# U.S. SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

# FORM 40-F

|[ ] | REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE  SECURITIES EXCHANGE ACT
OF 1934
|--- | -------------------------------------------------------------------------------------

OR

|[X] | ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE  SECURITIES EXCHANGE ACT
OF 1934
|--- | ----------------------------------------------------------------------------------------

|For
the fiscal year ended:   December 31, 2004 | Commission File Number:  000-31062
|---------------------------------------------- | ----------------------------------

ONCOLYTICS BIOTECH INC. 
(Exact name of
Registrant as specified in its charter)

|                                                             |  |                                                                 
|------------------------------------------------------------ |  | ----------------------------------------------------------------
|Not Applicable                                               |  | Province of Alberta, Canada                                     
|(Translation of Registrantsname into English (ifapplicable) |  | (Province of other jurisdiction ofincorporation or organization)

2834(Primary Standard Industrial Classification Code Number (if applicable))

Suite #210, 1167 Kensington Crescent N.W., Calgary, Alberta, Canada, T2N 1X7(403) 670-7377(Address and telephone number of Registrants principal executive offices)

DL Services, Inc., 1420 Fifth Avenue, Suite 3400, Seattle, Washington 98101(206) 903-8800(Name, address (including zip code) and telephone number (including area code) of agent for service in
the United States)

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

|Title of each classCommon Shares | Name of each exchange on which registeredNASDAQ SmallCap
|-------------------------------- | --------------------------------------------------------

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

None
(Title of Class)

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

None
(Title of Class)

---

For annual reports, indicated by
check mark the information filed with this Form:

|[X]   Annual information form | [X]   Audited annual financial statements
|----------------------------- | -----------------------------------------

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 December 31, 2004, 31,915,496 Common Shares without par value were issued and outstanding.

Indicate by check mark whether the
Registrant by filing the information contained in this Form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act
of 1934 (the Exchange Act). If Yes is marked, indicate the filing
number assigned to the Registrant in connection with such Rule.

||_| Yes: 82- | |X| No
|------------ | ------

Indicate by check mark whether the
Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act 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
|------- | ------

---

Explanatory Note: Oncolytics Biotech
Inc. (the Company or the Registrant) is a Canadian issuer eligible
to file its annual report pursuant to Section 13 of the Securities Exchange Act of
1934 (the 1934 Act) on Form 40-F. The Company is a foreign private
issuer as defined in Rule 3b-4 under the 1934 Act and in Rule 405 under
the Securities Act of 1933. Equity securities of the Company are accordingly exempt from
Sections 14(a), 14(b), 14(c), 14(f) and 16 of the 1934 Act pursuant to
Rule 3a12-3.

# NOTE REGARDING FORWARD
LOOKING STATEMENTS

Certain statements in this document
and the documents attached as exhibits hereto constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Oncolytics Biotech Inc. (Oncolytics, or the Company), or industry
results, to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Forward-looking statements are
statements that are not historical facts, and include but are not limited to, estimates
and their underlying assumptions; statements regarding plans, objectives and expectations
with respect to the efficacy of the Companys technologies; the timing and results of
clinical studies related to the Companys technologies; future operations, products
and services; the impact of regulatory initiatives on the Companys operations; the
size of and opportunities related to the markets for the Companys technologies;
general industry and macroeconomic growth rates; expectations related to possible joint
and/or strategic ventures and statements regarding future performance. Forward-looking
statements generally, but not always, are identified by the words expects,
anticipates, believes, intends, estimates,
projects, potential, possible and similar expressions,
or that events or conditions will, may, could or
should occur.

The forward-looking statements in
this Annual Report are subject to various risks and uncertainties, most of which are
difficult to predict and generally beyond the control of the Company, including without
limitation:

| |  |  | uncertainty
as to the Company's ability to achieve the goals and satisfy assumptions of management;
| | - |  | ---------------------------------------------------------------------------------------------------

| |  |  | the
uncertainties related to the outcome of clinical studies and the long process related to
such studies;
| | - |  | ----------------------------------------------------------------------------------------------------------

| |  |  | the
need for regulatory approvals to market REOLYSIN(R)and other products of the Company;
| | - |  | -----------------------------------------------------------------------------------------

| |  |  | the
Company's need for additional financing which may not be available on acceptable terms or
at all;
| | - |  | -----------------------------------------------------------------------------------------------------

| |  |  | uncertainty
as to whether the Company will be able to complete any  licensing,  partnering or
marketing  arrangements  for its technologies;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | uncertainty
as to the market acceptance of the Company's  products and the Company's ability to
generate  sufficient  revenues          to make its products and technologies
commercially viable;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the
intense  competition in the biotechnology  industry and risks related to changing
technology that may render the Company's          technology obsolete; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | other
factors identified under the heading Risk Factors in the Companys
Renewal Annual Information Form, and those that are discussed or identified in the Companys
other public filings with the SEC.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company's  actual  results,
 performance  or achievement  could differ  significantly  from those  expressed in, or
implied by, the Company's  forward-looking  statements.  Accordingly,  the Company

---

cannot assure that any of the events
anticipated by the Companys forward-looking statements will occur, or if they do,
what impact they will have on the Companys results of operations and financial
condition.

Forward-looking statements are based
on the beliefs, opinions and expectations of the Companys management at the time
they are made, and the Company does not assume any obligation to update its
forward-looking statements if those beliefs, opinions, or expectations, or other
circumstances, should change.

For all of the reasons set forth
above, investors should not place undue reliance on forward-looking statements.

# CURRENCY

Unless otherwise indicated, all
dollar amounts in this report are Canadian dollars. The exchange rate of Canadian dollars
into United States dollars, on December 31, 2004, based upon the noon buying rate in
New York City for cable transfers payable in Canadian dollars as certified for customs
purposes by the Federal Reserve Bank of New York, was U.S.$1.00 = CDN $1.2034.

# AUDITED ANNUAL
FINANCIAL STATEMENTS AND 
MANAGEMENTS DISCUSSION AND ANALYSIS

Audited Annual Financial
Statements

The audited financial statements,
including the report of the auditors with respect thereto are included herein by
reference. For a reconciliation of important differences between Canadian and United
States generally accepted accounting principles, see Note 18  Reconciliation of
Canadian GAAP to US GAAP of the Notes to Audited Financial Statements included herein by
reference.

Managements Discussion and
Analysis

The Companys management
discussion and analysis of financial conditions and results of operations (MD&A)
is included herein by reference.

# DISCLOSURE CONTROLS
AND PROCEDURES

As of the end of the period covered
by this report, the Company carried out an evaluation, under the supervision of the
Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the Companys disclosure controls and procedures pursuant to Rule 13a-15 of
the United States Securities Exchange Act of 1934 (Exchange Act). Based upon
that evaluation, the Companys Chief Executive Officer and Chief Financial Officer
have concluded that the Companys disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that it files
or submits under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and forms.

# CHANGES IN INTERNAL
CONTROLS OVER FINANCIAL REPORTING

During the period covered by this
Annual Report on Form 40-F, no changes occurred in the Companys internal control
over financial reporting that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.

---

The Companys management,
including the Chief Executive Officer and Chief Financial Officer, does not expect that
its disclosure controls and procedures or internal controls and procedures will prevent
all error and all fraud. A control system can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the Company have
been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the control. The
design of any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.

CODE OF ETHICS FOR CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER 
AND CONTROLLER

The Company has adopted a Code of
Ethics for Chief Executive Officer, Chief Financial Officer and Controller. This code
applies to the Companys President and Chief Executive Officer, the Chief Financial
Officer and the Controller. A copy of the Code of Ethics for Chief Executive Officer,
Chief Financial Officer and Controller is attached to this annual report as Exhibit 99.F, and
is available in print to any shareholder who requests it by writing to the Company at
Suite #210, 1167 Kensington Crescent N.W., Calgary, Alberta, Canada, T2N 1X7, Attention:
Doug Ball. All amendments to the code, and all waivers of the code with respect to any of
the officers covered by it, will be disclosed in the Companys annual report on Form
40-F or in current reports on Form 6-K and provided in print to any shareholder upon
written request to the Company.

The Company has a separate Code of
Ethics applicable to all employees, officers and directors of the Company, a copy of which
is available in print to any shareholder who requests it by writing to the Company at
Suite #210, 1167 Kensington Crescent N.W., Calgary, Alberta, Canada, T2N 1X7, Attention:
Doug Ball. All amendments to the Code of Ethics applicable to all employees, officers and
directors of the Company, and all waivers of the code with respect to any of the officers
covered by it, will be disclosed in the Companys annual report on Form 40-F or in
current reports on Form 6-K and provided in print to any shareholder upon written request
to the Company.

# AUDIT COMMITTEE

The Companys Board of Directors
has a separately-designated standing Audit Committee for the purpose of overseeing the
accounting and financial reporting processes of the Company and audits of the
Companys annual financial statements. As at the review of the 2004 Annual Report,
and as at the date of this Report, the following individuals comprise the entire
membership of the Companys Audit Committee, which have been established in
accordance with Section 3(a)(58)(A) of the Exchange Act:

| | Fred Stewart
Robert Schultz
Jim Dinning
| | ---------------------------------------

Independence

The Company has adopted the criteria
for director independence and unrelatedness prescribed by the Sarbanes-Oxley Act of 2002,
Section 10A(m)(3) of the Exchange Act and Rule 10A-3(b)(1) promulgated
thereunder, for members of public company audit committees.

---

Audit Committee Financial
Expert

Mr.           Robert Schultz has been determined by the Company to meet the audit committee
          financial expert criteria prescribed by the Securities and Exchange Commission
          and has been designated as an audit committee financial expert for the Audit
          Committee. Each of the previously mentioned directors have also been determined
          by the Company to be independent within the criteria referred to above under the
          subheading Independence.

# PRINCIPAL ACCOUNTING
FEES AND SERVICES  INDEPENDENT AUDITORS

The table setting forth the
Companys fees paid to its independent auditor, Ernst & Young LLP for the years
ended December 31, 2004 and December 31, 2003 are set forth under the heading
Additional Information  External Auditor Service Fees of the
Companys 2004 Annual Information Form included herein by reference.

# PRE-APPROVAL OF AUDIT
AND NON-AUDIT SERVICES PROVIDED BY 
INDEPENDENT AUDITORS

The Audit Committee pre-approves all
audit services to be provided to the Company by its independent auditors. The Audit
Committees policy regarding the pre-approval of non-audit services to be provided to
the Company by its independent auditors is that all such services shall be pre-approved by
the Audit Committee or by the Chairman of the Audit Committee, who must report all such
pre-approvals to the Audit Committee at their next meeting following the granting thereof.
Non-audit services that are prohibited to be provided to the Company by its independent
auditors may not be pre-approved. In addition, prior to the granting of any pre-approval,
the Audit Committee or the Chairman, as the case may be, must be satisfied that the
performance of the services in question will not compromise the independence of the
independent auditors. See, "Audit Committee Matters" in the Company's 2004 Annual
Information Form included herein by reference.

# OFF-BALANCE SHEET
ARRANGEMENTS

As disclosed in the Companys
MD&A included herein by reference, under the heading Liquidity and Capital
Resources  Off-Balance Sheet Arrangements, the Company has not entered
into any off-balance sheet arrangements.

# TABLE OF CONTRACTUAL
COMMITMENTS

As disclosed in the Companys
MD&A included herein by reference, under the heading Liquidity and Capital
Resources  Contractual Obligations,the Company has set forth
its contractual commitments.

# NASDAQ CORPORATE
GOVERNANCE

The Companys common shares are
quoted for trading on the Nasdaq SmallCap Market (Nasdaq). Section 4350 of
the Nasdaq Marketplace Rules permits Nasdaq to grant exemptions to a foreign private
issuer when provisions of Section 4350 related to qualitative listing requirements are
contrary to a law, rule or regulation of any public authority exercising jurisdiction
over such issuer or contrary to generally accepted business practices in the issuers
country of domicile. The Company is organized under the laws of Province of Alberta and
its common shares are listed for trading on The Toronto Stock Exchange. The Company
complies with the laws of Province of Alberta and rules and regulations of The Toronto
Stock Exchange, including rules related to corporate governance practices. Section 4350
of the Nasdaq Marketplace Rules requires a foreign private issuer to provide a
description of the significant ways in which the Companys governance practices
differ from those followed by domestic companies pursuant to Section 4350 of the Nasdaq
Marketplace Rules in annual reports for years beginning

---

December 31, 2003. A description of
the significant ways in which the Companys governance practices differ from those
followed by domestic companies pursuant to Section 4350 of the Nasdaq Marketplace Rules in
the years ended December 31, 2003 and December 31, 2004 and currently is as follows:

| | Shareholder
Meeting Quorum Requirement: The Nasdaq minimum quorum requirement for a shareholder
meeting under Section 4350(b) of the Nasdaq Marketplace Rules is one-third of the
outstanding shares of common stock. In addition, a company listed on Nasdaq is required to
state its quorum requirement in its bylaws. The Companys quorum requirement is set
forth in its corporate bylaws. A quorum for a meeting of members of the Company is two
persons present and being, or representing by proxy, members holding not less than 5% of
the issued shares entitled to be voted at such meeting. The foregoing quorum requirement
is consistent with the laws, customs and practices in Canada and the rules of The Toronto
Stock Exchange.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# UNDERTAKING AND
CONSENT TO SERVICE OF PROCESS

Undertaking

The Company undertakes to make
available, in person or by telephone, representatives to respond to inquiries made by the
Commission staff, and to furnish promptly, when requested to do so by the Commission
staff, information relating to: the securities registered pursuant to Form 40-F; the
securities in relation to which the obligation to file an annual report on Form 40-F
arises; or transactions in said securities.

Consent to Service of
Process

The Company previously filed an
Amended Appointment of Agent for Service of Process and Undertaking on Form F-X signed by
Oncolytics Biotech Inc. and its agent for service of process on November 10, 2003 with
respect to the class of securities in relation to which the obligation to file the Form
40-F arises, which Form F-X is incorporated herein by reference.

---

# Signatures

Pursuant to the requirements of the
Exchange Act, the Registrant certifies that it meets all of the requirements for filing
on Form 40-F and has duly caused this annual report to be signed on its behalf by the
undersigned, thereto duly authorized.

Registrant

Oncolytics Biotech Inc.

By /s/ Doug Ball 
       Doug Ball
       Chief Financial Officer

Date:  March 4, 2005

---

# DOCUMENTS FILED AS
PART OF THIS REPORT

|1. |  | Renewal
Annual Information Form of the Registrant for the year ended December
                    31, 2004
|-- |  | ----------------------------------------------------------------------------------------------------------

|2. |  | The
following audited financial statements of the Registrant, are exhibits to
                    and form a part of this Annual Report:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------

| | Auditors' Report on Financial Statements
| | ----------------------------------------

| | Balance Sheets as of December 31, 2004 and 2003;
| | ------------------------------------------------

| | Statements of Loss and Deficit for the years ended December 31, 2004, 2003, 2002 and
cumulative from inception on April 2, 1998 to December 31, 2004;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | Statements of Cash Flows for the years ended December 31, 2004, 2003, 2002 and
cumulative from inception on April 2, 1998 to December 31, 2004;
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | Notes to Financial Statements (which include reconciliation with United States generally
accepted accounting principles).
| | -------------------------------------------------------------------------------------------------------------------------

|3. |  | Management
Discussion and Analysis of Financial Conditions and Results of           Operations
|-- |  | ----------------------------------------------------------------------------------------------

# EXHIBITS

|99.A |  | Certifications
by the Chief Executive Officer of the Company pursuant to                     Rule 13a-14(a)
of the Exchange Act, as adopted pursuant to Section 302                     of the
Sarbanes-Oxley Act of 2002.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|99.B |  | Certifications
by the Chief Financial Officer of the Company pursuant to                     Rule 13a-14(a)
of the Exchange Act, as adopted pursuant to Section 302                     of the
Sarbanes-Oxley Act of 2002.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|99.C |  | Certificate
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
                    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|99.D |  | Certificate
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
                    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|99.E |  | Consent
of Ernst & Young LLP, Independent Chartered Accountants.
|---- |  | ----------------------------------------------------------------

|99.F |  | Code of Ethics
For Chief Executive Officer, Chief Financial Officer and Controller
|---- |  | ----------------------------------------------------------------------------------

---

EXHIBIT 1



# RENEWAL ANNUAL
INFORMATION FORM

# for the Year Ended
December 31, 2004

# March 4, 2005

---

# TABLE OF CONTENTS

|                                                                 | Page
|---------------------------------------------------------------- | ----
|CORPORATE STRUCTURE                                              |     
|
|GENERAL DEVELOPMENT OF THE BUSINESS                              |     
|
|General                                                          |     
|Clinical Trials                                                  |     
|Animal Studies                                                   |     
|Manufacturing                                                    |     
|Reovirus for Animal Use                                          |     
|Financings and Other Distributions                               |     
|Shareholdings in Other Issuers                                   |     
|Publications and Presentations                                   |     
|Patents                                                          |     
|Recent Developments                                              |     
|Future Development                                               |     
|
|NARRATIVE DESCRIPTION OF THE BUSINESS                            |     
|
|Business of the Company                                          |     
|Scientific Background                                            |     
|The Potential Cancer Product                                     |     
|Repayable Grants                                                 |     
|Business Strategy                                                |     
|Regulatory Requirements                                          |     
|Market and Competition                                           |     
|Product Marketing Strategy                                       |     
|Third Party Advisor, Collaborators and Scientific Advisory Board |     
|Intellectual Property Policy                                     |     
|Patent and Patent Application Summary                            |     
|Acquisition of all of the Shares of the Company by SYNSORB       |     
|Employees                                                        |     
|Research and Development Expenditures                            |     
|Dividend Policy                                                  |     
|
|MARKET FOR SECURITIES                                            |     
|
|Market for Common Shares                                         |     
|Description of Common Shares                                     |     
|
|DIRECTORS AND OFFICERS                                           |     
|
|AUDIT COMMITTEE MATTERS                                          |     
|
|Mandate of the Audit Committee                                   |     
|Composition of the Audit Committee                               |     
|
|RISK FACTORS                                                     |     
|
|ADDITIONAL INFORMATION                                           |     
|
|Legal Proceedings                                                |     

---

-ii-

|                                                           | Page
|---------------------------------------------------------- | ----
|                                                           |     
|Interest of Management and Others in Material Transactions |     
|Transfer Agent and Registrar                               |     
|Material Contracts                                         |     
|Interests of Experts                                       |     
|External Auditor Service Fees                              |     
|Audit Fees                                                 |     
|Audit-Related Fees                                         |     
|Tax Fees                                                   |     
|All Other Fees                                             |     
|Other Additional Information                               |     
|
|GLOSSARY                                                   |     

---

This Annual Information Form
contains forward-looking statements reflecting the current expectations of Oncolytics
Biotech Inc. Investors are cautioned that these forward-looking statements involve risks
and uncertainties, including, without limitation, clinical trial study delays, product
development delays, regulatory delays, the ability to attract and retain business
partners, future levels of government funding, competition from pharmaceutical and other
biotechnology companies and the ability to provide the capital required for research,
product development, operations and marketing. These factors should be carefully
considered and readers should not place undue reliance on the Companys
forward-looking statements. Actual events may differ materially from current expectations
due to risks and uncertainties.

In the context of this Annual
Information Form, statements of the Companys belief are based primarily upon the
Companys results derived to date from its research and development program with
animals and early stage human results, upon which the Company believes that it has a
reasonable scientific basis to expect the particular results to occur. It is not possible
to predict, based upon studies in animals or early stage human results, whether a new
therapeutic will be proved to be safe and effective in humans. There can be no assurance
that the particular result expected by the Company will occur. See Managements
Discussion and Analysis and Risk Factors.

# CORPORATE STRUCTURE

Oncolytics Biotech Inc. (the
Company) was incorporated pursuant to the provisions of the ABCA on April 2,
1998 as 779738 Alberta Ltd. On April 8, 1998, the Company amended its articles and changed
its name to Oncolytics Biotech Inc. On July 29, 1999, the Company further amended its
articles by removing the private company restrictions and subdividing its issued and
outstanding 2,222,222 common shares to create 6,750,000 common shares. The head office and
principal place of business of the Company is located at 210, 1167 Kensington Crescent
N.W., Calgary, Alberta T2N 1X7. The registered office of the Company is located at 4500
Bankers Hall East, 855  2nd Street S.W., Calgary, Alberta T2P 4K7.

# GENERAL DEVELOPMENT OF
THE BUSINESS

# General

The Company focuses on the discovery
and development of oncolytic viruses for the treatment of cancers that have not been
successfully treated with conventional therapeutics. Recent scientific advances in
oncology, virology, and molecular biology have created opportunities for new approaches to
the treatment of cancer. The product presently being developed by the Company may
represent a novel treatment for Ras mediated cancers which can be used as an alternative
to existing cytotoxic or cytostatic therapies, as an adjuvant therapy to conventional
chemotherapy, radiation therapy, or surgical resections, or to treat certain cellular
proliferative disorders for which no current therapy exists.

The Companys technologies are
based primarily on discoveries in the Department of Microbiology and Infectious Diseases
at the University of Calgary in the 1990s. The Company was formed in 1998 to explore
the natural oncolytic capability of the reovirus, a virus that preferentially replicates
in cells with an activated Ras pathway.

The lead product being developed by
the Company may represent a novel treatment for certain tumor types and some cellular
proliferative disorders. The Companys lead product is a virus that is able to
replicate specifically in, and hence kill, certain tumor cells both in tissue culture as
well as in a number of animal models. See Narrative Description of the Business
 Business of the Company; Scientific Background.

The Company is also assessing the
potential opportunities for product candidates resulting from issued patents received for
Ras targeted adenovirus and herpes virus.

---

-2-

# Clinical Trials

On February 27, 2004, the Company
announced that it received approval to commence a Phase I clinical trial to investigate
the systemic delivery of REOLYSIN® as a treatment for patients with advanced or
metastatic solid tumors from the Medicines and Healthcare products Regulatory Authority in
the United Kingdom. The principal investigator for the study is Dr. J. de Bono of the
Royal Marsden Hospital in London, England. This clinical trial is the first to examine the
systemic delivery of REOLYSIN®, which is expected to result in delivery of the virus
throughout the body to both the primary tumor and metastatic disease sites. The trial is
an open-label, dose escalation Phase I study in which REOLYSIN® is administered
intravenously to patients diagnosed with advanced or metastatic solid tumors that are
refractory (have not responded) to standard therapy or for which no curative standard
therapy exists. The primary objective of the study is to determine the maximum tolerated
dose, dose limiting toxicity and safety profile of REOLYSIN®. Secondary objectives
include the evaluation of viral replication, immune response to the virus and any evidence
of antitumor activity. The enrolment in this study is expected to be up to 40 evaluable
patients and will depend upon the number of dose levels tested.

On February 27, 2004, the Company
announced the final update on its technical clinical study for T2 prostate cancer. On
March 23, 2003, the Company previously reported results from an interim assessment of this
clinical trial. These results were presented by Dr. Don Morris, from the Alberta Cancer
Board, the principal investigator for the trial. Dr. Morris reported that there was
evidence of viral activity in five of six patients and there were no safety concerns, from
either a clinical or histopathological perspective, in all six patients reported upon. The
preliminary data, in four of the six patients, showed clear histopathological evidence of
apoptotic tumour cell death (one measure of viral activity). In a fifth patient, the PSA
level dropped by 53% and the prostate gland shrunk by 67% from the period of time prior to
treatment to the time of surgical removal. There was no evidence of viral activity in the
sixth patient. In all six patients, there was no histopathological evidence of any viral
effect on healthy prostate tissue. This trial, which was approved by Health Canada on
October 11, 2001, was primarily a technical study designed to allow the Company to measure
overall tumour response and examine changes or effects inside the tumour and in
surrounding normal tissue, as part of a human clinical trial.

On October 29, 2003, the Company
announced the approval by the Drug Development Group of the Division of Cancer Treatment
and Diagnosis, U.S. National Cancer Institute (NCI) for multiple clinical
trials to evaluate the efficacy of REOLYSIN® in a range of cancers. The NCI approved
REOLYSIN® for collaborative development after an analysis of preclinical, GLP
toxicology and available clinical data. The Company and NCI plan to collaborate to select
cancer indications and suitable development programs for a number of clinical trials. The
NCI is an agency of the National Institutes of Health, one of eight agencies that comprise
the Public Health Service in the U.S. Department of Health and Human Services. The NCI,
established under the National Cancer Act of 1937, is the U.S. Federal Governments
principal agency for cancer research and training.

On July 3, 2002, the Company
commenced its Phase I/II clinical trial for recurrent glioma (brain tumor) for which it
had received approval to proceed from Health Canada on April 11, 2002. The Company
reported positive interim safety results from this trial on December 23, 2002, indicating
that the product appeared to be well tolerated in the first six patients treated. As a
result of information from the interim review, the Company and an independent data safety
monitoring board submitted recommended changes to the protocol, which were reviewed and
approved by Health Canada on May 6, 2003. With approval received from Health Canada, the
Company resumed enrollment in the trial.

On March 21, 2002, the Company
announced summary results from its Phase I clinical trial of REOLYSIN®. The study
examined the administration of escalating dosages of REOLYSIN® directly into a
subcutaneous (underneath the skin) tumour in eighteen terminal cancer patients with
progressive

---

-3-

(actively growing) cancer that had
failed to respond to conventional therapies. The primary outcome of the trial was safety.
None of the patients receiving reovirus experienced any serious adverse events related to
the reovirus, nor were there any dose limiting toxicities detected in any of the patients.
The secondary outcomes measured in the study related to tumour responses. Tumour responses
were measured at both the treated lesion as well as remote tumour sites. Viral activity is
defined as a transitory or lasting tumour regression of at least 30% measured in two
dimensions against the tumour size prior to injection on the first day of treatment.
Evidence of viral activity was detected in 11 of 18 patients (61%), with tumour regression
ranging from 32% to 100%.

# Animal Studies

On February 14, 2003, the Company
announced successful completion of a primate toxicology study testing the safety of
intravenous infusion of REOLYSIN® over 28 days. At the maximum daily dose used in the
study, each primate received daily from 10 to 100 times the expected maximum single human
dose per unit of body weight. The product was well tolerated and no product-related
serious adverse events were observed.

On April 18, 2002, the Company
reported results from a study conducted by a third party, which examined the use of
REOLYSIN® in canines (companion pet dogs) with naturally occurring tumours. The study
examined the effect of three injections of REOLYSIN® administered on alternating days
directly into a subcutaneous malignant tumour in 17 dogs. Efficacy was assessed by both
measurement of tumour response and by histopathological comparison of pre-treatment and
post-treatment tumour biopsies (tissue sample comparison). Canines were considered to be
evaluable for tumour response only if they were available for all follow-ups. None of the
animals were screened for Ras activation of their tumours prior to enrolment. In six of
the 15 evaluable canines, the injected tumours were classified as stable disease (five) or
partial response (one) on day 32 after the first injection of REOLYSIN®. Fifteen of 17
cases were evaluable by histopathology, where tumour necrosis (cell death) is the primary
indication of efficacy in cancer therapy. Nine of 15 (60%) post-treatment biopsies from
tumour masses showed increased cell death. Two of the treated masses appeared to be
completely replaced by non-cancerous cells and fibrous tissue and another four cases had
evidence of cell death in at least 75% of the biopsy sample.

