources to meet its financial obligations as
they come due. The Companys liquidity and operating results may be adversely
affected if the Companys access to the capital markets is hindered, whether as
a result of a downturn in stock market conditions generally or related to
matters specific to the Company, or if the value of the Companys investments
declines, resulting in losses upon disposition. In order to mitigate this risk,
the Company maintains a sufficient cash balance in order to satisfy short-term
liabilities as they come due and actively pursues raising capital through
various public and private financing mechanisms to satisfy longer term needs.

(ii) Market risk:

Market risk is the risk that the fair
value of, or future cash flows from, the Companys financial instruments will
significantly fluctuate because of changes in market prices. The value of the
financial instruments can be affected by changes in interest rates, foreign
exchange rates, and equity and commodity prices. The Company is exposed to
market risk in trading its investments and unfavourable market conditions could
result in dispositions of investments at less than favourable prices.

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(iii) Currency risk:

The Company is subject to currency risk
through its purchases of inventory in US dollars, product acquisitions
denominated in foreign currencies, and foreign source debt. As such, changes in
the exchange rate affect the operating results of the Company. Dependent on the
nature, amount and timing of foreign currency receipts and payments, the Company
may from time to time enter into foreign currency derivative contracts to reduce
its exposure to foreign currency risk.

(iv) Credit risk:

Certain of the Companys financial
assets, including cash, short-term investments and loans receivable are exposed
to the risk of financial loss occurring as a result of default of a counterparty
on its obligations to the Company. The Company may, from time to time, invest in
debt obligations. The Company is also exposed, in the normal course of business,
to credit risk from customer receivables. These amounts are continually
monitored by management for collectability, and, in general, are lower risk as
they are typically due from large institutions or multinational
distributors.

(v) Interest rate risk:

Interest risk is the impact that
changes in interest rates could have on the Companys earnings and liabilities.
At September 30, 2012, the Company held no interest-bearing investments. Also,
the Company had no exposure to liabilities which bore variable interest rates,
which for example, fluctuated with the prime rate or overnight lending rate. It
is managements opinion that the Company is not exposed to significant interest
rate risk.

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

A.        There have
been no material modifications in the constituent instruments defining any class
of registered securities of the Company.

B.        There has
been no material limitation or qualification of the rights evidenced by any
class of registered securities of the Company by the issuance or modification of
any other class of securities of the Company.

C.There has
been no material withdrawal or substitution of assets securing any class of
registered securities of the Company.

D.        Not
applicable.

E.Not
applicable.

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Item 15: Controls and Procedures

The Company maintains disclosure controls and procedures that
are designed to ensure that the information required to be disclosed in the
Companys Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. After evaluating the
effectiveness of the Companys disclosure controls and procedures (as defined in
Exchange Act Rules l3a - 15(e) and 15d- 15(e)) as of September 30, 2012, our
Chief Executive Officer and Chief Financial Officer have concluded that as of
such date, the Companys disclosure controls and procedure were effective.

There were no changes in our internal controls or in other
factors that could significantly affect these disclosure controls and procedures
during the 2012 fiscal year, including any significant deficiencies or material
weaknesses of internal controls that would require corrective action.

Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. Management
has designed such internal control over financial reporting to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
International Financial Reporting Standards, as applicable.

Because of its inherent limitations, the Companys internal
control over financial reporting may not prevent or detect all possible
misstatements or frauds. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with policies
or procedures may deteriorate.

Management has assessed the effectiveness of the Companys
internal control over financial reporting and concluded that such internal
control over financial reporting is effective as of September 30, 2012.

This annual report does not include an attestation report of
our independent auditors regarding internal control over financial reporting.
Management's report was not subject to attestation by our independent auditors
pursuant to rules of the SEC that permit our Company to provide only
management's report in this annual report.

Changes In Internal Controls Over Financial Reporting

There were no changes in our internal control over financial
reporting during the period covered by this annual report that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.

Item 16A: Audit Committee Financial Expert

The Companys Board of Directors has determined that David
Guebert, an independent director of the Company, is an audit committee financial
expert. The Audit Committee has determined that all three members of the Audit
Committee are Financially Literate. Financially Literate means that a member
has the ability to read and understand a set of financial statements that
present a breadth and level of complexity of accounting issues that are
generally comparable to the breadth and complexity of the issues that can
reasonably be expected to be raised by the Companys financial statements. David
Guebert was determined to be Financially Literate based on his qualifications as
a Canadian Chartered Accountant and experience as the Chief Financial Officer of
a number of public companies where he was responsible for supervising the
preparation of financial statements of a similar breadth and complexity to the
Companys financial statements, where he was responsible for making judgments
and decisions related to accounting matters on behalf of management and where he
was accountable for internal controls and financial reporting procedures. Tim
Sorensen was determined to be Financially Literate based on his significant
experience as director of capital markets and institutional sales. Joseph Rus
was determined to be Financially Literate based on his experience in executive
positions over 25 years in the pharmacy industry. The particulars of each
members experience can be found in the biographies under Item 6A.

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Item 16B: Code of Business Conduct

The Board has adopted a Code of Business Conduct (the Code).
All of the Companys employees, directors and officers must follow the Code,
which provides guidelines for ethical behaviour. A copy of the Code is
incorporated by reference herein as Exhibit 11.1 to this Form 20-F.

The Code sets out in detail the principles and general business
tenets and ethics and compliance policies applicable to the Companys business
and activities. The Code addresses topics such as: honest and ethical conduct
and conflicts of interest; compliance with applicable laws and Company policies
and procedures; business integrity and fair dealing; public disclosure; use of
corporate property and opportunities; confidentiality; compliance with insider
trading and other legal requirements; and records and document retention.

The Board expects all employees at all levels of the companies
within its group, as well as officers, directors, customers, suppliers, vendors,
contractors and partners, to read, understand and comply with the Code. If any
employee is uncertain about a situation, the employee is expected to refer the
matter to a supervisor or Human Resources representative. All employees are also
expected to report in good faith any violations or potential violations of the
Code and to co-operate in internal investigations about a reported violation.
Supervisors are expected to answer employee questions about the Code or direct
them to the right source of information; provide timely advice and guidance to
employees on ethics and compliance concerns; handle all employee reports
promptly and confidentially; encourage employees to ask questions and get advice
before they act; and report in good faith any violations of the Code or
situations that could result in violations to the Companys Chief Legal Officer.
In addition to employees and supervisors responsibilities detailed above,
senior management has the responsibility to continuously promote ethical
business conduct, in line with the Companys values and general business
principles.

No material change report has been filed since October 1, 2007
that pertains to any conduct of a director or executive officer that constitutes
a departure from the Code.

In addition to the Code, the Company has also developed
procedures for the receipt, retention and treatment of complaints regarding
accounting, internal controls, auditing matters or evidence of an activity that
may constitute corporate fraud or violation of applicable law and for the
confidential and anonymous submission by employees of concerns regarding
questionable accounting or auditing matters. The complete Complaint Procedures
for Accounting and Auditing Matters is incorporated by reference herein as
Exhibit 11.2 to this Form 20-F.

Directors and officers of the Company are required under the
British Columbia Business Corporations Act to disclose any material
interest in any material contract or transaction with the Company and refrain
from voting with respect thereof, subject to certain exceptions.

Item 16C: Principal Accountant Fees and Services

|(a) | AUDIT FEESwere $158,500 in 2012 and $95,000 in
      2011. These fees include year end audit work, consents, reviews and
      assistance with regulatory filings.                                                                                                                                                                                                                                                                                                                                                                          
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(b) | AUDIT-RELATED FEESwere $15,000 in 2012 and $nil
      in 2011. These fees include assistance with due diligence and accounting
      research.                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(c) | TAX FEESwere $48,550 in 2012 and $42,500 in 2011.
      These fees include tax compliance services and tax advice.                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(d) | ALL OTHER FEESwere $75,000 in 2012, and $60,000
      in 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(e) | In accordance with the Companys Audit Committee Charter,
      the Audit Committee ensures the independent auditor submits a formal
      written statement delineating all relationships between the independent
      auditor and the Company and pre-approves all audit fees and non-audit
      services to be provided to the Company or any subsidiary by the
      independent auditor. All services provided to the Company after the
      adoption of the Audit Committee Charter were pre-approved by the Audit
      Committee.

59

---

Item 16D: Exemptions from the Listing Standards for Audit
Committees

Not Applicable.

Item 16F: Change in Registrants Certifying
Accountant.

Saturna Group Chartered Accountants LLP has resigned as the
Companys auditor, effective February 27, 2012 at the request of the Company.
PricewaterhouseCoopers LLP has been appointed as the Companys auditor,
effective March 1, 2012. The resignation of Saturna Group Chartered Accountants
LLP and the appointment of PricewaterhouseCoopers LLP as the Companys auditor
have been considered and approved by the Companys Audit Committee and Board of
Directors. There were no reservations in Saturna Group Chartered Accountants
LLPs report on the Companys financial statements for the year ended May 31,
2011 or any subsequent period. There have been no reportable events within the
meaning assigned under subsection 4.11(1) of National Instrument 51-102.

Effective April 3, 2012, PricewaterhouseCoopers LLP resigned as
the Companys auditor at the request of the Company. Deloitte & Touche LLP
has been appointed as the Companys auditor, effective April 9, 2012. The
resignation of PricewaterhouseCoopers LLP and the appointment of Deloitte &
Touche LLP as the Companys auditor have been considered and approved by the
Companys Audit Committee and Board of Directors. PricewaterhouseCoopers LLPs
did not produce any report relating to financial statements of the Company,
however, in PricewaterhouseCoopers LLPs view, Old Merus should have been
treated as the accounting acquirer. In the Companys opinion, this difference of
opinion between the Company and PricewaterhouseCoopers LLP constituted a
disagreement as defined by subsection 4.11(1) of National Instrument 51-102
and, as a result, constitutes a reportable event. The Companys Audit Committee
did not have formal discussions with the former auditor, however, there were
discussions with the Audit Committee Chair regarding the disagreement. The
former auditor was authorized to respond fully to inquiries by the successor
auditor concerning the disagreement.

Item 16G. Corporate Governance.

The following is a summary of the significant ways in which the
Companys corporate governance practices differ from those required to be
followed by U.S. domestic issuers pursuant to NASDAQ Listing Rules.

The Companys Board of Directors is responsible for determining
whether or not each director is independent. In making this determination, the
Board has adopted the definition of "independence" as set forth in National
Instrument 58-101 Disclosure of Corporate Governance Standards. The Companys
Board of Directors has not adopted the director independence standards contained
in Rule 5605 of the NASDAQ Listing Rules.

Rule 5605(e)(1)(B) of the NASDAQ Listing Rules requires that
each member of a nominating committee be independent. Not every member of the
Companys Compensation and Nominating and Corporate Governance Committee is
independent. The Compensation and Nominating and Corporate Governance Committee
is currently comprised of two independent directors and one non-independent
director according to the definition of independence adopted by the Board.

Rule 5605(d)(1)(B) of the NASDAQ Listing Rules requires that
each member of a compensation committee be independent. Not every member of the
Companys Compensation and Nominating and Corporate Governance Committee is
independent. The Compensation and Nominating and Corporate Governance Committee
is currently comprised of two independent directors and one non-independent
director according to the definition of independence adopted by the Board.

Rule 5620(c) of the NASDAQ Listing Rules requires that the
quorum for meetings of shareholders of a listed company be not less than 33 1/3%
of the issued and outstanding shares entitled to vote at a meeting of
shareholders. The Companys articles provide that a quorum for the transaction
of business at a shareholder meeting is two people who are, or who represent by
proxy, shareholders who, in the aggregate, hold at least 5% of the outstanding
shares of the Company carrying voting rights at the meeting.

The Company has also elected to follow Canadian rules regarding
shareholder approval for a private placement.

Item 16H. Mine Safety Disclosure.

None.

60

---

PART III

Item 17: Financial Statements

(a) Merus Labs International Inc.

| | (i)   | Auditors
      Report on the financial statements for the year ended September 30, 2012
      and 2011 | F-1
| | ----- | ------------------------------------------------------------------------------------------------------- | ---
| |       |                                                                                                         |    
| | (ii)  | Consolidated
      Balance Sheets as at September 30, 2012 and 2011                                     | F-2
| |       |                                                                                                         |    
| | (iii) | Consolidated
      Statements of Operations for the years ended September 30, 2012 and 2011             | F-3
| |       |                                                                                                         |    
| | (iv)  | Consolidated
      Statements of Cash Flows for the years ended September 30, 2012 and 2011             | F-5
| |       |                                                                                                         |    
| | (v)   | Notes
      to Consolidated Financial Statements                                                        | F-8

61

---





F-1

---

|Merus
      Labs International Inc.                      | 
|-------------------------------------------------------- | 
|Consolidated Balance Sheets                              | 
|(Expressed in Canadian dollars)                          | 
|                                                         | 
|As at:                                                   | 
|                                                         | 
|                                                         | 
|Assets                                                   | 
|Current assets                                           | 
|Cash and cash
      equivalents                          | 
|Short-term investments                                   | 
|Trade and other
      receivables                        | 
|Inventories                                              | 
|Loans receivable                                         | 
|Prepaid expenses                                         | 
|                                                         | 
|Non-current assets                                       | 
|Investments                                              | 
|Real estate held for sale                                | 
|Property and equipment                                   | 
|Intangible assets                                        | 
|Total assets                                             | 
|Liabilities and Equity                                   | 
|Current liabilities                                      | 
|Bank indebtedness                                        | 
|Accounts payables and
      accrued liabilities          | 
|Derivative liabilities                                   | 
|Provisions                                               | 
|Deferred revenue                                         | 
|Long term debt due
      within one year                 | 
|                                                         | 
|Non-current liabilities                                  | 
|Provisions                                               | 
|Long term debt                                           | 
|Total liabilities                                        | 
|                                                         | 
|Equity                                                   | 
|Share capital                                            | 
|Equity reserves                                          | 
|Warrants reserve                                         | 
|Accumulated deficit                                      | 
|Accumulated other
      comprehensive income             | 
|Equity attributable to Shareholders of the
      Company | 
|                                                         | 
|Non-controlling interest                                 | 
|Total equity                                             | 
|Total
      liabilities and equity                       | 

Approved on behalf of the Board:(signed)
      (signed)Robert Pollock,
      Dave Guebert,Director
      Director


The accompanying notes are an integral part of these
consolidated financial statements

F-2

---

|Merus
      Labs International Inc.                                                                    | 
|------------------------------------------------------------------------------------------------------ | 
|Consolidated Statements of Operations                                                                  | 
|(Expressed in Canadian dollars)                                                                        | 
|                                                                                                       | 
|                                                                                                       | 
|                                                                                                       | 
|Revenues                                                                                               | 
|Cost of goods sold                                                                                     | 
|Gross margin                                                                                           | 
|Operating expenses:                                                                                    | 
|Sales and
      marketing                                                                              | 
|General and administrative                                                                             | 
|Acquisition costs                                                                                      | 
|                                                                                                       | 
|Earnings (loss) before depreciation,
      amortization, interest expense, investment income and taxes | 
|                                                                                                       | 
|Amortization of intangible assets                                                                      | 
|Depreciation                                                                                           | 
|Interest expense                                                                                       | 
|Foreign exchange (gains) losses                                                                        | 
|Investment income                                                                                      | 
|Intangible assets and goodwill impairment charge                                                       | 
|Restructuring costs                                                                                    | 
|                                                                                                       | 
|Loss before income taxes and
      non-controlling interest                                            | 
|Income tax expense - current                                                                           | 
|- deferred                                                                                             | 
|Loss from continuing operations                                                                        | 
|Loss from discontinued operations, net of
      income taxes                                           | 
|Net loss for the year                                                                                  | 
|Attributable to:                                                                                       | 
|Owners of the Company                                                                                  | 
|Non-controlling interest                                                                               | 
|                                                                                                       | 
|Earnings (loss) per share                                                                              | 
|Basic                                                                                                  | 
|Diluted                                                                                                | 
|Earnings (loss) per share - continuing operations                                                      | 
|Basic                                                                                                  | 
|Diluted                                                                                                | 
|Earnings (loss) per share - discontinued
      operations                                              | 
|Basic                                                                                                  | 
|Diluted                                                                                                | 
|                                                                                                       | 
|Weighted average number of
      common shares outstanding - basic                                     | 
|Weighted average number of common shares outstanding -
      diluted                                   | 

The accompanying notes are an integral part of these
consolidated financial statements

F-3

---

|Merus
      Labs International Inc.                 |  
|--------------------------------------------------- | -
|Consolidated Statements of Comprehensive
      Loss |  
|(Expressed in Canadian dollars)                     |  
|                                                    |  
|                                                    |  
|                                                    |  
|                                                    |  
|Net loss for the year                               | $
|Other comprehensive income (loss):                  |  
|Currency
      translation differences              |  
|Other comprehensive income for the year             |  
|Total comprehensive loss                            | $
|                                                    |  
|Attributable to:                                    |  
|Owners of the Company                               | $
|Non-controlling interest                            |  
|                                                    | $

The accompanying notes are an integral part of these
consolidated financial statements

F-4

---

|Merus
      Labs International Inc.                       |  
|--------------------------------------------------------- | -
|Consolidated Statements of Cash Flows                     |  
|(Expressed in Canadian dollars)                           |  
|                                                          |  
|                                                          |  
|                                                          |  
|Operating activities                                      |  
|                                                          |  
|Net loss for the year                                     | $
|Loss from discontinued operations                         |  
|Items not involving cash:                                 |  
|Amortization of intangible assets                         |  
|Depreciation                                              |  
|Gain on sale of real estate                               |  
|Impairment of
      intangible assets and goodwill        |  
|Unrealized gains on foreign exchange                      |  
|Fair value adjustment
      of loan receivable            |  
|Accrued interest and loan fees                            |  
|Reversal of provisions                                    |  
|Deferred tax liability                                    |  
|Loss on disposal of
      property and equipment          |  
|Share-based compensation                                  |  
|Net change in non-cash working capital
      balances:    |  
|Trade and other receivables                               |  
|Prepaid expenses                                          |  
|Inventories                                               |  
|Short-term investments                                    |  
|Accounts payable and accrued
      liabilities            |  
|Income taxes payable                                      |  
|Derivative liabilities                                    |  
|Net cash provided by (used in) operating
      activities |  
|Financing activities                                      |  
|Repayment of operating
      line of credit               |  
|Non-controlling interest                                  |  
|Payment to Old Merus                                      |  
|Proceeds from debt issuance                               |  
|Repayment of long-term
      debt                         |  
|Private placement proceeds                                |  
|Proceeds from
      prospectus offering                   |  
|Proceeds from exercise of stock options                   |  
|Proceeds from exercise
      of stock warrants            |  
|Net cash provided by (used in) financing activities       |  

