UNITED
        STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM
        20-F

(Mark
        One)



REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
                        OF THE SECURITIES EXCHANGE ACT OF 1934




OR



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934




For the fiscal year ended December 31, 2007



OR



TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934




For the transition period from ___________________ to
        ____________________



OR



SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                        THE SECURITIES EXCHANGE ACT OF 1934




Date of the event requiring this shell company
        report________________________



Commission file
        number 000-31062



ONCOLYTICS BIOTECH INC.

(Exact
        name of Registrant as specified in its charter)



**Alberta, Canada**

(Jurisdiction of incorporation or organization)



**Suite 210, 1167 Kensington Crescent, N. W. Calgary, Alberta, T2N
        1X7, (403) 670-7377**

(Address
        of principal executive offices)



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



Title of each Class

                    

                    Name of each exchange on which registeredCommon Shares, no par value

                    

                    Nasdaq, Capital Market




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:



Not Applicable



Indicate the number of outstanding shares of each of the
        Registrant’s classes of capital of common stock as of December 31, 2007:
        41,180,748 Common Shares



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

Yes

                    No




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

Yes

                    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 Securities Exchange Act of 1934 during the preceding 12 months
        (or for such shorter period that the registrant was required to file such reports), and
        (2) has been subject to such filing requirements for the past 90 days.



Yes

                    No




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



|Large accelerated filer | Accelerated filer | Non-accelerated filer
|----------------------- | ----------------- | ---------------------



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



Item 17
                Item 18



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



Yes       
         No







---







ONCOLYTICS
        BIOTECH INC.



FORM
        20-F



**TABLE
        OF CONTENTS**





Item 1. Identity of Directors, Senior
                        Management and Advisers

                    3


Item 2. Offer Statistics and Expected
                        Timetable

                    3


Item 3. Key
                        Information

                    3


Item 4. Information on the
                        Company

                    10Item 4A. Unresolved Staff Comments

                    10


Item 5. Operating and Financial Review
                        and Prospects

                    10


Item 6. Directors, Senior Management
                        and Employees

                    43


Item 7. Major Shareholders and Related
                        Party Transactions

                    62


Item 8. Financial
                        Information

                    63Item 9. The Offer And Listing

                    63Item 10. Additional Information

                    64


Item 11. Quantitative and Qualitative
                        Disclosures About Market Risk.

                    77


Item 12. Description of Securities
                        Other Than Equity Securities.

                    78


Item 13. Defaults, Dividend
                        Arrearages and Delinquencies.

                    79


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

                    79


Item 15. Controls And
                        Procedures

                    79


Item 16A. Audit Committee Financial
                        Expert

                    80


Item 16B. Code of
                        Ethics

                    80


Item 16C. Principal Accountant Fees
                        and Services

                    80


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

                    82


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

                    82


Item 17. Financial
                        Statements.

                    83


Item 18.Financial Statements

                    83Item 19.
                        Exhibits.

                    83






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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS



Certain
        statements in this document and the documents attached as exhibits to this annual report
        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., 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 our technologies; the timing and results of clinical studies
        related to our technologies; future operations, products and services; the impact of
        regulatory initiatives on our operations; the size of and opportunities related to the
        markets for our 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 our control,
        including without limitation:



•

                    uncertainty as to our 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®
                        and other products;




•

                    our need for additional financing which may not be available
                        on acceptable terms or at all;




•

                    uncertainty as to whether we will be able to complete any
                        licensing, partnering or marketing arrangements for our
                        technologies;




•

                    uncertainty as to the market acceptance of our products and
                        our ability to generate sufficient revenues to make our products and
                        technologies commercially viable;




•

                    the intense competition in the biotechnology industry and
                        risks related to changing technology that may render our technology
                        obsolete; and




•

                    other factors identified under the heading “Risk
                        Factors” in our Renewal Annual Information Form, and those that are
                        discussed or identified in our other public filings with the
                        SEC.




If one
        or more of these risks or uncertainties materializes, or if underlying assumptions prove
        incorrect, our actual results may vary materially from those expected, estimated or
        projected. Forward-looking statements in this document are not a prediction of future
        events or circumstances, and those future events or circumstances may not occur. Given
        these uncertainties, users of the information included herein, including investors and
        prospective investors are cautioned not to place undue reliance on such forward-looking
        statements. We do not assume responsibility for the accuracy and completeness of these
        statements.