On February 8, 2002, the Company
announced the successful completion of its eighth formal toxicology study of
REOLYSIN®. This study involved daily injections of REOLYSIN® for 28 days in a
non-tumor bearing canine model. The total cumulative amount of virus injected per animal
at the highest dose was more than one hundred times the highest dose used in the recently
completed Phase I human clinical trial on a per unit of body weight basis.

On December 4, 2001, the Company
announced results of its first systemic toxicology study of multiple injections of
REOLYSIN® in animals. The toxicology study examined the effects of 28 consecutive days
of intravenous administration of REOLYSIN® in Sprague-Dawley rats. These studies were
conducted in support of future systemic clinical trials. The results of the study
demonstrated that there were no significant adverse clinical outcomes as a result of the
administration of the reovirus at any of the dose levels tested.

On August 8, 2001, the Company
reported on research work done at the University of Calgary, which demonstrated in animals
that REOLYSIN® could be successfully delivered systemically for the treatment of
cancer. This research explored the degree of involvement of the immune system in potential
systemic REOLYSIN® therapy, and those conditions that may benefit from co-therapy with
immune suppressants.

On June 19, 2001, the Company
reported results of research conducted through the Alberta Cancer Board and the University
of Calgary on the use of REOLYSIN® for the treatment of human malignant gliomas

---

-4-

(brain cancer) in animal models. Dr.
Peter Forsyth and his colleagues demonstrated that nude mice with intracerebral (in the
brain) gliomas treated with a single injection of REOLYSIN® administered
intratumourally survived significantly longer than untreated animals in the control group.
Complete tumour regression was found in 20 of the 23 animals treated with REOLYSIN®.

On February 28, 2001, the Company
reported summary results of work done by a research team at the University of Calgary
examining the effectiveness of REOLYSIN® for the treatment of metastatic cancer in
animal models. These results, along with three additional papers related to the reovirus
technology, were presented at the annual meeting of the American Association of Cancer
Research held in New Orleans on March 26, 2001. The team demonstrated, in an immune
competent mouse model, that REOLYSIN® administered intravenously led to a significant
reduction in tumour volume, and resulted in a significant enhancement of survival rates in
these animals. Experiments conducted as part of this study also demonstrated a potential
use for REOLYSIN® as a co-therapy with existing drugs.

On November 10, 2000, the Company
reported that Dr. Peter Forsyth and his research group at the Tom Baker Cancer Centre in
Calgary, Alberta, Canada presented the results of their work with REOLYSIN® for the
treatment of malignant gliomas, a specific type of brain tumor. The results were presented
in Chicago at the Society for Neuro-Oncology. Dr. Forsyth and his colleagues were able to
demonstrate in an athymic mouse model that REOLYSIN® treatment of intra-cerebral
tumours resulted in dramatic extension of life. In one set of investigations, 82% of
treated animals were alive at 90 days at which point the experiment was terminated.
Animals not receiving REOLYSIN® treatment experienced a median survival of 48 days.
Further, no side effects of the therapy were observed in the REOLYSIN® treated
animals.

On June 28, 2000, the Company
reported that Dr. Ron Moore and his research group at the Cross Cancer Institute in
Edmonton, Alberta, Canada presented the results of their work with REOLYSIN® in
selectively killing superficial transitional cell carcinoma (TCC) of the
bladder in animal models. The purpose of the investigation was to compare the efficacy of
REOLYSIN® to standard interventions of this disease state. Animal survival, tumor
response, and potential side effects were all examined. The results demonstrated better
efficacy with fewer adverse outcomes for animals receiving REOLYSIN® as compared to
the currently accepted standard treatment. In an animal model of TCC, Dr. Moores
group found that 70% of the animals had no evidence of tumors after treatment with
REOLYSIN®, with no evidence of toxicology as a result of the treatment.

On June 16, 2000, the Companys
initial toxicology studies examining the effects of REOLYSIN® in animals was
announced. The toxicology studies examined the effects of subcutaneous injections of
REOLYSIN® in rats and dogs. These studies were conducted in support of the initial
Phase I clinical study. The results of the studies demonstrated that there were no
significant adverse clinical outcomes as a result of the administration of REOLYSIN®
in rats and dogs at any of the dose levels tested.

# Manufacturing

The Company engages a toll
manufacturer, Cobra Biomanufacturing Plc for the production of reovirus for human clinical
trials and animal toxicology studies. The product will be produced in compliance with
current regulatory requirements and the manufacturer will confirm biosafety testing. See
Risk Factors  Manufacturing.

On February 6, 2003, the Company
announced the successful completion of its program for the development of a commercial
process for the manufacturing of REOLYSIN®, and indicated that it had filed selective
patent applications with respect to the process.

---

-5-

# Reovirus for Animal Use

The Company announced on November 20,
2000, that it had entered into an agreement with U.S. based pharmaceutical firm, Pfizer
Inc. (Pfizer) which had the potential of leading to the development and
marketing of a formulation of the reovirus for animal use. It was anticipated that the
agreement would also provide invaluable information towards the Companys primary
objective of developing the potential of REOLYSIN® as a product for human use. On
January 10, 2002, the Company reported that Pfizer had terminated its agreement with the
Company for the development of the reovirus as a potential cancer therapeutic for animals.
Based upon a review of the information available to the Company, there was nothing that
caused concerns with respect to safety or effectiveness of the reovirus as a potential
cancer therapy for human use. In addition, the Company eventually received information
that has assisted the Company in development of the reovirus as a potential therapeutic.
The primary focus of the Company has been and will continue to be the development of
REOLYSIN® as a human therapeutic.

# Financings and Other
Distributions

Since the initial public offering,
the Company has completed 10 offerings for net cash proceeds of $53,685,487. In 2004, the
following offerings of securities were completed:

| |  |  | on
April 7, 2004, the Company issued 1,077,100 units at $6.25 per unit (each unit consisting
of one common share and one-half of one common share purchase warrant with each full
share purchase warrant exercisable into one common share at an exercise price of $7.75
per share until October 7, 2005);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | on
September 23, 2004, the Company issued 21,459 common shares valued at $150,000 and
$250,000 cash to a non-management founding shareholder to cancel a portion of the Companys
future contingent payments; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | on
November 23, 2004, the Company issued 1,504,000 units at $6.65 per unit (each unit
consisting of one common share and one-half of one common share purchase warrant with
each full share purchase warrant exercisable into one common share at an exercise price
of $8.00 per share until November 23, 2007).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Shareholdings in Other
Issuers

During 2004, the Company sold 697,945
(2003  1,496,500) common shares of BCY for net cash proceeds of $133,609 (2003
 $450,151) and reported a gain on sale of these shares of $47,002 (2003 
$264,453). As at December 31, 2004, the Companys remaining ownership in BCY was
200,000 common shares which were still under escrow.

On June 6, 2003, the Company sold its
6,890,000 common shares in the capital of Transition Therapeutics Inc., for net proceeds
of $2,552,695. These shares were acquired by the Company on June 18, 2002 in exchange for
the issuance of 1,913,889 common shares in the capital of the Company. The Company
recorded a loss on sale with respect to the sale of these shares of $2,156,685.

# Publications and
Presentations

On December 15, 2004, Efficacy
and Safety Evaluation of Human Reovirus Type 3 in Immunocompetent Animals was
published in Clinical Cancer Research Vol. 10. This publication concluded that the data
showed the efficacy and safety of reovirus when it is used in the treatment of gliomas in
immunocompetent hosts. As well, inoculation of reovirus into the brain of nonhuman
primates did not produce significant toxicities.

---

-6-

On September 30, 2004, a poster was
presented at the 16th EORTC-NCI-AACR 2004 Symposium on Molecular Targets and Cancer
Therapeutics in Geneva, Switzerland entitled The oncolytic reovirus, Reolysin,
augments the anticancer effects of cytotoxic agents in vitro against the ras-mutated human
colon cancer cell line HCT 116. The researchers were able to show that REOLYSIN®
enhances the cytotoxicity of chemotherapeutic agents including 5-FU, gemcitabine,
doxorubicin and cisplatin.

On September 23, 2003, the Company
announced that Dr. Ramon Alemany, a collaborator to the Company since July 30, 2003, and
his colleagues at the Institut Catala dOncologia in Barcelona, Spain, had published
a research paper in the September 1, 2003 issue of Cancer Research, entitled
Ras-dependent Oncolysis with an adenovirus VAI Mutant. The researchers were
able to show that VAI mutant adenoviruses selectively replicated in and killed pancreatic
cancer cells with a Ras-activated pathway. The Company currently holds issued U.S. patent
number 6,596,268 with claims covering the treatment of Ras-mediated tumors using
adenoviruses modified in the VAI domain.

On March 19, 2003, the Company
announced that Dr. Don Morris and his research group with the Alberta Cancer Board and the
University of Calgary had published the results of their work with the reovirus for the
removal of contaminating cancer cells from autologous (harvested from the patient
themselves) blood stem cells in model systems. The results were published in the March 13,
2003 issue of Blood.

In addition, two recent publications
addressed different elements of research into the use of the reovirus as a potential
cancer therapeutic. Hirasawa et al. in the January 15th edition of Cancer Research
demonstrated the use of the reovirus in treating metastatic disease in animal models using
the reovirus delivered systemically. This is the first published examination of the
systemic use of the reovirus in immune competent animals. Etoh et al. in the March 9th
edition of Clinical Cancer Research examined the use of the reovirus to kill
pancreatic cancers both in vitro and in animal models.

On March 26, 2002, the Company
announced the publication of a research paper entitled Reovirus Oncolysis of Human
Breast Cancer by Norman et al. (Human Gene Therapy, Vol. 13, March 20, 2002).
The research examined the use of the reovirus as a treatment for breast cancer in two
animal models and various breast cancer cell lines. In the first animal model, a single
injection of the reovirus caused a continuous regression of a pre-established tumour,
during a 30-day observation period. In the second animal model, independent tumours were
established on both flanks of the mice. After the tumours had been established, a single
injection of the reovirus into only one tumour resulted in complete regression of both the
injected and non-injected tumours over 32 days. The research group also examined the
ability of the reovirus to infect and kill breast cancer cell lines. Widespread cell
killing was seen in all five established breast cancer cell lines and in one surgical
specimen. No cell killing was observed in two cell lines established from normal breast
tissue.

On March 7, 2002, the Company
announced that independent research assessing the potential of the reovirus as a potential
cancer therapeutic was scheduled to be presented at the American Association for Cancer
Research meeting in San Francisco in April.

# Patents

In 2004, the Company received
notification of issuance of three additional patents in the U.S. for a total of 13 U.S.
patents and one European patent. The new patents in 2004 continued to expand on previously
issued patents in the area of using recombinant reovirus for the treatment of neoplasia
(cancers), non-cancer cellular proliferative diseases, and various methods of production
and processing of the reovirus. In addition, the Company has a number of other patents
under application, both in the United States, and through filings under the Patent
Cooperation Treaty. See Narrative Description of the Business  Patent and
Patent Application Summary.

---

-7-

# Recent Developments

Recurrent Malignant
Glioma Clinical Trial Study in the U.S.

On February 28, 2005, the Company
announced that it had received clearance from the US Food and Drug Administration (FDA) to
begin a Phase I/II clinical trial to investigate the use of REOLYSIN® to treat
patients with recurrent malignant gliomas.

This clinical trial is an open-label
dose escalation Phase I/II study in which a single dose of REOLYSIN® will be
administered by infusion to patients with recurrent malignant gliomas that are refractory
to standard therapy. The administration involves the stereotactically-guided placement of
a needle into the tumour, through which REOLYSIN® will be administered or infused into
the tumour mass and surrounding tissue using a pump. The primary objective of the study is
to determine the maximum tolerated dose, dose limiting toxicity and safety profile of
REOLYSIN®. Secondary objectives include the evaluation of viral replication, immune
response to the virus and any evidence of antitumour activity. The enrolment in this study
is expected to be up to 30 evaluable patients in the dose escalation phase with up to an
additional 14 patients added at the maximum tolerated dose.

REOLYSIN® in Combination with
Radiation Therapy Clinical Trial Study in the U.K.

On February 18, 2005, the Company
announced that it had received a letter of approval from the U.K. regulatory authorities
(Medicines and Healthcare products Regulatory Agency or MHRA) for its Clinical Trial
Application to begin a Phase I clinical trial to evaluate the feasibility, safety and
anti-tumour effects of intratumoural administration of REOLYSIN® in combination with
radiation in patients with advanced cancers.

The trial is a Phase I open-label,
dose-escalation study of REOLYSIN® combined with two different radiation
dosages/schedules. The enrolment in this study is expected to be approximately thirty
evaluable patients, and will depend upon the number of dose levels tested. Up to an
additional fifteen patients will also be treated at the maximum tolerated dose. The
primary objective of the study is to determine the maximum tolerated dose, dose limiting
toxicity, and safety profile of REOLYSIN® when administered intratumourally to
patients receiving radiation treatment. A secondary objective is to examine any evidence
of anti-tumour activity. Patients who have been diagnosed with advanced or metastatic
solid tumours that are refractory (have not responded) to standard therapy or for which no
curative standard therapy exists will be eligible.

# Future Developments

The Company anticipates that many
important activities related to its clinical trial program, its product manufacturing and
its intellectual property development and protection will occur in 2005 and beyond. The
Company presently intends to continue to focus its clinical trial program on the
evaluation of the effectiveness of REOLYSIN® as a potential treatment for various
cancer indications. This will include continuing its clinical trial program presently
underway, expanding into other areas including utilizing its association with the NCI to
broaden its clinical trial program. The Company also intends to expand human clinical
trials to determine the safety and effectiveness of systemic delivery of REOLYSIN® as
a cancer therapeutic. Various forms of cancer are being assessed and the Company intends
to evaluate and select one or more forms of cancer that appear to provide the best
opportunity for timely approval.

The Company plans to continue its
focus on establishing strategic relationships with potential partners who can provide
expertise in marketing and distribution, as well as assistance with research and
development.

---

-8-

Except for historical information,
this review contains statements which by their nature are forward-looking and which
involve known and unknown risks, delays, uncertainties and other factors not under the
Companys control. Any of these factors may cause actual results, performance or
achievement of the Company to be materially different from the results, performance or
expectations implied by these forward-looking statements. These factors include, but are
not limited to, results of current or pending clinical trials, actions by regulatory
authorities such as the Food and Drug Administration in the United States, the Health
Protection Branch in Canada, or MHRA in the UK as well as those factors detailed in the
Companys regulatory filings.

# NARRATIVE DESCRIPTION
OF THE BUSINESS

# Business of the Company

The Companys potential product
for human use, REOLYSIN®, is developed from the reovirus. This virus has been
demonstrated to replicate specifically in tumor cells bearing an activated Ras pathway.
Activating mutations of Ras occur in approximately thirty per cent of all human tumors
directly, but considering its central role in signal transduction, activation of the Ras
pathway may play a role in approximately two-thirds of all tumors.

The functionality of the product is
based upon the finding that tumors bearing an activated Ras pathway are deficient in their
ability to activate the anti-viral response mediated by the host cellular protein, PKR.
Since PKR is responsible for preventing reovirus replication, tumor cells lacking the
activity of PKR are susceptible to reovirus infections. As normal cells do not possess Ras
activations, these cells are able to thwart reovirus infections by the activity of PKR. In
a tumor cell with an activated Ras pathway, reovirus is able to freely replicate and hence
kill the host tumor cell. The result of this replication is progeny viruses that are then
free to infect surrounding cancer cells. This cycle of infection, replication and cell
death is believed to be repeated until there are no longer any tumor cells carrying an
activated Ras pathway available.

The following schematic illustrates
the molecular basis of how the reovirus kills cancer cells.



---

-9-

# Scientific Background

The Ras protein is a key regulator of
cell growth and differentiation. It transmits signals from the cells surface, via
growth factor receptors, to downstream elements, which are in turn relayed to the nucleus.
This transmission of signals from the cell surface to the cells nucleus is
collectively referred to as signal transduction. The transmission of these
signals results in cell growth, division, and in some instances cellular differentiation.
In normal cells, cell growth occurs only in the presence of factors stimulating the cells
to grow. Mutations in Ras itself, or any of the elements along the Ras pathway, often lead
to activation of the pathway in the absence of the appropriate growth stimuli, leading to
the uncontrolled growth of these cells and ultimately to the development of a cancerous
state. In fact, approximately 30% of all cancers are known to be due to mutations in Ras
itself. The frequency of these Ras mutations, as well as their etiology in a given tumor
is however, tissue specific. Activating mutations in Ras are found in many types of human
malignancies but are highly represented in pancreatic (90%), sporadic colorectal (50%),
lung carcinomas (40%), and myeloid leukemia (30%). Because Ras is a regulator of key
mitogenic signals, aberrant function of upstream elements such as receptor tyrosine
kinases (RTKs) can also result in Ras activation in the absence of mutations in Ras
itself. Indeed, over-expression of these RTKs such as HER2/neu/ErbB2 or the epidermal
growth factor receptor is common in breast cancer (25-30%), and over-expression of the
platelet-derived growth factor receptor (PDGFR) is common in glioblastomas and gliomas,
all of which are tumor types in which Ras mutations are relatively rare. Although
activating mutations of Ras itself is thought to occur in only about 30% of all tumors it
is expected that approximately two-thirds of all tumors have activated Ras signaling
pathways as a result of mutations in genes that lie upstream of Ras. With this in mind,
Ras becomes a significant therapeutic target in oncology.

All available scientific evidence
developed or reviewed by the Company to date supports the premise that the reovirus only
actively infects and replicates in cells with an activated Ras pathway. This naturally
occurring virus is believed to cause only mild infections of the respiratory and
gastrointestinal tract and in general, reovirus infections in humans are asymptomatic and
usually sub-clinical. Research has indicated this virus replicates in, and therefore
kills, only cancer cells (i.e. cancer cells with an activated Ras pathway), but does not
replicate in normal cells. It has been demonstrated that reovirus replication is
restricted in normal cells due to the activation of the double stranded
RNA-activated protein kinase (PKR). PKR is a crucial element in protecting cells from
reovirus infection and is capable of blocking viral protein translation. Activated Ras (or
an activated element of the Ras pathway) prevents PKR activation, and thus allows viral
replication to ensue only in this subset of cancer cells. To prove that reovirus could be
used as a potential cancer therapeutic, a number of animal models were developed.
Experiments using this virus to treat mouse tumors, expanded animal models as well as
human brain, breast, and prostate tumors implanted in immuno-compromised mice have yielded
promising results. In animals where tumor regression was noted, a single injection of
reovirus is often enough to cause complete tumor regression. More importantly, it was
demonstrated that this treatment is effective in causing tumor regression in immune
competent animals. The Company will conduct an expanded animal toxicology program to
determine any long-term side effects of REOLYSIN® therapy. Management of the Company
believes that the nature of this virus, combined with its selective replication makes it
an attractive candidate as a cancer therapy.

The Company believes that this
research may have broad utility in the treatment of tumours with an activated Ras pathway
as well as a potential use as an adjuvant therapy following surgical tumor resection or as
an adjuvant therapy to conventional chemotherapeutic or radiation therapies.

# The Potential Cancer
Product

Cancer is a group of related diseases
characterized by the aberrant or uncontrolled growth of cells and the spread of these
cells to other sites in the body. These cancer cells eventually accumulate and form tumors

---

-10-

that can disrupt and impinge on
normal tissue and organ function. In many instances, cells from these tumors can break
away from the original tumor and travel through the body to form new tumors through a
process referred to as metastasis.

The Companys cancer product is
a potential therapeutic for tumors possessing an activated Ras pathway. In tumor cells
with this type of activation, the virus is cytotoxic but may have no effect on the
surrounding normal tissue. Activating mutations of Ras are believed to account for
approximately 30% of all human tumors directly. It is also possible to activate Ras
through mutation of proteins that control its activity rather than through direct
mutations of Ras itself. This suggests that approximately two thirds of tumors may respond
to this treatment.

# Repayable Grants

Pursuant to the Technology
Commercialization Agreement with the Alberta Heritage Foundation, the Company received
$150,000 to offset the REOLYSIN® development costs. Under the Technology
Commercialization Agreement, the Company agreed to repay the amount of the grant from
gross sales of the Company. The Company agreed to repay the Alberta Heritage Foundation in
annual installments in an amount equal to the lesser of: (a) 5% of gross sales; or (b)
$15,000 per annum until the entire grant has been paid in full.

In accordance with the Clinical Trial
Agreement with the ACB, the Company has received funding and overhead support from the ACB
to offset the REOLYSIN® clinical trial expenditures. Under the Clinical Trial
Agreement, the Company agreed to repay the amount of the grant together with a royalty, to
a combined maximum amount of $400,000 plus an overhead repayment of $100,000, upon sales
of product. The Company agreed to repay the ACB in annual installments from the date of
commencement of sales in an amount equal to the lesser of: (a) 5% of gross sales of
REOLYSIN®; or (b) $100,000 per annum. See Managements Discussion and
Analysis.

# Business Strategy

The Companys business strategy
is to develop and market REOLYSIN® in an effective and timely manner, and access
additional technologies at a time and in a manner that the Company believes best for its
development. The Company intends to achieve its business strategy by focusing on these key
areas:

| |  | Develop REOLYSIN® by initiating toxicology and manufacturing programs and progress the
product through a clinical setting to assess its safety and efficacy in human subjects.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Establish collaborations with experts to assist the Company with scientific and clinical
developments of this new potential pharmaceutical product.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Implement strategic alliances with selected pharmaceutical and biotechnology companies and
selected laboratories, where such alliances may complement and expand the Companys
research and development efforts on the product and provide sales and marketing
capabilities.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Utilize
the Companys broadening patent base and collaborator network as a mechanism to meet
its strategic objectives.
|- |  | ----------------------------------------------------------------------------------------------------------------------

| |  | Develop relationships with companies that could be instrumental in assisting the Company
to access other innovative therapeutics.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------

The Companys business strategy
is based on attaining a number of commercial objectives, which, in turn, are supported by
a number of product development goals. The current new product development

---

-11-

presently being conducted by the
Company is primarily of a research and development nature. In the context of this Annual
Information Form, statements of the Companys belief are based primarily
upon the Companys results derived to date from its research and development program
with animals, and early stage human trials, and upon which the Company believes that it
has a reasonable scientific basis to expect the particular results to occur. It is not
possible to predict, based upon studies in animals, or early stage human trials, whether a
new therapeutic will ultimately prove to be safe and effective in humans. There are no
assurances that the particular result expected by the Company will occur. See
Risk Factors.

At this time the Company does not
intend to become a fully integrated pharmaceutical company with substantial in-house
research and development, marketing and distribution or manufacturing capabilities. The
Company is pursuing a strategy of establishing relationships with larger companies as
strategic partners. The Company intends to partner or joint venture with larger
pharmaceutical companies that have existing and relevant marketing capability for its
products. It is anticipated that future clinical development of the Companys
products outside Canada would generally occur in conjunction with a strategic partner or
partners, who would contribute expertise and financial assistance. In exchange for certain
product rights and commitments to market the Companys products, the strategic
partners would be expected to share in gross proceeds from the sale of the Companys
product or products. The proceeds generated from partnering or joint venturing projects
are expected to be distributed on the basis of relative risk taken and resources
contributed by each party to the partnership or joint venture.

# Regulatory Requirements

The development of new
pharmaceuticals is strongly influenced by a countrys regulatory environment. The
drug approval process in Canada is regulated by Health Canada. The primary regulatory body
in the United States is the FDA and in the UK is the MHRA. Similar processes are conducted
in other countries by equivalent regulatory bodies. Regulations in each jurisdiction
require the licensing of manufacturing facilities and mandate strict research and product
testing standards. Companies must establish the safety and efficacy of their products,
comply with Good Manufacturing Practices and submit marketing materials before being
allowed to market pharmaceutical products. While the Company plans to pursue or support
the pursuit of the approval of its product, success in acquiring regulatory approval for
any product is not assured.

In order to market its pharmaceutical
product in Canada, the United States, Europe and other jurisdictions, a company must
successfully meet the requirements of those jurisdictions. The requirements of the
Appropriate Regulatory Authority will generally include the following stages as part of
the regulatory process:

Pre-Pharmacological Studies Pre-Pharmacological studies involve extensive testing on laboratory animals to
determine if a potential therapeutic product has utility in an in vivo disease
model and has any adverse toxicology in a disease model.

Investigational New Drug
Application  An Investigational New Drug (IND)
Submission, or the equivalent, must be submitted to the appropriate regulatory authority
prior to conducting Pharmacological Studies.

Pharmacological Studies(or Phase I Clinical Trials)  Pharmacological studies are designed to assess the
potential harmful or other side effects that an individual receiving the therapeutic
compound may experience. These studies, usually short in duration, are often conducted
with healthy volunteers or actual patients and use up to the maximum expected therapeutic
dose.

---

-12-

Therapeutic Studies(or
Phase II and III Clinical Trials)  Therapeutic studies are designed primarily to
determine the appropriate manner for administering a drug to produce a preventive action
or a significant beneficial effect against a disease process. These studies are conducted
using actual patients with the condition that the therapeutic is designed to remedy.

Prior to initiating these studies,
the organization sponsoring the program is required to satisfy a number of requirements
via the submission of documentation to support the approval for a clinical trial.

New Drug
Submission  After all three phases of a clinical trial have been
completed, the results are submitted with the original IND Submission to the appropriate
regulatory authority for marketing approval. Once marketing approval is granted, the
product is approved for commercial sales.

# Market and Competition

According to estimates for 2005 from
the American Cancer Society, 1.37 million Americans are expected to be diagnosed with
cancer in the year, and 57,000 Americans are forecast to die of cancer. In the United
States cancer accounts for 22.8% of all deaths, second only to cardiovascular disease. In
the United States, the relative lifetime risk of a male developing cancer is 1 in 2, while
for women, this risk is 1 in 3.

The costs of this disease state are
also significant. In the United States, the National Institute of Health estimates that
the overall annual costs for cancer treatment are $189.9 billion. Of this figure, $69.4
billion can be attributed to direct patient costs.

It has been estimated that
approximately 30% of all tumors are a result of activating mutations of Ras itself. Since
Ras can be activated by mechanisms other than direct mutations it is believed that the
number of tumors with activated Ras (either through direct activating mutation or mutation
or over-expression of elements upstream of Ras) is approximately two thirds.

The Company is aware of large
pharmaceutical companies developing small molecule programs for the development of
therapeutics to treat Ras mediated tumors. In addition, there are numerous companies, both
big and small, that are working in the field of cancer therapeutics including some
companies developing other oncolytic viruses. See Risk Factors.

# Product Marketing
Strategy

The markets for the cancer product
being developed by the Company may be large and could require substantial sales and
marketing capability. Before or upon successful completion of the development of a cancer
product, the Company intends to enter into one or more strategic partnerships or other
collaborative arrangements with a pharmaceutical company or other company with marketing
and distribution expertise to address this need. If necessary, the Company will establish
arrangements with various partners for different geographical areas or specific
applications. The Companys management and consultants have relevant experience with
the partnering process.

# Third Party Advisor,
Collaborators and Scientific Advisory Board

On December 15, 2004, Efficacy
and Safety Evaluation of Human Reovirus Type 3 in Immunocompetent Animals was
published in Clinical Cancer Research Vol. 10. This publication concluded that the data
showed the efficacy and safety of reovirus when it is used in the treatment of gliomas in
immunocompetent hosts. As well, inoculation of reovirus into the brain of nonhuman
primates did not produce significant toxicities.