The accompanying notes are an integral part of these
consolidated financial statements

F-5

---

|Merus
      Labs International Inc.                       |  
|--------------------------------------------------------- | -
|Consolidated Statements of Cash Flows                     |  
|(Expressed in Canadian dollars)                           |  
|                                                          |  
|                                                          |  
|                                                          |  
|Investing activities:                                     |  
|Sale of investment                                        |  
|Acquisition of Factive                                    |  
|Acquisition of Enablex                                    |  
|Loan receivable
      advances                            |  
|Loan receivable repayments                                |  
|Purchase of property
      and equipment                  |  
|Proceeds from sale of subsidiary, net                     |  
|Proceeds from sale of
      real estate                   |  
|Cash acquired in amalgamation                             |  
|Net cash provided by (used in) investing
      activities |  
|Net change in cash from continuing operations             |  
|Cash flows from discontinued
      operations             |  
|Net cash provided by (used in)
      operating activities |  
|Net change in cash from discontinued
      operations     |  
|                                                          |  
|Net change in cash and cash
      equivalents             |  
|                                                          |  
|Cash and cash equivalents,beginning
      of year         |  
|                                                          |  
|Cash and cash equivalents,end of year                     | $
|Supplemental cash flow information:                       |  
|Interest paid                                             | $
|Income taxes paid                                         | $

The accompanying notes are an integral part of these
consolidated financial statements

F-6

---

Merus
        Labs International Inc.Consolidated Statement of Changes in
        Equity(Expressed in Canadian dollars)Accumulatedothercomprehensive
      
      
      
      
      
      **Non-****Share**
      
      
      **Equity**
      
      
      Warrants
      
      
      Accumulated
      
      
      income
      
      
      
      
      
      controlling
      
      
      **Total**capital
      
      
      **reserves**
      
      
      reserve
      
      
      deficit
      
      
      (AOCI)
      
      
      Total
      
      
      interest
      
      
      equityBalance, October 1, 2010
      $
      8,762,524
      
      $
      29,781,172
      
      $
      -
      
      $
      (21,595,424
      )
      $
      -
      
      $
      16,948,272
      
      $
      7,242
      
      $
      16,955,514Share-based compensation (note 14)
      
      -
      
      
      938,176
      
      
      -
      
      
      -
      
      
      -
      
      
      938,176
      
      
      -
      
      
      938,176Net loss and comprehensive loss for the
        year
      
      -
      
      
      -
      
      
      -
      
      
      (7,553,936
      )
      
      -
      
      
      (7,553,936
      )
      
      (7,018
      )
      
      (7,560,954
      )Foreign currency
        revaluation
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      (224
      )
      
      (224
      )Balance, September 30, 2011
      $
      8,762,524
      
      $
      30,719,348
      
      $
      -
      
      $
      (29,149,360
      )
      $
      -
      
      $
      10,332,512
      
      $
      -
      
      $
      10,332,512Share-based compensation (note 14)
      
      -
      
      
      2,214,421
      
      
      -
      
      
      -
      
      
      -
      
      
      2,214,421
      
      
      -
      
      
      2,214,421Private placement (note 14)
      
      7,945,633
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      7,945,633
      
      
      -
      
      
      7,945,633Issuance of securities pursuant to amalgamation (notes 3,
        14)
      
      23,501,892
      
      
      337,223
      
      
      1,521,743
      
      
      -
      
      
      -
      
      
      25,360,858
      
      
      -
      
      
      25,360,858Issuance of shares pursuant to acquisition
        (note 14)
      
      1,486,558
      
      
      (1,486,558
      )
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      -Exercise of stock options (note 14(g))
      
      395,000
      
      
      (316,000
      )
      
      -
      
      
      -
      
      
      -
      
      
      79,000
      
      
      -
      
      
      79,000Exercise of warrants (note 15)
      
      341,160
      
      
      -
      
      
      (94,568
      )
      
      -
      
      
      -
      
      
      246,592
      
      
      -
      
      
      246,592Prospectus offering (note 14)
      
      9,206,711
      
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      9,206,711
      
      
      -
      
      
      9,206,711Net loss for the year
      
      -
      
      
      -
      
      
      -
      
      
      (20,720,548
      )
      
      -
      
      
      (20,720,548
      )
      
      -
      
      
      (20,720,548
      )Other
        comprehensive income (note 16)
      
      -
      
      
      -
      
      
      -
      
      
      -
      
      
      598,603
      
      
      598,603
      
      
      -
      
      
      598,603Balance, September 30, 2012
      $
      51,639,478
      
      $
      31,468,434
      
      $
      1,427,175
      
      $
      (49,869,908
      )
      $
      598,603
      
      $
      35,263,782
      
      $
      -
      
      $
      35,263,782


The accompanying notes are an integral part of these
consolidated financial statements

F-7

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
      ended September 30, 2012 and 2011


|1. | Presentation of Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Nature of Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Merus Labs International Inc. (formerly Envoy Capital
      Group Inc.) and its subsidiaries (the Company), operated in Canada under
      the Business Corporations Act (Ontario) until December 19, 2011 and
      subsequently under the Business Corporations Act (British Columbia). The
      registered office of the Company is 30 St. Patrick Street, Suite 301,
      Toronto, Ontario M5T 3A3. The Company is a specialty pharmaceutical
      company engaged in the acquisition and licensing of legacy-branded
      prescription pharmaceutical products.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Basis of Preparation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | These consolidated annual financial statements of the
      Company have been prepared in accordance with International Financial
      Reporting Standards as issued by the International Accounting Standards
      Board (IASB) (IFRS) for financial statements. The consolidated annual
      financial statements have been prepared on a historical cost basis, except
      for items that are required to be accounted for at fair value.
      Furthermore, they have been prepared in accordance with IAS 1,
      Presentation of Financial Statements, and are covered by IFRS 1, First-
      time Adoption of IFRS. These consolidated financial statements have been
      prepared in accordance with those IFRS standards and IFRS Interpretations
      Committee (IFRIC) interpretations issued and effective or issued and
      early adopted as at the time of preparing these statements. The policies
      set out below have been consistently applied to all the periods
      presented.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | For all periods up to and including the year ended
      September 30, 2011 the Company prepared its consolidated financial
      statements in accordance with Canadian generally accepted accounting
      principles (Canadian GAAP). The Company has prepared consolidated
      financial statements which comply with IFRS applicable for periods
      beginning on October 1, 2011 as described in the accounting policies. In
      preparing these consolidated financial statements, the Companys opening
      balance sheet was prepared as at October 1, 2010, the Companys date of
      transition to IFRS. Note 25 explains the principal adjustments made by the
      Company in restating its Canadian GAAP consolidated balance sheet,
      statement of operations, and statement of comprehensive loss as at
      September 30, 2011 and for the year then ended.                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Going Concern Assumption                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | During the year ended September 30, 2012, the Company
      realigned its business model from that of a merchant bank to a speciality
      pharmaceutical company. Further, the Company was active in building its
      product portfolio during the year and continues to do so. The financial
      statements were prepared on a going concern basis. The going concern basis
      assumes that the Company will continue in operation for the foreseeable
      future and will be able to realize its assets and discharge its
      liabilities and commitments in the normal course of business.                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | For the fiscal year ended September 30, 2012, the Company had
  a net loss of $20,720,548, positive cash flow from operations of $1,770,522,
  and negative net current assets of $21,714,188. In addition, one of the
  Company's products faced the emergence of a generic competitor. These
  uncertainties cast substantial doubt upon the Company's ability to continue as
  a going concern. Continuation of the Company as a going concern is dependent
  upon the Company obtaining additional financing and achieving profitable
  operations. To address its financing requirements, the Company has a debt
  facility in place to refinance up to US$20,000,000 of its current debt
  obligations (refer to note 13). The Company may seek additional financing
  through various debt and equity instruments for any incremental financing
  needs.                                                                                                                                                         

F-8

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


|   | The consolidated financial statements were authorized for issue by the Company’s Board of Directors on December 31, 2012.
|-- | -------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                          
|2. | Significant Accounting Policies                                                                                          
|   |                                                                                                                          
|   | (a)                                                                                                                      
|   |                                                                                                                          
|   |                                                                                                                          
|   |                                                                                                                          
|   |                                                                                                                          

| |                                   |  | September 30      |  |  | September 30      |  |  | October
      1   |  |  |                  | 
| | --------------------------------- |  | ----------------- |  |  | ----------------- |  |  | ----------------- |  |  | ---------------- | 
| |                                   |  | 2012              |  |  | 2011              |  |  | 2010              |  |  | Jurisdiction of  | 
| | Company                           |  | %
      ownership |  |  | %
      ownership |  |  | %
      ownership |  |  | incorporation    | 
| |                                   |  |                   |  |  |                   |  |  |                   |  |  |                  | 
| | Merus Labs Inc.                   |  | 100.0             |  |  | -                 |  |  | -                 |  |  | British Columbia | 
| | Merus Labs Luxco S.a r.l.         |  | 100.0             |  |  | -                 |  |  | -                 |  |  | Luxembourg       | 
| | Merus Labs Netherlands BV         |  | 100.0             |  |  | -                 |  |  | -                 |  |  | Netherlands      | 
| | ECG Properties Inc.               |  | 100.0             |  |  | 100.0             |  |  | 100.0             |  |  | Ontario          | 
| | Envoy Securities Corp.            |  | 100.0             |  |  | 100.0             |  |  | 100.0             |  |  | Ontario          | 
| | ECG Holdings (US) Inc.            |  | 100.0             |  |  | 100.0             |  |  | 100.0             |  |  | Delaware         | 
| | Orbis Pharma Inc.                 |  | 100.0             |  |  | -                 |  |  | -                 |  |  | Ontario          | 
| | Envoy Capital Group Monaco S.A.M. |  | -                 |  |  | -                 |  |  | 99.8              |  |  | Monaco           | 
| | Watt International Inc.           |  | -                 |  |  | -                 |  |  | 100.0             |  |  | Ontario          | 
| | Watt International (USA) Inc.     |  | -                 |  |  | -                 |  |  | 100.0             |  |  | California       | 
| | 1632159 Ontario Ltd.              |  | -                 |  |  | -                 |  |  | 100.0             |  |  | Ontario          | 

On September 30, 2011, the Company
sold its ownership in Watt International Inc. (Watt). The results of
subsidiaries acquired or disposed of during the year are included in the
consolidated statement of operations and statement of comprehensive loss from
the effective date of acquisition or up to the effective date of
      disposal, as appropriate. Watts operations for fiscal 2011 have been
      presented as discontinued operations.

F-9

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


| | (b) | Accounting judgments, estimates, and uncertainties
      Critical judgements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | The following are the critical judgements, apart from
      those involving estimations (see below), that have been made in the
      process of applying the Company's accounting policies and that have the
      most significant effect on the amounts recognised in the consolidated
      financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | Acquisition accounting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | Management exercised judgement in determining the
      accounting treatment for the amalgamation transaction of Envoy and Old
      Merus as described in note 3. In addition, judgement was exercised in
      determining that the product acquisitions of Factive and Enablex, as
      described in Note 3, were business combinations accounted for under the
      acquisition method of accounting. Management considered the guidance and
      definitions per IFRS 3 and industry practise based on comparable companies
      in making this determination. These transactions have been recorded in the
      consolidated financial statements based on managements assessment of fair
      value for the acquired assets and liabilities.                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | Functional currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | Management exercised judgement in determining the accounting treatment for
      the amalgamation transaction of Envoy and Old Merus as described in note
      3. In addition, judgement was exercised in determining that the product
      acquisitions of Factive and Enablex, as described in Note 3, was a
      business combination accounted for under the acquisition method of
      accounting and an asset acquisition, respectively. Management considered
      the guidance and definitions per IFRS 3 and industry practice based on
      comparable companies in making this determination. These transactions have
      been recorded in the consolidated financial statements based on
      management's assessment of fair value for the acquired assets and
      liabilities.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | Use of estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | In preparation of the Companys consolidated financial
      statements in accordance with IFRS, management is required to make
      estimates and assumptions that affect the reported amount of assets,
      liabilities, and the disclosure of contingent liabilities at the date of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates used in the Companys consolidated financial statements and such
      differences could be material. Significant estimates
  include:                                                                                                                                                                                            

| |  | the allowance for doubtful
      accounts;                                                                 
| | - | -----------------------------------------------------------------------------------------------------------
| |  | the allowance for inventory
      obsolescence;                                                            
| |  | estimate for product returns;                                                                              
| |  | allocation of the purchase price and estimates of fair
      value for the acquired assets and liabilities;
| |  | the estimated useful lives of
      property and equipment and intangible assets;                          

F-10

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


| |  | impairment of financial and non-financial
    assets;               
| | - | --------------------------------------------------------------------
| |  | the valuation of deferred tax
      assets and liabilities; and     
| |  | the valuation of warrants and
      share-based compensation expense

Significant estimates

The following are the key assumptions
concerning the future, and other key sources of estimation uncertainty at the
end of the reporting period, that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next
financial year:

(i)      Allowance for doubtful accounts

The Company reviews its sales and
accounts receivable aging and determines the balance for the allowance for
doubtful accounts. The Company has minimal overdue accounts and has determined
that no allowance for doubtful accounts is required as at September 30,
2012.

(ii)     Inventory obsolescence

The Company reviews the net realizable
value of its inventory. The Company has recorded a write-down of $21,000
relating to inventory that expires within one year from September 30, 2012. The
Company has determined that there are adequate sales to support the carrying
amount for all other inventory as at September 30, 2012. In addition, management
reviews specific product and industry experience with returns in assessing if a
write-down is required.

(iii)    Estimated product returns

Revenue from product sales is
recognized net of estimated sales discounts, credits, returns, rebates and
allowances. The Company's return policy is limited to damaged or expired
product. The return allowance is determined based on an analysis of the
historical rate of returns, industry return data, and current market conditions,
which is applied directly against sales.

(iv)     Allocation of the purchase price
and estimates of fair value for the acquired assets and liabilities

The Company as part of its business
combinations and product acquisitions performs a preliminary assessment of the
fair value of all assets and liabilities acquired based on all current available
information. As part of the measurement period to finalize the purchase price
allocation, management updates the estimated fair values as information becomes
available, support from third party market data becomes available, and where
necessary, third party independent valuations are obtained. Management is
ultimately responsible for concluding on the allocation of purchase price and
estimates of fair value for the acquired assets and liabilities. As at September
30, 2012, the purchase price allocations for acquisitions completed during
fiscal 2012 are considered to be finalized.

F-11

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


(v)      Impairment of non-financial assets

Determining whether goodwill is
impaired requires an estimation of the recoverable amount of the cash generating
units (CGUs) or groups of CGUs to which goodwill has been allocated. The
determination of recoverable amount requires the Company to estimate the future
cash flows expected to arise from these CGUs and a suitable discount rate in
order to calculate the recoverable amount of the CGUs. If the recoverable amount
of the CGUs is less than its carrying amount, an impairment loss is
recorded.

Property and equipment and intangible
assets are reviewed each reporting period for impairment when events or changes
in circumstances indicate that the carrying amount of an asset exceeds its
recoverable amount. The recoverable amount is determined with reference to fair
value less costs to sell or value-in-use calculations. An impairment loss is
measured as the difference between the asset's carrying amount and its
recoverable amount. Where recoverable amount is determined to be less than the
carrying amount, an impairment loss may arise.

(vi)     Useful lives of property,
equipment and intangible assets

The Company reviews the estimated useful lives of property, equipment and intangible assets at the end of each year, based on estimates of fair value and expected market data of future cash inflows on products sales of acquired patents/product rights over the estimated period of benefit.

Depreciation on property, equipment,
and intangible assets is calculated using the straight-line method to allocate
their cost to their residual values over their estimated useful lives, as
follows:


    Furniture, fittings and equipment
    3  5 years
    Leasehold improvements
    Over the term of the lease
    Product rights
    2  10 years
    Product patents
    Remaining economic life of patent


During the year ended September 30,
2012, the useful lives were considered reasonable.

(vii)    Valuation of deferred tax assets
and liabilities

The Company estimates the probability
that taxable profits will be available against deductible temporary differences
can be utilized and thus give rise to deferred tax assets. The Company has
reviewed the expected profitability and determined that no deferred tax asset
should be recognized at this time.

(viii)   Valuation of warrants and
share-based compensation expense

The Company estimates the fair value of warrants and share options issued for employment services based on the Black Scholes option-pricing model for warrants and share options with a service condition. These methods of valuation were applied to the equity transactions during the year.

F-12

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


| | (c) | Financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | The Company classifies all financial instruments as
      either fair value through profit or loss (FVTPL), available-for-sale
      (AFS), held-to-maturity (HTM), loans and receivables or other
      financial liabilities. Financial instruments are required to be measured
      at fair value on initial recognition. Measurement in subsequent periods
      depends on the financial instruments classification. Financial
      instruments classified as FVTPL are measured at fair value with unrealized
      gains and losses recognized in the results of operations. AFS instruments
      are measured at fair value with unrealized gains and losses recognized in
      other comprehensive income. HTM instruments, loans and receivables, and
      other financial liabilities are measured at amortized cost. Transaction
      costs for FVTPL financial instruments are expensed as incurred, whereas
      transaction costs for AFS, HTM, and other financial liability instruments
      are capitalized upon initial recognition of the instrument.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | The Company has classified its financial instruments as
      follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Cash and cash equivalents
    Loans and receivablesPublicly-traded investments
    Fair value through profit or lossPrivately-held investments
    Available-for-sale at costTrade and other receivables
    Loans and receivablesLoans receivable
    Loans and receivablesBank indebtedness
    Other financial liabilityAccounts payable and accrued liabilities
    Other financial liabilityDerivative liabilities
    Fair value through profit or lossLong term debt
    Other financial liability


At each financial reporting period,
the Companys management estimates the fair value of investments based on the
criteria below and reflects such valuations in the consolidated financial
statements.

(i) Publicly-traded investments:

Securities which are traded on a
recognized securities exchange and for which no sales restrictions apply are
recorded at fair values based on quoted market prices at the consolidated
balance sheet dates or the closing price on the last day the security traded if
there were no trades at the consolidated balance sheet dates.

Securities which are traded on a recognized securities exchange but which are escrowed or otherwise restricted as to sale or transfer may be recorded at amounts discounted from market value. In determining whether a discount is appropriate for such investments, the Company considers the nature and length of the restriction, the business risk of the investee company, its stage of development, market potential, relative trading volume and price volatility and any other factors that may be relevant to the ongoing and realizable value of the investments.