Forward-looking statements are based on our beliefs, opinions and
        expectations at the time they are made, and we do not assume any obligation to update our
        forward-looking statements if those beliefs, opinions, or expectations, or other
        circumstances, should change



All
        references in this annual report on Form 20-F to the terms “we”,
        “our”, “us”, “the Company” and “Oncolytics”
        refer to Oncolytics Biotech Inc.



1

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CURRENCY AND EXCHANGE RATES

Canadian Dollars Per U.S. Dollar



The
        following table sets out the exchange rates for one United States dollar
        (“US$”) expressed in terms of one Canadian dollar (“Cdn$”) in
        effect at the end of the following periods, and the average exchange rates (based on the
        average of the exchange rates on the last day of each month in such periods) and the range
        of high and low exchange rates for such periods.



Canadian Dollars Per U.S. Dollars2007

                    2006

                    2005

                    2004

                    2003Average for the period

                    0.9309

                    0.8818

                    0.8254

                    0.7682

                    0.7139Low for the period

                    1.0120

                    0.9100

                    0.8579

                    0.8310

                    0.7738




For the Month ofApril
                         2008

                    March
                         2008

                    February 2008

                    January 2008

                    December 2007

                    November 2007High for the period

                    1.0268

                    1.0275

                    1.0291

                    1.0010

                    1.0221

                    1.0908Low for the period

                    1.0021

                    0.9847

                    0.9815

                    0.9714

                    0.9789

                    0.9993






Exchange
        rates are based upon the noon buying rate in New York City for cable transfers in foreign
        currencies as certified for customs purposes by the Federal Reserve Bank of New York. The
        noon rate of exchange on May 22, 2008 as reported by the United States Federal Reserve Bank
        of New York for the conversion of United States dollars into Canadian dollars was US$1.00 =
        Cdn$0.9861. Unless otherwise indicated, in this annual report on Form 20-F, all references
        herein are to Canadian Dollars.



2

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PART
        I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
        ADVISERS

Not
        Applicable

ITEM 2. OFFER STATISTICS AND EXPECTED
        TIMETABLE

Not
        Applicable

ITEM 3. KEY INFORMATION

A.

                    Selected Financial Data


The
        following table of selected financial data of has been derived from financial statements
        prepared in accordance with Canadian generally accepted accounting principles
        (“GAAP”) which have been reconciled with U.S. GAAP in accordance with Item 18
        (see note 21 of the audited financial statements). The data is qualified by reference to,
        and should be read in conjunction with, the audited financial statements, and related notes
        thereto, prepared in accordance with Canadian GAAP (See Item 18, "Financial Statements").
        All dollar amounts are expressed in Canadian dollars.



2007

                        $

                    2006

                        $

                    2005

                        $

                    2004

                        $

                    2003

                        $Revenues

                    —

                    —

                    —

                    —

                    313,305Net loss, Canadian GAAP(2)

                    15,642,191

                    14,297,524

                    12,781,831

                    12,956,119

                    8,544,031Net loss, U.S. GAAP(2)

                    15,280,691

                    13,936,024

                    12,420,331

                    12,594,619

                    8,182,531Basic and diluted loss per share, Canadian GAAP(2),
                        (3)

                    0.39

                    0.39

                    0.39

                    0.45

                    0.35Basic and diluted loss per share, U.S.

                        GAAP(2), (3)

                    0.38

                    0.38

                    0.38

                    0.43

                    0.34Total assets, Canadian GAAP (1),
                        (3)

                    30,781,857

                    33,565,692

                    46,294,326

                    39,488,641

                    26,050,600Total assets, U.S. GAAP(1), (3)

                    30,239,607

                    32,661,942

                    45,029,076

                    37,500,391

                    23,746,565Shareholders’ equity, Canadian GAAP

                    27,960,630

                    30,799,271

                    44,451,845

                    38,389,383

                    25,015,672Shareholders’ equity, U.S. GAAP

                    27,418,380

                    29,895,521

                    43,186,595

                    36,401,133

                    22,711,637Cash dividends declared per
                        share(4)

                    Nil

                    Nil

                    Nil

                    Nil

                    NilWeighted average number of common shares
                        outstanding

                    40,428,825

                    36,346,266

                    32,804,540

                    29,028,391

                    24,242,845


Notes:

1)

                    Subsequent to the acquisition of Oncolytics Biotech Inc. by
                        SYNSORB in April 1999, we applied push down accounting. See note 2 to the
                        audited financial statements for 2007.