On September 30, 2004, a poster was
presented at the 16th EORTC-NCI-AACR 2004 Symposium on Molecular Targets and Cancer
Therapeutics in Geneva, Switzerland entitled The oncolytic reovirus,

---

-13-

Reolysin, augments the anticancer
effects of cytotoxic agents in vitro against the ras-mutated human colon cancer cell line
HCT 116. The researchers were able to show that REOLYSIN® enhances the
cytotoxicity of chemotherapeutic agents including 5-FU, gemcitabine, doxorubicin and
cisplatin.

On July 30, 2003, the Company
announced a research collaboration with Dr. Ramon Alemany of the Institut Catala
dOncologia, Barcelona, Spain to develop modified adenoviruses that are selective for
Ras mediated cancers. The research has the potential to add a new generation of viruses
that could be designed to be selective for Ras mediated tumors.

Pursuant to the Research Contract
with the Governors of the University of Calgary, the Company paid to the University of
Calgary an aggregate sum of $102,000 over a twelve month period, to perform research for
the REOLYSIN® project commencing August 31, 1999. This contract was extended for an
additional 12 months, but was not renewed beyond August 2001. Under the contract, the
research was under the direction and supervision of Dr. Patrick Lee. Work to be conducted
in Dr. Lees laboratory included dose response studies, studies of alternate routes
of administration, and work to further enable patent claims.

During 2001 and 2002, and in
connection with the progress from pre-clinical research to the present clinical trial
program, the Company broadened its advisor base. In addition to receiving assistance from
Dr. Don Morris and Dr. Peter Forsyth, the Principal Investigators responsible for the
prostate and brain tumour clinical trials respectively, the Company engaged Dr. George
Gill and Dr. Alan Tuchman to apply their expertise in their respective fields of clinical
and regulatory affairs and neurology as the Company progresses its clinical trial program
for gliomas into the United States. The Company is at various stages of discussion with
other advisors and collaborators, who are expected to provide assistance in addressing
clinical trial and regulatory issues as the development program of the Company progresses.

# Scientific Advisory Board

The Company formed a Scientific
Advisory Board in 2003 to provide the Company with additional scientific and clinical
guidance on the development of REOLYSIN®. The advisory board is comprised of Ramon
Alemany, Ph.D., Richard Gorlick, M.D., Alan Tuchman, M.D., and Frank Tufaro, Ph.D.

| | Ramon
Alemany, Ph.D., is a recognized expert on the development of antitumoural agents based on
the adenovirus. During an eight year period in the United States he held progressively
more senior positions in gene therapy laboratories at the MD Anderson Cancer Center,
Baxter Healthcare Corporation and the University of Alabama at Birmingham. In 2001, he was
appointed Director of the Gene and Viral Therapy Group at the Institut Catala
dOncologia in Barcelona. Dr. Alemany is currently collaborating with the Company to
develop modified adenoviruses that are selective for Ras mediated cancers.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Richard
Gorlick, M.D., is the Section Chief of Hematology/Oncology in the department of pediatrics
at the Childrens Hospital at Montefiore in New York. He is actively involved in the
national pediatric cooperative group, the Childrens Oncology Group, for which he
serves as the Chairman of the subcommittee on Bone Tumour Biology. Dr. Gorlick is known
for his research work on molecular pharmacology of antifolate resistance and developing
new therapeutic approaches for osteosarcoma.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Alan
Tuchman, M.D., works in private practice and is Clinical Professor of Neurology at New
York Medical College. He is also the Principal of NeuroPhysics Corporation, a healthcare
and neuroscience consulting firm. From 1997 to 2001 Dr. Tuchman was the Senior Vice
President of Equity Research for Oscar Gruss & Son, where he conducted investment
research and helped develop marketing strategies for healthcare companies. He also held
senior neurology positions at New York Medical College and Lincoln Medical and Mental
Health Center.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

-14-

| | Frank
Tufaro, Ph.D., has extensive experience with biotech firms and was one of the founders of
NeuroVir Inc., a Vancouver-based biotech company, which is now merged with MediGene AG to
develop Herpes Simplex virus-based oncolytic vectors for cancer therapy. Under Dr.
Tufaros direction, NeuroVir and then MediGene Inc. were able to initiate and
complete the first Phase I/II U.S. clinical trials of two herpes-based oncolytic viruses
for the treatment of malignant brain tumours, and the treatment of colorectal cancer
metastatic to the liver. He currently serves on scientific advisory boards for several
biotech companies.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Intellectual Property
Policy

The Company has 13 patents issued in
the United States (11 of the 13 related to the reovirus technology), one European patent
issuance, and additional applications in process. All potentially valuable intellectual
property is identified by the inventory, and classified by the Company in terms of its
sensitivity. All sensitive documentation related to the intellectual property is protected
and kept in secure areas. All employees execute agreements containing confidentiality
clauses, which assign any new intellectual property to the Company. The Company believes
that it applies its intellectual property protection policy consistently.

Where appropriate, and consistent
with managements objective, patents are pursued as soon as the concepts have been
validated through appropriate laboratory work. To that end, patents will continue to be
sought on components or concepts that management of the Company perceives to be essential.

The Company believes that one of the
best intellectual property control policies is a strong human resources policy to ensure
that technical leaders with access to proprietary intellectual property do not consider
leaving the Company for other employment. The Company intends that all staff be
compensated through competitive salaries and all staff participate in the company stock
option program.

# Patent and Patent
Application Summary

Where a patent is filed in the United
States there is an option to file a Patent Cooperation Treaty (PCT)
application. The PCT application process is a means for technology patented in one of the
PCT signatory countries to receive protection in other PCT countries. The PCT includes
over 100 countries. Within one year of filing a patent in the United States, the applicant
files for PCT coverage in all PCT countries. Approximately 18 months after the PCT filing,
the applicant must pay individual filing fees in designated PCT countries and at that time
the applicant may wish to restrict coverage to a subset of countries which have potential
for the technology. At the time of filing the PCT application the applicant designates
which of the member countries are to be covered by the application. The PCT application
allows the applicant to defer national filings in the various designated countries for a
period of up to 30 months from the original PCT application filing date. After the PCT
application deferral period, the applicant must file for separate national or regional
patents in one or more designated countries, depending on which specific markets the
applicant intends to target.

The following table sets forth the
Companys patent issuances, including its first European patent:

---

-15-

|Title                                    | Ownership | Inventors               | Status of Patent
|---------------------------------------- | --------- | ----------------------- | ----------------
|
|Patent Number U.S. 6,110,461             |           | Oncolytics Biotech Inc. |                 
|Reovirus for the Treatment of            |           |                         |                 
|Neoplasia                                |           |                         |                 
|
|Patent Number U.S. 6,136,307             |           | Oncolytics Biotech Inc. |                 
|Reovirus for the Treatment of            |           |                         |                 
|cellular proliferative disorders         |           |                         |                 
|
|Patent Number U.S. 6,261,555             |           | Oncolytics Biotech Inc. |                 
|Reovirus for the treatment of            |           |                         |                 
|Neoplasia                                |           |                         |                 
|
|Patent Number U.S. 6,344,195             |           | Oncolytics Biotech Inc. |                 
|Reovirus for the treatment of            |           |                         |                 
|Neoplasia                                |           |                         |                 
|
|European Application Number              |           | Oncolytics Biotech Inc. |                 
|98940002.3                               |           |                         |                 
|Patent Number 1003534                    |           |                         |                 
|Reovirus for the treatment of            |           |                         |                 
|Neoplasia                                |           |                         |                 
|
|Patent Number U.S. 6,455,038             |           | Oncolytics Biotech Inc. |                 
|Reovirus for the treatment of            |           |                         |                 
|Cellular Proliferative Disorders         |           |                         |                 
|                                         |           |                         |                 
|Patent Number U.S. 6,528,305             |           | Oncolytics Biotech Inc. |                 
|Method of Producing Infectious 
Reovirus |           |                         |                 
|
|Patent Number U.S. 6,565,831             |           | Oncolytics Biotech Inc. |                 
|Methods of Preventing Reovirus           |           |                         |                 
|Recognition for the Treatment for        |           |                         |                 
|Cellular Proliferative Disorders         |           |                         |                 
|
|Patent Number U.S. 6,576,234             |           | Oncolytics Biotech Inc. |                 
|Reovirus for the Treatment of            |           |                         |                 
|Neoplasia                                |           |                         |                 
|
|Patent Number U.S. 6,596,268             |           | Oncolytics Biotech Inc. |                 
|Viruses for the Treatment of             |           |                         |                 
|Cellular Proliferative Disorders(1)      |           |                         |                 
|
|Patent Number U.S. 6,649,157             |           | Oncolytics Biotech Inc. |                 
|Viruses for the Treatment of             |           |                         |                 
|Cellular Proliferative Disorders(2)      |           |                         |                 
|

---

-16-

|Title                            | Ownership | Inventors               | Status of Patent
|-------------------------------- | --------- | ----------------------- | ----------------
|
|                                 |           |                         |                 
|Patent Number U.S. 6,703,232     |           | Oncolytics Biotech Inc. |                 
|Methods of Producing Infectious  |           |                         |                 
|Reovirus                         |           |                         |                 
|
|Patent Number U.S. 6,808,916     |           | Oncolytics Biotech Inc. |                 
|Method of Extracting Virus from  |           |                         |                 
|Cell Culture                     |           |                         |                 
|
|Patent Number U.S. 6,811,775     |           | Oncolytics Biotech Inc. |                 
|Reovirus for the Treatment of    |           |                         |                 
|Cellular Proliferative Disorders |           |                         |                 

# Notes:

|(1) |  | Claims
cover the treatment of Ras mediated tumors using modified adenoviruses.
|--- |  | ------------------------------------------------------------------------------

|(2) |  | Claims
cover the treatment of Ras mediated tumors using modified herpes           viruses.
|--- |  | ------------------------------------------------------------------------------------------

Other patent applications have been
filed by the Company, but have yet to be published or approved.

# Acquisition of all of
the Shares of the Company by SYNSORB

In April 1999, the Company, the
Vendors and SYNSORB entered into the Share Purchase Agreement whereby SYNSORB acquired all
of the then outstanding common shares of the Company for a share and cash exchange valued
at $2,500,000 paid primarily in common shares of SYNSORB, four milestone payments payable
to the Vendors valued, in the aggregate, at up to $4,000,000 and a royalty commitment.
Pursuant to an assignment dated July 29, 1999, the obligation to make the milestone and
certain royalty payments was assigned from SYNSORB to the Company. The Company thereby
agreed to indemnify and save harmless SYNSORB from all actions, suits, demands, claims,
costs, losses, expenses, charges and damages brought against SYNSORB in relation to the
payment or non-payment of such obligations; however such assignment did not affect or
release SYNSORB from its liabilities and responsibilities under the terms of the Share
Purchase Agreement. As at the date hereof, the Company has made three milestone payments
totaling $3,000,000. The final milestone payment is $1.0 million payable within 90 days of
the first receipt, in any country, from the Appropriate Regulatory Authority, for
marketing approval to sell REOLYSIN® to the public or the approval of a new drug
application for REOLYSIN®. In addition to the milestone payments, royalty payments
payable to the Vendors will become due and payable in accordance with the Share Purchase
Agreement upon realization of sales of REOLYSIN®.

During the year, the Company reached
an agreement that cancelled a portion of its future contingent obligation for
consideration of $400,000 consisting of $250,000 cash and 21,459 common shares valued at
$150,000. As a result, the Companys future contingent obligations were reduced to
11.75% (formerly 14.25%) of royalty payments or other payments received as a result of
entering into partnerships or other arrangements for the development of the reovirus
technology. Alternatively, if the Company develops the reovirus treatment to the point
where it may be marketed at a commercial level, the payments referred to in the foregoing
sentence will be amended to equal a royalty payment of 2.35% (formerly 2.85%) of net sales
received by the Company for such products.

# Employees

As of December 31, 2004, the Company
had 9 employees. The majority of the activities of the Company are conducted under
contract with third party service providers.

---

-17-

# Research and Development
Expenditures

For the period ended December 31,
2004, the Company incurred research and development expenditures of $7,107,998
representing approximately 51.9% of the Companys total expenses for the year. See
Managements Discussion and Analysis  Results of Operations 
Research and Development Expenses.

# Dividend Policy

To date, the Company has not paid any
dividends on its outstanding common shares. The future payment of dividends will be
dependent upon the financial requirements of the Company to fund future growth, the
financial condition of the Company and other factors which the Board of Directors of the
Company may consider appropriate in the circumstances. It is unlikely that dividends will
be paid in the foreseeable future.

# MARKET FOR SECURITIES

# Market for Common Shares

The outstanding common shares of the
Company are listed and posted for trading on the Toronto Stock Exchange under the trading
symbol ONC and on the Nasdaq Small Cap Market under the trading symbol
ONCY. The following table sets forth the market price ranges and the aggregate
volume of trading of the common shares on the Toronto Stock Exchange and Nasdaq Small Cap
Market for the periods indicated:

|           | Toronto Stock Exchange | Nasdaq Small Cap Market
|---------- | ---------------------- | -----------------------
|           |                        |                        
|
|           |                        |                        
|Period2004
|January    |                        | 4.86                   
|February   |                        | 6.00                   
|March      |                        | 8.45                   
|April      |                        | 12.90                  
|May        |                        | 9.55                   
|June       |                        | 8.25                   
|July       |                        | 7.90                   
|August     |                        | 6.84                   
|September  |                        | 8.29                   
|October    |                        | 7.90                   
|November   |                        | 7.36                   
|December   |                        | 6.06                   

Description of Common Shares

The holders of the common  shares of
the Company are  entitled  to one vote per share at  meetings  of  shareholders,  to
receive  such dividends as declared by the Company and to receive the  remaining
 property and assets of the Company upon  dissolution  or winding up of the  Company.
 The common  shares of the  Company are not subject to any future  call or  assessment
 and there are no  pre-emptive, conversion  or  redemption  rights  attached to such
shares.  The Company  currently  has  outstanding  stock  options and common share
purchase warrants to purchase common shares as set forth in Note 10 and 11 of the audited
financial statements of the Company.

---

-18-

DIRECTORS AND OFFICERS

The directors of the Company are
elected by the  shareholders  at each Annual General  Meeting and typically hold office
until the next Annual  General  Meeting at which time they may be  re-elected or
replaced.  Casual  vacancies on the board are filled by the remaining directors  and the
persons  filling  those  vacancies  hold  office  until the next  Annual  General
 Meeting at which time they may be re-elected  or replaced.  The officers are  appointed
 by the Board of Directors  and hold office  indefinitely  at the pleasure of the Board
of Directors.

The following  table sets forth the
names and  municipalities  of residence of all directors and officers of the Company as
at the date hereof, as well as the positions and offices with the Company held by such
persons and their principal occupations.

|Name and Municipality
      of Residence | Position with the 
     Corporation | Principal Occupation     | Director of the
Corporation
Since
|---------------------------------------- | ----------------------------------- | ------------------------ | ---------------------------------
|                                         |                                     |                          |                                  
|Bradley G. Thompson                      |                                     | President, Chief         |                                  
|Ph.D(2)                                  |                                     | Executive Officer        |                                  
|Calgary, Alberta                         |                                     | and Executive            |                                  
|                                         |                                     | Chairman of the          |                                  
|                                         |                                     | Board                    |                                  
|
|Douglas A. Ball C.A                      |                                     | Chief Financial          |                                  
|Calgary, Alberta                         |                                     | Officer and              |                                  
|                                         |                                     | Director                 |                                  
|                                         |                                     |                          |                                  
|                                         |                                     |                          |                                  
|                                         |                                     |                          |                                  
|                                         |                                     |                          |                                  
|                                         |                                     |                          |                                  
|                                         |                                     |                          |                                  
|
|William A. Cochrane,                     |                                     | Director                 |                                  
|OC, M.D.(3)                              |                                     |                          |                                  
|Calgary, Alberta                         |                                     |                          |                                  
|                                         |                                     |                          |                                  
|                                         |                                     |                          |                                  
|                                         |                                     |                          |                                  
|                                         |                                     |                          |                                  
|                                         |                                     |                          |                                  
|                                         |                                     |                          |                                  
|                                         |                                     |                          |                                  
|                                         |                                     |                          |                                  
|                                         |                                     |                          |                                  
|
|Matthew C. Coffey Ph.D.                  |                                     | Chief Scientific Officer |                                  
|Calgary, Alberta                         |                                     | Officer                  |                                  
|                                         |                                     |                          |                                  
|

---

-19-

|Name and Municipality
      of Residence | Position with the 
     Corporation | Principal Occupation | Director of the
Corporation
Since
|---------------------------------------- | ----------------------------------- | -------------------- | ---------------------------------
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|George M. Gill, M.D                      |                                     | Senior Vice          |                                  
|Washington, D.C                          |                                     | President,           |                                  
|                                         |                                     | Clinical and         |                                  
|                                         |                                     | Regulatory Affairs   |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|
|Antoine A. Noujaim                       |                                     | Director             |                                  
|Ph.D.(2)                                 |                                     |                      |                                  
|Edmonton, Alberta                        |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|
|Robert B. Schultz,                       |                                     | Lead Director        |                                  
|F.C.A.(1)                                |                                     |                      |                                  
|Toronto, Ontario                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|
|Fred A. Stewart,                         |                                     | Director             |                                  
|Q.C.(1)(2)                               |                                     |                      |                                  
|Bragg Creek, Alberta                     |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|
|Jim Dinning(1)                           |                                     | Director             |                                  
|Calgary, Alberta                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  

---

-20-

|Name and Municipality
      of Residence | Position with the 
     Corporation | Principal Occupation | Director of the
Corporation
Since
|---------------------------------------- | ----------------------------------- | -------------------- | ---------------------------------
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|J. Mark Lievonen C.A(3)                  |                                     | Director             |                                  
|Markham, Ontario                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  
|                                         |                                     |                      |                                  

# Notes:

|(1) |  | These
persons are members of the Audit Committee. Mr. Stewart is the Chair of           the
Audit Committee.
|--- |  | ------------------------------------------------------------------------------------------------------------

|(2) |  | These
persons are members of the Compensation           Committee. Dr. Noujaim is the Chair of
the Compensation Committee.
|--- |  | --------------------------------------------------------------------------------------------------------------------------

|(3) |  | These
          persons are members of the Corporate Governance and Nominating Committee. Mr.
          Lievonen is the Chair of the Corporate Governance and Nominating Committee.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As at the date hereof, the directors
and senior officers as a group beneficially owned, directly or indirectly, 29,500 common
shares of the Company, representing less than 0.1% of the issued and outstanding common
shares.

Certain directors of the Company are
associated with other companies, which may give rise to conflicts of interest. In
accordance with the ABCA, directors who have a material interest in any person who is a
party to a material contract or a proposed material contract with the Company are
required, subject to certain exceptions, to disclose that interest and abstain from voting
on any resolution to approve that contract. In addition, the directors are required to act
honestly and in good faith with a view to the best interests of the Company.

# AUDIT COMMITTEE MATTERS

Mandate of the Audit
Committee

|1. |  | Policy
Statement
|-- |  | ----------------

It is the policy of Oncolytics
Biotech Inc. (the Corporation) to establish and maintain an Audit Committee,
composed entirely of independent directors, to assist the Board of Directors (the
Board) in carrying out their oversight responsibility for the
Corporations internal controls, financial reporting and risk management processes.
The Audit Committee will be provided with resources commensurate with the duties and
responsibilities assigned to it by the Board including administrative support. If
determined necessary by the Audit Committee, it will have the discretion to institute
investigations of improprieties, or suspected improprieties within the scope of its
responsibilities, including the standing authority to retain special counsel or experts.

|2. |  | Composition
of the Committee
|-- |  | ----------------------------

| | (a) |  | The
Audit Committee shall consist of a minimum of three (3) directors, at least
               half of whom shall be resident Canadians. The Board shall appoint the
members of                the Audit Committee and may seek the advice and assistance of
the Corporate                Governance and Nominating Committee in identifying qualified
candidates. The                Board shall appoint one
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

-21-

| | member
of the Audit Committee to be the Chair of the Audit Committee, or delegate such authority
to appoint the Chair of the Audit Committee to the Audit Committee.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | Each
director appointed to the Audit Committee by the Board shall be an outside
               director who is unrelated. An outside, unrelated director is a director
who is                independent of management and is free from any interest, any
business or other                relationship which could, or could reasonably be
perceived, to materially                interfere with the directors ability to act
with a view to the best                interests of the Corporation, other than interests
and relationships arising                from shareholding. In determining whether a
director is independent of                management, the Board shall make reference to
the then current legislation,                rules, policies and instruments of
applicable regulatory authorities.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | Each
member of the Audit Committee shall be financially literate. In order to be
               financially literate, a director must be, at a minimum, able to read and
               understand basic 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                Corporations financial statements. At least one member
shall have                accounting or related financial management expertise, meaning
the ability to                analyze and interpret a full set of financial statements,
including the notes                attached thereto, in accordance with generally
accepted accounting principles.                In determining whether a member of the
Audit Committee is financially literate                or has accounting or related
financial expertise, reference shall be made to the                then current
legislation, rules, policies and instruments of applicable                regulatory
authorities.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) |  | A
director appointed by the Board to the Audit Committee shall be a member of
               the Audit Committee until replaced by the Board or until his or her
resignation.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | Meetings
of the Committee
|-- |  | -------------------------

| | (a) |  | The
Audit Committee shall convene a minimum of four times each year at such
               times and places as may be designated by the Chair of the Audit Committee
and                whenever a meeting is requested by the Board, a member of the Audit
Committee,                the auditors, or senior management of the Corporation.
Scheduled meetings of the                Audit Committee shall correspond with the review
of the year-end and quarterly                financial statements and management
discussion and analysis.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | Notice
of each meeting of the Audit Committee shall be given to each member of
               the Audit Committee and to the auditors, who shall be entitled to attend
each                meeting of the Audit Committee and shall attend whenever requested to
do so by a                member of the Audit Committee.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | Notice
of a meeting of the Audit Committee shall:
| | --- |  | -------------------------------------------------

| |  | (i) |  | be
in writing, including by electronic communication facilities;
| |  | --- |  | ----------------------------------------------------------------

| |  | (ii) |  | state
the nature of the business to be transacted at the meeting in reasonable
               detail;
| |  | ---- |  | -----------------------------------------------------------------------------------------------------

| |  | (iii) |  | to
the extent practicable, be accompanied by copies of documentation to be
               considered at the meeting; and
| |  | ----- |  | ------------------------------------------------------------------------------------------------------------------------

---

-22-

| |  | (iv) |  | be
given at least two business days prior to the time stipulated for the meeting
                    or such shorter period as the members of the Audit Committee may
permit.
| |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) |  | A
quorum for the transaction of business at a meeting of the Audit Committee
                    shall consist of a majority of the members of the Audit Committee.
However, it                     shall be the practice of the Audit Committee to require
review, and, if                     necessary, approval of certain important matters by
all members of the Audit                     Committee.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) |  | A
member or members of the Audit Committee may participate in a meeting of the
                    Audit Committee by means of such telephonic, electronic or other
communication                     facilities, as permits all persons participating in the
meeting to communicate                     adequately with each other. A member
participating in such a meeting by any such                     means is deemed to be
present at the meeting.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) |  | In
the absence of the Chair of the Audit Committee, the members of the Audit
                    Committee shall choose one of the members present to be Chair of the
meeting. In                     addition, the members of the Audit Committee shall choose
one of the persons                     present to be the Secretary of the meeting.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (g) |  | A
member of the Board, senior management of the Corporation and other parties
                    may attend meetings of the Audit Committee; however the Audit
Committee (i)                     shall, at each meeting, meet with the external auditors
independent of other                     individuals other than the Audit Committee and
(ii) may meet separately with                     management.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (h) |  | Minutes
shall be kept of all meetings of the Audit Committee and shall be signed
                    by the Chair and the Secretary of the meeting.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | Duties
and Responsibilities of the Committee
|-- |  | --------------------------------------------

| | (a) |  | The
Audit Committees primary duties and responsibilities are to:
| | --- |  | -----------------------------------------------------------------

| |  | (i) |  | identify
and monitor the management of the principal risks that could impact the
                    financial reporting of the Corporation ;
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | (ii) |  | monitor
the integrity of the Corporations financial reporting process and
                    system of internal controls regarding financial reporting and
accounting                     compliance;
| |  | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (iii) |  | monitor
the independence and performance of the Corporations external
                    auditors. This will include receipt, review and evaluation, at least
annually,                     of a formal written statement from the independent auditors
confirming their                     independence, and qualifications, including their
compliance with the                     requirements of the relevant oversight boards;
| |  | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (iv) |  | deal
directly with the external auditors to pre-approve external audit plans,
                    other services (if any) and fees;
| |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------

| |  | (v) |  | directly
oversee the external audit process and results (in addition to items
                    described in Section 4(d) below);
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------

| |  | (vi) |  | provide
an avenue of communication among the external auditors, management and
                    the Board;
| |  | ---- |  | -------------------------------------------------------------------------------------------------------------

---

-23-

| |  | (vii) |  | carry
out a review designed to ensure that an effective whistle
                    blowing procedure exists to permit stakeholders to express any
concerns                     regarding accounting or financial matters to an
appropriately independent                     individual;
| |  | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (viii) |  | pre-approve
any related party transactions to be entered into by the Company,                     and
ensure appropriate disclosure thereof; and
| |  | ------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (ix) |  | ensure
financial disclosure incorporates inclusion of any material correcting
                    adjustments required by the external auditors.
| |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | The
Audit Committee shall have the authority to:
| | --- |  | ------------------------------------------------

| |  | (i) |  | inspect
any and all of the books and records of the Corporation and its
                    affiliates;
| |  | --- |  | -------------------------------------------------------------------------------------------------------

| |  | (ii) |  | discuss
with the management of the Corporation and its affiliates, any affected
                    party and the external auditors, such accounts, records and other
matters as any                     member of the Audit Committee considers necessary and
appropriate;
| |  | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (iii) |  | engage
independent counsel and other advisors as it determines necessary to
                    carry out its duties; and
| |  | ----- |  | -------------------------------------------------------------------------------------------------------------------------

| |  | (iv) |  | to
set and pay the compensation for any advisors employed by the Audit
                    Committee.
| |  | ---- |  | -----------------------------------------------------------------------------------------------------

| | (c) |  | The
Audit Committee shall, at the earliest opportunity after each meeting,
                    report to the Board the results of its activities and any reviews
undertaken and                     make recommendations to the Board as deemed
appropriate.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) |  | The
Audit Committee shall:
| | --- |  | --------------------------

| |  | (i) |  | review
the audit plan with the Corporations external auditors and with
                    management;
| |  | --- |  | -------------------------------------------------------------------------------------------------------

| |  | (ii) |  | Review
with the independent auditors the matters required to be discussed
                    relating to the conduct of the audit, including (a) the proposed
scope of their                     examination, with emphasis on accounting and financial
areas where the                     Committee, the independent auditors or management
believes special attention                     should be directed; (b) the results of
their audit, including their audit                     findings report and resulting
letter, if any, of recommendations for management;                     (c) their
evaluation of the adequacy and effectiveness of the Companys
                    internal controls over financial reporting; (d) significant areas of
                    disagreement, if any, with management; (e) co-operation received from
management                     in the conduct of the audit; (f) significant accounting,
reporting, regulatory                     or industry developments affecting the Company;
and (g) review any proposed                     changes in major accounting policies or
principles proposed or contemplated by                     the independent auditors or
management, the presentation and impact of material                     risks and
uncertainties and key estimates and judgements of management that may
                    be material to financial reporting;
| |  | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (iii) |  | review
with management and with the external auditors material financial
                    reporting issues arising during the most recent fiscal period and the
resolution                     or proposed resolution of such issues;
| |  | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