F-13

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


(ii) Privately-held investments:

Securities in privately-held companies
are designated as AFS and are recorded at fair value upon acquisition. These
securities are subsequently measured at their initial cost less impairment.

(iii) Other financial liabilities

Other financial liabilities (including
debt and trade and other payables) are subsequently measured at amortized costs
using the effective interest method. The effective interest method is a method
of calculating the amortized cost of a financial liability and of allocating
interest expense over the relevant period. The effective interest rate is the
rate that exactly discounts estimated future cash payments (including all fees
and points paid or received that form an integral part of the effective interest
rate, transaction cost and other premiums or discounts) through the expected
life of the financial liability, or (where appropriate) a shorter period, to the
net carrying amount on initial recognition.

| | (d) | Derivative financial instruments and hedging
      activities                                                                                                                                                                                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | Derivatives are initially recognized at fair value on the
      date a derivative contract is entered into and are subsequently
      re-measured at their fair value. The method of recognizing the resulting
      gain or loss depends on whether the derivative is designated as a hedging
      instrument, and if so, the nature of the item being hedged. The Company
      designates certain derivatives as one of the following:
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | i)                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | ii)                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | iii)                                                                                                                                                                                                                                                                                                                                                                                                                                      

The effective portion of changes in
the fair value of derivatives that are designated and qualify as cash flow
hedges is recognized in other comprehensive income. The gain or loss relating to
the ineffective portion is recognized immediately in the statement of
operations. Amounts accumulated in equity are reclassified to profit or loss in
the periods when the hedged item affects profit or loss.

When a hedging instrument expires or
is sold, or when a hedge no longer meets the criteria for hedge accounting, any
cumulative gain or loss existing in equity at that time remains in equity and is
recognized when the forecast transaction is ultimately recognized in the
statement of operations. When a forecast transaction is no longer expected to
occur, the cumulative gain or loss that was reported in equity is immediately
transferred to the statement of operations within foreign exchange (gains)
losses.

The Company has not designated any of
its derivatives as hedges as at September 30, 2012 and 2011.

F-14

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


| | (e) | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | Cash includes demand deposits with financial institutions of $3,174,863, $5,059,650 and $8,710,990 at September 30, 2012, September 30, 2011 and October 1, 2010, respectively. Cash equivalents consist of short-term, highly liquid investments purchased with original maturities of three months or less and were $288,056, $nil and $nil at September 30, 2012, September 30, 2011 and October 1, 2010, respectively.  Interest earned on cash and cash equivalents for the year-ended September 30, 2012 $21,977 (2011 - $nil).                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (f) | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | Inventories are comprised of raw materials and finished
      goods of pharmaceutical product and are recorded at the lower of cost and
      net realizable value on a first-in first-out basis. Costs are comprised of
      raw materials (active pharmaceutical ingredient), conversion costs
      (contract manufacturing), and batch-specific regulatory testing. Net
      realizable value is the estimated selling price in the ordinary course of
      business less estimated costs of completion and applicable selling
      expenses. The Company writes down inventory to its estimated net
      realizable value based upon assumptions about future and market conditions
      when necessary.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (g) | Trade and other receivables                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | Trade and other receivables are stated at their amortized
      cost and are non-interest bearing and unsecured. Management conducts a
      periodic review of the collectability of trade receivables. The Company
      records an allowance for doubtful accounts if any uncertainty exists with
      respect to the recoverability of certain amounts based on historical
      experience or economic climate.                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (h) | Intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | Intangible assets include all costs incurred to acquire
      licensing and distribution agreements, product rights and patents.
      Intangible assets are recorded at cost and amortized on a straight-line
      basis over their estimated useful life of 2 to 10 years. Management has
      estimated the useful life based on industry data of similar products and
      patents. The Company conducts an annual assessment of the residual
      balances, useful lives and depreciation methods being used for intangible
      assets and any changes arising from the assessment are applied by the
      Company prospectively.                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (i) | Business combinations and goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | Business combinations are accounted for using the
      acquisition method. The cost of an acquisition is measured as the
      aggregate of the consideration transferred, measured at the acquisition
      date fair value. Acquisition costs incurred are expensed and included in
      acquisition costs.                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | Goodwill represents the price paid for acquisitions in
      excess of the fair market value of net tangible and identifiable
      intangible assets acquired. Goodwill is carried at cost, less impairment
      losses if any. Goodwill is tested for impairment at the end of each fiscal
      year or if events or changes in circumstances indicate a potential
      impairment. Determining whether goodwill is impaired requires an
      estimation of the recoverable amount of the cash generating units (CGUs)
      to which goodwill has been allocated.                                                                                                                                         

F-15

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


| |     | For the purpose of impairment testing, goodwill acquired
      in a business combination is allocated to each of the CGUs, or groups of
      CGUs, that is expected to benefit from the synergies of the combination.
      Each unit or group of units to which the goodwill is allocated represents
      the lowest level within the entity at which the goodwill is monitored for
      internal management purposes.                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (j) | Impairment of non-financial assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | At the end of each reporting period, the Company reviews
      the carrying amounts of its property and equipment, intangible assets and
      goodwill to determine whether there is an indication that those assets
      have suffered an impairment loss. If any such indication exists, the
      recoverable amount of the asset is estimated in order to determine the
      extent of the impairment loss. In addition, goodwill, intangible assets
      with indefinite useful lives and intangible assets not yet available for
      use, if any, are tested for impairment annually.                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | An impairment loss is recognized when the carrying amount
      of an asset, or its CGU, exceeds its recoverable amount. A CGU is the
      smallest identifiable group of assets that generates cash inflows that are
      largely independent of the cash inflows from other assets or groups of
      assets. Determining whether goodwill is impaired requires an estimation of
      the recoverable amount of the CGUs to which goodwill has been
      allocated.                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | The recoverable amount is the greater of the assets or
      CGUs fair value less costs to sell (FVLCTS) and value in use (VIU).
      In assessing VIU, the estimated future cash flows are discounted to their
      present value using a pre-tax discount rate that reflects current market
      assessments of the time value of money and the risks specific to the asset
      or CGU. In determining FVLCTS, a post-tax discounted cash flow model is
      used. For an asset that does not generate largely independent cash
      inflows, the recoverable amount is determined for the CGU to which the
      asset belongs. If the recoverable amount of the asset or CGU is less than
      its carrying amount, an impairment loss is recognized immediately in the
      statement of operations.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | Other than goodwill, where an impairment loss
      subsequently reverses, the carrying amount of the asset is increased to
      the revised estimate of its recoverable amount to the extent that the
      increased carrying amount does not exceed the carrying amount that would
      have been determined had no impairment loss been recognized for the asset
      in prior years. Goodwill impairment losses are not reversed.                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (k) | Provisions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | Provisions are recorded when a present legal or
      constructive obligation exists as a result of past events where it is
      probable that an outflow of resources embodying economic benefits will be
      required to settle the obligation, and a reliable estimate of the amount
      of the obligation can be made.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | The amount recognized as a provision is the best estimate
      of the consideration required to settle the present obligation at the
      balance sheet date, taking into account the risks and uncertainties
      surrounding the obligation. Where a provision is measured using the cash
      flows estimated to settle the present obligation, its carrying amount is
      the present value of those cash flows. When some or all of the economic
      benefits required to settle a provision are expected to be recovered from
      a third party, the receivable is recognized as an asset if it
  is virtually certain that reimbursement will be received and
      the amount receivable can be measured reliably.                                                                                    

F-16

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


| | (l) | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Provision for income taxes consists of current and
      deferred income tax expense. Tax is recognized in the statement of
      operations, except to the extent that it relates to items recognized in
      other comprehensive income or directly in equity. In this case, the tax is
      also recognized in other comprehensive income or directly in equity,
      respectively.                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Current income tax expense is the expected tax payable on
      the taxable income for the year, using tax rates enacted or substantively
      enacted at period end in the countries where the Company and its
      subsidiaries operate and generate taxable income, adjusted for amendments
      to tax payable with regards to previous years.                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Deferred income tax is recognized, using the liability
      method, on temporary differences between the carrying amounts of assets
      and liabilities on the balance sheet and their corresponding tax values,
      using the enacted or substantively enacted, as applicable, income tax
      rates at each balance sheet date.                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Deferred tax assets also result from unused losses and
      other deductions carried forward. An assessment of the probability that a
      deferred tax asset will be recovered is made prior to any deferred tax
      asset being recognized. The valuation of deferred tax assets is reviewed
      on a quarterly basis and adjusted, if necessary, to reflect the estimated
      realizable amount.                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Deferred income tax assets and liabilities are offset
      when there is a legally enforceable right to offset current tax assets
      against current tax liabilities and when the deferred income tax assets
      and liabilities relate to income taxes levied by the same taxation
      authority on either the same taxable entity or different taxable entities
      where there is an intention to settle the balances on a net
  basis.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (m) | Foreign currency translation                                                                                                                                                                                                                                                                                                                                                                                                                        

(i)      Functional and presentation
currency

Items included in the financial
statements of each of the Companys entities are measured using the currency of
the primary economic environment in which the entity operates (the functional
currency). The consolidated financial statements of the Company are presented
in Canadian dollars (CAD), which is the parent Companys functional and
presentation currency.

(ii)     Transactions and balances

Foreign currency transactions are
initiated by the Companys entities at their respective functional currency
using the exchange rates prevailing at the date of the transaction. At each
balance sheet date, monetary assets and liabilities are translated using the
period-end foreign exchange rate. Non-monetary items that are measured in terms
of historical cost in a foreign currency are translated using exchange rates as
at the dates of the initial transactions. Non-monetary items measured at fair
value in a foreign currency are translated using the exchange rates at the date when
acquired. All gains and losses on translation of these foreign currency
transactions are included in the statement of operations.

F-17

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


(iii)    Companys subsidiaries

On consolidation the assets and
liabilities of foreign operations are translated into CAD at the rate of
exchange prevailing at the reporting date and their statement of operations are
translated at the average exchange rates prevailing during the period. The
exchange differences arising on translation for consolidation are recognized in
other comprehensive income. On disposal of a foreign operation, the component of
other comprehensive income relating to that particular foreign operation is
recognized in the consolidated statement of income.

| | (n) | Revenue recognition and estimated product
  returns                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | Revenue from product sales (excluding Enablex as
      described below), including shipments to distributors, is recognized when
      the product is delivered to the Companys customers, provided the Company
      has not retained any significant risks of ownership or future obligations
      with respect to the product, it is probable that the economic benefits
      associated with the transaction will flow to the Company and the amount of
      revenue can be measured reliably. Revenue from product sales is recognized
      net of estimated sales discounts, credits, returns, rebates and
      allowances.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | In connection with its acquisition of Enablex (note 3), the Company entered
  into a transition services and supply agreement with the vendor (Novartis
  Pharma AG, or "Novartis") to facilitate the seamless and efficient transfer of
  the product to the Company. The agreement requires that Novartis continue to
  manufacture, distribute, and promote the product until the Company can obtain
  the necessary marketing authorizations to allow it to take over these
  functions from a regulatory standpoint. As a result, Novartis currently
  provides the Company with a monthly reconciliation of revenues, cost of goods,
  and marketing and selling expenses for which the Company then bills Novartis
  for the net amount receivable. The Company relies on the financial information
  provided by Novartis to estimate the amounts due under this agreement. Based
  on this current arrangement and the guidance per IAS 18 regarding agency
  relationships, for the period ended September 30, 2012 management recorded
  revenues relating to Enablex net of cost of goods and marketing and selling
  expenses in a single line, revenue, in the statements of operations. This
  presentation has no impact on net income/(loss). This accounting presentation
  will be reassessed in future periods as the Company takes over the day-to-day
  functions of operating this product.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | The Companys return policy is limited to damaged or
      expired product. The return allowance is determined based on analysis of
      the historical rate of returns and current market conditions, which is
      applied directly against sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (o) | Share-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | From time to time, the Company grants options to
      directors, officers, employees and non- employees to purchase common
      shares. The Company accounts for its stock options using the fair-value
      method. Share-based payments, equal to the fair value of the options on
      the date of grant, are recognized in operations, with an offsetting credit
      to equity reserves, for stock options granted to employees, officers and
      directors over the period during which the related options vest. Share-based payments are recognized
      in operations, with an offsetting credit to equity reserves, for options
      granted to non-employees based on the fair value of the services received.
      Consideration paid upon exercise of stock options, along with the
      applicable amount of equity reserves, is credited to share
  capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-18

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


| | (p) | Comprehensive income or loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | Comprehensive income or loss is the change in net assets
      arising from transactions and other events and circumstances from
      non-owner sources, and comprises net income or loss and other
      comprehensive income or loss. Financial assets that are classified as
      available for sale will have revaluation gains and losses included in
      other comprehensive income or loss until the asset is removed from the
      balance sheet.                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (q) | Basic and diluted net earnings per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | Basic earnings per share are computed using the weighted
      average number of common shares outstanding during the period. The
      treasury stock method is used to compute the dilutive effect of equity
      instruments. Stock options, share purchase warrants, and other equity
      instruments are dilutive when the average market price of the common
      shares during the period exceeds the exercise price of the options,
      warrants and other equity instruments. The diluted earnings per share is
      equal to the basic earnings per share if the effects of the outstanding
      options and warrants are anti-dilutive.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (r) | Related parties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | Parties are considered to be related if one party has the
      ability, directly or indirectly, to control the other party or exercise
      significant influence over the other party in making financial and
      operating decisions. Parties are also considered to be related if they are
      subject to common control. Related parties may be individuals or corporate
      entities. A transaction is considered to be a related party transaction
      when there is a transfer of resources or obligations between related
      parties.                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (s) | Future changes in accounting standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | During the year ended September 30, 2012 the following
      new or amended standards were issued effective for annual periods
      beginning on or after January 1, 2013 (October 1, 2013 for the
      Company).                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-19

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


| |  | IAS 27 Separate Financial Statements: IAS 27 outlines the
      accounting principles to be applied with regards to investments in
      subsidiaries, joint ventures and associates when an entity elects or is
      required by local regulations to present separate, non-consolidated,
      financial statements. The previous standard was titled IAS 27 Consolidated
      and Separate Financial Statements.          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | IAS 28 Investments in Associates and Joint Ventures: IAS
      28 outlines the accounting treatment and corresponding application of the
      equity method of accounting in investments in associates and joint
      ventures. The previous standard was titled IAS 28 Investments in
      Associates.                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | IFRS 10 Consolidated Financial Statements: IFRS 10
      outlines the principles for the presentation and preparation of
      consolidated financial statements.                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | IFRS 11 Joint Arrangements: IFRS 11 defines the two types
      of joint arrangements (joint operations and joint ventures) and outlines
      how to determine the type of joint arrangement entered into and the
      principles for accounting for each type of joint arrangement.                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | IFRS 12 Disclosure of Interests in Other Entities: IFRS
      12 outlines the disclosures required in order to provide users of
      financial statements with the information necessary to evaluate an
      entitys interest in other entities, the corresponding risks related to
      those interests and the effects of those interests on the entitys
      financial position, financial performance and cash flows.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | IFRS 13 Fair Value Measurement: IFRS 13 defines fair
      value, summarizes the methods of determining fair value and outlines the
      required fair value disclosures. IFRS 13 is utilized when another IFRS
      standard requires or allows fair value measurements or disclosures about
fair value measurements.                                                                                                       

Accounting standards that have been
amended but are not yet effective include:

| |  | IFRS 7 Financial Instruments: Disclosures: The IASB
      published new disclosures requirements jointly with the Financial
      Accounting Standards Board (FASB) that enable users of the financial
      statements to better compare financial statements prepared in accordance
      with IFRS and US GAAP.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | IFRS 9 Financial Instruments. IFRS 9 will replace IAS 39,
      Financial Instruments Recognition and Measurements, on classification and
      measurement of financial assets and financial liabilities.                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                     
| |  | IAS 32 Financial Instruments: Presentation: The IASB
      published amendments to IAS 32 to clarify the application of the
      offsetting requirements.                                                                                                                                                          

The Company is currently evaluating
the impact that these standards will have on its financial statements.

F-20

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


|3. | Acquisitions                                                                                                                                                                                                                                                                                                                                                 
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                              
|   | Business Combinations                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                              
|   | Amalgamation                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                              
|   | On December 19, 2011, the Company and Merus Labs
      International Inc. (Old Merus) amalgamated and formed a new entity under
      the name Merus Labs International Inc. The securities of the two companies
      that were issued and outstanding immediately before the Amalgamation were
      converted into securities of the Company as
follows:

(a) the common shares of Old Merus were
exchanged for common shares of the Company on the basis of one common share of
the Company for every four common shares of Old Merus. Stock options and share
purchase warrants were exchanged on the same basis. The exercise price and all
other terms and conditions for all options and warrants issued by the Company
remained the same as the original Old Merus options and warrants.

(b) the issued and outstanding common
shares held by shareholders before the Amalgamation were exchanged for common
shares of the Company on the basis of one common share of the Company for every
one share previously held. Stock options were exchanged at the same ratio. All
terms and conditions of the stock options and share purchase warrants remain
unchanged.

The Amalgamation resulted in the
Company issuing common shares, stock options, and share purchase warrants to Old
Merus shareholders, option holders, and warrant holders as follows:

| |                         |  | Old
      Merus  |  |  | Issued     | 
| | ----------------------- |  | ---------------- |  |  | ---------- | 
| |                         |  | Outstanding      |  |  | by the     | 
| |                         |  | Pre-Amalgamation |  |  | Company    | 
| |                         |  |                  |  |  |            | 
| | Common shares           |  | 47,003,784       |  |  | 11,750,946 | 
| | Stock options           |  | 910,000          |  |  | 227,500    | 
| | Share purchase warrants |  | 9,614,230        |  |  | 2,403,557  | 

Bringing together the financial experience and capital of the Company combined with the sales and growth potential of Old Merus were perceived as beneficial to both parties.  In determining which entity was the acquirer and which was the acquiree, management considered a number of factors including share ownership of the combined entity, the existence of minority control groups, board control and the ability to elect its members, the ability to direct finance and operating policies and the composition of senior management and the relevant size of each entity’s assets in reaching the conclusion that the Company was the acquirer.

The Amalgamation has been accounted for
using the acquisition method, with the Company as the acquirer, whereby all the
Old Merus assets acquired and liabilities assumed were recorded at fair value.
The common shares exchanged were valued using the market rate at the time of
amalgamation, while the stock options and warrants were valued using the
Black-Scholes pricing model.