2)

                    Included in net loss and net loss per share is stock based
                        compensation expense of $539,156 (2006 – $403,500; 2005 –
                        $64,104).


3)

                    We issued 4,660,000 common shares for cash proceeds of
                        $12,114,394 (2006 – 284,000 common shares for cash proceeds of
                        $241,400; 2005 – 4,321,252 common shares for cash proceeds of
                        $18,780,189).


4)

                    We have not declared or paid any dividends since
                        incorporation.




3

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B.

                    Capitalization and Indebtedness


Not
        Applicable



C.

                    Reasons for the Offer and Use of Proceeds


Not
        Applicable



D.

                    Risk Factors


Investment in shares of our common stock ("Common Shares") involves a degree
        of risk. These risks should be carefully considered before any investment decision is made.
        The following are some of the key risk factors generally associated with our business.
        However, the risks described below are not the only ones that we face. Additional risks not
        currently known to us, or that we currently deem immaterial, may also impair our business
        operations.



All of our 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. We are 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 and early stage human clinical trials, whether
        REOLYSIN® will prove to be safe and effective in humans.
        REOLYSIN® will require additional research and development, including
        extensive additional clinical testing, before we 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 we conducted 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 we, alone or with others, must successfully develop,
        introduce and market our 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 us
        to abandon our 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 we are unable to establish that REOLYSIN® is a safe, effective
        treatment for cancer, we may be required to abandon further development of the product and
        develop a new business strategy.



4

---



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 we develop will be
        affected by numerous factors beyond our control, including but not limited to:



•

                    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 production factors may make
                        manufacturing of products ineffective, 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.




Our
        products under development have 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 our products may
        require the development of new manufacturing technologies and expertise. The impact on our
        business in the event that new manufacturing technologies and expertise are required to be
        developed is uncertain. There can be no assurance that we 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 our 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 U.S.
        FDA and similar regulatory authorities in other countries may deny approval of a new drug
        application 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 our own pharmaceuticals, we may supply active pharmaceutical ingredients and
        advanced pharmaceutical intermediates for use in our 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 possibly other regulatory authorities in other jurisdictions. 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. We
        cannot predict how long the necessary regulatory approvals will take or whether our
        customers will ever obtain such approval for their products. To the extent that our
        customers do not obtain the necessary regulatory approvals for marketing new products, our
        product sales could be adversely affected.



5

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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 us to lose profits or incur
        liabilities.



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



Our 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 we anticipate manufacturing 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 our
        customers may require the manufacturing facilities contracted by us 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 us 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. We may not be able to
        contract suitable alternative or back-up manufacturing facilities on terms acceptable to us
        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.



We are
        subject to regulation by governments in many jurisdictions. If we do not comply with
        healthcare, drug, manufacturing and environmental regulations, among others, our existing
        and future operations may be curtailed, and we could be subject to liability.



In
        addition to the regulatory approval process, we may be subject to regulations under local,
        provincial, state, federal and foreign law, including, but not limited to, 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 we must
        successfully compete with larger companies with substantially greater
        resources.



Technological competition in the pharmaceutical industry is intense and we
        expect 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 our product. Many of these competitors are more
        established, benefit from greater name recognition and have substantially greater
        financial, technical and marketing resources than us. 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 we may compete from time to time, and which may
        have significantly better and larger resources than we do. Accordingly, our competitors may
        succeed in manufacturing and/or commercializing products



6

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more
        rapidly or effectively, which could have a material adverse effect on our business,
        financial condition or results of operations.



We
        anticipate that we 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 our competitors will not be more effective, or be
        more effectively manufactured, marketed and sold, than any that may be developed or sold by
        us. Competitive products may render our products obsolete and uncompetitive prior to
        recovering research, development or commercialization expenses incurred with respect to any
        such products.



We
        rely on patents and proprietary rights to protect our technology.



Our
        success will depend, in part, on our ability to obtain patents, maintain trade secret
        protection and operate without infringing the rights of third parties. We have patents in
        the United States, Canada, Europe, Japan, and other jurisdictions and have filed
        applications for patents in the United States and under the PCT, allowing us to file in
        other jurisdictions. See “Narrative Description—Patent and Patent Application
        Summary”. Our success will depend, in part, on our ability to obtain, enforce and
        maintain patent protection for our technology in Canada, the United States and other
        countries. We 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 our technology. In addition, no assurance can be given that any patents
        issued to, or licensed by, us will not be challenged, invalidated, infringed or
        circumvented, or that the rights granted thereunder will provide continuing competitive
        advantages to us.