-24-

| |  | (iv) |  | review
any problems experienced or concerns expressed by the external auditors
                    in performing an audit, including any restrictions imposed by
management or                     material accounting issues on which there was a
disagreement with management;
| |  | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (v) |  | review
with senior management the process of identifying, monitoring and
                    reporting the principal risks affecting financial reporting;
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (vi) |  | review
audited annual financial statements (including management discussion and
                    analysis) and related documents in conjunction with the report of the
external                     auditors and obtain an explanation from management of all
material variances                     between comparative reporting periods. Without
restricting the generality of the                     foregoing, the committee will
discuss with management and the independent                     auditors to the extent
required, any issues and disclosure requirements                     regarding (a) the
use of pro forma or adjusted non-GAAP
                    information, as well as financial information and earnings guidance
provided to                     analysts and rating agencies, (b) any off balance sheet
arrangements, and (c)                     any going concern qualification;
| |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (vii) |  | consider
and review with management, the internal control memorandum or
                    management letter containing the recommendations of the external
auditors and                     managements response, if any, including an
evaluation of the adequacy and                     effectiveness of the internal
financial controls of the Corporation and                     subsequent follow-up to any
identified weaknesses;
| |  | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (viii) |  | review
with financial management and the external auditors the quarterly
                    unaudited financial statements and management discussion and analysis
before                     release to the public;
| |  | ------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (ix) |  | before
release, review and if appropriate, recommend for approval by the Board,
                    all public disclosure documents containing audited or unaudited
financial                     information, including any prospectuses, annual reports,
annual information                     forms, management discussion and analysis and
press releases; and
| |  | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (x) |  | oversee,
any of the financial affairs of the Corporation or its affiliates, and,
                    if deemed appropriate, make recommendations to the Board, external
auditors or                     management.
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) |  | The
Audit Committee shall:
| | --- |  | --------------------------

| |  | (i) |  | evaluate
the independence and performance of the external auditors and annually
                    recommend to the Board the appointment of the external auditor or the
discharge                     of the external auditor when circumstances are warranted
and monitor the audit                     partners rotation as required by law;
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (ii) |  | consider
the recommendations of management in respect of the appointment of the
                    external auditors;
| |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------

| |  | (iii) |  | pre-approve
all non-audit services to be provided to the Corporation or its
                    subsidiary entities by its external auditors, or the external
auditors of                     affiliates of the Corporation subject to the over-riding
principle that the                     external auditors not being permitted to be
retained by the Corporation to                     perform specifically listed categories
of non-audit services as set forth by the                     Securities and Exchange
| |  | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

-25-

| | Commission
as well as internal audit outsourcing services, financial information systems work and
expert services. Notwithstanding, the foregoing the pre-approval of non-audit services may
be delegated to a member of the Audit Committee, with any decisions of the member with the
delegated authority reporting to the Audit Committee at the next scheduled meeting;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (iv) |  | approve
the engagement letter for non-audit services to be provided by the
               external auditors or affiliates, together with estimated fees, and
considering                the potential impact of such services on the independence of
the external                auditors;
| |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (v) |  | when
there is to be a change of external auditors, review all issues and provide
               documentation related to the change, including the information to be
included in                the Notice of Change of Auditors and documentation required
pursuant to the then                current legislation, rules, policies and instruments
of applicable regulatory                authorities and the planned steps for an orderly
transition period; and
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (vi) |  | review
all reportable events, including disagreements, unresolved issues and
               consultations, as defined by applicable securities policies, on a routine
basis,                whether or not there is to be a change of external auditors.
| |  | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) |  | The
Audit Committee shall enquire into and determine the appropriate resolution
               of any conflict of interest in respect of audit or financial matters,
which are                directed to the Audit Committee by any member of the Board, a
shareholder of the                Corporation, the external auditors, or senior
management.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (g) |  | The
Audit Committee shall periodically review with management the need for an
               internal audit function.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------

| | (h) |  | The
Audit Committee shall review the Corporations accounting and reporting
               of costs, liabilities and contingencies.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------

| | (i) |  | The
Audit Committee shall establish and maintain procedures for:
| | --- |  | ----------------------------------------------------------------

| |  | (i) |  | the
receipt, retention and treatment of complaints received by the Corporation
               regarding accounting controls, or auditing matters; and
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (ii) |  | the
confidential, anonymous submission by employees of the Corporation or
               concerns regarding questionable accounting or auditing matters.
| |  | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | (j) |  | The
Audit Committee shall review and approve the Corporations hiring
               policies regarding employees and former employees of the present and
former                external auditors.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (k) |  | The
Audit Committee shall review with the Corporations legal counsel, on
               no less than an annual basis, any legal matter that could have a material
impact                on the Corporations financial statements, and any enquiries
received from                regulators, or government agencies.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (l) |  | The
Audit Committee shall assess, on an annual basis, the adequacy of this
               Mandate and the performance of the Audit Committee.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

---

-26-

|5. |  | Date
of Mandate
|-- |  | ---------------

The Audit Committee Mandate was
initially approved by the Board on September 3, 1999. Subsequent to that date, the Board
has amended and restated this Mandate on each of December 13, 2002 and April 23, 2003 and
March 5, 2004. This Mandate is effective from and after December 8, 2004.

Composition of the Audit
Committee

The following table sets forth the
name of each of the current members of the Audit Committee, whether such member is
independent, whether such member is financially literate and the relevant education and
experience of such member.

|Name                    | Independent | Financially
Literate | Relevant Education and Experience
|----------------------- | ----------- | -------------------- | ---------------------------------
|Fred A. Stewart, Q.C    |             | Yes                  |                                  
|(Chairman)              |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|
|Robert B. Schultz F.C.A |             | Yes                  |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|
|Jim Dinning             |             | Yes                  |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  
|                        |             |                      |                                  

# RISK FACTORS

All of the Companys
potential products, including REOLYSIN®, are in the research and development stage and
will require further development and testing before they can be marketed commercially.

Prospects for companies in the
biotechnology industry generally may be regarded as uncertain given the nature of the
industry and, accordingly, investments in biotechnology companies should be regarded as
speculative. The Company is currently in the research and development stage on one
product, REOLYSIN®, for human application, the riskiest stage for a company in the
biotechnology industry. It is not possible to predict, based upon studies in animals,
whether REOLYSIN® will prove to be safe and effective in humans. REOLYSIN® will
require additional research and development, including extensive

---

-27-

clinical testing, before the Company
will be able to obtain the approvals of the relevant regulatory authorities in applicable
countries to market REOLYSIN® commercially. There can be no assurance that the
research and development programs conducted by the Company will result in REOLYSIN® or
any other products becoming commercially viable products, and in the event that any
product or products result from the research and development program, it is unlikely they
will be commercially available for a number of years.

To achieve profitable operations the
Company, alone or with others, must successfully develop, introduce and market its
products. To obtain regulatory approvals for products being developed for human use, and
to achieve commercial success, human clinical trials must demonstrate that the product is
safe for human use and that the product shows efficacy. Unsatisfactory results obtained
from a particular study relating to a program may cause the Company to abandon its
commitment to that program or the product being tested. No assurances can be provided that
any current or future animal or human test, if undertaken, will yield favourable results.
If the Company is unable to establish that REOLYSIN® is a safe, effective treatment
for cancer, it may be required to abandon further development of the product and develop a
new business strategy.

# There are inherent risks
in pharmaceutical research and development

Pharmaceutical research and
development is highly speculative and involves a high and significant degree of risk. The
marketability of any product developed by the Company will be affected by numerous factors
beyond the Companys control, including:

| |  |  | the
discovery of unexpected toxicities or lack of sufficient efficacy of products which make
them unattractive or unsuitable for human use;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | preliminary
results as seen in animal and/or limited human testing may not be substantiated in larger
controlled clinical trials;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

| |  |  | manufacturing
costs or other factors may make manufacturing of products impractical and non-competitive;
| | - |  | --------------------------------------------------------------------------------------------------------

| |  |  | proprietary
rights of third parties or competing products or technologies may preclude
commercialization;
| | - |  | ---------------------------------------------------------------------------------------------------------

| |  |  | requisite
regulatory approvals for the commercial distribution of products may not be obtained; and
| | - |  | ---------------------------------------------------------------------------------------------------

| |  |  | other factors may become apparent during the course of research, up-scaling or
manufacturing which may result in the discontinuation of research and other critical
projects.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Companys product under
development has never been manufactured on a commercial scale, and there can be no
assurance that such products can be manufactured at a cost or in a quantity to render such
products commercially viable. Production and utilization of the Companys products
may require the development of new manufacturing technologies and expertise. The impact on
the Companys business in the event that new manufacturing technologies and expertise
are required to be developed is uncertain. There can be no assurance that the Company will
successfully meet any of these technological challenges, or others that may arise in the
course of development.

---

-28-

# Pharmaceutical products
are subject to intense regulatory approval processes

The regulatory process for
pharmaceuticals, which includes preclinical studies and clinical trials of each compound
to establish its safety and efficacy, takes many years and requires the expenditure of
substantial resources. Moreover, if regulatory approval of a drug is granted, such
approval may entail limitations on the indicated uses for which it may be marketed.
Failure to comply with applicable regulatory requirements can, among other things, result
in suspension of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. Further, government policy may change, and
additional government regulations may be established that could prevent or delay
regulatory approvals for the Companys products. In addition, a marketed drug and its
manufacturer are subject to continual review. Later discovery of previously unknown
problems with the product or manufacturer may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market.

The FDA in the United States and
similar regulatory authorities in other countries may deny approval of a NDA or NDS if
required regulatory criteria are not satisfied, or may require additional testing. Product
approvals may be withdrawn if compliance with regulatory standards is not maintained or if
problems occur after the product reaches the market. The FDA and similar regulatory
authorities in other countries may require further testing and surveillance programs to
monitor the pharmaceutical product that has been commercialized. Non-compliance with
applicable requirements can result in fines and other judicially imposed sanctions,
including product withdrawals, product seizures, injunction actions and criminal
prosecutions.

In addition to its own
pharmaceuticals, the Company may supply active pharmaceutical ingredients and advanced
pharmaceutical intermediates for use in its customers drug products. The final drug
products in which the pharmaceutical ingredients and advanced pharmaceutical intermediates
are used, however, are subject to regulation for safety and efficacy by the FDA and other
jurisdictions, as the case may be. Such products must be approved by such agencies before
they can be commercially marketed. The process of obtaining regulatory clearance for
marketing is uncertain, costly and time consuming. The Company cannot predict how long the
necessary regulatory approvals will take or whether the Companys customers will ever
obtain such approval for their products. To the extent that the Companys customers
do not obtain the necessary regulatory approvals for marketing new products, the
Companys product sales could be adversely affected.

The FDA and other governmental
regulators have increased requirements for drug purity and have increased environmental
burdens upon the pharmaceutical industry. Because pharmaceutical drug manufacturing is a
highly regulated industry, requiring significant documentation and validation of
manufacturing processes and quality control assurance prior to approval of the facility to
manufacture a specific drug, there can be considerable transition time between the
initiation of a contract to manufacture a product and the actual initiation of manufacture
of that product. Any lag time in the initiation of a contract to manufacture product and
the actual initiation of manufacture could cause the Company to lose profits or incur
liabilities.

The pharmaceutical regulatory regime
in Europe and other countries is, by and large, generally similar to that of the United
States. The Company could face similar risks in these other jurisdictions, as the risks
described above.

The Companys operations and
products may be subject to other government manufacturing and testing regulations

Securing regulatory approval for the marketing
of therapeutics by the FDA in the United States and similar regulatory agencies in other
countries is a long and expensive process, which can delay or prevent product development
and marketing. Approval to market products may be for limited applications or may not be
received at all.

---

-29-

The products anticipated to be
manufactured by the Company will have to comply with the FDAs current Good
Manufacturing Practices (cGMP) and other FDA, and local government guidelines
and regulations, including other international regulatory requirements and guidelines.
Additionally, certain of the Companys customers may require the manufacturing
facilities contracted by the Company to adhere to additional manufacturing standards, even
if not required by the FDA. Compliance with cGMP regulations requires manufacturers to
expend time, money and effort in production, and to maintain precise records and quality
control to ensure that the product meets applicable specifications and other requirements.
The FDA and other regulatory bodies periodically inspect drug-manufacturing facilities to
ensure compliance with applicable cGMP requirements. If the manufacturing facilities
contracted by the Company fail to comply with the cGMP requirements, the facilities may
become subject to possible FDA or other regulatory action and manufacturing at the
facility could consequently be suspended. The Company may not be able to contract suitable
alternative or back-up manufacturing facilities on terms acceptable to the Company or at
all.

The FDA or other regulatory agencies
may also require the submission of any lot of a particular product for inspection. If the
lot product fails to meet the FDA requirements, then the FDA could take any of the
following actions: (i) restrict the release of the product; (ii) suspend manufacturing of
the specific lot of the product; (iii) order a recall of the lot of the product; or (iv)
order a seizure of the lot of the product.

The Company is subject to regulation
by governments in many jurisdictions and, if the Company does not comply with healthcare,
drug, manufacturing and environmental regulations, among others, the Companys
existing and future operations may be curtailed, and the Company could be subject to
liability.

In addition to the regulatory
approval process, the Company may be subject to regulations under local, provincial,
state, federal and foreign law, including requirements regarding occupational health,
safety, laboratory practices, environmental protection and hazardous substance control,
and may be subject to other present and future local, provincial, state, federal and
foreign regulations.

The biotechnology industry is
extremely competitive and the Company must successfully compete with larger companies with
substantially greater resources

Technological competition in the
pharmaceutical industry is intense and the Company expects competition to increase. Other
companies are conducting research on therapeutics involving the Ras pathway as well as
other novel treatments or therapeutics for the treatment of cancer which may compete with
the Companys product. Many of these competitors are more established, benefit from
greater name recognition and have substantially greater financial, technical and marketing
resources than the Company. In addition, many of these competitors have significantly
greater experience in undertaking research, preclinical studies and human clinical trials
of new pharmaceutical products, obtaining regulatory approvals and manufacturing and
marketing such products. In addition, there are several other companies and products with
which the Company may compete from time to time, and which may have significantly better
and larger resources than the Company. Accordingly, the Companys competitors may
succeed in manufacturing and/or commercializing products more rapidly or effectively,
which could have a material adverse effect on the Companys business, financial
condition or results of operations.

The Company anticipates that it will
face increased competition in the future as new products enter the market and advanced
technologies become available. There can be no assurance that existing products or new
products developed by the Companys competitors will not be more effective, or be
more effectively manufactured, marketed and sold, than any that may be developed or sold
by the Company. Competitive products may render the Companys products obsolete and
uncompetitive prior to recovering research, development or commercialization expenses
incurred with respect to any such products.

---

-30-

# The Company relies on
patents and proprietary rights to protect its technology

The Companys success will
depend, in part, on its ability to obtain patents, maintain trade secret protection and
operate without infringing the rights of third parties. The Company has patents in the
United States and Europe and has filed applications for patents in the United States and
under the PCT, allowing it to file in other jurisdictions. See Narrative
Description  Patent and Patent Application Summary. The Companys
success will depend, in part, on its ability to obtain, enforce and maintain patent
protection for its technology in Canada, the United States and other countries. The
Company cannot be assured that patents will issue from any pending applications or that
claims now or in the future, if any, allowed under issued patents will be sufficiently
broad to protect its technology. In addition, no assurance can be given that any patents
issued to or licensed by the Company will not be challenged, invalidated, infringed or
circumvented, or that the rights granted thereunder will provide continuing competitive
advantages to the Company.

The patent positions of
pharmaceutical and biotechnology firms, including the Company, are generally uncertain and
involve complex legal and factual questions. In addition, it is not known whether any of
the Companys current research endeavours will result in the issuance of patents in
Canada, the United States, or elsewhere, or if any patents already issued will provide
significant proprietary protection or will be circumvented or invalidated. Since patent
applications in the United States and Canada are maintained in secrecy until at least 18
months after filing of the original priority application, and since publication of
discoveries in the scientific or patent literature tends to lag behind actual discoveries
by several months, the Company cannot be certain that it or any licensor was the first to
create inventions claimed by pending patent applications or that it was the first to file
patent applications for such inventions. Loss of patent protection could lead to generic
competition for these products, and others in the future, which would materially and
adversely affect the financial prospects for these products and the Company.

Similarly, since patent applications
filed before October 2000 in the United States are maintained in secrecy until the patents
issue or foreign counterparts, if any, publish, the Company cannot be certain that it or
any licensor was the first creator of inventions covered by pending patent applications or
that it or such licensor was the first to file patent applications for such inventions.
There is no assurance that the Companys patents, if issued, would be held valid or
enforceable by a court or that a competitors technology or product would be found to
infringe such patents.

Accordingly, the Company may not be
able to obtain and enforce effective patents to protect its proprietary rights from use by
competitors, and the patents of other parties could require the Company to stop using or
pay to use certain intellectual property, and as such, the Companys competitive
position and profitability could suffer as a result.

In addition, the Company may be
required to obtain licenses under patents or other proprietary rights of third parties. No
assurance can be given that any licenses required under such patents or proprietary rights
will be available on terms acceptable to the Company. If the Company does not obtain such
licenses, it could encounter delays in introducing one or more of its products to the
market while it attempts to design around such patents, or could find that the
development, manufacture or sale of products requiring such licenses could be foreclosed.
In addition, the Company could incur substantial costs in defending itself in suits
brought against the Company on such patents or in suits in which the Company attempts to
enforce its own patents against other parties.

The Companys products may
fail or cause harm, subjecting the Company to product liability claims, which are
uninsured

The sale and use of products of the
Company entail risk of product liability. The Company currently does not have any product
liability insurance. There can be no assurance that it will be able to obtain

---

-31-

appropriate levels of product
liability insurance prior to any sale of its pharmaceutical products. An inability to
obtain insurance on economically feasible terms or to otherwise protect against potential
product liability claims could inhibit or prevent the commercialization of products
developed by the Company. The obligation to pay any product liability claim or a recall of
a product could have a material adverse effect on the business, financial condition and
future prospects of the Company.

The Company has limited
manufacturing experience and intends to rely on third parties to commercially manufacture
its products, if and when developed.

To date, the Company has relied upon
a sole contract manufacturer to manufacture small quantities of REOLYSIN®. The
manufacturer may encounter difficulties in scaling up production, including production
yields, quality control and quality assurance. Only a limited number of manufacturers can
supply therapeutic viruses and failure by the manufacturer to deliver the required
quantities of REOLYSIN® on a timely basis at a commercially reasonable price may have
a material adverse affect on the Company. The Company has recently completed its program
for the development of a commercial process for manufacturing REOLYSIN® and has filed
a number of patent applications related to the process. There can be no assurance that the
Company will successfully obtain sufficient patent protection related to its manufacturing
process.

# New products may not be
accepted by the medical community or consumers.

The Companys primary activity
to date has been research and development and the Company has no experience in marketing
or commercializing products. The Company will likely rely on third parties to market its
products, assuming that they receive regulatory approvals. If the Company relies on third
parties to market its products, the commercial success of such product may be outside of
its control. Moreover, there can be no assurance that physicians, patients or the medical
community will accept the Companys product, even if the Companys product
proves to be safe and effective and is approved for marketing by Health Canada, the FDA
and other regulatory authorities. A failure to successfully market its products would have
a material adverse affect on the Companys revenue.

# The Companys
technologies may become obsolete

The pharmaceutical industry is
characterized by rapidly changing markets, technology, emerging industry standards and
frequent introduction of new products. The introduction of new products embodying new
technologies, including new manufacturing processes, and the emergence of new industry
standards may render the Companys products obsolete, less competitive or less
marketable. The process of developing the Companys products is extremely complex and
requires significant continuing development efforts and third party commitments. The
Companys failure to develop new technologies and products and the obsolescence of
existing technologies could adversely affect its business.

The Company may be unable to
anticipate changes in its potential customer requirements that could make the
Companys existing technology obsolete. The Companys success will depend, in
part, on its ability to continue to enhance its existing technologies, develop new
technology that addresses the increasing sophistication and varied needs of the market,
and respond to technological advances and emerging industry standards and practices on a
timely and cost-effective basis. The development of the Companys proprietary
technology entails significant technical and business risks. The Company may not be
successful in using its new technologies or exploiting its niche markets effectively or
adapting its businesses to evolving customer or medical requirements or preferences or
emerging industry standards.

---

-32-

# The Company is highly
dependent on third party relationships for research and clinical trials

The Company relies upon third party
relationships for assistance in the conduct of research efforts, pre-clinical development
and clinical trials, and manufacturing. In addition, the Company expects to rely on third
parties to seek regulatory approvals for and to market the Companys product.
Although the Company believes that its collaborative partners will have an economic
motivation to commercialize the Companys product included in any collaborative
agreement, the amount and timing of resources diverted to these activities generally is
expected to be controlled by the third party. Furthermore, if the Company cannot maintain
these relationships, its business may suffer.

# The Company has no
operating revenues and a history of losses.

To date, the Company has not
generated sufficient revenues to offset its research and development costs and accordingly
has not generated positive cash flow or made an operating profit. As of December 31, 2004,
the Company had an accumulated deficit of $38.0 million. The Company incurred net losses
of $13.0, $8.5 million, and $6.1 million for the years ended December 31, 2004, 2003, and
2002 , respectively. The Company anticipates that it will continue to incur significant
losses during 2005 and in the foreseeable future. The Company will not reach profitability
until after successful commercialization of one or more of its products. Even if one or
more of its products are profitably commercialized, the initial losses incurred by the
Company may never be recovered.

The Company may need additional
financing in the future to fund the research and development of its products and to meet
its ongoing capital requirements.

As of December 31, 2004, the Company
had cash and cash equivalents, including short-term investments, of $33.9 million and
working capital of approximately $33.3 million. The Company presently anticipates that its
average cash usage for 2005 will be approximately $1.0 million per month and its existing
capital resources are adequate to fund its current plans for research and development
activities into 2007. Factors that will affect the Companys anticipated monthly cash
useage include, but are not limited to, the number of manufacturing runs required to
supply its clinical trial program and the cost of each run, the number of clinical trials
ultimately approved, the timing of patient enrollment in the approved clinical trials, the
actual costs incurred to support each clinical trial, the number of treatments each
patient will receive, the timing of the NCIs R&D activity, and the level of
pre-clinical activity required by a health authority.

The Company anticipates that it may
need additional financing in the future to fund research and development and to meet its
on going capital requirements. The amount of future capital requirements will depend on
many factors, including continued scientific progress in its drug discovery and
development programs, progress in its pre-clinical and clinical evaluation of drug
candidates, time and expense associated with filing, prosecuting and enforcing its patent
claims and costs associated with obtaining regulatory approvals. In order to meet such
capital requirements, the Company will consider contract fees, collaborative research and
development arrangements, and additional public or private financings (including the
incurrence of debt and the issuance of additional equity securities) to fund all or a part
of particular programs as well as potential partnering or licensing opportunities. There
can be no assurance that additional funding will be available or, if available, that it
will be available on acceptable terms. If adequate funds are not available on terms
favorable to the Company, the Company may have to reduce substantially or eliminate
expenditures for research and development, testing, production and marketing of its
proposed product, or obtain funds through arrangements with corporate partners that
require the Company to relinquish rights to certain of its technologies or product. There
can be no assurance that the Company will be able to raise additional capital if its
current capital resources are exhausted.

---

-33-

The cost of director and officer
liability insurance may increase substantially and may affect the ability of the Company
to retain quality directors and officers

The Company carries liability
insurance on behalf of its directors and officers. Given a number of large director and
office liability insurance claims in the U.S. equity markets, director and officer
liability insurance is becoming increasingly more expense with increased restrictions.
Consequently, there is no assurance that the Company will continue to be offered this
insurance or be able to obtain adequate coverage. The inability to acquire the appropriate
insurance coverage will limit the Companys ability to attract and maintain directors
and officers as required to conduct its business.

# The Company is dependent
on its key employees and collaborators

The Companys ability to develop
the product will depend, to a great extent, on its ability to attract and retain highly
qualified scientific personnel and to develop and maintain relationships with leading
research institutions. Competition for such personnel and relationships is intense. The
Company is highly dependent on the principal members of its management staff, Dr.
Thompson, Dr. Coffey, Mr. Ball and Dr. Gill, as well as its advisors and collaborators,
the loss of whose services might impede the achievement of development objectives. The
persons working with the Company are affected by a number of influences outside of the
control of the Company. The loss of key employees and/or key collaborators may affect the
speed and success of product development.

The Company  presently  carries
 insurance in the amounts of $1,500,000,  $1,000,000 and $500,000 for Dr. Thompson,  Dr.
Coffey and Mr. Ball, respectively.

# The Companys share
price may be highly volatile

Market prices for securities of
biotechnology companies generally are volatile. This increases the risk of securities
litigation. Factors such as announcements (publicly made or at scientific conferences) of
technological innovations, new commercial products, patents, the development of
proprietary rights, results of clinical trials, regulatory actions, publications,
quarterly financial results, the Companys financial position, public concern over
the safety of biotechnology, future sales of shares by the Company or by its current
shareholders and other factors could have a significant effect on the market price and
volatility of the common shares.

The Company incurs some of its
expenses in foreign currencies and therefore is exposed to foreign currency exchange rate
fluctuations

The Company incurs some of its
manufacturing, clinical and consulting expenses in foreign currencies (to date mainly in
the U.S. and the UK). Over the past year the Canadian dollar has appreciated relative to
the U.S. dollar thereby decreasing the Canadian dollar equivalent. However, if this trend
reverses, the Companys Canadian dollar equivalent costs will increase.

Also, as the Company expands to other
foreign jurisdictions there may be an increase in its foreign exchange exposure.

The Company earns interest income
on its excess cash reserves and is exposed to changes in interest rates

The Company invests its excess cash
reserves in investment vehicles that provide a rate of return with little risk to
principal. As interest rates change the amount of interest income the Company earns will
be directly impacted.

---

-34-

# ADDITIONAL INFORMATION

# Legal Proceedings

The Company is not aware of any
material legal proceedings nor are any such proceedings known by the Company to be
contemplated.

# Interest of Management
and Others in Material Transactions

Other than as discussed herein, there
are no material interests, direct or indirect, of directors, executive officers, senior
officers, any direct or indirect shareholder of the Company who beneficially owns, or who
exercises control over, more than 10% of the outstanding common shares of the Company or
any known associate or affiliate of such persons, in any transaction within the three most
recently completed financial years or during the current financial year that has
materially affected or will materially affect the Company.

# Transfer Agent and
Registrar

The transfer agent and registrar for
the common shares of the Company is Computershare Trust Company of Canada at its principal
offices in Calgary, Alberta and Toronto, Ontario.

# Material Contracts

Other than as discussed herein, there
are no material contracts, other than contracts entered into in the ordinary course of
business, that are material to the Company that were entered into within the most recently
completed financial year, or before the most recently completed financial year but are
still in effect.