F-21

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


The purchase price allocation is
summarized as follows:

| | Purchase price consideration             |   |            | 
| | ---------------------------------------- | - | ---------- | 
| | Common shares issued                     | $ | 23,501,892 | 
| | Stock options issued                     |   | 337,223    | 
| | Share purchase warrants issued           |   | 1,521,743  | 
| | Fair value of net assets acquired        |   | 25,360,858 | 
| | Fair value of investment in Old Merus    |   | 671,134    | 
| | Total purchase
      price consideration | $ | 26,031,992 | 

The Company stock options granted and
warrants issued in exchange for the Old Merus options and warrants were assigned
a fair value based on the following weighted average assumptions used in the
Black-Scholes option pricing model:

Options
    WarrantsRisk-free interest rate
    1.0%
    1.0%Expected share price volatility
    86%
    86%Weighted average expected life
    0.66 years
    1.28 yearsForfeiture rate
    0%
    0%Expected dividends
    Nil
    Nil


Costs incurred to complete the
amalgamation were approximately $455,000. In addition, the Company recorded a
gain of $108,641 in investment income on the shares of Old Merus held prior to
the amalgamation in order to recognize the increase in value of its holdings.
The gain was recorded as investment income in the period. Goodwill recorded on
acquisition, representing intangible assets which do not qualify for separate
recognition, is not deductible for income tax purposes.

The fair value of the acquired
identifiable net assets was allocated as follows:

| | Cash                                                        | $ | 980,539     |  
| | ----------------------------------------------------------- | - | ----------- | -
| | Trade and other receivables, net of allowance
      of $nil |   | 1,830,902   |  
| | Inventories                                                 |   | 708,335     |  
| | Prepaid expenses                                            |   | 1,873       |  
| | Intangible assets                                           |   | 19,510,423  |  
| | Goodwill                                                    |   | 16,676,097  |  
| | Accounts payable and accrued
      liabilities              |   | (547,813    | )
| | Due to related party                                        |   | (2,000      | )
| | Income taxes payable                                        |   | (534,249    | )
| | Long term debt                                              |   | (11,226,005 | )
| | Deferred income taxes                                       |   | (1,366,110  | )
| | Net assets
      acquired                                   | $ | 26,031,992  |  

F-22

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


The results for the year ended
September 30, 2012 included the operations of Old Merus from December 20, 2011,
the first day after amalgamation, to September 30, 2012. The financial
information in the table below summarizes selected results of operations on a
pro-forma basis as if the Company had acquired Old Merus as of October 1, 2011.
The pro-forma presentation is for information purposes only and does not purport
to represent what the Companys results would have been had the acquisition
occurred at the beginning of the period, or to project the Companys results of
operations for any future period.

| |                                                                                          |   |                |   |   | Old Merus    |   |   |              |  
| | ---------------------------------------------------------------------------------------- | - | -------------- | - | - | ------------ | - | - | ------------ | -
| |                                                                                          |   | As reported in |   |   | results from |   |   | Pro-forma    |  
| |                                                                                          |   | the Statement  |   |   | October 1 to |   |   | Statement of |  
| | (Unaudited)                                                                              |   | of Operations  |   |   | amalgamation |   |   | Operations   |  
| |                                                                                          |   |                |   |   |              |   |   |              |  
| | Revenues                                                                                 | $ | 10,421,034     |   | $ | 2,483,176    |   | $ | 12,904,210   |  
| | Cost of goods sold                                                                       |   | 1,189,253      |   |   | 306,202      |   |   | 1,495,455    |  
| | Gross margin                                                                             |   | 9,231,781      |   |   | 2,176,974    |   |   | 11,408,755   |  
| |                                                                                          |   |                |   |   |              |   |   |              |  
| | Operating expenses:                                                                      |   |                |   |   |              |   |   |              |  
| | Sales and marketing                                                                      |   | 281,272        |   |   | 66,711       |   |   | 347,983      |  
| | General and
      administrative                                                         |   | 5,048,471      |   |   | 165,745      |   |   | 5,214,216    |  
| | Acquisition costs                                                                        |   | 518,819        |   |   | -            |   |   | 518,819      |  
| |                                                                                          |   | 5,848,562      |   |   | 232,456      |   |   | 6,081,018    |  
| | Earnings before depreciation, amortization,
      interest expense and investment income |   | 3,383,219      |   |   | 1,944,518    |   |   | 5,327,737    |  
| |                                                                                          |   |                |   |   |              |   |   |              |  
| | Amortization of intangible assets                                                        |   | 4,324,845      |   |   | 299,970      |   |   | 4,624,815    |  
| | Depreciation                                                                             |   | 5,015          |   |   | -            |   |   | 5,015        |  
| | Interest expense                                                                         |   | 1,466,151      |   |   | 64,961       |   |   | 1,531,112    |  
| | Foreign exchange (gains)
      losses                                                    |   | (1,825,206     | ) |   | -            |   |   | (1,825,206   | )
| | Investment income                                                                        |   | (467,001       | ) |   | (2,892       | ) |   | (469,893     | )
| | Impairment charge                                                                        |   | 22,208,721     |   |   | -            |   |   | 22,208,721   |  
| |                                                                                          |   |                |   |   |              |   |   |              |  
| | Earnings (loss) before income
      taxes                                                |   | (22,329,306    | ) |   | 1,582,479    |   |   | (20,746,827  | )

Factive

On March 7, 2012, the Company completed
the acquisition of the North American product rights for FACTIVE® (Gemifloxacin
Mesylate) tablets from Cornerstone Therapeutics Inc. (Cornerstone). The
Company acquired the license to the FACTIVE® product rights and patent,
inventory on hand, and certain related intellectual property and other
information and materials for total consideration of US$3,979,000, fully paid at
closing. This transaction has been accounted for as a business combination under
the acquisition method of accounting.

Costs incurred to complete the
acquisition were approximately $63,000, which were expensed in the current
period. The fair value of the acquired identifiable assets and liabilities was
allocated as follows:

| | Inventories                  | $ | 1,149,350  |  
| | ---------------------------- | - | ---------- | -
| | Product returns liability    |   | (1,118,422 | )
| | Deferred tax
      liability |   | (242,648   | )
| | Product rights               |   | 3,036,004  |  
| | Patent                       |   | 1,145,360  |  
| | Net
      assets acquired    | $ | 3,969,644  |  

The Company has not provided
proforma information with respect to the operations of FACTIVE® as determining
such information is impracticable. Costs relating to operation of the business
by the seller were not segregated in sufficient detail in order to accurately
determine product profitability.

F-23

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


Product Acquisitions

Enablex

On July 11, 2012, the Company announced
that it had acquired the Canadian and European rights (excluding France, Spain
and Italy) to manufacture, market, and sell the branded prescription medicine
product Emselex®/Enablex® (Enablex or darifenacin) extended release
tablets.

Pursuant to the acquisition, Merus
acquired the Emselex®/Enablex® product rights and patent, certain related
intellectual property, and other information and materials required to continue
marketing the brand in the territories acquired. Total consideration for the
product acquisition was US$63,000,000 in the form of US$43,000,000 cash and a
US$20,000,000 vendor take back note (VTB Note) due July 11, 2013.
US$35,000,000 of the upfront cash payment was funded through a US$55,000,000
debt facility from a private lender, with the remainder funded from cash on
hand. The VTB Note is guaranteed by the aforementioned debt facility and
management intends on utilizing the unused balance of the debt facility to repay
the VTB Note at maturity. The transaction was accounted for as an asset
acquisition.

Costs incurred to complete the
acquisition were approximately $431,000, which were capitalized to the cost of
the assets acquired. The fair value of the acquired identifiable net assets was
$64,233,646 (US$63,000,000), which was allocated between the intangible assets
acquired (product rights and patent). The fair value of the acquired
identifiable net assets was allocated as follows:

| | Product rights      | $ | 45,293,991 | 
| | ------------------- | - | ---------- | 
| | Patent              |   | 19,370,500 | 
| | Net assets acquired | $ | 64,664,491 | 

The Company has not provided proforma
information with respect to the operations of Enablex as determining such
information is impracticable. Costs relating to operation of the business by the
seller were not segregated in sufficient detail in order to accurately determine
product profitability.

F-24

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


|4. | Short-term investments
|-- | ----------------------

| |                                                  |   | September 30 |  |   | September 30 |  |   | October
      1 | 
| | ------------------------------------------------ | - | ------------ |  | - | ------------ |  | - | --------------- | 
| |                                                  |   | 2012         |  |   | 2011         |  |   | 2010            | 
| | Short-term investments                           |   |              |  |   |              |  |   |                 | 
| | Publicly-traded investments                      |   |              |  |   |              |  |   |                 | 
| | Equities                                         | $ | 11,936       |  | $ | 979,547      |  | $ | 6,510,492       | 
| | Derivatives                                      |   | -            |  |   | 193,430      |  |   | 210,636         | 
| |                                                  |   | 11,936       |  |   | 1,172,977    |  |   | 6,721,128       | 
| | Privately held investments Equities (note 23(b)) |   | 1,262,000    |  |   | 1,961,160    |  |   | -               | 
| | Total short-term investments                     | $ | 1,273,936    |  | $ | 3,134,137    |  | $ | 6,721,128       | 
| | Investments                                      |   |              |  |   |              |  |   |                 | 
| | Investment in capital pool company               | $ | -            |  | $ | -            |  | $ | 141,006         | 
| | Total investments                                | $ | -            |  | $ | -            |  | $ | 141,006         | 
| |                                                  |   |              |  |   |              |  |   |                 | 

As at September 30, 2012 the portfolio
of short-term investments was invested in marketable securities, including
common shares and warrants, as well as an investment in a private entity. The
marketable securities have been designated as FVTPL. The investment in a private
entity was reclassified from FVTPL to AFS during the year (refer to note 23(b)).
For the year ended September 30, 2012, the investment portfolio, including
interest and dividend income, realized and unrealized investment gains and
losses, earned $244,424 (September 30, 2011 - $1,413,708), after deducting fees
and expenses.

At October 1, 2010 the Company owned approximately a 21% interest in Sereno Capital Corporation (“Sereno”), a Capital Pool Company.  Members of the Company’s management group were also officers and directors of Sereno and exercised significant influence.  Accordingly, the investment in Sereno was accounted for using the equity method. In February 2011, the Company sold its shares in Sereno at their original cost of $200,000 in a private transaction.

F-25

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


|5. | Trade and other
receivables
|-- | ---------------------------

| |                                       |   | September 30 |  |   | September 30 |  |   | October
      1 |  
| | ------------------------------------- | - | ------------ |  | - | ------------ |  | - | --------------- | -
| |                                       |   | 2012         |  |   | 2011         |  |   | 2010            |  
| | Trade receivables                     | $ | 4,555,705    |  | $ | -            |  | $ | 1,185,584       |  
| | Less: provision for doubtful accounts |   | -            |  |   | -            |  |   | (65,138         | )
| | Trade receivables  net               | $ | 4,555,705    |  | $ | -            |  | $ | 1,120,446       |  
| | Work in process                       |   | -            |  |   | -            |  |   | 1,010,316       |  
| | HST and VAT receivable                |   | 361,750      |  |   | 78,978       |  |   | 25,527          |  
| | Trade and other
      receivables     | $ | 4,917,455    |  | $ | 78,978       |  | $ | 2,156,289       |  

The aging analysis of trade receivables
is as follows:

| |                              |   | September 30 |  |   | September 30 |  |   | October
      1 | 
| | ---------------------------- | - | ------------ |  | - | ------------ |  | - | --------------- | 
| |                              |   | 2012         |  |   | 2011         |  |   | 2010            | 
| | Current                      | $ | 4,035,826    |  | $ | -            |  | $ | 939,485         | 
| | 1 to 30 days overdue         |   | 352,757      |  |   | -            |  |   | 90,862          | 
| | 31 to 60 days overdue        |   | 15,812       |  |   | -            |  |   | 47,121          | 
| | 61 to 90 days overdue        |   | 53,856       |  |   | -            |  |   | 33,782          | 
| | Greater than 90 days overdue |   | 97,454       |  |   | -            |  |   | 9,196           | 
| |                              |   |              |  |   |              |  |   |                 | 
| | Total trade receivables      | $ | 4,555,705    |  | $ | -            |  | $ | 1,120,446       | 

|   | The Companys customer base is primarily comprised of
      large domestic, national, and multinational pharmaceutical distribution
      companies.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                     
|6. | Inventories                                                                                                                                         

| |                         |   | September 30 |  |   | September 30 |  |   | October
      1 | 
| | ----------------------- | - | ------------ |  | - | ------------ |  | - | --------------- | 
| |                         |   | 2012         |  |   | 2011         |  |   | 2010            | 
| | Raw materials           | $ | 1,014,973    |  | $ | -            |  | $ | -               | 
| | Finished goods          |   | 1,164,639    |  |   | -            |  |   | -               | 
| |                         |   |              |  |   |              |  |   |                 | 
| | Total
      inventories | $ | 2,179,612    |  | $ | -            |  | $ | -               | 

The amount of inventories expensed in cost of goods sold during the year amounted to $753,659 (2011 – nil).

F-26

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


|7. | Loans receivable
|-- | ----------------

| |                                   |   | September 30 |  |   | September 30 |  |   | October
      1 | 
| | --------------------------------- | - | ------------ |  | - | ------------ |  | - | --------------- | 
| |                                   |   | 2012         |  |   | 2011         |  |   | 2010            | 
| | Loan
      receivable  Vansen    | $ | 737,400      |  | $ | -            |  | $ | -               | 
| | Loan receivable 
      Old Merus |   | -            |  |   | 1,248,260    |  |   | -               | 
| | Loan receivable  Watt            |   | -            |  |   | 350,000      |  |   | -               | 
| | Total loans receivable            | $ | 737,400      |  | $ | 1,598,260    |  | $ | -               | 

On March 7, 2012, the Company entered
into a sales and promotion agreement for FACTIVE® with Vansen Pharma Inc.
(Vansen) to market the product in the United States. As part of this
arrangement, the Company agreed to provide Vansen with a short-term loan in the
amount of US$1,000,000 for working capital purposes. The loan is due within
twelve months with monthly payments of US$83,333 beginning July 1, 2012, plus a
lump sum payment of US$333,333 due March 1, 2013. The loan is secured by the
inventory, intellectual property and equity of Vansen under a general security
agreement. The Company has the legal right to offset any payments owing to
Vansen by any amount of the short-term loan still due and owing to the Company.

In May 2011, the Company advanced a
loan in the principal amount of $1,850,000 to Old Merus, a then unrelated
entity. The loan bore interest at 12% per annum, compounded monthly, with
payments of $123,333 plus accrued interest due on the last business day of each
month. The loan had an initial six month term and was secured by a promissory
note, share pledge agreement and a general security agreement on the assets of
Old Merus.

In connection with the loan, the
Company received 925,000 units from Old Merus, each consisting of one common
share and one share purchase warrant granting the Company the right to purchase
a common share of Old Merus at a purchase price of $0.40, for a term of two
years from the date of issuance of the warrant. The Company accounted for these
units as loan fees totaling $517,352 by adjusting the yield on the loan based on
the fair value of the units received on the date of the loan. The common shares
were valued based on the closing share price of Old Merus of $0.37 on the
issuance date of the loan. The warrants were valued based on a Black-Scholes
option valuation model, using an exercise price of $0.40, the closing share
price of Old Merus of $0.37 on the date of the loan, a term of two years,
volatility of 100%, a risk free rate of 2%, and a dividend yield of $nil.

The loan fees were amortized using the
effective interest method over the six month term of the loan and recorded as
interest income. During fiscal 2012, $116,546 (2011: $400,806) of interest
related to these loan fees and $5,427 (2011: $75,973) of cash interest was
recorded. On October 14, 2011, the loan was paid in full, including all accrued
interest.

On November 25, 2011, the Company
advanced another loan to Old Merus in the amount of US$6,500,000, for purposes
of making the second installment on the purchase of Vancocin. The term of the
loan was six months, bearing interest at 12% per annum, and was eliminated upon
the amalgamation of the Company with Old Merus in December 2011. Interest of
$58,359 was recorded during fiscal 2012 related to this loan.

F-27

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


|   | On September 30, 2011, the Company agreed to accept
      partial payment on the sale of Watt International Inc. in the form of a
      loan receivable in the amount of $350,000. The loan was non-interest
      bearing and due on demand. Payment was received in full on January 18,
      2012.                                                                                                                                                                                                                                                                                                                    
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|8. | Real estate held for sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The Company owned two properties in Toronto, which it had
      planned to develop for use. Given market conditions, the Company made a
      decision not to develop the properties and subsequently offered the
      properties for sale. In late 2011, the Company entered into an agreement
      to sell the properties. Book value of the properties approximated fair
      value, net of disposal costs. On February 27, 2012, the Company completed
      the sale of the properties for net proceeds of approximately $1,136,238,
      realizing a gain of $20,238, which is included in investment
  income.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|9. | Intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |                                                |   | Licensing    |  |   | Product    |  |   | Patents    |  |   | Goodwill   |  |   | Total       | 
| | ---------------------------------------------- | - | ------------ |  | - | ---------- |  | - | ---------- |  | - | ---------- |  | - | ----------- | 
| |                                                |   | and          |  |   | Rights     |  |   |            |  |   |            |  |   |             | 
| |                                                |   | Distribution |  |   |            |  |   |            |  |   |            |  |   |             | 
| | Cost at October 1, 2010 and September 30, 2011 | $ | -            |  | $ | -          |  | $ | -          |  | $ | -          |  | $ | -           | 
| | Acquired through amalgamation (note 3)         |   | 122,020      |  |   | 19,388,403 |  |   | -          |  |   | 16,676,097 |  |   | 36,186,520  | 
| | Product acquisitions                           |   | -            |  |   | 48,318,627 |  |   | 20,513,225 |  |   | -          |  |   | 68,831,852  | 
| | Foreign exchange
      differences             |   | -            |  |   | 591,371    |  |   | 252,935    |  |   | -          |  |   | 844,306     | 
| |                                                |   |              |  |   |            |  |   |            |  |   |            |  |   |             | 
| | Cost at
      September 30, 2012               | $ | 122,020      |  | $ | 68,298,401 |  | $ | 20,766,160 |  | $ | 16,676,097 |  | $ | 105,862,678 | 

| |                                                                          |   | Licensing    |  |   | Product    |  |   | Patents    |  |   | Goodwill   |  |   | Total      | 
| | ------------------------------------------------------------------------ | - | ------------ |  | - | ---------- |  | - | ---------- |  | - | ---------- |  | - | ---------- | 
| |                                                                          |   | and          |  |   | Rights     |  |   |            |  |   |            |  |   |            | 
| |                                                                          |   | Distribution |  |   |            |  |   |            |  |   |            |  |   |            | 
| | Accumulated Amortization at October 1, 2010
      and September 30, 2011 | $ | -            |  | $ | -          |  | $ | -          |  | $ | -          |  | $ | -          | 
| | Amortization charge                                                      |   | 24,957       |  |   | 3,174,456  |  |   | 1,125,432  |  |   | -          |  |   | 4,324,845  | 
| | Impairment charge                                                        |   | 97,063       |  |   | 5,435,561  |  |   | -          |  |   | 16,676,097 |  |   | 22,208,721 | 
| | Foreign exchange
      differences                                       |   | -            |  |   | 15,427     |  |   | 5,806      |  |   | -          |  |   | 21,233     | 
| | Accumulated Amortization at September 30, 2012                           | $ | 122,020      |  | $ | 8,625,444  |  | $ | 1,131,238  |  | $ | 16,676,097 |  | $ | 26,554,799 | 
| |                                                                          |   |              |  |   |            |  |   |            |  |   |            |  |   |            | 
| | Carrying amount at October 1, 2010 and September 30, 2011                | $ | -            |  | $ | -          |  | $ | -          |  | $ | -          |  | $ | -          | 
| | Carrying amount
      at September 30, 2012                              | $ | -            |  | $ | 59,672,957 |  | $ | 19,634,922 |  | $ | -          |  | $ | 79.307,879 | 

F-28

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


Licensing and Distribution

As part of the amalgamation transaction
disclosed in Note 3, the Company acquired an exclusive licensing and
distribution agreement to import, distribute and sell products of Innocoll
Pharmaceuticals Inc. (Innocoll).