The
        patent positions of pharmaceutical and biotechnology firms, including us, are generally
        uncertain and involve complex legal and factual questions. In addition, it is not known
        whether any of our 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 may be 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, we cannot be certain that we or any licensor were the first to create
        inventions claimed by pending patent applications or that we or the licensor were 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 our financial prospects for these products.



Similarly, since patent applications filed before November 29, 2000 in the
        United States may be maintained in secrecy until the patents issue or foreign counterparts,
        if any, publish, we cannot be certain that we or any licensor were the first creator of
        inventions covered by pending patent applications or that we or such licensor were the
        first to file patent applications for such inventions. There is no assurance that our
        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, we may not be able to obtain and enforce effective patents to
        protect our proprietary rights from use by competitors. If other such parties obtain
        patents for certain information relied on by us in conducting our business, then we may be
        required to stop using, or pay to use, certain intellectual property, and as such, our
        competitive position and profitability could suffer as a result.



In
        addition, we 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 us. If we do not obtain such
        licenses, we could encounter delays in introducing one or more of our products to the
        market while we attempt to design around such patents, or we could find that the
        development, manufacture or sale of products requiring such licenses could be foreclosed.
        In addition, we could incur substantial costs in defending ourselves in suits brought
        against us on such patents or in suits in which our attempts to enforce our own patents
        against other parties.



Our products may fail or cause harm, subjecting us to product
        liability claims.



Use of
        our product during current clinical trials may entail risk of product liability. We
        maintain clinical trial liability insurance; however, it is possible this coverage may not
        provide full protection against all risks. Given the



7

---



scope
        and complexity of the clinical development process, the uncertainty of product liability
        litigation, and the shrinking capacity of insurance underwriters, it is not possible at
        this time to assess the adequacy of current clinical trial coverage, nor the ability to
        secure continuing coverage at the same level and at reasonable cost in the foreseeable
        future. While we carry, and intend to continue carrying amounts believed to be appropriate
        under the circumstances, it is not possible at this time to determine the adequacy of such
        coverage.



In
        addition, the sale and commercial use of our product entails risk of product liability. We
        currently do not carry any product liability insurance for this purpose. There can be no
        assurance that we will be able to obtain appropriate levels of product liability insurance
        prior to any sale of our 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 us. The
        obligation to pay any product liability claim or a recall of a product could have a
        material adverse effect on our business, financial condition and future
        prospects.



We
        have limited manufacturing experience and intend to rely on third parties to commercially
        manufacture our products, if and when developed.



To date,
        we have relied upon a 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 effect on us. We have
        completed a program for the development of a commercial process for manufacturing
        REOLYSIN® and have filed a number of patent applications related to the
        process. There can be no assurance that we will successfully obtain sufficient patent
        protection related to our manufacturing process.



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



Our
        primary activity to date has been research and development and we have no experience in
        marketing or commercializing products. We will likely rely on third parties to market our
        products, assuming that they receive regulatory approvals. If we rely on third parties to
        market our products, the commercial success of such product may be outside of our control.
        Moreover, there can be no assurance that physicians, patients or the medical community will
        accept our product, even if it 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 our product would have a material adverse effect on our
        revenue.



Our 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 our products obsolete, less competitive or
        less marketable. The process of developing our products is extremely complex and requires
        significant continuing development efforts and third party commitments. Our failure to
        develop new technologies and products and the obsolescence of existing technologies could
        adversely affect our business.



We may
        be unable to anticipate changes in our potential customer requirements that could make our
        existing technology obsolete. Our success will depend, in part, on our ability to continue
        to enhance our existing technologies, develop new technologies that address 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 our proprietary technology entails significant technical and business risks.
        We may not be successful in using our new technologies or exploiting our niche markets
        effectively or adapting our businesses to evolving customer or medical requirements or
        preferences or emerging industry standards.



We
        are highly dependent on third party relationships for research and clinical
        trials.



We rely
        upon third party relationships for assistance in the conduct of research efforts,
        pre-clinical development and clinical trials, and manufacturing. In addition, we expect to
        rely on third parties to seek regulatory approvals for and



8

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to
        market our product. Although we believe that our collaborative partners will have an
        economic motivation to commercialize our 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 we cannot maintain these relationships, our
        business may suffer.