# Interests of Experts

Ernst & Young LLP, Chartered
Accountants, have audited the financial statements of the Company for the year ended
December 31, 2004, as set forth in the Annual Report of the Company.

As at the date hereof, the partners
and associates of Ernst & Young LLP, Chartered Accountants, the independent auditors
of the Company, as a group did not beneficially own any of the outstanding common shares
of the Company.

# External Auditor Service
Fees

During the financial years ended
December 31, 2004 and 2003, Ernst & Young LLP received the following fees from the
Company:

|                              | December 31,
|----------------------------- | ------------
|
|                             
|Audit fees                    |             
|Audit-related fees(1),(3),(4) |             
|Tax fees(2)                   |             
|All other fees                |             
|                             

---

-35-

# Notes:

|(1) |  | Includes
review of interim financial statements, accounting consultations and subscription to
on-line accounting.
|--- |  | -----------------------------------------------------------------------------------------------------------------

|(2) |  | Comprised
of tax return preparation, scientific research and development return and other tax
consultation fees.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|(3) |  | Includes
fees associated with matters relating to the prospectus offerings in 2004 and 2003.
|--- |  | --------------------------------------------------------------------------------------------

|(4) |  | Includes
fees associated with preliminary internal control work for Sarbanes Oxley Section 404.
|--- |  | -----------------------------------------------------------------------------------------------

Audit Fees

Audit fees were for professional
services rendered by Ernst & Young, LLP for the audit of the Companys annual
financial statements and services provided in connection with statutory and regulatory
filings or engagements.

Audit-Related Fees

Audit-related fees were for assurance
and related services reasonably related to the performance of the audit or review of the
annual statements and are not reported under the heading Audit Fees above. These services
consisted of accounting consultations, assistance with prospectus filings and assistance
with preparations for compliance with section 404 of the Sarbanes-Oxley Act of
2002.

Tax Fees

Tax fees were for tax compliance and
professional tax consultations.

All Other Fees

There were no fees paid to Ernst
& Young, LLP that would be considered All Other Fees in 2004 or 2003. Fees to be
disclosed under this category would be for products and services other than those
described under the headings Audit Fees, Audit-Related Fees and Tax Fees above.

# Other Additional
Information

Additional information, including
information as to directors and officers remuneration and indebtedness,
principal holders of the Companys securities, options to purchase securities and
interests of insiders in material transactions is contained in the Information Circular of
the Company for the Companys most recent annual meeting of shareholders that
involved the election of directors, which is incorporated herein by reference and forms an
integral part of this Annual Information Form.

Additional financial information is
contained in the financial statements of the Company for the year ended December 31, 2004
and under the heading Managements Discussion and Analysis of Financial
Conditions and Results of Operations in the 2004 Annual Report of the Company, which
are incorporated herein by reference and form an integral part of this Annual Information
Form.

The documents referred to above as
well as additional information relating to the Company is available through the Internet
on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR)
at www.sedar.com.

Alternatively, a request for any
documents referred to above may be made to the Chief Financial Officer, Oncolytics Biotech
Inc., Suite 210, 1167 Kensington Crescent N.W., Calgary, Alberta, Canada, T2N 1X7 or by
telecopier at (403) 283-0858.

---

-36-

# GLOSSARY

In this Annual Information Form,
unless the context otherwise requires, the following words and phrases shall have the
meaning set forth below:

ABCA Business
Corporations Act (Alberta), as amended.

ACB Alberta Cancer
Board.

Activating mutations a
type of genetic mutation that results in a particular protein being active in the absence
of an appropriate stimuli. This type of mutation typically leads to the development of a
cancerous transformation of a cell.

Adjuvant therapy a form
of therapy that is to be used in conjunction with one or more addition therapies.

Alberta Heritage Foundation the Alberta Heritage Foundation for Medical Research.

Animal model a human
disease given to an animal which exhibits similar or identical characteristics to this
disease in humans.

Appropriate Regulatory Authority means (a) Health Canada, (b) the Food and Drug Administration in the United
States, or (c) the comparable authorities in the following countries or areas: United
Kingdom, France, Germany, Japan, Benelux.

Asymptomatic without
any signs or symptoms.

Cancer a heterogeneous
group of diseases that is characterized by the uncontrolled or aberrant growth of cells.
In addition to the uncontrolled growth of these tumor cells, these cells are able to
invade and colonize other sites in the body; by definition these tumors are malignant.

Carcinomas a type of
cancer that arises from epithelial tissue.

Cellular proliferative disorder
a heterogeneous group of disease characterized by the uncontrolled or aberrant growth of
cells; is distinct from cancer in that it does not necessarily imply a malignant state.

Clinical Trial Agreement the agreement among the Company, Dr. Don Morris and the ACB dated May 1, 1999,
providing for, among other things, a repayable grant of $200,000 to the Company to offset
the future REOLYSIN® clinical trial expenditures.

Cytostatic any drug or
agent that is capable of preventing a cells growth and division.

Cytotoxic any drug or
agent that is capable of causing cell death.

Differentiation a form
of growth; a process whereby a cell develops different or more advanced processes than
were possessed by the cell before.

Epidermal growth factor
a compound that promotes the growth of cells.

Epidermal growth factor receptor the cellular receptor that interacts with the epidermal growth factor; a
particular family of receptor tyrosine kinase.

---

-37-

Epithelial the tissue
that forms the outer layer of the body surface or the tissue that lines the gut or other
hollow structure.

Etiology the reason or
causation of an illness, disease or disorder.

FDA the Food and
Drug Administration

Gastrointestinal tract
within the digestive system including the stomach, intestine, and all accessory organs.

Glioblastoma a specific
form of cancer derived from brain tissue.

Gliomas a specific form of
cancer derived from brain tissue.

Good Manufacturing Practices the current regulatory requirements and standards regarding quality assurance
procedures to be adhered to in the manufacturing of therapeutic products established and
monitored by various governments including Canada and the United States.

Growth factor receptor
a form of receptor that interacts with growth factors.

HER2/neu/ErbB2 a form
of receptor tyrosine kinase that is frequently overexpressed in breast cancers.

Immune competent an
animal with a fully functional immune system; an animal that can mount a response to a
foreign or infectious agent.

Immuno-compromised an
animal that is lacking an immune system.

Investigational New Drug
Submission (or IND) documentation filed with government agencies responsible
for evaluating and licensing pharmaceutical drugs. This documentation is necessary for the
initiation of clinical trials.

In Vivo in the
living body.

Lesion a morbid change
in the functioning or texture of an organ or tissue.

Metastasis the process whereby
a tumor cell is able to leave the original tumor mass and spread to secondary sites in the
body forming additional tumor sites.

Mitogenic a drug or
agent that promotes cellular division or growth.

Neoplasia  a group of
diseases characterized by uncontrolled cell growth, including, but not limited to, cancer.

Nucleus an organelle in
the cell that contains genetic material.

Oncology the study and
treatment of cancer and tumors.

Patent Cooperation Treaty or PCT an international patent treaty, of which Canada is a signatory, whereby a
single international patent application can be filed in the applicants or
inventors home country for possible protection of intellectual property in over 100
PCT member countries.

PKR (or double stranded RNA
dependent protein kinase)  a host protein that plays a key role in mediating the
cells antiviral activity.

---

-38-

Platelet-derived growth factor
receptor (PDGFR) the cellular receptor that interacts with the platelet-derived
growth factor; a particular family of receptor tyrosine kinase.

Ras a cellular protein
that is a key relay in the transmission of growth signals from the outside of the cell to
the cells nucleus. In a noncancerous cell, Ras is activated in the presence of an
appropriate growth signal.

Receptor a cellular
structure, usually found on the cell surface, that can interact with a certain compound to
elicit a specific type of cellular response.

Receptor tyrosine kinase (RTK) a type of host receptor that uses a particular residue for cellular signaling
to the nucleus. Mutation or overexpression of this type of receptor is frequently seen in
the development of a variety of cancers.

REOLYSIN® is a
trademark of the Company for the human reovirus for the treatment of a specific disease.

Reovirus a double
stranded RNA virus first identified in 1959. The name is an acronym for Respiratory
Enteric Orphan virus. The virus is given the designate of orphan virus since it is not
associated with a known disease state. For the purpose of this prospectus, all reference
to reovirus is to reovirus type III Dearing.

Research Contract an
agreement between the Company and the Governors of the University of Calgary, providing
for the aggregate sum of $102,000 to be paid by the Company for a research project under
the direction and supervision of Dr. Patrick Lee.

Share Purchase Agreement the share purchase agreement among the Vendors, SYNSORB and the Company dated
April 21, 1999 providing for the purchase by SYNSORB of all of the issued and outstanding
shares in the capital of the Company.

Signal Transduction The
transmission of signals from the cell surface to the cells nucleus.

SYNSORB  SYNSORB Biotech Inc.
(now Hawker Resources Inc. by name change), a public Company incorporated under the ABCA.

Technology Commercialization
Agreement the agreement between the Company and the Alberta Heritage Foundation
dated February 9, 1999 providing for a repayable grant of $150,000 to the Company to
offset reovirus clinical trial expenditures.

Toxicology the
scientific determination of the quantity of a substance that is required to act adversely
in the body.

Tumor an abnormal
growth of tissue whether benign or malignant.

Vendors  Dr. Patrick
Lee, Dr. James Strong, Dr. Matthew Coffey, Dr. Bradley Thompson and University
Technologies International Inc.

---

EXHIBIT 2

Financial Statements

Oncolytics Biotech Inc.
December 31, 2004 and 2003

---

# AUDITORS REPORT

To the Shareholders of Oncolytics Biotech Inc.

We have audited the balance sheets of
Oncolytics Biotech Inc. as at December 31, 2004 and 2003 and the statements of loss and
deficit and cash flows for each of the years in the three-year period ended December 31,
2004 and for the cumulative period from inception on April 2, 1998. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States) and
auditing standards generally accepted in Canada. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, these financial
statements present fairly, in all material respects, the financial position of the Company
at December 31, 2004 and 2003 and the results of its operations and its cash flows for
each of the years in the three year period ended December 31, 2004 and the cumulative
period from inception on April 2, 1998 in accordance with Canadian generally accepted
accounting principles.

|Calgary, Canada
February 11, 2005 [except note 20  which 
is as of February 21, 2005] | Chartered Accountants
|------------------------------------------------------------------------------------- | ---------------------

---

# Oncolytics Biotech Inc.

# BALANCE SHEETS

As at December 31

|                                            | 2004
$ | 2003
$     
|------------------------------------------- | ------ | -----------
|                                            |       
|ASSETS                                      |        |            
|Current                                     |       
|Cash and cash equivalents                   |        | 12,408,516 
|Short-term investments                      |        | 21,510,707 
|Accounts receivable                         |        | 47,767     
|Prepaid expenses                            |        | 250,365    
|                                            |       
|                                            |        | 34,217,355 
|                                            |       
|Capital assets [note 4]                     |        | 5,259,286  
|                                            |       
|Investments [notes 6 and 7]                 |        | 12,000     
|                                            |       
|                                            |        | 39,488,641 
|                                            |       
|LIABILITIES AND SHAREHOLDERS' EQUITY        |       
|Current                                     |       
|Accounts payable and accrued liabilities    |        | 949,258    
|                                            |       
|Alberta Heritage Foundation loan [note 5]   |        | 150,000    
|                                            |       
|Commitments and contingency [notes 8 and 9] |       
|Shareholders' equity                        |       
|Share capital [note 10]                     |       
|Authorized: unlimited                       |       
|Issued: 31,915,496 (2003 - 27,208,262)      |        | 66,643,325 
|Warrants [note 10]                          |        | 3,347,630  
|Contributed surplus [notes 2, 6, 11 and 12] |        | 6,349,139  
|Deficit                                     |        | (37,950,711
|                                            |       
|                                            |        | 38,389,383 
|                                            |       
|                                            |        | 39,488,641 
|                                            |       

See accompanying notes

On behalf of the Board:

|/s/ Doug Ball
Director | /s/ Fred Stewart
Director
|---------------------- | -------------------------

---

# Oncolytics Biotech Inc.

# STATEMENTS OF LOSS AND
DEFICIT

For the periods ended
December 31

|                                                      | 2004
$ | 2003
$     | 2002
$ | Cumulative
from inception
on April 2,
1998 to
December 31,
2004
$
|----------------------------------------------------- | ------ | ---------- | ------ | -----------------------------------------------------------------
|                                                      |       
|Revenue                                               |        |            |        |                                                                  
|Rights revenue                                        |        | --         |        | --                                                               
|Interest income                                       |        | 699,757    |        | 313,305                                                          
|                                                      |       
|                                                      |        | 699,757    |        | 313,305                                                          
|                                                      |       
|Expenses                                              |       
|Research and development [note 9]                     |        | 7,107,998  |        | 2,818,962                                                        
|Operating                                             |        | 2,803,669  |        | 2,449,478                                                        
|Stock based compensation [note 11]                    |        | 2,668,570  |        | 996,707                                                          
|Foreign exchange loss (gain)                          |        | 358,068    |        | 2,881                                                            
|Amortization                                          |        | 751,756    |        | 663,524                                                          
|                                                      |       
|                                                      |        | 13,690,061 |        | 6,931,552                                                        
|                                                      |       
|                                                      |       
|Loss before the following:                            |        | 12,990,304 |        | 6,618,247                                                        
|                                                      |       
|Gain on sale of BCY LifeSciences Inc. [note 7]        |        | (34,185    | )      | (264,453                                                         
|                                                      |       
|Loss on sale of Transition Therapeutics Inc. [note 7] |        | --         |        | 2,156,685                                                        
|                                                      |       
|Loss before taxes                                     |        | 12,956,119 |        | 8,510,479                                                        
|                                                      |       
|Capital tax (recovery)                                |        | --         |        | 33,552                                                           
|                                                      |       
|Future income tax recovery [note 14]                  |        | --         |        | --                                                               
|                                                      |       
|Net loss for the period                               |        | 12,956,119 |        | 8,544,031                                                        
|                                                      |       
|Deficit, beginning of period                          |        | 24,994,592 |        | 16,450,561                                                       
|                                                      |       
|Deficit, end of period                                |        | 37,950,711 |        | 24,994,592                                                       
|                                                      |       
|Basic and diluted loss per share [note 13]            |        | (0.45      | )      | (0.35                                                            
|                                                      |        |           

See accompanying notes

---

# Oncolytics Biotech Inc.

# STATEMENTS OF CASH
FLOWS

For the periods ended
December 31

|                                                 | 2004
$ | 2003
$      | 2002
$ | Cumulative
from inception
on April 2,
1998 to
December 31,
2004
$
|------------------------------------------------ | ------ | ----------- | ------ | -----------------------------------------------------------------
|                                                
|OPERATING ACTIVITIES                             |        |             |        |                                                                  
|Net loss for the year                            |        | (12,956,119 | )      | (8,544,031                                                       
|Deduct non-cash items                            |       
|Amortization                                     |        | 751,756     |        | 663,524                                                          
|Non-cash compensation [note 11]                  |        | 2,668,570   |        | 996,707                                                          
|Gain on sale of BCY LifeSciences Inc.            |        | (34,185     | )      | (264,453                                                         
|Cancellation of contingent payment obligation    |       
|settled in common shares [note 9]                |        | 150,000     |        | --                                                               
|Loss on sale of Transition Therapeutics Inc.     |        | --          |        | 2,156,685                                                        
|Foreign exchange loss                            |        | 264,080     |        | 2,881                                                            
|Future income tax recovery                       |        | --          |        | --                                                               
|Net changes in non-cash working capital          |        | (69,065     | )      | (489,051                                                         
|                                                
|Cash used in operating activities                |        | (9,224,963  | )      | (5,477,738                                                       
|                                                
|INVESTING ACTIVITIES                             |       
|Intellectual property                            |        | (958,809    | )      | (1,045,869                                                       
|Other capital assets                             |        | (15,230     | )      | (50,729                                                          
|Purchase of short-term investments               |        | (6,777,179  | )      | (18,111,608                                                      
|Redemption of short-term investments             |        | 3,114,000   |        | --                                                               
|Investment in BCY LifeSciences Inc.              |        | 133,609     |        | 450,151                                                          
|Investment in Transition Therapeutics Inc.       |        | --          |        | 2,552,695                                                        
|                                                
|Cash used in investing activities                |        | (4,503,609  | )      | (16,205,360                                                      
|                                                
|FINANCING ACTIVITIES                             |       
|Alberta Heritage Foundation loan                 |        | --          |        | --                                                               
|Proceeds from exercise of stock options and      |       
|warrants                                         |        | 8,121,296   |        | 700,882                                                          
|Proceeds from private placements                 |        | 6,223,763   |        | 9,844,700                                                        
|Proceeds from public offerings                   |        | 9,150,902   |        | 5,459,399                                                        
|                                                
|Cash provided by financing activities            |        | 23,495,961  |        | 16,004,981                                                       
|                                                
|Increase (decrease) in cash and cash equivalents |       
|during the period                                |        | 9,767,389   |        | (5,678,117                                                       
|                                                 |       
|Cash and cash equivalents, beginning of the      |       
|period                                           |        | 2,641,127   |        | 8,319,244                                                        
|                                                
|Cash and cash equivalents, end of the period     |        | 12,408,516  |        | 2,641,127                                                        
|                                                
|Cash interest received                           |        | 459,757     |        | 187,843                                                          
|                                                
|Cash taxes paid (net)                            |        | --          |        | 1,552                                                            
|                                                

See accompanying notes

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

# 1.    INCORPORATION AND
NATURE OF OPERATIONS

Oncolytics  Biotech Inc. (the
 "Company") was  incorporated  on April 2, 1998 under the Business  Corporations  Act
(Alberta) as 779738 Alberta Ltd.  On April 8, 1998, the Company changed its name to
Oncolytics Biotech Inc.

The Company is a development stage
biopharmaceutical company that focuses on the discovery and development of pharmaceutical
products for the treatment of cancers that have not been successfully treated with
conventional therapeutics. The product being developed by the Company may represent a
novel treatment for Ras mediated cancers which can be used as an alternative to existing
cytotoxic or cytostatic therapies, as an adjuvant therapy to conventional chemotherapy,
radiation therapy, or surgical resections, or to treat certain cellular proliferative
disorders for which no current therapy exists.

# 2.    BASIS OF FINANCIAL
STATEMENT PRESENTATION

On April 21, 1999, SYNSORB Biotech
Inc. (SYNSORB) purchased all of the shares of the Company. In connection with
the acquisition, the basis of accounting for the assets and liabilities of Oncolytics was
changed to reflect SYNSORBs cost of acquiring its interest in such assets and
liabilities (i.e. reflecting SYNSORBs purchase cost in the financial statements of
the Company). The amount by which SYNSORBs purchase price exceeded the underlying
net book value of the Companys assets and liabilities at April 21, 1999 was
$2,500,000. Such amount has been credited to contributed surplus and charged to
intellectual property which will be amortized to income based on the established
amortization policies for such assets. Subsequent to April 21, 1999 SYNSORBs
ownership has been diluted through public offerings of the Companys common shares,
sales of the Companys shares by SYNSORB and a distribution of SYNSORBS
ownership interest in the Company to its shareholders [note 6]. As a result,
SYNSORB no longer has any ownership in the Company.

# 3.    SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

The financial statements of the
Company have been prepared in accordance with Canadian generally accepted accounting
principles. These policies are, in all material respects, in accordance with United States
generally accepted accounting principles except as disclosed in note 18. The financial
statements have, in managements opinion, been properly prepared within reasonable
limits of materiality and within the framework of the accounting policies summarized
below.

# Use of estimates

Because a precise determination of
many assets and liabilities is dependent upon future events, the preparation of financial
statements in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of expenses during the reporting periods.
Actual results could differ from those estimates and such differences could be
significant. Significant estimates made by management affecting the Companys
financial statements include the assessment of the net realizable value of long lived
assets and the amortization period of intellectual property.

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

# Cash and cash equivalents

Cash and cash equivalents consists of
cash on hand and balances with the Companys bank including interest bearing deposits
earning an average interest rate of 2.26% (2003  2.89%).

# Short-term investments

Short-term investments consisting
primarily of bankers acceptances, coupons and notes, and are liquid investments that
are readily convertible to known amounts of cash and are subject to an insignificant risk
of changes in value and with original maturities less than two years at the time of
purchase, and are carried at the lower of amortized cost and market value. Gains and
losses on disposal of short-term investments are included in income in the period of
realization. Premiums or discounts are amortized over the remaining maturity of the
instrument and reported in interest income.

# Capital assets

Capital assets are recorded at cost.
Amortization is provided on bases and at rates designed to amortize the cost of the assets
over their estimated useful lives. Amortization is recorded using the declining balance
method at the following annual rates:

|                               | 
|------------------------------ | 
|Office equipment and furniture | 
|Medical equipment              | 
|Computer equipment             | 
|Leasehold improvements         | 

Costs relating to acquiring and
establishing intellectual property (mainly patents) are recorded at cost, net of
recoveries. Amortization of the intellectual property is on a straight-line basis over
seventeen years or estimated useful life (currently estimated to be ten years) and begins
on the earlier of a patent being granted or its utilization. The Company assesses
potential impairment of its intellectual property when any events that might give rise to
impairment are known to the Company by measuring the expected net recovery from products
based on the use of the intellectual property.

# Investments

Investments are accounted for at cost
and written down only when there is evidence that a decline in value that is other than
temporary has occurred.

# Foreign exchange

Transactions originating in foreign
currencies are translated into Canadian dollars at the exchange rate in effect at the date
of the transaction. Monetary assets and liabilities are translated at the year-end rate of
exchange and non-monetary items are translated at historic exchange rates. Exchange gains
and losses are included in net loss for the year.

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

# Research and development

Research costs are expensed as
incurred. Development costs that meet specific criteria related to technical, market and
financial feasibility will be capitalized. To date, all of the development costs have been
expensed.

# Loss per common share

Basic loss per share is determined
using the weighted average number of common shares outstanding during the period.

The Company uses the treasury stock
method to calculate diluted loss per share. Under this method, diluted loss per share is
computed in a manner consistent with basic loss per share except that the weighted average
shares outstanding are increased to include additional shares from the assumed exercise of
options and warrants, if dilutive. The number of additional shares is calculated by
assuming that any outstanding in the money options and warrants were exercised
at the later of the beginning of the period or the date of issue and that the proceeds
from such exercises were used to acquire shares of common stock at the average market
price during the reporting period.

# Stock option plan

The Company has one stock option plan
(the Plan) available to officers, directors, employees, consultants and
suppliers with grants under the Plan approved from time to time by the Board of Directors.
Under the Plan, the exercise price of each option equals the market price of the
Companys stock on the date of grant in accordance with Toronto Stock Exchange
guidelines. Vesting is provided for at the discretion of the Board and the expiration of
options is to be no greater than ten years from the date of grant.

# Stock based compensation

Officers, Directors and Employees
Effective January 1, 2003, the
Company prospectively adopted the fair value based method of accounting for employee
awards granted under its stock option plan (see note 11). The fair value of each stock
option grant is calculated using the Black Scholes Option Pricing Model and is recorded
over the options vesting period on a straight line basis. Previously, the intrinsic
value method was used. The following tables provide pro forma net loss and pro forma basic
and diluted net loss per share had compensation expense, for awards granted in 2002, been
based on the fair value method of accounting for stock based compensation:

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

|                                               | 2004
$ | 2003
$     | 2002
$
|---------------------------------------------- | ------ | ---------- | ------
|                                              
|Reported net loss                              |        | 12,956,199 |       
|Compensation expense                           |        | 4,425      |       
|                                              
|Pro forma net loss                             |        | 12,960,624 |       
|                                              
|Reported basic and diluted net loss per share  |        | (0.45      | )     
|                                              
|Pro forma basic and diluted net loss per share |        | (0.45      | )     
|                                              

As this policy has been applied
prospectively, comparative information has not been restated.

Non-employees
Stock based compensation to
non-employees is recorded at the fair market value based on the fair value of the
consideration received, or the fair value of the equity instruments granted, or
liabilities incurred, whichever is more reliably measurable, on the earlier of the date at
which a performance commitment is reached, performance is achieved, or the vesting date of
the options.

# Future income taxes

The Company follows the liability
method of accounting for income taxes. Under the liability method, future income taxes are
recognized for the difference between financial statement carrying values and the
respective income tax basis of assets and liabilities (temporary differences). Future
income tax assets and liabilities are measured using substantively enacted income tax
rates expected to apply in the years in which temporary differences are expected to be
recovered or settled. The effect on future income tax assets and liabilities of a change
in tax rates is included in income in the period of the change.

# 4.    CAPITAL ASSETS

|                       | 2004
|---------------------- | ----
|                      
|
|                      
|Intellectual property  |     
|Medical equipment      |     
|Office equipment       |     
|Office furniture       |     
|Computer equipment     |     
|Leasehold improvements |     
|                      
|                       |     
|                      

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

|                       | 2003
|---------------------- | ----
|                      
|
|                      
|Intellectual property  |     
|Medical equipment      |     
|Office equipment       |     
|Office furniture       |     
|Computer equipment     |     
|Leasehold improvements |     
|                      
|                       |     
|                      

# 5.    ALBERTA HERITAGE
FOUNDATION LOAN

The Company has received a loan of
$150,000 from the Alberta Heritage Foundation for Medical Research. Pursuant to the terms
of the agreement, the Company is required to repay this amount in annual installments from
the date of commencement of sales in an amount equal to the lesser of: (a) 5% of the gross
sales generated by the Company; or (b) $15,000 per annum until the entire loan has been
paid in full.

# 6.    RELATED PARTY
TRANSACTIONS

On May 7, 2002, the shareholders of
SYNSORB and the Company approved an arrangement whereby the Company would release from
escrow 4,000,000 common shares held by SYNSORB. As consideration, SYNSORB provided the
Company with 1,500,000 common shares of BCY Life Sciences Inc. (BCY) along
with the rights to receive an additional 400,000 common shares of BCY upon the attainment
of certain milestones by BCY at no cash cost to the Company. The Company received 200,000
of these 400,000 common shares on November 27, 2002. These 1,700,000 common shares in BCY
were recorded as an investment at $170,000 based on the quoted market price of the BCY
common shares at that time with an offsetting credit recorded to contributed surplus.

# 7.    INVESTMENTS

On April 23, 2002, the Company
acquired 694,445 common shares of BCY, a public company, for $0.18 per share, and warrants
exercisable until April 23, 2004 to purchase up to 694,445 common shares in BCY at an
exercise price of $0.27 per share for total consideration of $127,123 (including costs of
$2,123). After this transaction and the transaction described in note 6, the Company held
a total of 2,394,445 BCY shares. During the first six months of 2004, the Company sold
697,945 (2003  1,496,500) of its BCY shares for net cash proceeds of $133,609 (2003
 $450,151) recording a gain on sale of investment of $47,002 (2003  $264,453).
In the third quarter of 2004, the Company recorded a write down of its remaining
investment in BCY of $12,817 to reflect the investments market value (as estimated
based on its publicly traded share price) at that time. As at December 31, 2004, the
Companys remaining ownership

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

in BCY was 200,000 common shares with
a book value (net of write down) of $12,000. The warrants expired out of the money.