As at September 30, 2012, the Company
has limited visibility with respect to the sales of this product line due to the
slower than expected product marketing authorization of a key product in the
portfolio and a refocusing of management priorities. Based on this, management
believes the recoverable amount of the licensing and distribution agreements to
be nil and therefore the value of the agreements has been reduced to nil through
the recognition of an impairment charge of $97,063 against this intangible
asset.

Vancocin  Product Rights

The product rights provides the Company
with the rights to manufacture, market and sell Vancocin Oral 125 mg and 250 mg
capsules in the Canadian market. In accordance with the asset purchase agreement
between Old Merus and Iroko International LP (Iroko), the final payment for
the acquisition of the product rights was paid on February 28, 2012.

Although there are a number of barriers
to entry, in December 2011, Health Canada granted a notice of compliance (NOC)
to Pharmaceutical Partners of Canada Inc. (PPC), which grants PPC the
authority to market their generic version of Vancocin capsules in the Canadian
market. In July 2012, PPC confirmed that it would market a generic Vancomycin
capsule product. The Company viewed this announcement as an indicator for
impairment with respect to its Vancocin product rights intangible asset. The
recoverable amount of the product rights was determined based on FVLCTS
calculations using a discounted cash flow analysis. These calculations used
post-tax cash flow projections covering a five-year period based on managements
best estimate of the impact of the generic entrant at September 30, 2012. Cash
flows beyond the five-year period were extrapolated using an estimated rate of
decline of -13.0% . A post-tax discount rate of 20.0% was applied. Based on this
analysis, the carrying amount of the Vancocin product rights has been reduced to
its recoverable amount through recognition of an impairment charge of $5,435,561
against the product rights.

Goodwill  Impairment Test

Goodwill was recognized on amalgamation
of the Company with Old Merus. In connection with the impairment of the Vancocin
product rights discussed above, management tested the Companys goodwill for
impairment. The recoverable amount of the CGU to which goodwill had been
allocated was determined based on FVLCTS calculations using a discounted cash
flow analysis. These calculations used post-tax cash flow projections based on
financial budgets covering a five-year period that reflect managements best
estimate. Cash-flows beyond the five-year period were extrapolated using an
estimated rate of decline of -13.0% . A post-tax discount rate of 20.0% was
applied. Based on this analysis, the carrying amount of goodwill has been
reduced to its recoverable amount through recognition of an impairment charge of
$16,676,097 against the goodwill.

F-29

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


|10. | Bank indebtedness                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Bank indebtedness in prior periods consisted of a
      revolving demand credit facility of $1,000,000 in order to manage
      day-to-day operating requirements. Amounts borrowed under the facility
      bore interest at the bank prime rate. Drawings under the credit facility
      were secured by $2,000,000 of the Companys investment portfolio.
      Borrowings under the facility at October 1, 2010 were $780,000. This
      facility was cancelled by the Company in March 2011.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|11. | Derivative liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| |                                        |   | September 30 |  |   | September 30 |  |   | October 1 | 
| | -------------------------------------- | - | ------------ |  | - | ------------ |  | - | --------- | 
| |                                        |   | 2012         |  |   | 2011         |  |   | 2010      | 
| | Liabilities:                           |   |              |  |   |              |  |   |           | 
| | Put options on U.S. equities (a)       | $ | -            |  | $ | -            |  | $ | 775,318   | 
| | Forward foreign exchange contracts (b) |   | 336,700      |  |   | -            |  |   | -         | 
| | Total                                  | $ | 336,700      |  | $ | -            |  | $ | 775,318   | 

| | (a) | Put options on US equities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | As part of its former investment strategy, the Company
      maintained a portfolio of derivative instruments consisting of various put
      options on large cap U.S. publicly-traded companies. The options were
      recorded at their fair value based on quoted market prices. At September
      30, 2012 and September 30, 2011, the Company held no put option positions.
      Gains or losses on put options were included in net investment income for
      the period.                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (b) | Forward foreign exchange contracts:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | In connection with the acquisition of the European rights
      to Enablex, the Company entered into a series of foreign currency
      contracts in order to partially hedge the risk associated with its foreign
      source revenue. At September 30, 2012, the Company had forward foreign
      exchange contracts outstanding with a notional principal amount of
      $8,527,400 (2011: nil). For the period ended September 30, 2012, a
      realized loss of $37,100 (2011: nil) and unrealized loss of $336,700
      (2011: nil) was recognized in foreign exchange (gains) losses in the
      statement of operations.

F-30

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


|12. | Provisions
|--- | ----------

| |                                                                                     |   | Product Returns |   |   |           |  
| | ----------------------------------------------------------------------------------- | - | --------------- | - | - | --------- | -
| |                                                                                     |   | Liability (a)   |   |   | Total     |  
| | Balance at October 1, 2010 and September
      30, 2011                             | $ | -               |   | $ | -         |  
| | Provisions recognized from product acquisitions                                     |   | 1,118,422       |   |   | 1,118,422 |  
| | Reductions arising from payments/other
      sacrifices of future economic benefits |   | (387,425        | ) |   | (387,425  | )
| | Balance at September 30, 2012                                                       | $ | 730,997         |   | $ | 730,997   |  
| | Less: current
      portion of provisions                                           |   | 550,161         |   |   | 550,161   |  
| | Non-current portion of provisions                                                   | $ | 180,836         |   | $ | 180,836   |  

| | (a) | Product Returns Liability:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | In connection with the acquisition
        of Factive, the Company agreed to accept all product returns relating
        to Factive product sales made prior to the acquisition date. Management
        has estimated the fair value of this product returns liability as at the
        acquisition date, March 7, 2012, by taking into consideration the amount
        of Factive units previously sold, returns experience to date, and changes
        in the marketplace. The provision has been reduced by the amount of product
        returns recognized during the period that relate to pre-acquisition sales.

|13. | Long-term debt
|--- | --------------

| |                                |   | September 30 |  |   | September 30 |  |   | October 1 | 
| | ------------------------------ | - | ------------ |  | - | ------------ |  | - | --------- | 
| |                                |   | 2012         |  |   | 2011         |  |   | 2010      | 
| | Current                        |   |              |  |   |              |  |   |           | 
| | Enablex Debt Facility (a)      | $ | 12,122,563   |  | $ | -            |  | $ | -         | 
| | Enablex VTB Note (b)           |   | 19,664,000   |  |   | -            |  |   | -         | 
| | Support Services Agreement (c) |   | 140,125      |  |   | -            |  |   | -         | 
| | Other                          |   | -            |  |   | -            |  |   | 27,326    | 
| | Total                          | $ | 31,926,688   |  | $ | -            |  | $ | 27,326    | 

F-31

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


| | Non-Current                    |   |            |  |   |     |  |  |        | 
| | ------------------------------ | - | ---------- |  | - | --- |  |  | ------ | 
| | Enablex Debt Facility (a)      | $ | 21,972,205 |  | $ | - $ |  |  | -      | 
| | Support Services Agreement (c) |   | 187,937    |  |   | -   |  |  | -      | 
| | Other                          |   | -          |  |   | -   |  |  | 70,178 | 
| | Total                          | $ | 22,160,142 |  | $ | - $ |  |  | 70,178 | 

| | (a) | Enablex Debt Facility:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | On July 10, 2012, in connection with the acquisition of
      Enablex, the Company entered into a credit agreement (Enablex Debt
      Facility) of up to US$55,000,000 with a third-party lender. US$35,000,000
      of this amount was drawn down upon acquisition of the asset with a further
      US$20,000,000 guaranteed through a letter of credit facility. The loan
      bears interest at 13.5% per annum, with monthly interest payments and
      periodic principal repayments until the loan matures March 31, 2015. The
      Enablex Debt Facility contains customary affirmative covenants, including
      compliance with laws and contractual obligations and payment of taxes. The
      facility also contains customary negative covenants, including
      restrictions on the incurrence of indebtedness, the granting of liens,
      making restricted payments and investments, entering into affiliate
      transactions and transferring assets. The Company was in compliance with
      the facilitys affirmative and negative covenants as at September 30,
      2012. The Borrower is also required by the terms of the credit agreement
      to comply with customary financial covenants, which are not applicable
      until March 31, 2013. Finance costs of $359,314 have been capitalized
      to the loan balance and are being amortized over the remaining period of
      the loan.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (b) | Enablex VTB Note:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | In connection with the acquisition of Enablex, part of
      the consideration included a US$20,000,000 vendor take back note (VTB
      Note), which is due on July 11, 2013. The VTB Note bears no interest. The
      VTB Note is guaranteed by the Enablex Debt Facility discussed above and
      management intends on utilizing this facility to repay the VTB Note at
      maturity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (c) | Support Services Agreement:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | In connection with its support services agreement with a
      distribution services provider, the distribution services provider
      provided the Company with loan of $500,000 to be used for working capital
      purposes and in consideration for being the Companys exclusive provider
      of certain distribution services for the Companys products in Canada.
      Payments are made based on net sales of Vancocin. The agreement is for a
      five year term with automatic renewal terms of two years until terminated.
      For the year ended September 30, 2012, the Company repaid $171,938. As at
      September 30, 2012, the carrying value of the loan is $328,062.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-32

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


|14. | Share capital
|--- | -------------
|    |              
|    | (a)          
|    |              
|    |              

| |                                                      |  | Year
      ended   |  |   | Year ended         | 
| | ---------------------------------------------------- |  | ------------------ |  | - | ------------------ | 
| |                                                      |  | September 30, 2012 |  |   | September 30, 2011 | 
| |                                                      |  | Number             |  |   |                    | 
| |                                                      |  | of
      shares    |  |   | Amount             | 
| |                                                      |  |                    |  |   |                    | 
| | Balance, beginning of year                           |  | 8,028,377          |  | $ | 8,762,524          | 
| | Common shares issued pursuant to private placement   |  | 4,196,500          |  |   | 7,945,633          | 
| | Common shares issued pursuant to amalgamation        |  | 11,750,946         |  |   | 23,501,892         | 
| | Common shares issued pursuant to acquisition         |  | 825,035            |  |   | 1,486,558          | 
| | Common shares issued pursuant to options exercised   |  | 197,500            |  |   | 395,000            | 
| | Common shares issued pursuant to warrants exercised  |  | 154,120            |  |   | 341,160            | 
| | Common shares issued pursuant to prospectus offering |  | 5,556,000          |  |   | 9,206,711          | 
| |                                                      |  |                    |  |   |                    | 
| | Balance, end of year                                 |  | 30,708,478         |  | $ | 51,639,478         | 

| | (b) | Private placement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | On December 19, 2011, the Company completed a private
      placement consisting of 4,196,500 units (Unit) at a price of $2.00. Each
      Unit consists of one common share of the Company and one half of one
      warrant, which entitles the holder to purchase an additional common share
      of the Company at an exercise price of $3.00 at any time for a period of
      36 months. The Company may accelerate the term to 30 days if the share
      price exceeds $4.00 for 20 consecutive trading days. In connection with
      the private placement, the Company also issued 197,700 warrants as a
      finders fee. Each of these warrants entitles its holders to purchase one
      Unit until December 2, 2014 at an exercise price of $2.00 per Unit. Costs
      of the offering were approximately $447,000.

F-33

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


| | (c) | Amalgamation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | On December 19, 2011, the Company entered into a plan of
      arrangement whereby it amalgamated with Merus Labs International Inc.
      (Old Merus). Pursuant to the Arrangement, all of the outstanding common
      shares of Old Merus were exchanged on a 4:1 basis for common shares of the
      Company. Holders of options and warrants of Old Merus received options and
      warrants to purchase shares of the Company on the same terms and
      conditions after adjustment for the foregoing share exchange ratio. In
      connection with the amalgamation, the Company issued 11,750,946 common
      shares, 227,500 common share options and 2,403,557 common share warrants
      (see note 3).                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (d) | Acquisition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | On January 6, 2012, the Company acquired 51% of Orbis
      Pharma Inc. (Orbis), a development stage pharmaceutical company. The
      arrangement involved the issuance of 300,000 shares which are released
      over a 3 year period. The Company was also obligated to purchase the
      remaining 49%, based on the achievement of certain milestones, through the
      issuance of additional common shares. Upon closing of the Enablex
      transaction, the Company issued an additional 525,035 shares in connection
      with the purchase of the remaining 49% of Orbis. The Company determined
      Orbis did not meet the definition of a business for accounting purposes
      and thus was not accounted for as a business combination. The estimated
      fair value of the shares issued was $1,486,558, of which $609,906 was
      recognized in general and administrative expenses during fiscal 2012. The
      balance of these shares will be recognized over the remaining escrow
      period.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (e) | Prospectus offering                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | On May 4, 2012, the Company announced a bought deal
      common share financing with a syndicate of underwriters, pursuant to which
      the Company sold 5,556,000 common shares at a price of $1.80 per share.
      The arrangement closed on May 29, 2012. Costs of the offering were
      approximately $794,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (f) | Stock option plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | The Company has reserved 3,070,847 common shares under a
      10% rolling reloading stock option plan. Under the plan, the options are
      exercisable for one common share and the exercise price of the option must
      equal the market price of the underlying share at the grant date. The
      options have vesting periods ranging from the date of grant up to three
      years. Once vested, options are exercisable at any time until
    expiry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | On July 26, 2011 the Company granted its directors a
      total of 600,000 options at the exercise price of $2.00 per share. These
      options vest immediately and expire on July 25, 2016.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     | The estimated fair value of the options granted during
      fiscal 2011, using the Black-Scholes option pricing model, was $938,176
      which was expensed fully in the financial statements in the fourth quarter
      of fiscal 2011 and has been included in equity as equity
  reserves.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-34

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


On October 31, 2011 the Company granted
one of its directors 150,000 options at the exercise price of $2.00 per share.
One third of the options vest immediately with one-third vesting on each of the
next two anniversaries, and expire on October 31, 2016.

In January 2012, the Company granted a
total of 1,440,000 options to officers of the Company in connection with their
employment agreements. 600,000 options were granted with an exercise price of
$2.05 per share and the remaining 840,000 with an exercise price of $2.02.
640,000 of the options vest immediately and the remaining 200,000 options vest
as follows: one-quarter immediately and one-quarter on each of the next three
anniversaries. All of the options have a term of five years.

In September 2012, the Company granted
100,000 options to an officer of the Company in connection with their employment
agreement. The options were granted with an exercise price of $1.52 per share,
with 25,000 options vesting immediately and 25,000 on each of the next three
anniversaries.

The estimated fair value of the options
granted during the twelve months of fiscal 2012, using the Black-Scholes option
pricing model, was $2,138,973, of which $1,604,515 was expensed in the financial
statements during the twelve months ending September 30, 2012 (2011: $938,176),
and has been included in equity as equity reserves. The remaining expense will
be recognized over the balance of the vesting periods.

| | (g) | Stock option details
| | --- | --------------------

The fair value of each option granted
was estimated on the date of the grant using the Black-Scholes fair value option
pricing model with the following assumptions:

| |                                               |   | Year
      ended Sepember 30 | 
| | --------------------------------------------- | - | ---------------------------- | 
| |                                               |   | 2012                         | 
| | Weighted-average fair value of options        | $ | 1.27                         | 
| | Risk-free interest rate                       |   | 2.0%                         | 
| | Volatility of the Company's common shares     |   | 77%                          | 
| | Weighted average expected life of the options |   | 5 years                      | 
| | Forfeiture rate                               |   | 0%                           | 
| | Expected dividends                            |   | Nil                          | 

Volatility was determined based on
daily observations of the historical stock price over a period consistent with
the expected life of the options at the date of grant.

F-35

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


Details of the options are as follows:

| |                                                  |  | Number
      of |   |   | Weighted
      average |  
| | ------------------------------------------------ |  | --------------- | - | - | ---------------------- | -
| |                                                  |  | options         |   |   | price
      per share  |  
| |                                                  |  |                 |   |   |                        |  
| | Options outstanding, October 1, 2010             |  | -               |   | $ | -                      |  
| | Options granted                                  |  | 600,000         |   |   | 2.00                   |  
| | Options exercised                                |  | -               |   |   | -                      |  
| | Options cancelled                                |  | -               |   |   | -                      |  
| | Options outstanding, September 30, 2011          |  | 600,000         |   | $ | 2.00                   |  
| | Options issued pursuant to amalgamation (note 3) |  | 227,500         |   |   | 0.69                   |  
| | Options granted                                  |  | 1,690,000       |   |   | 2.00                   |  
| | Options exercised                                |  | (197,500        | ) |   | (0.40                  | )
| | Options cancelled                                |  | -               |   |   | -                      |  
| |                                                  |  |                 |   |   |                        |  
| | Options exercisable, September 30, 2012          |  | 2,320,000       |   | $ | 2.01                   |  

The range of exercise prices for
options outstanding and exercisable options at September 30, 2012 are as
follows:

Number
    Weighted Average
    NumberExercise Price
    Outstanding
    Contractual Life
    Exercisable$ 0.56
    5,000
    0.42
    5,000$ 1.52
    100,000
    4.95
    25,000$ 2.00
    750,000
    3.87
    650,000$ 2.02
    840,000
    4.30
    690,000$ 2.05
    600,000
    4.27
    150,000$ 3.00
    25,000
    0.74
    25,0002,320,000
    
    1,545,000


|15. | Equity reserves and warrants reserve                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Pursuant to the amalgamation in December 2011, the Company issued 227,500 stock options and 2,403,557 warrants in exchange for the existing issued and outstanding warrants of Old Merus. The fair value of these options and warrants was calculated using the Black-Scholes model to be $337,223 for the options and $1,521,743 for the warrants.  These amounts were accounted for as equity reserves and warrants reserve, respectively.  Assumptions used to value these warrants
  reserve are disclosed in note 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | On December 19, 2011, the Company completed a private
      placement consisting of 4,196,500 Units at a price of $2.00. Each Unit
      consisted of one common share of the Company and one half of one warrant,
      which entitles the holder to purchase an additional common share of
    the Company at an exercise price of $3.00
at any time for a period of 36 months. The Company may accelerate the term to 30
days if the share price exceeds $4.00 for 20 consecutive trading days. In
allocating the fair value of the proceeds between the common shares and these
half warrants, it was determined that the fair value of the common shares was
more reliably measurable and since the common shares of the Company were trading
at $2.00 per share on December 19, 2011, the entire value of the proceeds was
allocated to the shares. In addition, the Company also issued 197,700 warrants
as a finders fee. The fair value of these warrants was deemed to be of nominal
value.