We
        have no operating revenues and a history of losses.



To date,
        we have not generated sufficient revenues to offset our research and development costs and,
        accordingly, have not generated positive cash flow or made an operating profit. As of
        December 31, 2007, we had an accumulated deficit of $80.5 million and we incurred net
        losses of $15.6 million, $14.3 million, and $12.8 million, for the years ended December 31,
        2007, 2006, and 2005, respectively. We anticipate that we will continue to incur
        significant losses during 2008 and in the foreseeable future. We do not expect to reach
        profitability at least until after successful and profitable commercialization of one or
        more of our products. Even if one or more of our products are profitably commercialized,
        the initial losses incurred by us may never be recovered.



We
        may not be able to obtain third-party reimbursement for the cost of our
        product.



Uncertainty exists regarding the reimbursement status of newly-approved
        pharmaceutical products and reimbursement may not be available for
        REOLYSIN®. Any reimbursements granted may not be maintained or limits on
        reimbursements available from third-party payors may reduce the demand for, or negatively
        affect the price of, these products. If REOLYSIN® does not qualify for
        reimbursement, if reimbursement levels diminish, or if reimbursement is denied, our sales
        and profitability would be adversely affected.



We
        may need additional financing in the future to fund the research and development of our
        products and to meet our ongoing capital requirements.



As of
        December 31, 2007, we had cash and cash equivalents (including short-term investments) of
        $25.2 million and working capital of approximately $22.4 million. We anticipate that we may
        need additional financing in the future to fund research and development and to meet our
        ongoing capital requirements. The amount of future capital requirements will depend on many
        factors, including continued scientific progress in our drug discovery and development
        programs, progress in our pre-clinical and clinical evaluation of drug candidates, time and
        expense associated with filing, prosecuting and enforcing our patent claims and costs
        associated with obtaining regulatory approvals. In order to meet such capital requirements,
        we 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 us, we may have to reduce
        substantially or eliminate expenditures for research and development, testing, production
        and marketing of our proposed product, or obtain funds through arrangements with corporate
        partners that require us to relinquish rights to certain of our technologies or product.
        There can be no assurance that we will be able to raise additional capital if our current
        capital resources are exhausted.



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



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



We
        are dependent on our key employees and collaborators.



Our
        ability to develop the product will depend, to a great extent, on our 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. We are highly dependent on the principal members of our management



9

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as well
        as our advisors and collaborators, the loss of whose services might impede the achievement
        of development objectives. The persons working with us are affected by a number of
        influences outside of our control. The loss of key employees and/or key collaborators may
        affect the speed and success of product development.



We
        presently carry key man insurance in the amounts of $1,500,000, $1,000,000 and $500,000 for
        Dr. Thompson, Dr. Coffey and Mr. Ball, respectively.



Our 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, our financial position, public concern over the
        safety of biotechnology, future sales of shares by us or our current shareholders and other
        factors could have a significant effect on the market price and volatility of the common
        shares.



We
        incur some of our expenses in foreign currencies and therefore we are exposed to foreign
        currency exchange rate fluctuations.



We incur
        some of our manufacturing, clinical, collaborative and consulting expenses in foreign
        currencies, primarily the U.S. dollar and the British Pound (“GBP”). Over the
        past few years the Canadian dollar has appreciated relative to the U.S. dollar and the GBP
        thereby decreasing the Canadian dollar equivalent cost. However, if this trend reverses,
        our Canadian dollar equivalent costs will increase. Also, as we expand to other foreign
        jurisdictions there may be an increase in our foreign exchange exposure.



We
        earn interest income on our excess cash reserves and are exposed to changes in interest
        rates.



We
        invest our 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 we earn
        will be directly impacted.



ITEM 4. INFORMATION ON THE COMPANY

A.

                    History and Development of the Company




Oncolytics Biotech Inc. was formed under the
        Business Corporations Act (Alberta) on April 2,
        1998 as 779738 Alberta Ltd. On April 8, 1998, we changed our name to Oncolytics Biotech
        Inc.



Our
        principal executive office is located at 210, 1167 Kensington Cres. NW, Calgary, Alberta,
        Canada, T2N 1X7, telephone (403) 670-7377. Our agent for service in the U.S. is DL Service,
        Inc. located at 1420 Fifth Avenue, Suite 3400, Seattle, Washington, 98101, telephone (206)
        903-8800.