On June 14, 2002, the Company
acquired 6,890,000 common shares of Transition Therapeutics Inc. (TTH), a
public company, through the issuance of 1,913,889 common shares of the Company from
treasury. The investment was recorded at $4,709,380 (including acquisition costs of
$20,352) based on the trading price of the Companys shares at the time of
acquisition. On June 6, 2003, the Company sold all of its 6,890,000 common shares of TTH
for net cash proceeds of $2,552,695 recording a loss on sale of investment of $2,156,685.

# 8.    COMMITMENTS

The Company is committed to payments
totaling $943,815 during 2005 for activities related to its clinical trial program and
collaborations.

The Company is committed to monthly
rental payments (including the Companys portion of operating costs) of $11,087 under
the terms of a lease for office premises, which expires on May 31, 2006.

Under a clinical trial agreement
entered into with the Alberta Cancer Board (ACB), the Company has agreed to
repay the amount funded under the agreement together with a royalty, to a combined maximum
amount of $400,000 plus an overhead repayment of $100,000, upon sales of a specified
product. The Company agreed to repay the ACB in annual installments in an amount equal to
the lesser of: (a) 5% of gross sales of a specified product; or (b) $100,000 per annum.

# 9.    CONTINGENCY

During 1999, the Company entered into
an agreement that assumed certain obligations (the Assumption Agreement) in
connection with a Share Purchase Agreement (the Agreement) between SYNSORB and
the former shareholders of the Company to make milestone payments and royalty payments.

As of December 31, 2003, a milestone
payment was still outstanding for $1.0 million, due within 90 days of the first receipt
from an Appropriate Regulatory Authority, for marketing approval to sell REOLYSIN® to
the public or the approval of a new drug application for REOLYSIN®.

This milestone payment, when payable,
will be accounted for as research and development expense and will not be deductible for
tax purposes.

In addition to the milestone payment,
payments may become due and payable in accordance with the Agreement upon realization of
sales of REOLYSIN®. In 2003, the Company completed amendments and revisions to the
contingent obligations to its five founding shareholders with respect to these other
contingent payments. The amendments and revisions reduced the amount and clarified the
determination of potential obligations of the Company to these shareholders arising from
the Agreement and Assumption Agreement entered into in 1999. Also, on September 23, 2004,
the Company reached an agreement that further reduced its contingent payments to its
founding shareholders through the cancellation of a portion of these contingent payments
from one of its non-management founding shareholders. The consideration paid by the
Company consisted of $250,000 cash and 21,459 common shares valued at $150,000 and has

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

been recorded as research and
development expense. The value of the common shares was based on the closing market price
on September 23, 2004.

As a result of the amendments and the
cancellation agreement, if the Company receives royalty payments or other payments as a
result of entering into partnerships or other arrangements for the development of the
reovirus technology, the Company is obligated to pay to the founding shareholders 11.75%
(formerly in 2003  14.25% and 2002  20%) of the royalty payments and other
payments received. Alternatively, if the Company develops the reovirus treatment to the
point where it may be marketed at a commercial level, the payments referred to in the
foregoing sentence will be amended to a royalty payment of 2.35% (formerly in 2003 
2.85% and 2002  4%) of Net Sales received by the Company for such products.

# 10.    SHARE CAPITAL

# Authorized:

Unlimited number of common shares

|Issued:                                                | Shares | Warrants  
|------------------------------------------------------ | ------ | ----------
|                                                      
|
|                                                      
|Balance, December 31, 1998                             |        | 2,145,300 
|Issued on exercise of stock options                    |       
|                                                       |        | 76,922    
|                                                      
|                                                       |        | 2,222,222 
|                                                      
|July 29, 1999 share split(a)                           |        | 6,750,000 
|Issued for cash pursuant to July 30, 1999 private      |       
|placement (net of share issue costs of $45,000)(b)     |        | 1,500,000 
|Issued for cash pursuant to August 24, 1999 private    |       
|placement                                              |        | 1,399,997 
|Issued on initial public offering (net of share issue  |       
|costs of $317,897)(c)                                  |        | 4,000,000 
|Issued for cash pursuant to exercise of share purchase |       
|warrants                                               |        | 20,000    
|                                                      
|Balance, December 31, 1999                             |        | 13,669,997
|Issued on exercise of stock options and warrants       |       
|                                                       |        | 573,910   
|Issued for cash pursuant to July 17, 2000 private      |       
|placement(d)                                           |        | 244,898   
|Issued on public offering (net of share issue costs of |       
|$998,900)(e)                                           |        | 3,000,000 

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

|                                                      |  |            |  |           
|----------------------------------------------------- |  | ---------- |  | ----------
|                                                     
|Balance, December 31, 2000                            |  | 17,488,805 |  | 21,602,937
|                                                     
|Issued on exercise of stock options and warrants      |  | 1,702,590  |  | 2,210,016 
|                                                     
|Balance, December 31, 2001                            |  | 19,191,395 |  | 23,812,953
|                                                     
|Issued on exercise of stock options                   |  | 40,000     |  | 34,000    
|                                                     
|Issued on acquisition of the interest in Transition   | 
|Therapeutics Inc. [note 7]                            |  | 1,913,889  |  | 4,689,028 
|                                                     
|Issued for cash pursuant to December 11, 2002 private | 
|placement(f)                                          |  | 1,000,000  |  | 1,896,714 
|                                                     
|Share issue costs                                     |  |           |  | (241,123  
|                                                     
|Balance, December 31, 2002                            |  | 22,145,284 |  | 30,191,572
|                                                     
|Issued for cash pursuant to February 10, 2003 private | 
|placement(g)                                          |  | 140,000    |  | 265,540   
|                                                     
|Issued for cash pursuant to June 19, 2003 private     | 
|placement(h)                                          |  | 2,120,000  |  | 5,912,113 
|                                                     
|Issued for cash pursuant to August 21, 2003 private   | 
|placement(i)                                          |  | 1,363,900  |  | 3,801,778 
|                                                     
|Issued for cash pursuant to October 14, 2003 public   | 
|offering(j)                                           |  | 1,200,000  |  | 5,528,972 
|                                                     
|Exercise of options                                   |  | 64,700     |  | 149,615   
|                                                     
|Exercise of warrants                                  |  | 174,378    |  | 593,194   
|                                                     
|Share issue costs                                     |  |           |  | (1,730,195
|                                                     

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

|                                                          |  |            |  |           
|--------------------------------------------------------- |  | ---------- |  | ----------
|                                                         
|Balance, December 31, 2003                                |  | 27,208,262 |  | 44,712,589
|                                                         
|Issued for cash pursuant to April 7, 2004 private         | 
|placement(k)                                              |  | 1,077,100  |  | 5,924,050 
|                                                         
|Issued for cash pursuant to pursuant to November 23, 2004 | 
|public offering(l)                                        |  | 1,504,000  |  | 8,693,120 
|                                                         
|Issued pursuant to cancellation of contingent             | 
|payment [note 9]                                          |  | 21,459     |  | 150,000   
|                                                         
|Exercise of warrants                                      |  | 1,907,175  |  | 8,178,546 
|                                                         
|Expired warrants                                          |  |           |  | 2,827     
|                                                         
|Exercise of options                                       |  | 197,500    |  | 778,951   
|                                                         
|Share issue costs                                         |  |           |  | (1,796,758
|                                                         
|Balance, December 31, 2004                                |  | 31,915,496 |  | 66,643,325
|                                                         

|(a) | Pursuant to subsection 167(1)(f) of the Business Corporations Act (Alberta), the
          Articles of the Company were amended by subdividing the 2,222,222 issued and
          outstanding common shares of the Company into 6,750,000 common shares.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Pursuant to a private placement, 1,500,000 common share purchase warrants were
          issued entitling the holders thereof to acquire one additional share at $0.75
          per share until November 8, 2001. At December 31, 2001, all of the warrants
          had been exercised.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Pursuant to the initial public offering, the agent was issued common share
          purchase warrants entitling it to acquire 400,000 common shares at $0.85 per
          share until May 8, 2001. At December 31, 2001, all of the warrants had been
          exercised.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Pursuant to the private placement, 244,898 common shares were issued at an issue
          price of $12.25 per share net of issue costs of $1,355.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | Pursuant to a special warrant offering, the Company sold 3,000,000 special
          warrants for $4.70 per warrant for net proceeds of $13,101,100. Each warrant
          entitled the holder to one common share upon exercise. At December 31, 2001, all
          of the warrants had been exercised.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) | Pursuant to a private placement, 1,000,000 units were issued at an issue price
          of $2.00 per unit net of issue costs of $241,123. Each unit included one common
          share (ascribed value of $1.897) and one-half of one common share purchase
          warrant (ascribed value of $0.103) for a total of 500,000 warrants. Each whole
          common share purchase warrant entitles the holder to acquire one common share in
          the capital of the Company upon payment of $3.00 per share until June 11, 2004.
          In addition, the Company issued 50,000 common share purchase warrants on the
          same terms to the brokerage firm assisting with the transaction. The ascribed
          value of these broker warrants was $11,000 ($0.22 per
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

| | broker
warrant) and has been included in the issue costs. The ascribed values of the warrants
were based on the Black Scholes Option Pricing Model.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(g) | Pursuant to a private placement, 140,000 units were issued at an issue price of
          $2.00 per unit net of issue costs of $37,369. Each unit included one common
          share (ascribed value of $1.897) and one-half of one common share purchase
          warrant (ascribed value of $0.103) for a total of 70,000 warrants. Each whole
          common share purchase warrant entitles the holder to acquire one common share in
          the capital of the Company upon payment of $3.00 per share until August 10,
          2004. In addition, the Company issued 7,000 common share purchase warrants on
          the same terms to the brokerage firm assisting with the transaction. The
          ascribed value of these broker warrants was $1,540 ($0.22 per broker warrant)
          and has been included in the issue costs. The ascribed values of the warrants
          were based on the Black Scholes Option Pricing Model.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(h) | Pursuant to a private placement, 2,120,000 units were issued at an issue price
          of $3.00 per unit net of issue costs of $637,986. Each unit included one common
          share (ascribed value of $2.789) and one-half of one common share purchase
          warrant (ascribed value of $0.211) for a total of 1,060,000 warrants. Each whole
          common share purchase warrant entitles the holder to acquire one common share in
          the capital of the Company upon payment of $4.00 per share until December 19,
          2004. In addition, the Company issued 212,000 common share purchase warrants on
          the same terms to the brokerage firms assisting with the transaction. The
          ascribed value of these broker warrants was $95,400 ($0.45 per broker warrant)
          and has been included in the issue costs. The ascribed values of the warrants
          were based on the Black Scholes Option Pricing Model.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(i) | Pursuant to a private placement, 1,363,900 common shares and 681,943 common
          share purchase warrants were issued for gross proceeds of $4,091,738. Each
          common share and whole common share purchase warrant have ascribed values of
          $2.787 and $0.425 respectively. Each common share purchase warrant entitles the
          holder to acquire one common share in the capital of the Company upon payment of
          $4.00 per share until February 21, 2005. Share issue costs related to this
          private placement were $367,839. In addition, the Company issued 131,590 common
          share purchase warrants on the same terms to the advisors assisting with the
          transaction. The ascribed value of these additional warrants was $59,216 ($0.45
          per additional warrant) and has been included in the issue costs. The ascribed
          values of the warrants were based on the Black Scholes Option Pricing Model.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(j) | Pursuant to a public offering, 1,200,000 units were issued at an issue price of
          $5.00 per unit net of issue costs of $687,001. Each unit included one common
          share (ascribed value of $4.607) and one-half of one common share purchase
          warrant (ascribed value of $0.393) for a total of 600,000 warrants. Each whole
          common share purchase warrant entitles the holder to acquire one common share in
          the capital of the Company upon payment of $6.25 per share until April 14, 2005.
          In addition, the Company issued 120,000 common share purchase warrants with an
          exercise price of $5.00 that expires on April 14, 2005 to the brokerage firms
          assisting with the transaction. The ascribed value of these broker warrants was
          $146,400 ($1.19 per broker warrant) and has been included in the issue costs.
          The ascribed values of the warrants were based on the Black Scholes Option
          Pricing Model.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(k) | Pursuant to a private placement, the Company sold 1,077,100 units at an average
          price of $6.25 per unit for gross cash proceeds of $6,731,875. The units were
          comprised of 1,077,100 common shares and 538,550 common share purchase warrants
          and have ascribed values of $5.50 and $1.50 respectively. Each common share
          purchase warrant entitles the holder to acquire one common share
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

| | in
the capital of the Company upon payment of $7.75 per share until October 7, 2005. Share
issue costs related to the private placement were $728,918. In addition, the Company
issued 107,710 common share purchase warrants to its advisor entitling the holder to
acquire one common share of the capital of the Company upon payment of $7.00 per share
until October 7, 2005. The ascribed value of these additional warrants was $220,806 ($2.05
per additional warrant) and has been included in the share issue costs above. The ascribed
values of the warrants were based on the Black Scholes Option Pricing Model.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(l) | Pursuant to a public offering, the Company sold 1,504,000 units at an issue
          price of $6.65 per unit for gross cash proceeds of $10,001,600. Each unit
          included one common share (ascribed value of $5.78) and one-half of one common
          share purchase warrant (ascribed value of $0.87) for a total of 752,000
          warrants. Each whole common share purchase warrant entitles the holder to
          acquire one common share in the capital of the Company upon payment of $8.00 per
          share until November 23, 2007. Share issue costs related to this public offering
          were $ 1,063,890. In addition, the Company issued 112,800 common share purchase
          warrants with an exercise price of $7.06 that expires on May 23, 2006 to the
          brokerage firm assisting with the transaction. The ascribed value of these
          broker warrants was $213,192 ($1.89 per broker warrant) and has been included in
          the share issue costs above. The ascribed values of the warrants were based on
          the Black Scholes Option Pricing Model.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table summarizes the
Companys outstanding warrants as at December 31, 2004:

|Exercise 
Price | Outstanding,
Beginning of
the Year | Granted
During the
Year | Exercised
During the
Year | Expired
During the
Year | Outstanding,
End of Year | Weighted 
Average
Remaining
Contractual
Life (years)
|--------------- | ---------------------------------- | ----------------------- | ------------------------- | ----------------------- | ------------------------ | ----------------------------------------------------
|               
|$3.00           |                                    | 480,755                 |                           |                        |                          | 480,755                                             
|$4.00           |                                    | 1,243,867               |                           |                        |                          | 1,237,167                                           
|$4.00           |                                    | 813,533                 |                           |                        |                          | 44,561                                              
|$5.00           |                                    | 120,000                 |                           |                        |                          | 74,442                                              
|$6.25           |                                    | 600,000                 |                           |                        |                          | 70,250                                              
|$7.00           |                                    |                        |                           | 107,710                 |                          |                                                    
|$7.06           |                                    |                        |                           | 112,800                 |                          |                                                    
|$7.75           |                                    |                        |                           | 538,550                 |                          |                                                    
|$8.00           |                                    |                        |                           | 752,000                 |                          |                                                    
|               
|                |                                    | 3,258,155               |                           | 1,511,060               |                          | 1,907,175                                           
|               

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

# 11.    STOCK BASED
COMPENSATION

# Stock Option Plan

The Company has issued stock options
to acquire common stock through its stock option plan of which the following are
outstanding at December 31:

|                                   | 2004 | 2003     
|---------------------------------- | ---- | ---------
|                                  
|
|                                  
|Outstanding at beginning of year   |      | 2,800,800
|Granted during year                |      | 1,202,250
|Cancelled during year              |      |         
|Exercised during year              |      | (197,500 
|                                   |      |          
|Outstanding at end of year         |      | 3,805,550
|                                   |      |          
|Options exercisable at end of year |      | 3,717,050
|                                   |      |          

The following table summarizes
information about the stock options outstanding and exercisable at December 31, 2004:

|Range of Exercise
Prices | Number
Outstanding | Weighted
Average
Remaining
Contractual
Life (years) | Weighted
Average
Exercise
Price
$ | Number
Exercisable | Weighted
Average
Exercise
Price
$
|------------------------ | ------------------ | --------------------------------------------------- | --------------------------------- | ------------------ | ---------------------------------
|                        
|$0.75 - $1.00            |                    | 982,550                                             |                                   | 4.8                |                                  
|$1.65 - $2.37            |                    | 281,000                                             |                                   | 6.5                |                                  
|$2.70 - $3.33            |                    | 478,750                                             |                                   | 8.0                |                                  
|$4.00 - $5.00            |                    | 1,211,750                                           |                                   | 9.5                |                                  
|$6.77 - $9.76            |                    | 708,500                                             |                                   | 7.1                |                                  
|$12.15 - $13.50          |                    | 143,000                                             |                                   | 5.8                |                                  
|                        
|                         |                    | 3,805,550                                           |                                   | 7.5                |                                  
|                        

The outstanding options vest annually
or after the completion of certain milestones. The Company has reserved 4,012,461 common
shares for issuance relating to outstanding stock options.

As the Company is following the fair
value based method of accounting for stock option awards, compensation expense related to
options granted to employees and consultants was $2,537,088 (2003  $812,711) and
$131,482 (2003  $102,466) respectively with an offsetting credit to contributed
surplus.

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

The estimated fair value of stock
options issued during the year was determined using the Black-Scholes model using the
following weighted average assumptions and fair value of options:

|                                                | 2004 | 2003   
|----------------------------------------------- | ---- | -------
|                                               
|Risk-free interest rate                         |      | 2.83%  
|Expected hold period to exercise                |      | 2 years
|Volatility in the price of the Company's shares |      | 71%    
|Dividend yield                                  |      | zero   
|Weighted average fair value of options          |      | $  2.26
|                                               

In 2002, the Company granted 48,000
share incentive rights to a non-employee which, when exercised by the holder, would
require payment in cash or shares, at the sole option of the Company for amounts in excess
of $2.31 based on the weighted average trading price for the ten trading days prior to the
exercise. The Company accounted for this transaction with a non-employee at fair value
determined using the Black-Scholes model. The related compensation expense recorded in
2003 was $81,530, with an offsetting credit to contributed surplus. As at December 31,
2004, these share incentive rights are still outstanding.

# 12.    CONTRIBUTED SURPLUS

The following table summarizes the
change in contributed surplus for the period ending December 31:

|                           | 2004
$ | 2003
$        
|-------------------------- | ------ | --------------
|                          
|Balance, beginning of year |        | $    3,699,425
|                          
|Stock based compensation   |        | 2,683,869     
|                          
|Exercise of stock options  |        | (34,155       
|                          
|Balance end of year        |        | $    6,349,139
|                          

# 13.   LOSS PER COMMON SHARE

Loss per common share is calculated
using the weighted average number of common shares outstanding for the year ended December
31, 2004 of 29,028,391 (2003  24,242,845; 2002  20,311,238). The effect of any
potential exercise of the Companys stock options and warrants outstanding during the
year has been excluded from the calculation of diluted earnings per share, as it would be
anti-dilutive.

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

# 14.   INCOME TAXES

The provision for income taxes
recorded in the financial statements differs from the amount which would be obtained by
applying the statutory income tax rate to the loss before tax as follows:

|                                                      | 2004
$ | 2003
$      | 2002
$
|----------------------------------------------------- | ------ | ----------- | ------
|                                                     
|Loss before taxes                                     |        | (12,956,119 | )     
|Statutory Canadian corporate tax rate                 |        | 33.87       | %     
|Anticipated tax recovery                              |        | (4,388,238  | )     
|Non-taxable portion of net capital loss (gain)        |        | (16,717     | )     
|Employee stock based compensation                     |        | 903,845     |       
|Cancellation of contingent payment obligation settled |       
|in common shares                                      |        | 50,805      |       
|Change in tax rate                                    |        | 198,610     |       
|Non-deductible expenses                               |        | 8,976       |       
|Change in valuation allowance(a)                      |        | 3,242,719   |       
|                                                     
|Future income tax recovery                            |        | --          |       
|                                                     

|(a) | As of December 31, 2004, the Company has non-capital losses for income tax
          purposes of approximately $23,814,000, which are available for application
          against future taxable income and expire in 2006 ($663,000) 2007 ($1,033,000),
          2008 ($2,898,000), 2009 ($4,483,000), 2010 ($4,483,000) and 2014 ($10,254,000).
          In addition to the loss carry forward amounts above, the Company has scientific
          research and development claims and related investment tax credits of
          approximately $7,772,000 as at December 31, 2004 which are available for
          application against future taxable income. The potential benefits resulting from
          these tax pools have been recognized in the financial statements only to the
          extent they are more likely than not of being realized.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The components of the Companys
future income tax asset are as follows:

|                                                                      | 2004
$ | 2003
$     
|--------------------------------------------------------------------- | ------ | -----------
|                                                                     
|Non-capital loss carryforwards                                        |        | 8,010,356  
|Scientific research and development                                   |        | 3,099,863  
|Net capital loss carryforwards                                        |        | 283,627    
|Undepreciated capital costs in excess of book value of capital assets |        | 93,596     
|Net book value of intellectual property in excess of tax value        |        | (71,327    
|Share issue costs                                                     |        | 683,239    
|Valuation allowance                                                   |        | (12,099,354
|                                                                     
|Future tax asset                                                      |        | --         
|                                                                     

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

# 15.    INDEMNIFICATION OF
OFFICERS AND DIRECTORS

The Companys corporate by-laws
require that, except to the extent expressly prohibited by law, the Company will indemnify
its officers and directors against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment reasonably incurred in respect of any
civil, criminal or administrative action or proceeding as it relates to their services to
the Company. The by-laws provide no limit to the amount of the indemnification. The
Company has purchased directors and officers insurance coverage to cover
claims made against the directors and officers during the applicable policy periods. The
amounts and types of coverage have varied from period to period as dictated by market
conditions. The Company believes that it has adequate insurance coverage; however there is
no guarantee that all indemnification payments will be covered under the Companys
existing insurance policies.

There is no pending litigation or
proceeding involving any officer or director of the Company as to which indemnification is
being sought, nor is the Company aware of any threatened litigation that may result in
claims for indemnification.

# 16.    FINANCIAL INSTRUMENTS

Financial instruments of the Company
consist of cash and cash equivalents, short term investments, accounts receivable,
investments, accounts payable, and the Alberta Heritage Foundation loan. As at December
31, 2004 and 2003, there are no significant differences between the carrying values of
these amounts and their estimated market values, with the exception of investments whose
market value at December 31, 2003 was $157,140, determined by the closing market value of
the investees shares.

Credit risk
The Company is exposed to credit risk
on its short-term investments in the event of non-performance by counterparties, but does
not anticipate such non-performance. The Company mitigates its exposure to credit risk by
restricting its portfolio to investment grade securities with short term maturities and by
monitoring the credit risk and credit standing of counterparties.

Interest rate risk
The Company has exposure to interest
income risk through its short-term investments in fixed-income securities that are
sensitive to interest rate fluctuations.

Foreign exchange riskThe Company purchases goods and
services denominated primarily in Canadian, U.S. and UK currencies. To manage its foreign
exchange risk, the Company, from time to time, acquires short-term investments denominated
in these securities.

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

# 17.    ECONOMIC DEPENDENCE

The Company contracts the production
and currently receives its supplies of REOLYSIN® from one toll manufacturer based in
the United Kingdom. There are a limited number of potential producers and suppliers of
REOLYSIN®. As a result, any significant disruption of the services provided by this
toll manufacturer has the potential to delay the progress of the Companys clinical
trial program. Management is aware of and is taking actions to minimize this exposure.

# 18.    RECONCILIATION OF
CANADIAN GAAP TO US GAAP

The financial statements of the
Company are prepared in accordance with Canadian GAAP which, in most respects, conforms to
US GAAP. Significant differences between Canadian and US GAAP are as follows:

|                                                      |  |    |   |            |  
|----------------------------------------------------- |  | -- | - | ---------- | -
|
|                                                     
|Net loss - Canadian GAAP                              |  |    |   | 12,956,119 |  
|Amortization of intellectual                          | 
|property                                              |  | (1 | ) | (361,500   | )
|In process research and development                   |  | (1 | ) | --         |  
|Future income tax recovery                            |  | (1 | ) | --         |  
|                                                     
|Net loss - US GAAP                                    |  |    |   | 12,594,619 |  
|Unrealized loss (gain) on                             | 
|available-for-sale securities                         |  | (2 | ) | --         |  
|Reclassification of unrealized                        | 
|gain (loss) on                                        | 
|available-for-sale securities                         |  | (2 | ) | 45,715     |  
|                                                     
|Comprehensive loss - US GAAP                          |  |    |   | 12,640,334 |  
|                                                     
|Basic and diluted loss per common
    share - US GAAP |  |    |   | (0.43      | )
|                                                     

There are no differences between
Canadian GAAP and US GAAP in amounts reported as cash flows from (used in) operating,
financing and investing activities.

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

Balance sheet items in accordance
with US GAAP are as follows:

|                                  |  | December 31, 2004 | December 31, 2003
|--------------------------------- |  | ----------------- | -----------------
|                                 
|
|                                 
|Capital assets                    |  | (1                | )                
|Investments                       |  | (2                | )                
|Future income taxes               |  | (1                | )                
|Deficit                           |  | (1                | )                
|Other comprehensive loss (income) |  | (2                | )                
|                                 

|1. |  | Push-DownAccounting
and In Process Research and Development
|-- |  | -------------------------------------------------------------

| | Intellectual
property of $2,500,000 recorded as a consequence of SYNSORBs acquisition of the
Companys shares comprises intangible assets related to research and development
activities. Under US GAAP, these items are expensed on acquisition.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of charging $2,500,000 to expense in 1999 for US GAAP purposes, the amortization
of the intellectual property and the future income tax recovery and future income tax
liability related to intellectual property recorded for Canadian GAAP purposes has been
reversed.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | Unrealized
Gains and Losses on Investments
|-- |  | ------------------------------------------

| | Under
U.S. GAAP, equity securities, having a readily determinable fair value and not classified
as trading securities, are classified as available-for-sale securities and
reported at fair value, with unrealized gains and losses included in comprehensive income
or loss and reported as a separate component of shareholders equity net of related
deferred income taxes. Declines in the fair value of individual available-for-sale
securities below their cost that are other than temporary result in write-downs of the
individual securities to their fair value. The related write-downs are included in
earnings as realized losses. Under Canadian GAAP, these securities are carried at cost and
written down only when there is evidence that a decline in value that is other than
temporary has occurred.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Stock Based Employee
Compensation

On January 1, 2003, the Company
prospectively adopted the fair value based method for its employee options (see note 3).
Consequently there were no differences between Canadian GAAP and U.S. GAAP with respect to
options granted in 2004 and 2003.

In 2002, the Company applied the
intrinsic value method for employee stock options and the fair value method for
non-employee options granted after January 1, 2002. Prior to January 1, 2002, for US GAAP,
the Company applied the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees and related
interpretations in accounting for its employee stock option plans. As well, the Company
provided pro forma disclosure as required by FAS 123 for those options granted prior to
January 1, 2002.