F-36

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


| |                                                       |  | Number
      of |   |   | Weighted
      average | 
| | ----------------------------------------------------- |  | --------------- | - | - | ---------------------- | 
| |                                                       |  | warrants        |   |   | exercise price         | 
| |                                                       |  |                 |   |   |                        | 
| | Balance, October 1, 2010 and September 30,
      2011 |  | -               |   | $ | -                      | 
| | Warrants issued pursuant to private placement         |  | 2,295,950       |   |   | 3.00                   | 
| | Warrants issued pursuant to amalgamation              |  | 2,403,557       |   |   | 2.34                   | 
| | Warrants exercised                                    |  | (154,120        | ) |   | 1.60                   | 
| | Warrants expired                                      |  | (68,000         | ) |   | 1.60                   | 
| | Balance, September
      30, 2012                     |  | 4,477,387       |   | $ | 2.70                   | 

The following share purchase warrants
were outstanding at September 30, 2012:

Exercise Price
    Number
    Weighted AverageOutstanding
    Contractual Life$ 1.60
    262,500
    0.52$ 2.00
    197,700
    2.22$ 2.60
    1,918,937
    0.58$ 3.00
    2,098,250
    2.224,477,387


F-37

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


|16. | Accumulated other comprehensive income
|--- | --------------------------------------

| |                                           |   | Translation |  |   | Total   | 
| | ----------------------------------------- | - | ----------- |  | - | ------- | 
| | At October 1, 2010 and September 30, 2011 | $ | -           |  | $ | -       | 
| | Currency
      translation differences    |   | 598,603     |  |   | 598,603 | 
| |                                           |   |             |  |   |         | 
| | At September
      30, 2012               | $ | 598,603     |  | $ | 598,603 | 

|17. | Commitments
|--- | -----------

(a) Operating lease commitments

The Company has entered into
non-cancellable operating lease agreements for office premises and equipment
with minimum annual lease payments to expiry as follows:

| |                  |   | September 30 |  |   | September 30 | 
| | ---------------- | - | ------------ |  | - | ------------ | 
| |                  |   | 2012         |  |   | 2011         | 
| | Less than 1 year | $ | 61,594       |  | $ | 35,656       | 
| | 1 to 2 years     |   | 25,408       |  |   | 24,859       | 
| | 2 to 3 years     |   | 22,689       |  |   | 25,591       | 
| | 3 to 4 years     |   | -            |  |   | 20,531       | 
| | 4 to 5 years     |   | -            |  |   | -            | 
| | Thereafter       |   | -            |  |   | -            | 
| | Total            | $ | 109,691      |  | $ | 106,637      | 

Lease expense recognized during the
period was $71,714 (2011: $74,236), which has been included in general and
administrative expenses in the statements of operations.

(b) Revenue based commitments

Pursuant to the Companys exclusive
licensing and distribution agreement with Innocoll, the Company is subject to
licensing fees based on a percentage of sales of the products. As at September
30, 2012, the Company is not obligated for any licensing fees as it has not
launched the sale of the products (see note 9).

Pursuant to the Companys support
services agreement with a distribution services provider, the Company is
committed to repay the loan based on net sales of Vancocin until June 30, 2016
(see note 13(c)).

Pursuant to its acquisition of Factive,
the Company is committed to paying a royalty fee of 8% of net sales of the
product through September 30, 2014 at which point the royalty fee will increase
to 16% for up to a 10 year period.

F-38

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


(c) Purchase commitments

Pursuant to the Companys acquisition
of Enablex, the Company is required to acquire finished goods inventory from
Novartis Pharma AG, on a country-by-country basis, at the earlier of the
marketing authorization transfer date and July 11, 2014. As at September 30,
2012, Management is unable to reliably estimate the quantum and timing of this
purchase commitment and therefore no provision has been made.

|18. | Related party transactions                                                                                                                                                            
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                       
|    | At September 30, 2012, there were no amounts owing to or
      from related parties. The remuneration of directors and other members of
      key management personnel are as follows:

| |                                                   |   | Year
      ended September 30 | 
| | ------------------------------------------------- | - | ----------------------------- | 
| |                                                   |   | 2012                          | 
| |                                                   |   |                               | 
| | Salaries                                          | $ | 968,751                       | 
| | Share based compensation                          |   | 2,214,421                     | 
| | Termination payments
    related to restructuring |   | -                             | 
| |                                                   | $ | 3,183,172                     | 

|19. | Income taxes                                                                                                                                                                                                                                                                    
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                 
|    | The Company recorded a deferred income tax recovery in
      the twelve months ended September 30, 2012 which reduced the deferred tax
      liabilities related to Old Merus that were recorded as part of the
      accounting for the acquisition as a business combination..
|    |                                                                                                                                                                                                                                                                                 
|    | The major components of income tax expense for the years
      ended September 30, 2012 and 2011 are:                                                                                                                                                                           

| | Income tax recognized in profit or loss                             |   | 2012       |   |   | 2011 | 
| | ------------------------------------------------------------------- | - | ---------- | - | - | ---- | 
| | Current tax                                                         | $ | -          |   | $ | -    | 
| |                                                                     |   |            |   |   |      | 
| | Deferred tax:                                                       |   |            |   |   |      | 
| | Relating to origination and reversal of temporary
      differences |   | -          |   |   | -    | 
| | Recognition of opening unrecognized deferred tax assets             | $ | (1,608,758 | ) | $ | -    | 
| | Provision for
      income taxes                                    | $ | (1,608,758 | ) | $ | -    | 

F-39

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


Due to changes in provincial
jurisdictions in which Merus has a taxable presence, and tax rate changes
enacted in the year, the statutory income tax rate that applies to Merus has
changed from 28.75% in 2011 to 25.01% in 2012.

A reconciliation between income tax
expense and the product of accounting income multiplied by Canadas domestic tax
rate for the years ended September 30, 2012 and 2011 is as follows:

| |                                                                                                                 |   | 2012        |   |   | 2011       |  
| | --------------------------------------------------------------------------------------------------------------- | - | ----------- | - | - | ---------- | -
| | Loss before income taxes and
      non-controlling interest                                                     | $ | (22,329,306 | ) | $ | (7,560,954 | )
| |                                                                                                                 |   |             |   |   |            |  
| | Income tax expense (benefit) at the
      statutory income tax rate of 25.01% (2011: 28.75%)                    |   | (5,584,559  | ) |   | (2,173,774 | )
| | Impairment losses on goodwill that is not tax deductible                                                        |   | 4,170,692   |   |   | -          |  
| | Utilization or expiry of previously
      unrecognized tax losses                                               |   | (643,862    | ) |   | 348,396    |  
| | Non-deductible expenses for tax purposes                                                                        |   | 455,021     |   |   | 383,956    |  
| | Deductible temporary differences and unused
      tax losses not recognized, including impact of change in rate |   | (6,050      | ) |   | 36,482     |  
| | Effect of income taxes recorded at rates different from the
      Canadian tax rate                             |   | -           |   |   | 1,398,362  |  
| | Other differences                                                                                               |   | -           |   |   | 6,578      |  
| |                                                                                                                 |   |             |   |   |            |  
| | Tax expense (recovery)                                                                                          | $ | (1,608,758  | ) | $ | -          |  

In 2012, deferred tax liabilities of
$1,608,758 were recorded as part of business combinations discussed above.
Deferred tax assets of $1,608,758 are recognized since the taxable temporary
differences giving rise to the above mentioned deferred tax liability are of the
appropriate character and reverse in the appropriate carryforward period. The
benefit of the recognition of deferred tax assets is recorded to profit or loss
from continuing operations in accordance with IAS 12.

The following is an analysis of
deferred tax assets/(liabilities) presented in the consolidated balance sheets:

| |                                |   | September 30 |  |   | September 30 |  |   | October
      1 | 
| | ------------------------------ | - | ------------ |  | - | ------------ |  | - | --------------- | 
| |                                |   | 2012         |  |   | 2011         |  |   | 2010            | 
| | Deferred tax assets            | $ | -            |  | $ | -            |  | $ | -               | 
| | Deferred tax
      liabilities |   | -            |  |   | -            |  |   | -               | 
| |                                |   |              |  |   |              |  |   |                 | 
| |                                | $ | -            |  | $ | -            |  | $ | -               | 

As at September 30, 2012, approximately
$471,978 of deferred tax liabilities have been recognized and are offset by
recognized deferred tax assets of the same amount. The Company offsets tax
assets and liabilities if and only if it has a legally enforceable right to
offset current tax assets and current tax liabilities and the deferred tax
assets and deferred tax liabilities relate to income taxes levied by the same
tax authorities.

F-40

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


The following is an analysis of
deferred tax assets, which are currently not being recognized in the
consolidated balance sheets:

| | September 30, 2012                               |   |           | 
| | ------------------------------------------------ | - | --------- | 
| | Unrecognized deferred tax assets in relation to: |   |           | 
| | Unused capital and non-capital losses            | $ | 5,628,859 | 
| | Capital and Intangible assets                    |   | 329,585   | 
| | Undeducted share and debt issuance costs         |   | 564,226   | 
| |                                                  | $ | 6,522,670 | 

| | September 30, 2011                               |   |           | 
| | ------------------------------------------------ | - | --------- | 
| | Unrecognized deferred tax assets in relation to: |   |           | 
| | Unused capital and non-capital losses            | $ | 6,499,534 | 
| | Capital and Intangible assets                    |   | 47,784    | 
| | Finance costs                                    |   | -         | 
| |                                                  | $ | 6,547,318 | 

The Company has unused non-capital tax losses that may be applied against future taxable income for Canadian federal and provincial income tax purposes, which expire between 2014 and 2032 as follows:

| | Non-capital losses |   | Federal and provincial | 
| | ------------------ | - | ---------------------- | 
| | Expires in         |   |                        | 
| | 2015               | $ | 1,316,000              | 
| | 2027 to 2029       |   | 12,744,000             | 
| | 2030 to 2032       |   | 2,116,000              | 
| | Total              | $ | 16,176,000             | 

The Company has realized net capital losses of approximately $14,824,000 available for carry forward to be applied against future taxable capital gains for Canadian tax purposes.  These losses are available for carry forward indefinitely.

The Company has not recognized any
potential deferred income tax assets that may be associated with these
non-capital and net capital losses.

F-41

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


|20. | Assets held for sale and discontinued
      operations                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | On September 30, 2011, the Company completed the sale of
      its wholly-owned subsidiary, Watt International Inc. Gross proceeds from
      the sale were $2,150,000, consisting of $1,800,000 cash paid on closing
      and a loan receivable for $350,000 due on demand with no specific term,
      which the Company received in full in January 2012. The disposition of
      Watt resulted in a loss on disposal of discontinued operations, net of
      income taxes, of $547,375.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The balance sheet of Watt International Inc. includes the
      following:                                                                                                                                                                                                                                                                                                                                                                                                                    

| |                                                |   | September 30 |  |   | September 30 |  |   | October
      1 | 
| | ---------------------------------------------- | - | ------------ |  | - | ------------ |  | - | --------------- | 
| |                                                |   | 2012         |  |   | 2011         |  |   | 2010            | 
| | Assets                                         |   |              |  |   |              |  |   |                 | 
| | Cash                                           | $ | -            |  | $ | -            |  | $ | 275,311         | 
| | Accounts receivable                            |   | -            |  |   | -            |  |   | 2,145,119       | 
| | Prepaid expenses                               |   | -            |  |   | -            |  |   | 121,275         | 
| | Property and equipment                         |   | -            |  |   | -            |  |   | 402,220         | 
| |                                                | $ | -            |  | $ | -            |  | $ | 2,943,925       | 
| |                                                |   |              |  |   |              |  |   |                 | 
| | Liabilities                                    |   |              |  |   |              |  |   |                 | 
| | Accounts payable and accrued
      liabilities | $ | -            |  | $ | -            |  | $ | 519,342         | 
| | Deferred revenue                               |   | -            |  |   | -            |  |   | 76,883          | 
| | Current portion of long-term
      debt        |   | -            |  |   | -            |  |   | 27,326          | 
| | Long-term debt                                 |   | -            |  |   | -            |  |   | 70,178          | 
| |                                                | $ | -            |  | $ | -            |  | $ | 693,729         | 
| |                                                |   |              |  |   |              |  |   |                 | 

F-42

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


The results of Watt International Inc.
were as follows:

| |                                              |   | 2012 |  |   | 2011      |   |   | 2010      | 
| | -------------------------------------------- | - | ---- |  | - | --------- | - | - | --------- | 
| | Net revenue                                  | $ | -    |  | $ | 7,873,704 |   | $ | 8,447,827 | 
| | Operating expenses                           |   | -    |  |   | 7,775,117 |   |   | 7,995,663 | 
| | Interest expense                             |   | -    |  |   | 13,884    |   |   | -         | 
| | Depreciation                                 |   | -    |  |   | 303,656   |   |   | 262,399   | 
| |                                              |   |      |  |   |           |   |   |           | 
| | (Loss) earnings from discontinued operations |   | -    |  |   | (218,953  | ) |   | 189,765   | 
| | Loss on sale of discontinued operations      |   | -    |  |   | (547,375  | ) |   | -         | 
| | Net (loss) income                            | $ | -    |  | $ | (766,328  | ) | $ | 189,765   | 

|21. | Earnings per share                                                                                                                                                                                   
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                      
|    | (a)     Basic                                                                                                                                                                                        
|    |                                                                                                                                                                                                      
|    | Basic earnings per share is calculated by dividing the
      profit attributable to equity holders of the Company by the weighted
      average number of ordinary shares in issue during the
  year.

| |                                                                                        |   | 2012        |   |   | 2011       |  
| | -------------------------------------------------------------------------------------- | - | ----------- | - | - | ---------- | -
| | Profit attributable to equity holders of
      the Company                             | $ | (20,720,548 | ) | $ | (6,787,608 | )
| | Profit from
      discontinued operation attributable to equity holders of the Company |   | -           |   |   | (766,328   | )
| |                                                                                        |   |             |   |   |            |  
| | Total                                                                                  | $ | (20,720,548 | ) | $ | (7,553,936 | )
| |                                                                                        |   |             |   |   |            |  
| | Weighted average
      number of ordinary shares in issue                              |   | 22,929,402  |   |   | 8,028,377  |  

F-43

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


| | (b)      Diluted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Diluted earnings per share is calculated by adjusting the
      weighted average number of ordinary shares outstanding to assume
      conversion of all dilutive potential ordinary shares. The Company has two
      categories of dilutive potential ordinary shares: warrants and stock
      options. As the Company recorded a net loss for the period ended September
      30, 2012, these items were considered anti-dilutive and have therefore
      been excluded from the calculation of diluted earnings per share.

| |                                                                                        |   | 2012        |   |   | 2011       |  
| | -------------------------------------------------------------------------------------- | - | ----------- | - | - | ---------- | -
| | Earnings                                                                               |   |             |   |   |            |  
| | Profit attributable to equity holders of the Company                                   | $ | (20,720,548 | ) | $ | (6,787,608 | )
| | Profit from discontinued operation attributable to equity
      holders of the Company |   | -           |   |   | (766,328   | )
| |                                                                                        |   |             |   |   |            |  
| | Total                                                                                  | $ | (20,720,548 | ) | $ | (7,553,936 | )
| |                                                                                        |   |             |   |   |            |  
| | Weighted average number of ordinary shares in issue                                    |   | 22,929,402  |   |   | 8,028,377  |  
| |                                                                                        |   |             |   |   |            |  
| | Weighted average number of ordinary shares for diluted earnings
      per share        |   | 22,929,402  |   |   | 8,028,377  |  

|22. | Management of capital                                                 
|--- | ----------------------------------------------------------------------
|    |                                                                       
|    | The Company includes the following in its definition of
      capital:

| |                                  |   | September 30 |   |   | September 30 |   |   | October
      1 |  
| | -------------------------------- | - | ------------ | - | - | ------------ | - | - | --------------- | -
| |                                  |   | 2012         |   |   | 2011         |   |   | 2010            |  
| |                                  |   |              |   |   |              |   |   |                 |  
| | Debt comprised of:               |   |              |   |   |              |   |   |                 |  
| | Enablex Debt Facility            | $ | 34,094,768   |   | $ | -            |   | $ | -               |  
| | Enablex VTB Note                 |   | 19,664,000   |   |   | -            |   |   | -               |  
| | Support Services
      Agreement |   | 328,062      |   |   | -            |   |   | -               |  
| |                                  |   |              |   |   |              |   |   |                 |  
| | Equity comprised of:             |   |              |   |   |              |   |   |                 |  
| | Share capital                    | $ | 51,639,478   |   | $ | 8,762,524    |   | $ | 8,762,524       |  
| | Equity reserves                  |   | 31,468,434   |   |   | 30,719,348   |   |   | 29,781,172      |  
| | Warrants                         |   | 1,427,175    |   |   | -            |   |   | -               |  
| | Deficit and AOCI                 |   | (49,271,305  | ) |   | (29,149,360  | ) |   | (21,595,424     | )
| |                                  |   |              |   |   |              |   |   |                 |  
| |                                  | $ | 89,350,612   |   | $ | 10,332,512   |   | $ | 16,948,272      |  

F-44

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


The Companys objectives when managing
capital are:

| | (a) | to allow the Company to respond to changes in economic
      and/or marketplace conditions;                              
| | --- | -------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                          
| | (b) | to give shareholders sustained growth in shareholder
      value by increasing shareholders equity;                     
| |     |                                                                                                                          
| | (c) | to ensure that the Company maintains the level of capital
      necessary to meet the requirements of its long-term debt;
| |     |                                                                                                                          
| | (d) | to comply with financial covenants required under its
      debt facilities; and                                         
| |     |                                                                                                                          
| | (e) | to maintain a flexible capital structure which optimizes
      the cost of capital at acceptable levels of risk          

The Company manages its capital
structure and makes adjustments to it in the light of changes in economic
conditions and the risk characteristics of its underlying assets. The Company
maintains or adjusts its capital level to enable it to meet its objectives by:

| | (a) | raising capital through equity financings;                      
| | --- | ----------------------------------------------------------------
| |     |                                                                 
| | (b) | utilizing leverage in the form of third party debt;
      and   
| |     |                                                                 
| | (c) | realizing proceeds from the disposition of its
      investments

|    | The Company is not subject to any capital requirements imposed by a regulator. The Company is subject to certain capital requirements and negative covenants with respect to its Enablex
  Debt Facility (refer to note 13). There were no changes in the Company's
  approach to capital management during the year. To date, the Company has not
  declared any cash dividends to its shareholders as part of its capital
  management program. The Company's management is responsible for the management
  of capital and monitors the Company's use of various forms of leverage on a
  regular basis.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|23. | Financial instruments and financial risk
      management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

a)      Fair Value Estimation

The Companys carrying value of cash,
short-term investments, trade and other receivables, loan receivable, bank
indebtedness, accounts payable and accrued liabilities approximate their fair
values due to the immediate or short term maturity of these instruments. The
fair value of long-term liabilities is not materially different than its
carrying value due to the recent issuance of these liabilities.