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

The following additional pro-forma
disclosure would be provided under US GAAP with respect to the fair value of employee
options granted prior to January 1, 2002. The fair value for these options granted was
estimated at the date of grant using a Black-Scholes Option Pricing Model with the
following weighted-average assumptions:

|                                              | 2001
|--------------------------------------------- | ----
|                                             
|Risk free interest rate                       |     
|Dividend yield                                |     
|Volatility factors of expected market price   |     
|Weighted average expected life of the options |     
|                                             

Pro forma disclosures of loss and
loss per common share are presented below as if the Company had adopted the cost
recognition requirements under FAS 123 from inception.

|                           |  | 2004
$                | 2003
$ | 2002
$    
|-------------------------- |  | --------------------- | ------ | ----------
|                          
|                           |  | Pro forma - Canadian  |        |           
|Net Loss                   |  | GAAP                  |        | 12,960,624
|                          
|                           |  | As reported - US GAAP |        | 12,594,619
|                           |  | Pro forma - US GAAP   |        | 12,599,044
|                          
|                          
|Basic and diluted net loss |  | Pro forma - Canadian  |       
|per common share           |  | GAAP ($/share)        |        | (0.45     
|                          
|                           |  | As reported - US GAAP |        | (0.43     
|                           |  | Pro forma - US GAAP   |       
|                           |  | ($/share)             |        | (0.43     
|                          

# Newly Issued U.S.
Accounting Standards

Share Based Payments

On December 16, 2004, the Financial
Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised
2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows.
Statement 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted
no later than July 1, 2005

The Company adopted the fair value
based method of accounting for share-based payments effective January 1, 2003 using the
prospective method described in FASB Statement No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. Currently, the Company uses the
Black Scholes model to estimate the value of stock options granted to employees and
expects to continue to use this acceptable option valuation model upon the required
adoption of Statement 123(R). The Company does not anticipate that adoption of Statement
123(R) will have a material impact on its results of operations or

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2004 and 2003

its financial position.

# 19.    COMPARATIVE FIGURES

Certain comparative figures have been
reclassified to conform with the current years presentation.

# 20.     SUBSEQUENT EVENT

During the January 1, to February 21, 2005
period, the Company received proceeds of $3,075,888 from the exercise of 768,972 warrants
previously issued on August 21, 2003. As of February 21, 2005, all of the 813,533 warrants
issued as part of the August 21, 2003 private placement have been exercised.

---

EXHIBIT 3

# March 2, 2005

# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
 CONDITION AND RESULTS OF OPERATIONS

The following information should be
read in conjunction with the Companys 2004 audited financial statements and notes
thereto, which were prepared in accordance with Canadian generally accepted accounting
principles (GAAP).

# FORWARD-LOOKING
STATEMENTS

The following discussion contains
forward-looking statements, within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements, including the Companys belief
as to the potential of REOLYSIN® as a cancer therapeutic and the Companys
expectations as to the success of its research and development programs in 2005 and
beyond, future financial position, business strategy and plans for future operations, and
statements that are not historical facts, involve known and unknown risks and
uncertainties, which could cause the Companys actual results to differ materially
from those in the forward-looking statements. Such
risks and uncertainties include, among others, the need for and availability of funds and
resources to pursue research and development projects, the efficacy of REOLYSIN® as a
cancer treatment, the success and timely completion of clinical studies and trials, the
Companys ability to successfully commercialize REOLYSIN®, uncertainties related
to the research and development of pharmaceuticals, uncertainties related to competition,
changes in technology, the regulatory process and general changes to the economic
environment. Investors should consult the Companys quarterly and annual filings with
the Canadian and U.S. securities commissions for additional information on risks and
uncertainties relating to the forward-looking statements. Forward looking statements are
based on assumptions, projections, estimates and expectations of management at the time
such forward looking statements are made, and such assumptions, projections, estimates
and/or expectations could change or prove to be incorrect or inaccurate. Investors are
cautioned against placing undue reliance on forward-looking statements. The Company does
not undertake to update these forward-looking statements.

# OVERVIEW

Oncolytics Biotech Inc.
is a Development Stage Company

Since its inception in April of 1998,
Oncolytics Biotech Inc. (the Company) has been a development stage company and
has focused its research and development efforts on the development of REOLYSIN®, its
potential cancer therapeutic. The Company has not been profitable since its inception and
expects to continue to incur substantial losses from its research and development. The
Company does not expect to generate significant revenues until, if and when, its cancer
product becomes commercially viable.

General Risk Factors

Prospects for biotechnology companies
in the research and development stage should generally be regarded as speculative. It is
not possible to predict, based upon studies in animals, or early studies in humans,
whether a new therapeutic will ultimately prove to be safe and effective in humans, or
whether necessary and sufficient data can be developed through the clinical trial process
to support a successful product application and approval.

If a product is approved for sale,
product manufacturing at a commercial scale and significant sales to end users at a
commercially reasonable price may not be successful. There can be no assurance that the
Company will generate adequate funds to continue development, or will ever achieve
significant revenues or profitable operations. Many factors (e.g. competition, patent
protection, appropriate regulatory approvals) can influence the revenue and product
profitability potential.

---

In developing a product for approval,
the Company will rely upon its employees, contractors, consultants and collaborators and
other third party relationships, including the ability to obtain appropriate product
liability insurance. There can be no assurance that these reliances and relationships will
continue as required.

In addition to developmental and
operational considerations, market prices for securities of biotechnology companies
generally are volatile, and may or may not move in a manner consistent with the progress
being made by the Company.

Highlights

In 2004, the Companys net loss
was $12,956,119 compared to a net loss of $8,544,031 in 2003 and $6,091,486 in 2002. The
increase in the Companys net loss was due to an increase in research and development
(R&D) activity as well as non-cash compensation expense. Cash used in
operating activities in 2004 was $9,224,963 compared to $5,477,738 and $7,255,700 in 2003
and 2002 respectively.

During 2004, the Company received
approval and commenced patient enrollment in a systemic (intravenous) delivery clinical
trial in the United Kingdom (UK). In conjunction with this new trial, the
Company provided a final update on the T2 prostate clinical study undertaken to provide
technical information to support a systemic delivery clinical trial application. For
manufacturing and related process development activity, the Company continued to focus on
supplying its clinical trial and research programs with REOLYSIN® as well as the
transfer of its manufacturing process to a UK based supplier. Finally, the Company
continued to incur expenses for research collaborations. In particular, animal model data
was reported from the examination of the use of REOLYSIN® with radiation therapy and
also with approved chemotherapeutics.

In 2004, the Company raised
$23,495,961 through a private placement, a public offering and the exercise of warrants
and options. In 2003, the Company raised $19,007,827 through three private placements, one
public offering, exercises of warrants and options, and the sale of all of its investments
in Transition Therapeutics Inc. (TTH) and a majority of its investment in BCY
LifeSciences Inc. (BCY). As a result of these financing activities, the
Company ended the year with cash and cash equivalents (including short-term investments)
of $33,919,223 at December 31, 2004 (2003  $20,752,735).

During 2004, the Company was granted
three additional U.S. patents for a total of 13 U.S. patents and one European patent. The
Company expended $958,809 in 2004 associated with its intellectual property compared to
$1,045,869 in 2003.

Recent Developments

Recurrent Malignant
Glioma Clinical Trial Study in the U.S.

On February 28, 2005, the Company
announced that it had received clearance from the US Food and Drug Administration (FDA) to
begin a Phase I/II clinical trial to investigate the use of REOLYSIN® to treat
patients with recurrent malignant gliomas.

This clinical trial is an open-label
dose escalation Phase I/II study in which a single dose of REOLYSIN® will be
administered by infusion to patients with recurrent malignant gliomas that are refractory
to standard therapy. The administration involves the stereotactically-guided placement of
a needle into the tumour, through which REOLYSIN® will be administered or infused into
the tumour mass and surrounding tissue using a pump. The primary objective of the study is
to determine the maximum tolerated dose, dose limiting toxicity and safety profile of
REOLYSIN®. Secondary objectives include the evaluation of viral replication, immune
response to the virus and any evidence of antitumour activity. The enrolment in this study
is expected to be up to 30 evaluable patients in the dose escalation phase with up to an
additional 14 patients added at the maximum tolerated dose.

---

REOLYSIN® in Combination with
Radiation Therapy Clinical Trial Study in the U.K.

On February 18, 2005, the Company
announced that it had received a letter of approval from the U.K. regulatory authorities
(Medicines and Healthcare products Regulatory Agency or MHRA) for its Clinical Trial
Application to begin a Phase I clinical trial to evaluate the feasibility, safety and
anti-tumour effects of intratumoural administration of REOLYSIN® in combination with
radiation in patients with advanced cancers.

The trial is a Phase I open-label,
dose-escalation study of REOLYSIN® combined with two different radiation
dosages/schedules. The enrolment in this study is expected to be approximately thirty
evaluable patients, and will depend upon the number of dose levels tested. Up to an
additional fifteen patients will also be treated at the maximum tolerated dose. The
primary objective of the study is to determine the maximum tolerated dose, dose limiting
toxicity, and safety profile of REOLYSIN® when administered intratumourally to
patients receiving radiation treatment. A secondary objective is to examine any evidence
of anti-tumour activity. Patients who have been diagnosed with advanced or metastatic
solid tumours that are refractory (have not responded) to standard therapy or for which no
curative standard therapy exists will be eligible.

# ACCOUNTING POLICIES

# Critical Accounting
Policies and Estimates

In preparing the Companys
financial statements, management is required to make certain estimates, judgments and
assumptions that the Company believes are reasonable based upon the information available.
These estimates and assumptions affect the reported amounts of assets at the date of the
financial statements and the reported amounts of expenses during the periods presented.
Significant estimates are used for, but not limited to, the treatment of the
Companys research and development expenditures, the assessment of realizable value
of long-lived assets, the amortization period of intellectual property and the calculation
of stock based compensation.

The significant accounting policies
which the Company believes are the most critical to aid in fully understanding and
evaluating its reported financial results include the following:

Research and Development

The research and development costs of
the Company are expensed as they are incurred. Under Canadian generally accepted
accounting principles, development costs should be capitalized if certain criteria are
met. Companies with products in clinical trials do not necessarily meet these criteria.
The Companys development costs do not meet the following two criteria: (i) the
technical feasibility of the product or process has been established; and (ii) the future
market for the product or process is clearly defined. With regard to (i), the Company has
completed enrollment in a Phase I clinical study for REOLYSIN®, its product being
developed for human use, is presently enrolling patients in a systemic (intravenous)
delivery human clinical study, is also conducting a human clinical study for brain cancer,
and is planning additional clinical studies. Until the appropriate clinical studies have
been completed, the technical feasibility of this product will not be known. With regard
to (ii), the future market for the product will not be clearly defined until the
completion of the clinical studies. Clinical studies not only determine the technical
feasibility of the product, but also provide information regarding the proper use of the
product and, therefore, the future market. Once the feasibility is determined a New Drug
Application, or equivalent, is made to the appropriate regulatory body. Regulatory
approval is required before the product can be marketed. For these reasons, the
Companys development costs are expensed and not capitalized.

Capitalization and
Amortization of Patent Costs

The Company treats third party costs
incurred (primarily legal and registration costs) in the development of its Patent
portfolio as limited-life intangible assets, and amortizes the costs related to these
assets over the

---

lesser of 17 years or their estimated
useful life. The Company also reviews the valuation of its Patent costs for impairment
when any events that might give rise to impairment are known to the Company. If there is
an indication of impairment, the Company would assess the fair value of its Patents and
would record a reduction if the fair value were less than the book value.

In capitalizing these costs, the
Company is recognizing the inherent future benefit of Patents, not only in protection of
its own potential products, but also as a possible asset that could give rise to revenues
in the future through licensing agreements. While Patent life is different in different
jurisdictions it is normally considered to be 20 years from date of application. With an
assumption of an average of three years from initial Patent application to Patent
issuance, the Company has set a maximum of 17 years to amortize the costs from the date of
issuance. The Company has then assessed the nature of the market and the continuing
efforts to develop and market new and better products, as well as the incurrence of costs
associated with Patents that have been issued and, as a result, the Company has chosen to
amortize the costs on a straight-line basis over ten years.

As the product to which the Patents
relate is in the development stage, with commercial recognition and revenue potential
highly uncertain, should the Company experience a significant failure in its clinical
trial program or other areas of risk, then the value of the Patents could be in serious
question, giving rise to a possible write-down or write-off of the asset.

In the event that the Company is
successful in its product development and sale, or other parties enter into licensing
agreements with the Company, then it is also possible that the Patents may have a life and
value beyond the ten years assumed for the amortization policy.

In any event, the revision to any of
these policies or estimates outlined above would impact losses but not impact cash flows.

# Changes in Accounting
Policy including Initial Adoption

Canadian GAAP 
Financial Instruments

On January 27, 2005, the Canadian
Institute of Chartered Accountants (the CICA) issued new accounting standards
CICA Section 1530, Comprehensive Income, CICA Section 3855, Financial Instruments, and
CICA Section 3865, Hedges, affecting the accounting treatment for financial instruments.
Under the new standards, all financial instruments are to be included on a companys
balance sheet (including derivatives) and initially measured, either at fair market value
or, in limited circumstances when fair value may not be considered most relevant, at cost
or amortized cost.

After initial recognition, the
measurement of financial instruments will vary depending on the category of the financial
instrument: financial assets held for trading, held-to-maturity investments, loans and
receivables, and available-for-sale financial assets. The standards have also introduced
other comprehensive income, a new location for recognizing certain gains and
losses. This provides an ability for certain gains and losses arising from changes in fair
value to be temporarily recorded outside the income statement, but in a transparent
manner.

The effective date for this standard
is for annual and interim periods in fiscal years beginning on or after October 1, 2006.

U.S. GAAP  Share
Based Payment

On December 16, 2004, the Financial
Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised
2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows.
Statement 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be

---

recognized in the income statement
based on their fair values. Pro forma disclosure is no longer an alternative. Statement
123(R) must be adopted no later than July 1, 2005

The Company adopted the fair value
based method of accounting for share-based payments effective January 1, 2003 using the
prospective method described in FASB Statement No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. Currently, the Company uses the
Black Scholes model to estimate the value of stock options granted to employees and
expects to continue to use this acceptable option valuation model upon the required
adoption of Statement 123(R). The Company does not anticipate that adoption of Statement
123(R) will have a material impact on its results of operations or its financial position.

# Fair Presentation

The Company prepares its financial
statements in accordance with GAAP. As a result of complying with GAAP, the Company
believes that the following should be mentioned in an effort to understand and fairly
present its financial information:

Stock Based Compensation

As required by the fair value based
method for measuring stock based compensation, the Company uses the Black Scholes Option
Pricing Model (Black Scholes or the Model) to calculate the fair
value of its options. Though there are other models available to calculate the option
values (for example, the binomial model), Black Scholes is currently widely used and
accepted by other publicly traded companies. Therefore, the Company has concluded that
Black Scholes is the appropriate option pricing model to use for its stock options at this
time.

Black Scholes uses inputs in its
calculation of fair value that requires the Company to make certain estimates and
assumptions. For 2004, the Company used the following weighted average assumptions:

|                                                | 2004
|----------------------------------------------- | ----
|                                               
|Risk-free interest rate                         |     
|Expected hold period to exercise                |     
|Volatility in the price of the Company's shares |     
|Dividend yield                                  |     

A change in these estimates and
assumptions will impact the value calculated by the Model. For instance, the volatility in
the price of the Companys shares is based on the quoted trading price. The Company
assumes that weekly trading prices best reflects the Companys trading price
volatility. However, an entity can choose between daily, weekly, monthly or quarterly
trading prices in the volatility calculation. For example, based upon periods chosen, if
the Company were to use daily trading prices, volatility would increase 31%, resulting in
an option value increase of 25% from that calculated from the stated volatility. If the
Company were to use monthly trading prices over the same period, volatility would increase
11%, resulting in an option value increase of 8%. Also, volatility would change based on
the period chosen and the frequency of price points chosen.

The Model also uses an expected hold
period to exercise in its calculation of fair value. The Company, when estimating the
expected hold period to exercise takes into consideration past history, the current
trading price and volatility of the Companys common shares and has concluded that 2
years is an appropriate estimate. However, the Companys options have a 10 year life
and given the fluctuations in its stock price the expected hold period could be different.
If the hold period was to increase 1 year, there would have been a 20% increase in the
Companys stock based compensation expense.

Consequently, in complying with GAAP
and selecting what the Company believes are the most appropriate assumptions under the
circumstances, the Company has increased its reported non-cash employee stock

---

based compensation expense for the
year by $2,537,088. However, given the above discussion this expense could be increased
between 8%  25% and still be in accordance with GAAP.

Warrant Values

During 2004 the Company continued to
raise cash through the issue of units. Typically, each unit consisted of one common share
and a fraction of one common share purchase warrant with each whole warrant exercisable at
a specified price for one additional common share for up to 36 months from the issue date.
GAAP requires that when recording the issued units, a value should be ascribed to each
component of the units based on the components fair value. For the Company, the fair
value of its common shares is established based on trading on stock exchanges in Canada
and the U.S. However as the warrants do not trade on an exchange, the Black Scholes Option
Pricing Model was used to determine the fair value of the warrants. In the event that the
total calculated value of each individual component is greater than the price paid for the
unit the value of each component is reduced on a relative basis until the total is equal
to the units issue price.

For reasons discussed above under
Stock Based Compensation, the Model can produce a wide range of calculated
values for the Companys warrants.

Initial Value of the
Companys Intellectual Property

The Company was acquired by SYNSORB
Biotech Inc. (SYNSORB) in 1999. At that time, SYNSORB purchased all of the
share capital of the Company for $2,500,000 and subsequently applied push down
accounting and revalued the Companys assets. As the only asset owned by the Company
was its intellectual property, the $2,500,000 was allocated to this asset with the
corresponding credit to contributed surplus. This accounting treatment permitted under
GAAP, increased the value of the Companys assets and shareholders equity. As
of December 31, 2004, the net book value of the Companys original intellectual
property was $1,083,333. Consequently, without the application of push down accounting
applied to the Company by SYNSORB the value of the Companys intellectual property
and shareholders equity would be $1,083,333 lower than presented in the 2004 audited
financial statements.

Selected Annual Information

|                                                | 2004
$ | 2003
$     | 2002
$
|----------------------------------------------- | ------ | ---------- | ------
|                                               
|Revenues(1)                                     |        | 699,757    |       
|Net loss(2),(3),(5)                             |        | 12,956,119 |       
|Basic and diluted loss per share(2),(3),(5),(6) |        | 0.45       |       
|Total assets(4),(6)                             |        | 39,488,641 |       
|Total long term financial liabilities(7)        |        | 150,000    |       
|Cash dividends declared per share(8)            |        | Nil        |       
|                                               

Notes:

|(1) |  | Revenue is comprised of interest income and income from short term investments.
|--- |  | -------------------------------------------------------------------------------

|(2) |  | Included in net loss and net loss per share for 2004 is a net gain (net loss)
                    from sale of investments of $34,185 (2003  ($1,892,232); 2002 
                    $nil).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Included in net loss and net loss per share for 2002 is a future income tax
                    recovery of $647,618 (2004 and 2003  $nil).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Subsequent to the acquisition of the Company by SYNSORB in April 1999, the
                    Company applied push down accounting. See note 2 to the audited financial
                    statements for 2004.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Included in net loss and net loss per share is stock based compensation expense
                    of $2,668,570 (2003  $996,707, and 2002  $32,718)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | The Company issued 4,685,775 common shares for cash proceeds of $23,495,961 in
                    2004 (2003  5,062,978 common shares for $16,004,981; 2002  1,040,000
                    common shares for $1,803,877). In addition, 21,459 common shares were issued in
                    2004 as partial consideration for the cancellation of a portion of the
                    Companys contingent payments (see note 9 to the audited financial
                    statements for 2004). In 2002, the Company issued 1,913,889 commons shares as
                    consideration for the acquisition of the Companys investment in Transition
                    Therapeutics Inc. with an ascribed value of $4,689,028.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | The long-term debt recorded in 2003, 2002 and 2001 represents repayable loans
                    from the Alberta Heritage Foundation.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | The Company has not declared or paid any dividends since incorporation.
|--- |  | -----------------------------------------------------------------------

---

# RESULTS OF OPERATIONS

Net loss for the year ended December
31, 2004 was $12,956,119 compared to $8,544,031 and $6,091,486 for 2003 and 2002,
respectively.

Research and Development
Expenses (R&D)

|                                                               | 2004
$ | 2003
$    | 2002
$
|-------------------------------------------------------------- | ------ | --------- | ------
|                                                              
|Manufacturing and related process development expenses         |        | 3,835,685 |       
|Clinical trial expenses                                        |        | 799,990   |       
|Pre-clinical trial expenses and collaborations                 |        | 824,889   |       
|Cancellation of contingent payment obligation                  |        | 400,000   |       
|Quebec scientific research and experimental development refund |        | (21,436   | )     
|Other R&D expenses                                             |        | 1,268,870 |       
|                                                              
|Research and development expenses                              |        | 7,107,998 |       
|                                                              

In 2004, R&D was $7,107,998
compared to $2,818,962 and $4,251,025 in 2003 and 2002 respectively.

# Manufacturing &
Related Process Development (M&P)

M&P expenses include product
manufacturing expenses and process development. Production manufacturing expenses include
third party direct manufacturing costs, quality control testing, and vial fill costs.
Process development expenses include costs associated with studies that examine components
of the Companys manufacturing process and costs associated with the creation of
master and working viral and cell banks.

|                                                       | 2004
$ | 2003
$    | 2002
$
|------------------------------------------------------ | ------ | --------- | ------
|                                                      
|Product manufacturing expenses                         |        | 2,179,387 |       
|Technology transfer expenses                           |        | 656,346   |       
|Process development expenses                           |        | 999,952   |       
|                                                      
|Manufacturing and related process development expenses |        | 3,835,685 |       
|                                                      

In 2004, the Company incurred
production costs of $2,179,387 compared to $924,456 and $761,359 in 2003 and 2002
respectively. The increase in production activity is a result of the need to supply the
Companys existing and planned clinical trial programs and its other research
activity (see Clinical Trial Program).

At the beginning of 2004, the Company
entered into a manufacturing contract with a UK based supplier and incurred technology
transfer costs of $656,346 associated with this contract throughout the year. This
technology transfer was completed in the fourth quarter of 2004.

In 2004, the Company incurred process
development expenses of $999,952 compared to $404,024 and $1,131,158 in 2003 and 2002
respectively. In 2002, the Company incurred process development expenses as it created a
manufacturing process that should comply with cGMP manufacturing regulatory guidelines and
should be scaleable to a commercial level. In 2003, the Companys process development
activity related to the establishment of an independent supply of its master and working
viral and cell banks. These banks provide the foundation of the Companys
manufacturing process. Finally in 2004, the Companys process development activity
continued to focus on the master and working viral and cell banks as well as including
studies that examined ways to continue to improve the Companys manufacturing process
(in particular the virus yield).

In 2005, the Company expects that it
will continue to produce REOLYSIN® and that a majority of its M&P expenses will
relate directly to manufacturing. Also, future manufacturing costs may be impacted by

---

the need to supply additional
clinical trails to be run by the Company as well by the U.S. National Cancer Institute and
to continue to supply future pre-clinical trial studies and research collaborations. In
addition, with respect to process development expenses, the Company expects to incur these
types of costs as it continues to examine ways to improve its manufacturing process.

# Clinical Trial Program

Clinical trial expenses include those
costs associated with the Companys clinical trial program in the UK and Canada as
well as those incurred in the preparation of commencing other clinical trials. Included in
clinical trial expenses are direct patient costs, CRO expenses, clinical trial site costs
and other costs associated with the Companys clinical trial program.

|                               | 2004
$ | 2003
$  | 2002
$
|------------------------------ | ------ | ------- | ------
|                              
|Direct clinical trial expenses |        | 649,405 |       
|Other clinical trial expenses  |        | 150,585 |       
|                              
|Clinical trial expenses        |        | 799,990 |       
|                              

In 2004, the Company incurred costs
directly associated with ongoing clinical trials of $649,405 compared to $64,559 and
$504,260 in 2003 and 2002 respectively.

At the beginning of 2004, the Company
received authorization to commence a systemic (intravenous) delivery trial in the UK and
enrolled the first patient in May, 2004. The Company continued to enroll patients
throughout 2004 and also opened up a second clinical trial site in the latter part of the
year. In Canada, the Company continued to enroll patients in its malignant glioma study.
Finally, with respect to the Companys Canadian T2 prostate cancer trial, the final
update was provided in February 2004.

In 2002, the Company incurred
clinical trial expenses associated with the malignant glioma and T2 prostate trials that
were actively enrolling patients. In 2003, patient enrollment for these trials was
temporarily postponed causing the decrease in direct clinical trial expenses.

In 2005, the Company expects to
expand its clinical trial program to include other applications and other jurisdictions.
If the Companys clinical trial program expands, it expects to incur additional
clinical trial costs. Also, in accordance with the Companys agreement with the
National Cancer Institute of America (the NCI), the Company will provide
REOLYSIN® to the NCI as the NCI and the Company together determine when and which
clinical trials will be carried out.

# Pre-Clinical Trial
Expenses and Research Collaborations

Pre-clinical trial expenses include
toxicology studies and are incurred by the Company in support of expanding its clinical
trial program into other jurisdictions and other applications. Research collaborations are
intended to expand the Companys intellectual property related to reovirus and other
viruses and identify potential licensing opportunities arising from the Companys
technology base.

|                                                        | 2004
$ | 2003
$  | 2002
$
|------------------------------------------------------- | ------ | ------- | ------
|                                                       
|Research collaboration expenses                         |        | 262,910 |       
|Pre-clinical trial expenses                             |        | 561,979 |       
|                                                       
|Pre-clinical trial expenses and research collaborations |        | 824,889 |       
|                                                       

In 2004, the Companys research
collaboration expenses increased to $262,910 from $120,026 in 2003. In 2004 the Company
continued to enter into collaborations with universities and research hospitals in Europe
and the US. In 2004, data from the Companys collaboration examining the use of
REOLYSIN® with approved chemotherapeutics in animal models was presented.

---

In 2004, the Company incurred
pre-clinical trial expenses of $561,979 compared to $202,034 and $663,012 in 2003 and 2002
respectively. The increase in pre-clinical trial expenses in 2004 related to toxicology
and equivalency studies that were performed in 2004 but not in 2003. In 2002, pre-clinical
toxicology studies were also performed. The frequency of these types of studies change
from year to year as the Company moves through its clinical trial program. Pre-clinical
trial expenses are expected to continue as the Company moves into different jurisdictions
and different types of clinical trials.

# Cancellation of
Contingent Payment Obligation

On September 23, 2004, the Company
reached an agreement that cancelled a portion of its future contingent obligation to one
of its non-management founding shareholders for consideration of $400,000. The
consideration paid included cash of $250,000 and non-cash consideration of 21,459 common
shares valued at $150,000 and was recorded as additional research and development expense.
The value of the common shares was based on the September 23, 2004 closing price of $6.99.
As a result, the Companys future contingent payment obligations have been reduced to
11.75% (formerly in 2003  14.25% and 2002  20%) of payments received
associated with a partnership or other arrangement for development. Similarly, if the
Company develops the reovirus treatment to the point where it may be marketed at a
commercial level, the payment referred to in the foregoing sentence has been amended to a
royalty payment of 2.35% (formerly in 2003  2.85% and 2002  4%) of Net Sales
received by the Company for such products.

# Other R&D Expenses

Other R&D expenses include
compensation expenses for employees (excluding stock based compensation), consultant fees,
travel and other miscellaneous R&D expenses.

In 2004, the Company incurred other
R&D expenses of $1,268,871 compared to $1,294,291 and $1,191,236 in 2003 and 2002
respectively. These costs have remained consistent over the past three years as there has
been no significant change in the costs associated with the Companys R&D
employees and consultants. The Company expects these cost will remain relatively constant
in 2005.

Operating Expenses

|                                | 2004
$ | 2003
$    | 2002
$
|------------------------------- | ------ | --------- | ------
|                               
|Public company related expenses |        | 1,910,611 |       
|Office expenses                 |        | 893,058   |       
|                               
|Operating expenses              |        | 2,803,669 |       
|                               

In 2004, the Company incurred
operating expenses of $2,803,669 compared to $2,449,478 and $2,102,870 in 2003 and 2002
respectively. The reason for the change is as follows:

# Public Company Related
Expenses

Public company related expenses
include costs associated with investor relations activities, legal and accounting fees,
corporate insurance, and transfer agent and other fees relating to the Companys two
stock listings. In 2004, the Company incurred public company related expenses of
$1,910,611 compared to $1,633,849 and $1,374,172 in 2003 and 2002 respectively. The
increase in 2003 and 2004 relates to the rising cost of directors and officers
liability insurance which has increased due to general market conditions for companies
with a US stock listing. As well, investor relation expenses increased compared to 2003
and 2002 due to the Companys shareholder base that has expanded to include US and
European shareholders.

---

# Office Expenses

Office expenses include compensation
costs (excluding stock based compensation), office rent, and other office related costs.
In 2004, the Company incurred office expenses of $893,058 compared to $815,629 and
$728,698 for 2003 and 2002 respectively. The increase in office expenses in 2004 and 2003
relate to office rent expense and compensation costs associated with increased staff
levels.

Stock Based Compensation

|                         | 2004
$ | 2003
$    | 2002
$
|------------------------ | ------ | --------- | ------
|                        
|Stock based compensation |        | 2,668,570 |       
|                        

Non-cash stock based compensation
recorded for 2004 increased to $2,668,570 compared to $966,707 and $32,718 for 2003 and
2002 respectively associated with the granting of stock options to its employees,
directors, and certain consultants.

Foreign Exchange Loss
(Gain)

|                             | 2004
$ | 2003
$  | 2002
$
|---------------------------- | ------ | ------- | ------
|                            
|Foreign exchange loss (gain) |        | 358,068 |       
|                            

The Company acquires investments in
foreign currency to pay for anticipated expenses that are to be incurred in the United
States (U.S.) and the United Kingdom (U.K.). As a result of recent
movements in the U.S. and U.K. exchange rates the Company recorded a non-cash loss of
$358,068 for the year ending December 31, 2004. In 2003 and 2002, the Companys
foreign exchange exposure was limited to the U.S. dollar.

Sale of Investments

|                                                            | 2004
$ | 2003
$  | 2002
$
|----------------------------------------------------------- | ------ | ------- | ------
|                                                           
|Gain on partial sale of investment in BCY LifeSciences Inc. |        | (34,185 | )     
|                                                           
|Loss on sale of investment in Transition Therapeutics Inc.  |        |        |       
|                                                           
|Net (gain) loss from sale of investments                    |        | (34,185 | )     
|                                                           

BCY LifeSciences Inc.
(BCY)

In 2004, the Company sold 697,945
(2003  1,496,500) common shares of BCY for net cash proceeds of $133,609 (2003
 $450,151). This resulted in an accounting gain of $47,002 (2003  $264,453).
The cash outlay for its investment in BCY was $127,123.

The Company still owns 200,000 common
shares of BCY that are currently in escrow and are scheduled to be released in 2005 and
2006. In the third quarter of 2004, the Company recorded a write down of $12,817 against
its remaining ownership in BCY to reflect the investments market value (as estimated
based on its remaining investment in BCY) at that time. As at December 31, 2004, the
market value of the Companys remaining BCY common shares approximates the current
book value of $12,000.

Transition Therapeutics
Inc. (TTH)

In 2003, the Company sold 6,890,000
common shares of TTH for net cash proceeds of $2,552,695. As a result of the sale, an
accounting loss of $2,156,685 was recorded. The Companys cash expenses with respect
to its investment in TTH were limited to acquisition legal costs of $20,352.

---

# Commitments

As at December 31, 2004, the Company
has committed to payments totaling $943,815 during 2005 for activities related to clinical
trial activity and collaborations. All of these committed payments are considered to be
part of the Companys normal course of business.

Subsequent to 2004, the Company has
entered into another research and development agreement and under this contract has
committed to payments totaling $1,801,000.

# SUMMARY OF QUARTERLY
RESULTS

The following unaudited quarterly
information is presented in thousands of dollars except for per share amounts:

|                           | 2004 | 2003     
|-------------------------- | ---- | ---------
|                          
|
|                          
|Revenue(1)                 |      | 205      
|Net loss(2),(5)            |      | 3,992    
|Basic and diluted loss per |     
|common share(2),(5)        |      | $    0.14
|Total assets(3),(6)        |      | 39,489   
|Total cash(4),(6)          |      | 33,919   
|Total long-term debt(7)    |      | 150      
|Cash dividends declared(8) |      | Nil      

|(1) |  | Revenue is comprised of interest income and income from short term investments.
|--- |  | -------------------------------------------------------------------------------

|(2) |  | Included in net loss and net loss per share in March, June, September and
                    December of 2004 is a gain (loss) on sale of investments of $47,648, ($646),
                    ($12,817) and $nil, respectively (2003  $nil, ($2,156,685), $nil, and
                    $264,453, respectively).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Subsequent to the acquisition of the Company by SYNSORB in April 1999, the
                    Company applied push down accounting. See note 2 to the audited financial
                    statements for 2004.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Included in total cash are cash and cash equivalents plus short-term
                    investments.
|--- |  | -----------------------------------------------------------------------------------------------------

|(5) |  | Included in net loss and loss per common share is stock based compensation of
                    $5,426, $734,670, $48,878, and $1,870,596 for March, June September, and
                    December of 2004 respectively (2003  $471, $68,318, $437,554 and 490,364).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | The Company issued 4,685,775 common shares for cash proceeds of $23,495,961 in
                    2004 (2003  5,062,978 common shares for $16,004,981). In addition, 21,459
                    common shares were issued in September 2004 as partial consideration for the
                    cancellation of a portion of the Companys contingent payments (see note 9
                    to the audited financial statements for 2004).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | The long-term debt recorded in 2004 and 2003 represents repayable loans from the
                    Alberta Heritage Foundation.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------

|(8) |  | The Company has not declared or paid any dividends since incorporation.
|--- |  | -----------------------------------------------------------------------

---

# FOURTH QUARTER

Statement of loss for the three month
period ended December 31, 2004 and 2003

|                                  | 2004
$
(unaudited) | 2003
$
(unaudited)
|--------------------------------- | ------------------ | ------------------
|                                 
|Interest income                   |                    | 204,941           
|                                 
|Research and development expenses |                    | 1,425,286         
|Operating expenses                |                    | 690,628           
|Stock based compensation          |                    | 1,879,596         
|Foreign exchange loss (gain)      |                    | 4,104             
|Amortization                      |                    | 197,280           
|                                 
|                                  |                    | 4,196,894         
|                                 
|Loss before the following:        |                    | 3,991,953         
|Gain on sale of investment in BCY |                    |                  
|                                 
|Loss before taxes                 |                    | 3,991,953         
|Capital tax                       |                    |                  
|                                 
|Net loss                          |                    | 3,991,953         
|                                 

# Review of Operations

For the three month period ended
December 31, 2004, the Companys net loss increased to $3,991,953 compared to
$1,695,541 for the three month period ended December 31, 2003. The reasons for the
increase are as follows:

Research and Development
Expenses (R&D)

|                                                               | 2004
$
(unaudited) | 2003
$
(unaudited)
|-------------------------------------------------------------- | ------------------ | ------------------
|                                                              
|Manufacturing and related process development expenses ("M&P") |                    | 492,388           
|Clinical trial expenses                                        |                    | 366,852           
|Pre-clinical trial expenses and research collaborations        |                    | 89,425            
|Other R&D expenses                                             |                    | 476,621           
|                                                              
|Research and development expenses                              |                    | 1,425,286         
|                                                              

The Companys R&D expenses
increased to $1,425,286 in the fourth quarter of 2004 compared to $767,053 for the fourth
quarter of 2003.

During the fourth quarter of 2004,
the Companys M&P expenses were $492,388 compared to $215,885 in 2003. The
increase in M&P expenses was a result of increased manufacturing activity in support
of the Companys clinical trial and research programs. During the fourth quarter of
2003, the Companys M&P activity was focused on the development of the
Companys master and working viral and cell banks.

The Companys clinical trial
expenses increased to $366,852 in the fourth quarter compared to $73,331 for the fourth
quarter of 2003. The increase in the fourth quarter of 2004 relates to the continued
patient enrollment and the addition of a second clinical trial site for its UK systemic
(intravenous) delivery clinical trial.

---

Operating Expenses

|                                | 2004
$
(unaudited) | 2003
$
(unaudited)
|------------------------------- | ------------------ | ------------------
|                               
|Public company related expenses |                    | 438,349           
|Office expenses                 |                    | 252,279           
|                               
|Operating expenses              |                    | 690,628           
|                               

The Companys operating expenses
for the fourth quarter of 2004 increased to $690,628 compared to $628,412 for the fourth
quarter of 2003.

During the fourth quarter of 2004,
the Companys public company related expenses increased to $438,349 compared to
$378,103 for the fourth quarter of 2003. This increase corresponds to an increase in
investor relations activity in the fourth quarter of 2004 compared to the fourth quarter
of 2003.

Stock Based Compensation

|                         | 2004
$
(unaudited) | 2003
$
(unaudited)
|------------------------ | ------------------ | ------------------
|                        
|Stock based compensation |                    | 1,879,596         
|                        

Non-cash stock based compensation
recorded for the fourth quarter of 2004 increased to $1,879,596 compared to $490,364 for
the fourth quarter of 2003 associated with the granting of stock options to its employees,
directors, and certain consultants.

# Financing Activities

During the fourth quarter of 2004,
the Company received cash proceeds of $3,362,580 from the exercise of 840,645 previously
issued warrants. These warrants related to the private placement entered into on June 19,
2003 and had an exercise price of $4.00.

On November 23, 2004, the Company
closed a public offering whereby it issued 1,504,000 units at an issue price of $6.65 per
unit for net cash proceeds of $9,150,902. Each unit was comprised of one common share and
one-half of one common share purchase warrant. Each whole common share purchase warrant
entitles the holder to acquire one common share in the capital of the Company upon payment
of $8.00 per share until November 23, 2007. In addition, the Company issued 112,800 common
share purchase warrants with an exercise price of $7.06 that expires on May 23, 2006.

On October 14, 2003, the Company
closed a public offering whereby it issued 1,200,000 units for net cash proceeds of
$5,459,399. Each unit was comprised of one common share and one half of one common share
purchase warrant. Each whole warrant entitles the holder to purchase an additional common
share for $6.25 and expires on April 14, 2005. In addition, the Company issued 120,000
broker warrants with an exercise price of $5.00 that expire on April 14, 2005.

# LIQUIDITY AND CAPITAL
RESOURCES

# Liquidity

As at December 31, 2004, the Company
had cash and cash equivalents (including short-term investments) and working capital
positions of $33,919,223 and $33,268,097 respectively compared to $20,752,735 and
$20,088,868 respectively for 2003. The increase in 2004 reflects the cash inflows from the
one private placement, one public offering and the exercise of options and warrants that
raised $23,495,961. Cash

---

outflows during the year arose from
research and development expenses, operational expenses, and intellectual property
expenditures.

The Company desires to maintain
adequate cash and short-term investment reserves to support its planned activities which
include its clinical trial program, production manufacturing, and its intellectual
property expansion and protection. The Company presently anticipates that its average cash
usage for 2005 will be approximately $1,000,000 per month and its existing capital
resources are adequate to fund its current plans for research and development activities
well into 2007. Factors that will affect the Companys anticipated monthly burn rate
include, but are not limited to, the number of manufacturing runs required to supply its
clinical trial program and the cost of each run, the number of clinical trials ultimately
approved, the timing of patient enrollment in the approved clinical trials, the actual
costs incurred to support each clinical trial, the number of treatments each patient will
receive, the timing of the NCIs R&D activity, and the level of pre-clinical
activity undertaken.

In the event that the Company chooses
to seek additional capital, the Company will look to fund additional capital requirements
primarily through the issue of additional equity. The Company recognizes the challenges
and uncertainty inherent in the capital markets and the potential difficulties it might
face in raising additional capital. Market prices and market demand for securities in
biotechnology companies are volatile and there are no assurances that the Company would
have the ability to raise funds when required.

# Capital Expenditures

The Company spent $958,809 on
intellectual property in 2004 compared to $1,045,869 in 2003. The change in intellectual
property expenditures reflects the timing of filing costs associated with its expanded
patent base. As well, the Company has benefited from a stronger Canadian dollar as its
patent costs are typically denominated in U.S. currency. The Company received three U.S.
patents in 2004 bringing its total patents issued to 13 in the U.S. and one in Europe.

# Contractual Obligations

The Company has the following
contractual obligations as at December 31, 2004:

|Contractual Obligations       | Payments Due by Period
|----------------------------- | ----------------------
|                             
|
|                             
|Long term debt(1)             |                       
|Capital lease obligations     |                       
|Operating leases(2)           |                       
|Purchase obligations          |                       
|Other long term obligations   |                       
|                             
|Total contractual obligations |                       
|                             

# Note:

|(1) |  | The Companys long term debt is a $150,000 loan from the Alberta Heritage
               Foundation. Repayments are required upon the realization of sales (see note 6 of
               the Companys audited 2003 financial statements).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The Companys operating leases are comprised of its office lease.
|--- |  | -----------------------------------------------------------------

Subsequent to the year end, the
Company entered into a toll manufacturing agreement that will increase the Companys
purchase obligations by $1,801,000 to $2,744,815. The combined purchase obligations
include activities associated with the Companys clinical trial and manufacturing
programs and research collaborations. These purchase obligations are assumed to all occur
in 2005.

The Company will fund its capital
expenditure requirements and commitments with existing working capital.

---

# Investing Activities

Under its Investment Policy, the
Company is permitted to invest in short-term instruments with a rating no less than R-1
(DBRS) with terms less than two years. The Company has $21,510,707 invested under this
policy and is currently earning interest at an effective rate of 2.26%.

# OFF-BALANCE SHEET
ARRANGEMENTS

As at December 31, 2004, the Company
has not entered into any off-balance sheet arrangements.

# TRANSACTIONS WITH
RELATED PARTIES

In 2004 and 2003 the Company did not
enter into any related party transactions.

# FINANCIAL INSTRUMENTS
AND OTHER INSTRUMENTS

The Company does not use financial
derivatives or other financial instruments.

# RISKS FACTORS AFFECTING
FUTURE PERFORMANCE

All of the Companys
potential products, including REOLYSIN®, are in the research and development stage and
will require further development and testing before they can be marketed commercially.

Prospects for companies in the
biotechnology industry generally may be regarded as uncertain given the nature of the
industry and, accordingly, investments in biotechnology companies should be regarded as
speculative. The Company is currently in the research and development stage on one
product, REOLYSIN®, for human application, the riskiest stage for a company in the
biotechnology industry. It is not possible to predict, based upon studies in animals, or
early studies in humans, whether REOLYSIN® will prove to be safe and effective in
humans. REOLYSIN® will require additional research and development, including
extensive clinical testing, before the Company will be able to obtain the approval of the
United States Food and Drug Administration (the FDA) or from similar
regulatory authorities in other countries to market REOLYSIN® commercially. There can
be no assurance that the research and development programs conducted by the Company will
result in REOLYSIN® or any other products becoming commercially viable products, and
in the event that any product or products result from the research and development
program, it is unlikely they will be commercially available for a number of years.

To achieve profitable operations the
Company, alone or with others, must successfully develop, introduce and market its
products. To obtain regulatory approvals for products being developed for human use, and
to achieve commercial success, human clinical trials must demonstrate that the product is
safe for human use and that the product shows efficacy. Unsatisfactory results obtained
from a particular study relating to a program may cause the Company to abandon its
commitment to that program or the product being tested. No assurances can be provided that
any current or future animal or human test, if undertaken, will yield favorable results.
If the Company is unable to establish that REOLYSIN® is a safe, effective treatment
for cancer, it may be required to abandon further development of the product and develop a
new business strategy.

There are inherent risks in
pharmaceutical research and development.

Pharmaceutical research and development
is highly speculative and involves a high and significant degree of risk. The
marketability of any product developed by the Company will be affected by numerous factors
beyond the Companys control, including:

---

| |  |  | the
 discovery  of  unexpected  toxicities  or lack  of  sufficient  efficacy  of  products
 which  make  them          unattractive or unsuitable for human use;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | preliminary
 results as seen in animal and/or  limited human  testing may not be  substantiated  in
larger          controlled clinical trials;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | manufacturing
costs or other factors may make manufacturing of products impractical and
non-competitive;
| | - |  | --------------------------------------------------------------------------------------------------------

| |  |  | proprietary
rights of third parties or competing products or technologies may preclude
commercialization;
| | - |  | ---------------------------------------------------------------------------------------------------------

| |  |  | requisite
regulatory approvals for the commercial distribution of products may not be obtained; and
| | - |  | ---------------------------------------------------------------------------------------------------

| |  |  | other
factors may become apparent during the course of research, up-scaling or manufacturing
which may result in the discontinuation of research and other critical projects.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Companys product under
development has never been manufactured on a commercial scale, and there can be no
assurance that such products can be manufactured at a cost or in a quantity to render such
products commercially viable. Production and utilization of the Companys products
may require the development of new manufacturing technologies and expertise. The impact on
the Companys business in the event that new manufacturing technologies and expertise
are required to be developed is uncertain. There can be no assurance that the Company will
successfully meet any of these technological challenges, or others that may arise in the
course of development.

Pharmaceutical products are subject
to intense regulatory approval processes.

The regulatory process for
pharmaceuticals, which includes preclinical studies and clinical trials of each compound
to establish its safety and efficacy, takes many years and requires the expenditure of
substantial resources. Moreover, if regulatory approval of a drug is granted, such
approval may entail limitations on the indicated uses for which it may be marketed.
Failure to comply with applicable regulatory requirements can, among other things, result
in suspension of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. Further, government policy may change, and
additional government regulations may be established that could prevent or delay
regulatory approvals for the Companys products. In addition, a marketed drug and its
manufacturer are subject to continual review. Later discovery of previously unknown
problems with the product or manufacturer may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market.

The FDA in the United States and
other relevant regulatory authorities may deny approval of a new drug application
(NDA) or its equivalent in the relevant jurisdiction if required regulatory
criteria are not satisfied, or may require additional testing. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if problems occur
after the product reaches the market. The FDA may require further testing and surveillance
programs to monitor the pharmaceutical product that has been commercialized.
Non-compliance with applicable requirements can result in fines and other judicially
imposed sanctions, including product withdrawals, product seizures, injunction actions and
criminal prosecutions.

In addition to its own
pharmaceuticals, the Company may supply active pharmaceutical ingredients and advanced
pharmaceutical intermediates for use in its customers drug products. The final drug
products in which the pharmaceutical ingredients and advanced pharmaceutical intermediates
are used, however, are subject to regulation for safety and efficacy by the FDA and other
jurisdictions, as the case may be. Such products must be approved by such agencies before
they can be commercially marketed. The process of obtaining regulatory clearance for
marketing is uncertain, costly and time consuming. The Company cannot predict how long the
necessary regulatory approvals will take or whether the Companys customers will ever
obtain such approval for their products. To the extent that the Companys customers
do not obtain the necessary regulatory approvals for marketing new products, the
Companys product sales could be adversely affected.

---

The FDA and other governmental
regulators have increased requirements for drug purity and have increased environmental
burdens upon the pharmaceutical industry. Because pharmaceutical drug manufacturing is a
highly regulated industry, requiring significant documentation and validation of
manufacturing processes and quality control assurance prior to approval of the facility to
manufacture a specific drug, there can be considerable transition time between the
initiation of a contract to manufacture a product and the actual initiation of manufacture
of that product. Any lag time in the initiation of a contract to manufacture product and
the actual initiation of manufacture could cause the Company to lose profits or incur
liabilities.

The pharmaceutical regulatory regime
in Europe and other countries is, by and large, generally similar to that of Canada and
the United States. The Company could face similar risks in these other jurisdictions, as
the risks described above.

The
Companys operations and products may be subject to other government manufacturing
and testing regulations.

Securing regulatory approval for the
marketing of therapeutics by the FDA in the United States and similar regulatory agencies
in other countries is a long and expensive process, which can delay or prevent product
development and marketing. Approval to market products may be for limited applications or
may not be received at all.

The products anticipated to be
manufactured by the Company will have to comply with the FDAs current Good
Manufacturing Practices (cGMP) and other FDA and local government guidelines
and regulations, including other international regulatory requirements and guidelines.
Additionally, certain of the Companys customers may require the manufacturing
facilities contracted by the Company to adhere to additional manufacturing standards, even
if not required by the FDA. Compliance with cGMP regulations requires manufacturers to
expend time, money and effort in production, and to maintain precise records and quality
control to ensure that the product meets applicable specifications and other requirements.
The FDA and other regulatory bodies periodically inspect drug-manufacturing facilities to
ensure compliance with applicable cGMP requirements. If the manufacturing facilities
contracted by the Company fail to comply with the cGMP requirements, the facilities may
become subject to possible FDA or other regulatory action and manufacturing at the
facility could consequently be suspended. The Company may not be able to contract suitable
alternative or back-up manufacturing facilities on terms acceptable to the Company or at
all.

The FDA or other regulatory agencies
may also require the submission of any lot of a particular product for inspection. If the
lot product fails to meet the FDA requirements, then the FDA could take any of the
following actions: (i) restrict the release of the product; (ii) suspend manufacturing of
the specific lot of the product; (iii) order a recall of the lot of the product; or (iv)
order a seizure of the lot of the product.

The Company is subject to regulation
by governments in many jurisdictions and, if the Company does not comply with healthcare,
drug, manufacturing and environmental regulations, among others, the Companys
existing and future operations may be curtailed, and the Company could be subject to
liability.

In addition to the regulatory
approval process, the Company may be subject to regulations under local, provincial,
state, federal and foreign law, including requirements regarding occupational health,
safety, laboratory practices, environmental protection and hazardous substance control,
and may be subject to other present and future local, provincial, state, federal and
foreign regulations.

The
Companys products may fail or cause harm, subjecting the Company to product
liability claims, which are uninsured.

The sale and use of products of the
Company entail risk of product liability. The Company currently does not have any product
liability insurance. There can be no assurance that it will be able to obtain appropriate
levels of product liability insurance prior to any sale of its pharmaceutical products. An
inability to obtain insurance on economically feasible terms or to otherwise protect
against potential

---

product liability claims could
inhibit or prevent the commercialization of products developed by the Company. The
obligation to pay any product liability claim or a recall of a product could have a
material adverse effect on the business, financial condition and future prospects of the
Company.

The Companys technologies may
become obsolete.

The pharmaceutical industry is
characterized by rapidly changing markets, technology, emerging industry standards and
frequent introduction of new products. The introduction of new products embodying new
technologies, including new manufacturing processes, and the emergence of new industry
standards may render the Companys products obsolete, less competitive or less
marketable. The process of developing the Companys products is extremely complex and
requires significant continuing development efforts and third party commitments. The
Companys failure to develop new technologies and products and the obsolescence of
existing technologies could adversely affect its business.

The Company may be unable to
anticipate changes in its potential customer requirements that could make the
Companys existing technology obsolete. The Companys success will depend, in
part, on its ability to continue to enhance its existing technologies, develop new
technology that addresses the increasing sophistication and varied needs of the market,
and respond to technological advances and emerging industry standards and practices on a
timely and cost-effective basis. The development of the Companys proprietary
technology entails significant technical and business risks. The Company may not be
successful in using its new technologies or exploiting its niche markets effectively or
adapting its businesses to evolving customer or medical requirements or preferences or
emerging industry standards.

The
Company has no operating revenues and a history of losses.

To date, the Company has not
generated sufficient revenues to offset its research and development costs and accordingly
has not generated positive cash flow or made an operating profit. As of December 31, 2004,
the Company had an accumulated deficit of $38.0 million. The Company incurred net losses
of $13.0 million, $8.5 million, and $6.1 million for the years ended December 31, 2004,
2003, and 2002, respectively. The Company anticipates that it will continue to incur
significant losses during 2005 and in the foreseeable future. The Company will not reach
profitability until after successful and profitable commercialization of one or more of
its products. Even if one or more of its products are profitably commercialized, the
initial losses incurred by the Company may never be recovered.

The
Company may need additional financing in the future to fund the research and development
of its products and to meet its ongoing capital requirements.

As of December 31, 2004, the Company
had cash and cash equivalents (including short-term investments) of $33.9 million and
working capital of approximately $33.3 million. The Company anticipates that it may need
additional financing in the future to fund research and development and to meet its
ongoing capital requirements. The amount of future capital requirements will depend on
many factors, including continued scientific progress in its drug discovery and
development programs, progress in its pre-clinical and clinical evaluation of drug
candidates, time and expense associated with filing, prosecuting and enforcing its patent
claims and costs associated with obtaining regulatory approvals. In order to meet such
capital requirements, the Company will consider contract fees, collaborative research and
development arrangements, and additional public or private financings (including the
incurrence of debt and the issuance of additional equity securities) to fund all or a part
of particular programs as well as potential partnering or licensing opportunities. There
can be no assurance that additional funding will be available or, if available, that it
will be available on acceptable terms. If adequate funds are not available on terms
favorable to the Company, the Company may have to reduce substantially or eliminate
expenditures for research and development, testing, production and marketing of its
proposed product, or obtain funds through arrangements with corporate partners that
require the Company to relinquish rights to certain of its technologies or product. There
can be no assurance that the Company will be able to raise additional capital if its
current capital resources are exhausted.

---

The cost of director and officer
liability insurance may continue to increase substantially or may not be available to the
Company and may affect the ability of the Company to retain quality directors and
officers.

The Company carries liability
insurance on behalf of its directors and officers. Given a number of large director and
office liability insurance claims in the U.S. equity markets, director and officer
liability insurance is becoming increasingly more expensive with increased restrictions.
Consequently, there is no assurance that the Company will continue to be offered this
insurance or be able to obtain adequate coverage. The inability to acquire the appropriate
insurance coverage may limit the Companys ability to attract and maintain directors
and officers as required to conduct its business.

The Company incurs some of its
expenses in foreign currencies and therefore is exposed to foreign currency exchange rate
fluctuations.

The Company incurs some of its
manufacturing, clinical and consulting expenses in foreign currencies, primarily the U.S.
dollar and the Great British pound (GBP). Over the past year the Canadian
dollar has appreciated relative to the U.S. dollar and the GBP thereby decreasing the
Canadian dollar equivalent. However, if this trend reverses, the Companys Canadian
dollar equivalent costs will increase.

Also, as the Company expands to other
foreign jurisdictions there may be an increase in its foreign exchange exposure.

The Company earns interest income
on its excess cash reserves and is exposed to changes in interest rates.

The Company invests its excess cash
reserves in investment vehicles that provide a rate of return with little risk to
principle. As interest rates change the amount of interest income the Company earns will
be directly impacted.

# OTHER MD&A
REQUIREMENTS

The Company has 32,684,468 common
shares outstanding at March 2, 2005. If all of the Companys warrants and options
were exercised the Company would have 38,576,386 common shares outstanding.

The Companys 2004 Annual
Information Form is available on www.sedar.com.

---