F-45

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


Carrying value and fair value of
financial assets and liabilities are summarized as follows:

| |                                                         |   |                |  |   | September 30 | 
| | ------------------------------------------------------- | - | -------------- |  | - | ------------ | 
| |                                                         |   |                |  |   | 2012         | 
| | Classification                                          |   | Carrying value |  |   | Fair value   | 
| |                                                         |   |                |  |   |              | 
| | Financial assets at FVTPL                               |   |                |  |   |              | 
| | - Short-term investments                                | $ | 11,936         |  | $ | 11,936       | 
| | Loans and receivables                                   |   |                |  |   |              | 
| | - Cash                                                  |   | 3,462,919      |  |   | 3,462,919    | 
| | - Trade and other receivables                           |   | 4,917,455      |  |   | 4,917,455    | 
| | - Loans receivable                                      |   | 737,400        |  |   | 737,400      | 
| | Other financial liabilities                             |   |                |  |   |              | 
| | - Accounts payable and accrued liabilities              |   | 1,960,227      |  |   | 1,960,227    | 
| | - Long term debt                                        |   | 54,086,830     |  |   | 54,398,733   | 
| | Derivative
      financial liabilities used for hedging |   | 336,700        |  |   | 336,700      | 

| |                                                  |   |                |  |   | September 30     | 
| | ------------------------------------------------ | - | -------------- |  | - | ---------------- | 
| |                                                  |   |                |  |   | 2011             | 
| | Classification                                   |   | Carrying value |  |   | Fair
      value | 
| |                                                  |   |                |  |   |                  | 
| | Financial assets at FVTPL                        |   |                |  |   |                  | 
| | - Short-term investments                         | $ | 3,134,137      |  | $ | 3,134,137        | 
| | Loans and receivables                            |   |                |  |   |                  | 
| | - Cash                                           |   | 5,059,650      |  |   | 5,059,650        | 
| | - Trade and other receivables                    |   | 78,978         |  |   | 78,978           | 
| | - Loans receivable                               |   | 1,598,260      |  |   | 1,598,260        | 
| | Other financial liabilities                      |   |                |  |   |                  | 
| | - Accounts payable
      and accrued liabilities |   | 686,339        |  |   | 686,339          | 

| |                                            |   |                |  |   | October
      1  | 
| | ------------------------------------------ | - | -------------- |  | - | ---------------- | 
| |                                            |   |                |  |   | 2010             | 
| | Classification                             |   | Carrying value |  |   | Fair
      value | 
| |                                            |   |                |  |   |                  | 
| | Financial assets at FVTPL                  |   |                |  |   |                  | 
| | - Short-term investments                   | $ | 6,721,128      |  | $ | 6,721,128        | 
| | Loans and receivables                      |   |                |  |   |                  | 
| | - Cash                                     |   | 8,710,990      |  |   | 8,710,990        | 
| | - Trade and other receivables              |   | 2,156,289      |  |   | 2,156,289        | 
| | Other financial liabilities                |   |                |  |   |                  | 
| | - Bank indebtedness                        |   | 780,000        |  |   | 780,000          | 
| | - Accounts payable and accrued liabilities |   | 955,149        |  |   | 955,149          | 
| | - Long term debt                           |   | 97,504         |  |   | 97,504           | 
| | Derivative
      financial liabilities     |   | 775,318        |  |   | 775,318          | 

F-46

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


The Company is required to present
information about its financial assets and liabilities with respect to the
hierarchy of the valuation techniques the Company utilized to determine fair
value. The different levels have been defined as follows:

| | - | Level 1 inputs utilize quoted prices
      (unadjusted) in active markets for identical assets or liabilities                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | - | Level 2 inputs utilize data points that are
      observable such as quoted prices, interest rates and yield curves                                                                   
| | - | Level 3 inputs are unobservable data points for
      the asset or liability, and includes situations where there is little, if
      any, market activity for the asset or liability.

At September 30, 2012, the Companys
financial assets and liabilities would be classified as follows:

| |                                    |   |                        |  |   | Significant |   |   | Significant Other |   |   | Significant  |  
| | ---------------------------------- | - | ---------------------- |  | - | ----------- | - | - | ----------------- | - | - | ------------ | -
| |                                    |   |                        |  |   | Observable  |   |   | Observable        |   |   | Unobservable |  
| |                                    |   |                        |  |   | Inputs      |   |   | Inputs            |   |   | Inputs       |  
| |                                    |   | **September 30, 2012** |  |   | (Level 1    | ) |   | (Level 2          | ) |   | (Level 3     | )
| |                                    |   |                        |  |   |             |   |   |                   |   |   |              |  
| | Assets:                            |   |                        |  |   |             |   |   |                   |   |   |              |  
| | Short-term
      investments       | $ | 11,936                 |  | $ | 11,936      |   | $ | -                 |   | $ | -            |  
| |                                    | $ | 11,936                 |  | $ | 11,936      |   | $ | -                 |   | $ | -            |  
| |                                    |   |                        |  |   |             |   |   |                   |   |   |              |  
| |                                    |   |                        |  |   |             |   |   |                   |   |   |              |  
| | Derivatives used
      for hedging | $ | 336,700                |  | $ | -           |   | $ | 336,700           |   | $ | -            |  
| |                                    | $ | 336,700                |  | $ | -           |   | $ | 336,700           |   | $ | -            |  

At September 30, 2011, the Companys
financial assets and liabilities would be classified as follows:

| |                              |   |                        |  |   | Significant |   |   | Significant Other |   |   | Significant  |  
| | ---------------------------- | - | ---------------------- |  | - | ----------- | - | - | ----------------- | - | - | ------------ | -
| |                              |   |                        |  |   | Observable  |   |   | Observable        |   |   | Unobservable |  
| |                              |   |                        |  |   | Inputs      |   |   | Inputs            |   |   | Inputs       |  
| |                              |   | **September 30, 2011** |  |   | (Level 1    | ) |   | (Level 2          | ) |   | (Level 3     | )
| |                              |   |                        |  |   |             |   |   |                   |   |   |              |  
| | Assets:                      |   |                        |  |   |             |   |   |                   |   |   |              |  
| | Short-term
      investments | $ | 3,134,137              |  | $ | 979,547     |   | $ | 2,154,590         |   | $ | -            |  
| |                              | $ | 3,134,167              |  | $ | 979,547     |   | $ | 2,154,590         |   | $ | -            |  
| |                              |   |                        |  |   |             |   |   |                   |   |   |              |  
| |                              |   |                        |  |   |             |   |   |                   |   |   |              |  
| | Liabilities:                 | $ | -                      |  | $ | -           |   | $ | -                 |   | $ | -            |  
| |                              | $ | -                      |  | $ | -           |   | $ | -                 |   | $ | -            |  

F-47

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


At October 1, 2010, the Companys
financial assets and liabilities would be classified as follows:

| |                               |   |                 |  |   | Significant |   |   | Significant Other |   |   | Significant  |  
| | ----------------------------- | - | --------------- |  | - | ----------- | - | - | ----------------- | - | - | ------------ | -
| |                               |   |                 |  |   | Observable  |   |   | Observable        |   |   | Unobservable |  
| |                               |   |                 |  |   | Inputs      |   |   | Inputs            |   |   | Inputs       |  
| |                               |   | October 1, 2010 |  |   | (Level 1    | ) |   | (Level 2          | ) |   | (Level 3     | )
| |                               |   |                 |  |   |             |   |   |                   |   |   |              |  
| | Assets:                       |   |                 |  |   |             |   |   |                   |   |   |              |  
| | Short-term
      investments  | $ | 6,721,128       |  | $ | 6,529,457   |   | $ | 191,671           |   | $ | -            |  
| |                               | $ | 6,721,128       |  | $ | 6,529,457   |   | $ | 191,671           |   | $ | -            |  
| |                               |   |                 |  |   |             |   |   |                   |   |   |              |  
| | Liabilities:                  |   |                 |  |   |             |   |   |                   |   |   |              |  
| | Derivatives
      liabilities | $ | 775,318         |  | $ | 775,318     |   | $ | -                 |   |   | -            |  
| |                               | $ | 775,318         |  | $ | 775,318     |   | $ | -                 |   | $ | -            |  

The fair value of financial instruments
traded in active markets is based on quoted market prices at the balance sheet
date. A market is regarded as active if quoted prices are readily and regularly
available from an exchange, dealer, broker, industry group, pricing service, or
regulatory agency, and those prices represent actual and regularly occurring
market transactions on an arms length basis.

The fair value of financial instruments
that are not traded in an active market (for example, over-the-counter
derivatives) is determined by using valuation techniques. These valuation
techniques maximize the use of observable market data where it is available and
rely as little as possible on entity specific estimates. If all significant
inputs required to fair value an instrument are observable, the instrument is
included in Level 2.

If one or more significant inputs are
not based on observable market data, the instrument is included in Level 3.

b)      Reclassification of Financial
Instruments

Until December 19, 2011, a major
component of the Companys strategy revolved around investment operations. On
December 19, 2011, in conjunction with the Companys amalgamation with Old Merus
to become a specialty pharmaceutical company that acquires, sells, and
distributes prescription medicine products, the Company no longer holds certain
investments for the purpose of selling or repurchasing them in the near term. As
a result of this change, the Company has reclassified its privately-held
investments from FVTPL to AFS measured at cost during the period. The amount
reclassified at December 19, 2011 was $1,262,000.

F-48

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


c)      Financial Risk Factors

Until December 19, 2011, a major
component of the Companys strategy revolved around investment operations. The
Companys business involved the purchase and sale of securities and,
accordingly, the majority of the Companys assets were comprised of financial
instruments. The use of financial instruments can expose the Company to several
risks, including market, credit and liquidity risks. Apart from the risks listed
below, management is of the opinion that they are not exposed to any other
significant risks. A discussion of the Companys use of financial instruments
and its risk management is provided below.

| | (i) | Liquidity risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     | Liquidity risk is the risk that the Company will have
      sufficient cash resources to meet its financial obligations as they come
      due. The Companys liquidity and operating results may be adversely
      affected if the Companys access to the capital markets is hindered,
      whether as a result of a downturn in stock market conditions generally or
      related to matters specific to the Company, or if the value of the
      Companys investments declines, resulting in losses upon disposition. In
      order to mitigate this risk, the Company maintains a sufficient cash
      balance in order to satisfy short-term liabilities as they come due and
      actively pursues raising capital through various public and private
      financing mechanisms to satisfy longer term needs.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     | The table below analyzes the Companys non-derivative
      financial liabilities into relevant maturity groupings based on the
      remaining period at the balance sheet date to the contractual maturity
      date. The amounts disclosed in the table are the contractual undiscounted
      cash flows and do not include capitalized transaction
  costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| |                                          |   |            |  |   |            |  |   | Year
      ended September 30 | 
| | ---------------------------------------- | - | ---------- |  | - | ---------- |  | - | ----------------------------- | 
| | At September 30,
      2012              |   | 2013       |  |   | 2014       |  |   | 2015                          | 
| | Debt                                     | $ | 32,094,125 |  | $ | 10,019,937 |  | $ | 12,290,000                    | 
| | Accounts payable and accrued liabilities |   | 1,960,227  |  |   | -          |  |   | -                             | 
| | Derivative liabilities                   |   | 336,700    |  |   | -          |  |   | -                             | 
| | Total                                    | $ | 34,391,052 |  | $ | 10,019,937 |  | $ | 12,290,000                    | 

| |                                          |   |         |  |   |      |  |   | Year
      ended September 30 | 
| | ---------------------------------------- | - | ------- |  | - | ---- |  | - | ----------------------------- | 
| | At September 30,
      2011              |   | 2012    |  |   | 2013 |  |   | 2014                          | 
| | Accounts payable and accrued liabilities | $ | 686,339 |  | $ | -    |  | $ | -                             | 
| | Total                                    | $ | 686,339 |  | $ | -    |  | $ | -                             | 

F-49

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


| | (ii) | Market risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |      | Market risk is the risk that the fair value of, or future
      cash flows from, the Companys financial instruments will significantly
      fluctuate because of changes in market prices. The value of the financial
      instruments can be affected by changes in interest rates, foreign exchange
      rates, and equity and commodity prices. The Company is exposed to market
      risk in trading its investments and unfavourable market conditions could
      result in dispositions of investments at less than favourable
    prices.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |      | The following table shows the estimated sensitivity of
      the Companys after-tax net loss for the period ended September 30, 2012
      from a change in the closing price of the Companys investments with all
      other variables held constant as at September 30,
2012:                                                                                                                                                                                                                                                                    

| |                      |   | Change
      in net after-tax |  |   | Change
      in net after-tax |  
| | -------------------- | - | ----------------------------- |  | - | ----------------------------- | -
| | Percentage change in |   | loss from % increase          |  |   | loss from % decrease          |  
| | closing price        |   | in
      closing price        |  |   | in
      closing price        |  
| |                      |   |                               |  |   |                               |  
| | 2%                   | $ | 25,478                        |  | $ | (25,478                       | )
| | 4%                   |   | 50,957                        |  |   | (50,957                       | )
| | 6%                   |   | 76,436                        |  |   | (76,436                       | )
| | 8%                   |   | 101,915                       |  |   | (101,915                      | )
| | 10%                  |   | 127,394                       |  |   | (127,394                      | )

| | (iii) | Currency risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |       | The Company is subject to currency risk through its
      purchases of inventory in US dollars, product acquisitions denominated in
      foreign currencies, and foreign source debt. As such, changes in the
      exchange rate affect the operating results of the Company. Dependent on
      the nature, amount and timing of foreign currency receipts and payments,
      the Company may from time to time enter into foreign currency derivative
      contracts to reduce its exposure to foreign currency risk as discussed in
      note 11.

F-50

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


The following financial assets and
liabilities were denominated in foreign currencies at September 30, 2012 (U.S.
dollar 0.9832, Euro 1.2646), September 30, 2011 and October 1, 2010:

| |                                                |   | **September 30** |   |   | September 30 |  |   | October
      1 |  
| | ---------------------------------------------- | - | ---------------- | - | - | ------------ |  | - | --------------- | -
| |                                                |   | 2012             |   |   | 2011         |  |   | 2010            |  
| | Denominated in U.S. dollars                    |   |                  |   |   |              |  |   |                 |  
| | Cash                                           | $ | 197,308          |   | $ | 141,718      |  | $ | 4,238,259       |  
| | Short-term investments                         |   | -                |   |   | 16,603       |  |   | 5,417,345       |  
| | Trade and other
      receivables              |   | 3,064,751        |   |   | -            |  |   | 350,377         |  
| | Loans receivable                               |   | 737,400          |   |   | -            |  |   | -               |  
| | Accounts payable
      and accrued liabilities |   | (744,573         | ) |   | -            |  |   | (124,539        | )
| | Debt                                           |   | (54,076,000      | ) |   | -            |  |   | -               |  
| | Derivative
      liabilities                   |   | -                |   |   | -            |  |   | (775,318        | )
| | Deferred revenue                               |   | -                |   |   | -            |  |   | (24,968         | )
| |                                                |   |                  |   |   |              |  |   |                 |  
| | Net assets denominated in U.S. dollars         | $ | (50,821,114      | ) | $ | 158,321      |  | $ | 9,081,156       |  
| |                                                |   |                  |   |   |              |  |   |                 |  
| | Denominated in Danish kroner                   |   |                  |   |   |              |  |   |                 |  
| | Short-term
      investments                   | $ | -                |   | $ | -            |  | $ | 61,080          |  
| | Net assets denominated in Danish kroner        | $ | -                |   | $ | -            |  | $ | 61,080          |  
| |                                                |   |                  |   |   |              |  |   |                 |  
| | Denominated in Euros                           |   |                  |   |   |              |  |   |                 |  
| | Cash                                           | $ | 144,624          |   | $ | -            |  | $ | (34,668         | )
| | Accounts payable and accrued liabilities       |   | (435,721         | ) |   | -            |  |   | (40,892         | )
| | Net assets denominated in Euros                | $ | (291,097         | ) | $ | -            |  | $ | (75,560         | )

The following table shows the
estimated sensitivity of the Companys after-tax net loss for the year ended
September 30, 2012 from a change in the U.S. dollar with all other variables
held constant as at September 30, 2012:

| |                      |   | Change
      in net after-tax |   |   | Change
      in net after-tax | 
| | -------------------- | - | ----------------------------- | - | - | ----------------------------- | 
| | Percentage change in |   | loss from % increase          |   |   | loss from % decrease          | 
| | USD                  |   | in
      USD                  |   |   | in
      USD                  | 
| |                      |   |                               |   |   |                               | 
| | 2%                   | $ | (1,016,422                    | ) | $ | 1,016,422                     | 
| | 4%                   |   | (2,032,845                    | ) |   | 2,032,845                     | 
| | 6%                   |   | (3,049,267                    | ) |   | 3,049,267                     | 
| | 8%                   |   | (4,065,689                    | ) |   | 4,065,689                     | 
| | 10%                  |   | (5,082,111                    | ) |   | 5,082,111                     | 

| | (iv) | Credit risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |      | Certain of the Companys financial assets, including
      cash, short-term investments and loans receivable are exposed to the risk
      of financial loss occurring as a result of default of a counterparty on
      its obligations to the Company. The Company may, from time to
  time, invest in debt obligations. The Company is also exposed,
      in the normal course of business, to credit risk from customer
      receivables. These amounts are continually monitored by management for
      collectability, and, in general, are lower risk as they are typically due
      from large institutions or multinational distributors.

F-51

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


| | (v) | Interest rate risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     | Interest risk is the impact that changes in interest
      rates could have on the Companys earnings and liabilities. At September
      30, 2012, the Company held no interest-bearing investments. Also, the
      Company had no exposure to liabilities which bore variable interest rates,
      which for example, fluctuated with the prime rate or overnight lending
      rate. It is managements opinion that the Company is not exposed to
      significant interest rate risk.

|24. | Segment information                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                        
|    | The Company operates in a single business segment focused
      on acquiring, in-licensing, marketing and distributing pharmaceutical
      products in North America and internationally. The Company carries out
      business principally in Canada, the United States, and Europe.
|    |                                                                                                                                                                                                                                                                                        
|    | Revenues by geographic region are detailed as
    follows:                                                                                                                                                                                                                             

| |               |   | Years ended
      September 30 | 
| | ------------- | - | ------------------------------ | 
| |               |   | 2012                           | 
| | Canada        | $ | 6,905,932                      | 
| | United States |   | 1,163,191                      | 
| | International |   | 2,351,911                      | 
| |               | $ | 10,421,034                     | 

Long-term assets by geographic region
are comprised of product rights and patents, property and equipment, and real
estate held for sale, detailed as follows:

| |               |   | September 30 |  |   | September 30 |  |   | October
      1 | 
| | ------------- | - | ------------ |  | - | ------------ |  | - | --------------- | 
| |               |   | 2012         |  |   | 2011         |  |   | 2010            | 
| | Canada        | $ | 15,772,896   |  | $ | 1,128,150    |  | $ | 1,720,924       | 
| | International |   | 63,546,052   |  |   | -            |  |   | -               | 
| |               | $ | 79,318,948   |  | $ | 1,128,150    |  | $ | 1,720,924       | 

F-52

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


|25. | First time adoption of IFRS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Company has adopted IFRS on October 1, 2011 with a
      transition date of October 1, 2010. Under IFRS 1, First-time Adoption
      of International Financial Reporting Standardsthe IFRS are applied
      retrospectively at the transition date with all adjustments to assets and
      liabilities taken to retained earnings unless certain exemptions are
      applied. The Company has applied the following exemptions on to its
      opening consolidated balance sheet dated October 1, 2010:
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | IFRS Exemption Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Business combinations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | IFRS 1 indicates that a first-time adopter may elect not
      to apply IFRS 3 Business Combinations retrospectively to business
      combinations that occurred before the date of transition to IFRS. The
      Company has taken advantage of this election and has applied IFRS 3 to
      business combinations that occurred on or after October 1, 2010.                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Consolidated and separate financial statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | In accordance with IFRS 1, if a company elects to apply
      IFRS 3 Business Combinations retrospectively, IAS 27 Consolidated and
      Separate Financial Statements must also be applied retrospectively. As the
      Company elected to apply IFRS 3 prospectively, the Company has also
      elected to apply IAS 27 prospectively.                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Share-based payment transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | IFRS 1 encourages, but does not require, first-time
      adopters to apply IFRS 2 Share-based Payment to equity instruments that
      were granted on or before November 7, 2002, or equity instruments that
      were granted subsequent to November 7, 2002 and vested before the later of
      the date of transition to IFRS. The Company has elected not to apply IFRS
      2 to awards that vested prior to October 1, 2010, which have been
      accounted for in accordance with Canadian GAAP.   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Company has elected not to reassess its
      determinations made under Canadian GAAP regarding whether an agreement
      contains a lease.                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | IFRS Mandatory Exceptions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | IFRS 1 also outlines guidelines that a first-time adopter
      must adhere to under certain circumstances. The Company has applied the
      following guidelines to its opening consolidated balance sheet dated
      October 1, 2010:                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | In accordance with IFRS 1, an entitys estimates in
      accordance with IFRS at the date of transition to IFRS must be consistent
      with estimates made for the same date in accordance with previous GAAP,
      unless there is objective evidence that those estimates were made in
      error.                                                                                                                                                                                                       

F-53

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


The Companys IFRS estimates at October
1, 2010 are consistent with its Canadian GAAP estimates for the same date.

Derecognition of financial assets and
liabilities

The derecognition requirements in IAS
39 were applied prospectively for transactions occurring on or after January 1,
2004.

Hedge accounting

Hedge accounting can only be applied
prospectively from the transition date to transactions that satisfy the hedge
accounting criteria in IAS 39 at that date. Hedging relationships cannot be
designated retrospectively and the supporting documentation cannot be created
retrospectively. The Company had no hedging relationships as of the transition
date.

Non-controlling interests

This exception stipulates that the
following requirements of IAS 27 be applied prospectively from the date of
transition to IFRS:

| |  | The requirement that total comprehensive income be
      attributed to the owners of the parent and to the non-controlling
      interests even if this results in the non-controlling interests having a
      deficit balance;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Requirements regarding the accounting for changes in the
      parents ownership interest in a subsidiary that do not result in a loss
      of control; and                                                                   
| |  | The requirements regarding the accounting for a loss of
      control over a subsidiary, and the related requirements in IFRS 5,
      Non-current Assets Held for Sale and Discontinued
      Operations.                      

The Company held no non-controlling
interests as of the date of transition.

Reconciliation of Canadian GAAP to
IFRS

IFRS employs a conceptual framework
similar to Canadian GAAP. However, significant differences exist in certain
matters of recognition, measurement, and disclosure. While adoption of IFRS has
not changed the Companys cash flows, it has resulted in changes to the
Companys reported financial position and results of operations. In order to
allow the users of the financial statements to better understand these changes,
the Companys Canadian GAAP consolidated balance sheets and consolidated
statements of loss and comprehensive loss have been reconciled to IFRS, with the
resulting differences explained.

F-54

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


The Canadian GAAP balance sheet at
October 1, 2010 has been reconciled to IFRS as follows:

| |                                          |   |             |   |   | As at
      October 1, 2010 |  
| | ---------------------------------------- | - | ----------- | - | - | --------------------------- | -
| |                                          |   |             |   |   | Effect of                   |  
| |                                          |   | Canadian    |   |   | Transition                  |  
| |                                          |   | GAAP        |   |   | to IFRS                     |  
| |                                          |   |             |   |   |                             |  
| | Assets                                   |   |             |   |   |                             |  
| | Current                                  |   |             |   |   |                             |  
| | Cash                                     | $ | 8,710,990   |   | $ | -                           |  
| | Short-term investments                   |   | 6,721,128   |   |   | -                           |  
| | Trade and other receivables (note 25(a)) |   | 2,085,474   |   |   | 70,815                      |  
| | Prepaid expenses                         |   | 331,037     |   |   | -                           |  
| |                                          |   | 17,848,629  |   |   | 70,815                      |  
| | Non-current                              |   |             |   |   |                             |  
| | Investments                              |   | 141,006     |   |   | -                           |  
| | Real estate                              |   | 1,116,000   |   |   | -                           |  
| | Property and equipment                   |   | 463,918     |   |   | -                           |  
| |                                          | $ | 19,569,553  |   | $ | 70,815                      |  
| | Liabilities                              |   |             |   |   |                             |  
| | Current                                  |   |             |   |   |                             |  
| | Bank indebtedness                        | $ | 780,000     |   | $ | -                           |  
| | Accounts payable and accrued liabilities |   | 955,149     |   |   | -                           |  
| | Derivative liabilities                   |   | 775,318     |   |   | -                           |  
| | Deferred revenue (note 25(a))            |   | 92,956      |   |   | (16,073                     | )
| | Long-term debt due within one year       |   | 27,326      |   |   | -                           |  
| |                                          |   | 2,630,749   |   |   | (16,073                     | )
| |                                          |   |             |   |   |                             |  
| | Long-term debt                           |   | 70,178      |   |   | -                           |  
| |                                          |   | 2,700,927   |   |   | (16,073                     | )
| | Equity                                   |   |             |   |   |                             |  
| | Share capital                            |   | 8,762,524   |   |   | -                           |  
| | Equity reserves                          |   | 29,781,172  |   |   | -                           |  
| | Deficit                                  |   | (21,682,312 | ) |   | 86,888                      |  
| |                                          |   | 16,861,384  |   |   | 86,888                      |  
| | Non-controlling interest                 |   | 7,242       |   |   | -                           |  
| |                                          |   | 16,868,626  |   |   | 86,888                      |  
| |                                          | $ | 19,569,553  |   | $ | 70,815                      |  

F-55

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


The Canadian GAAP balance sheet at
September 30, 2011 has been reconciled to IFRS as follows:

| |                                          |   |             |   |   | As at
      September 30, 2011 | 
| | ---------------------------------------- | - | ----------- | - | - | ------------------------------ | 
| |                                          |   |             |   |   | Effect of                      | 
| |                                          |   | Canadian    |   |   | Transition                     | 
| |                                          |   | GAAP        |   |   | to IFRS                        | 
| |                                          |   |             |   |   |                                | 
| | Assets                                   |   |             |   |   |                                | 
| | Current                                  |   |             |   |   |                                | 
| | Cash                                     | $ | 5,059,650   |   | $ | -                              | 
| | Short-term investments                   |   | 3,134,137   |   |   | -                              | 
| | Trade and other receivables              |   | 78,978      |   |   | -                              | 
| | Loans receivable                         |   | 1,598,260   |   |   | -                              | 
| | Prepaid expenses                         |   | 19,676      |   |   | -                              | 
| |                                          |   | 9,890,701   |   |   | -                              | 
| | Non-current                              |   |             |   |   |                                | 
| | Real estate                              |   | 1,116,000   |   |   | -                              | 
| | Property and equipment                   |   | 12,150      |   |   | -                              | 
| |                                          | $ | 11,018,851  |   | $ | -                              | 
| | Liabilities                              |   |             |   |   |                                | 
| | Current                                  |   |             |   |   |                                | 
| | Accounts payable and accrued liabilities | $ | 686,339     |   | $ | -                              | 
| |                                          |   | 686,339     |   |   | -                              | 
| | Equity                                   |   |             |   |   |                                | 
| | Share capital                            |   | 8,762,524   |   |   | -                              | 
| | Equity reserves                          |   | 30,719,348  |   |   | -                              | 
| | Deficit                                  |   | (29,149,360 | ) |   | -                              | 
| |                                          |   | 10,332,512  |   |   | -                              | 
| |                                          | $ | 11,018,851  |   | $ | -                              | 

F-56

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


The Canadian GAAP statement of
operations and comprehensive income for the year ended September 30, 2011 has
been reconciled to IFRS as follows:

| |                                                                                             |   | For the
      year ended September 30, 2011 |  
| | ------------------------------------------------------------------------------------------- | - | ------------------------------------------- | -
| |                                                                                             |   |                                             |  
| |                                                                                             |   | Canadian                                    |  
| |                                                                                             |   | GAAP                                        |  
| |                                                                                             |   |                                             |  
| | Revenue                                                                                     | $ | -                                           |  
| | Cost of goods sold                                                                          |   | -                                           |  
| | Gross margin                                                                                |   | -                                           |  
| |                                                                                             |   |                                             |  
| | Operating expenses                                                                          |   |                                             |  
| | Sales and marketing                                                                         |   | -                                           |  
| | General and administrative                                                                  |   | 2,587,633                                   |  
| | Acquisition costs                                                                           |   | -                                           |  
| |                                                                                             |   | 2,587,633                                   |  
| | Loss before depreciation, amortization, interest expense, investment
      income and taxes |   | (2,587,633                                  | )
| |                                                                                             |   |                                             |  
| | Depreciation                                                                                |   | 17,062                                      |  
| | Interest expense                                                                            |   | 10,865                                      |  
| | Restructuring costs                                                                         |   | 6,061,413                                   |  
| | Investment income                                                                           |   | (1,882,347                                  | )
| | Loss before income taxes, non-controlling interest and discontinued
      operations        |   | (6,794,626                                  | )
| |                                                                                             |   |                                             |  
| | Income tax recovery  current                                                               |   | -                                           |  
| | future                                                                                      |   | -                                           |  
| |                                                                                             |   |                                             |  
| | Loss from continuing operations                                                             |   | (6,794,626                                  | )
| | Loss on disposal of discontinued operations net of income tax
      (note 25(a))            |   | (396,471                                    | )
| | Loss from discontinued operations, net of income
      tax (note 25(a))                     |   | (282,969                                    | )
| |                                                                                             |   |                                             |  
| | Net loss and comprehensive loss                                                             |   | (7,474,066                                  | )
| |                                                                                             |   |                                             |  
| | Attributable to:                                                                            |   |                                             |  
| | Owners of the Company                                                                       |   | (7,467,048                                  | )
| | Non-controlling interest                                                                    |   | (7,018                                      | )
| |                                                                                             | $ | (7,474,066                                  | )

F-57

---

Merus Labs International Inc.Notes to Consolidated Financial Statements(Expressed in Canadian dollars)For the years
        ended September 30, 2012 and 2011


The adoption of IFRS has had no impact
on the net cash flows of the Company.

| | (a) | Assets held for disposal and income from discontinued
      operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | Under Canadian GAAP, the Companys former subsidiary,
      Watt International Inc., recognized revenue under the completed contract
      method. In accordance with IFRS, the Company changed their accounting
      policy for revenue recognition to the percentageof- completion method, as
      the completed contract method is not an acceptable policy under IFRS. The
      application of the percentage-of-completion method results in earlier
      recognition of revenue. The impact of applying this change in policy was
      an adjustment to work-in-progress and accrued revenue at October 1, 2010
      in the amount of $70,815 and $16,073, respectively. In the year ended
      September 30, 2011, an additional $86,888 was recognized. Upon
      retrospective reclassification to discontinued operations, a related
      adjustment was made from continuing operation to discontinued operations
      for the year ended September 30, 2011. There was no adjustment to the
      balance sheet at September 30, 2011 as the sale of the subsidiary was
      completed prior to the period end.

F-58

---

Item 18: Financial Statements

The Company has elected to provide financial statements
  pursuant to Item 17.

Item 19: Exhibits

EXHIBIT INDEX

|Exhibit No. | Description                                                                                                                                                                                                                                                                                                     
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1         | Articles dated December 19, 2011(Incorporated
      by reference to our Report of Foreign Private Issuer on Form 6-K filed on
      December 21, 2011)                                                                                                                                                          
|1.2*        | Notice of Articles of Merus Labs
      International Inc. dated October 1, 2012                                                                                                                                                                                                                                 
|1.3*        | Certificate of Amalgamation dated
      October 1, 2012                                                                                                                                                                                                                                                         
|4.1         | An Exclusive License and
      Distribution Agreement between Merus Labs and Innocoll Pharmaceuticals
      Limited dated September 17, 2010. (Incorporated by reference to our Report
      by Foreign Private Issuer on Form 6-K filed on April 16, 2012)                                                     
|4.2         | An Asset Purchase Agreement between
      Merus Labs and Iroko International LP dated May 13, 2011. (Incorporated by
      reference to our Report by Foreign Private Issuer on Form 6-K filed on
      April 16, 2012)                                                                                         
|4.3         | An Arrangement Agreement between Old
      Merus and Envoy dated November 10, 2011. (Incorporated by reference to our
      Report by Foreign Private Issuer on Form 6-K filed on April 16, 2012)                                                                                                               
|4.4*        | Asset Purchase Agreement between
      Novartis Pharma AG and Merus Labs Luxco SARL dated July 11, 2012
      (portions of the exhibit has been omitted pursuant to a request for
      confidential treatment)                                                                                                 
|4.5*        | Credit Agreement among Merus Labs
      International Inc., Merus Labs Luxco S.A R.L., Merus Labs Inc., ECG
      Holdings Inc., Merus Labs Netherlands B.V. and PDL BioPharma, Inc. dated
      July 10, 2012 (portions of the exhibit has been omitted pursuant to a
      request for confidential treatment)
|8.1         | Subsidiaries (contained in Item 4.C
      hereof)                                                                                                                                                                                                                                                               
|11.1        | Code of Business Conduct
      (Incorporated by reference to our Annual Report on Form 20-F, filed on
      December 29, 2005).                                                                                                                                                                                 
|11.2        | Complaint Procedures for Accounting
      and Auditing Matters (Incorporated by reference to our Annual Report on
      Form 20-F, filed on December 29, 2005).                                                                                                                                                 
|11.3        | Board Mandate (Incorporated by
      reference to our Annual Report on Form 20-F, filed on December 29, 2005).                                                                                                                                                                                                  
|12.1*       | Certification of Chief Executive
      Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                        
|12.2*       | Certification of Chief Financial
      Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                        
|13.1*       | Certifications of Chief Executive
      Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                       
|13.2*       | Certifications of Chief Financial
      Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                       
|15.1        | Audit Committee Charter
      (Incorporated by reference to our Annual Report on Form 20-F, filed on
      December 29, 2005).                                                                                                                                                                                  
|15.2        | Compensation Committee Charter
      (Incorporated by reference to our Annual Report on Form 20-F, filed on
      December 29, 2005).                                                                                                                                                                           
|15.3        | Nominating and Corporate Governance
      Committee Charter (Incorporated by reference to our Annual Report on Form
      20-F, filed on December 29, 2005).                                                                                                                                                    
|16.1        | Letter dated February 27, 2012 from Saturna Group Chartered Accountants LLP has re change in certifying accountant. (Incorporated by reference to our Report by Foreign Private Issuer on Form 6-K filed on April 20, 2012)                                                                                     
|16.2        | Letter dated April 3, 2012 from PricewaterhouseCoopers LLP re change in certifying accountant. (Incorporated by reference to our Report by Foreign Private Issuer on Form 6-K filed on April 20, 2012)                                                                                                          

*Filed herewith

62

---

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.

|                       | MERUS LABS INTERNATIONAL INC. 
|---------------------- | ------------------------------
|                       |                               
|Date: January 2,  2013 | /s/ ELIE FARAH                
|                       |                               
|                       | Name: Elie Farah              
|                       | Title: Chief Executive Officer

63

---