A
        description of our principal capital expenditures and divestitures and a description of
        acquisitions of material assets is found in our MD&A and in the notes to our financial
        statements included elsewhere in this annual report.



B.

                    Business Overview




Since
        our inception in April of 1998, Oncolytics Biotech Inc. has been a development stage
        company and we have focused our research and development efforts on the development of
        REOLYSIN®, our potential cancer therapeutic. We have not been profitable
        since our inception and expect to continue to incur substantial losses as we continue
        research and development efforts. We do not expect to generate significant revenues until,
        if and when, our cancer product becomes commercially viable.



Our Business



Our
        potential product for human use, REOLYSIN®, is developed from the reovirus.
        This virus has been demonstrated to replicate specifically in tumour cells bearing an
        activated Ras pathway. Activating mutations of



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Ras
        occur in approximately 30% of all human tumours directly, but considering its central role
        in signal transduction, activation of the Ras pathway has been shown to play a role in
        approximately two-thirds of all tumours.



The
        functionality of the product is based upon the finding that tumours 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, tumour 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 tumour cell with an activated Ras pathway,
        reovirus is able to freely replicate and hence kill the host tumour 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 tumour cells carrying an activated Ras pathway available.

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









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 tumour
        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 tumour types in which Ras mutations are relatively rare. Although activating
        mutations of Ras itself are thought to occur in only about 30% of all tumours, it is
        expected that approximately two-thirds of all tumours have



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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 us 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 tumours, expanded animal models as well as human brain, breast,
        and prostate tumours implanted in immuno-compromised mice have yielded promising results.
        In animals where tumour regression was noted, a single injection of reovirus is often
        enough to cause complete tumour regression. More importantly, it was demonstrated that this
        treatment is effective in causing tumour regression in immune competent animals. We believe
        that the nature of this virus, combined with its selective replication makes it an
        attractive candidate as a cancer therapy.



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

Our
        cancer product is a potential therapeutic for tumours possessing an activated Ras pathway.
        In tumour 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 tumours 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 tumours may respond to this
        treatment.



Clinical Trial Program

We are
        directing a broad clinical trial program with the objective of developing
        REOLYSIN® as a human cancer therapeutic. The clinical program includes human
        trials using REOLYSIN® alone, and in combination with radiation and
        chemotherapy, and delivered via local administration and/or intravenous
        administration.

Based
        on indications of activity in our clinical trial program to date, our Phase II clinical
        trial program may include combination chemotherapy/REOLYSIN® trials,
        including colorectal, prostate, pancreatic and non-small cell lung cancer, and combination
        radiation/ REOLYSIN® trials in a number of tumour types. In addition, the
        U.S. National Cancer Institute ("NCI") is planning to conduct two trials using
        REOLYSIN® as a monotherapy for melanoma and ovarian cancers.



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Clinical Trial Chart

The following chart shows the states of clinical trials that have been
        completed or that are in progress.

Trial number

                    Delivery Method

                    Trial Program and Cancer Indication

                    Location

                    StatusREO 012

                    Intravenous administration in combination with
                        cyclophosphamide

                    pancreatic, lung, ovarian

                    United Kingdom

                    Approval to commenceREO 014

                    Intravenous administration monotherapy

                    Phase II sarcoma

                    United States

                    OngoingREO 009

                    Intravenous administration in combination with
                        gemcitabine

                    pancreatic, lung, ovarian

                    United Kingdom

                    OngoingREO 010

                    Intravenous administration in combination with
                        docetaxel

                    bladder, prostate, lung, upper gastro-intestinal

                    United Kingdom

                    OngoingREO 011

                    Intravenous administration in combination with paclitaxel
                        and carboplatin

                    melanoma, lung, ovarian

                    United Kingdom

                    OngoingREO 008

                    Local therapy in combination with radiation

                    Phase II various metastatic tumours, including head &
                        neck

                    United Kingdom

                    OngoingREO 006

                    Local therapy in combination with radiation

                    Phase I various metastatic tumours

                    United Kingdom

                    CompleteREO 007

                    Infusion monotherapy

                    Phase I/II recurrent malignant gliomas

                    United States

                    OngoingREO 005

                    Intravenous administration monotherapy

                    Phase I various metastatic tumours

                    United Kingdom

                    CompleteREO 004

                    Intravenous administration monotherapy

                    Phase I various metastatic tumours

                    United States

                    CompleteREO 003

                    Local monotherapy

                    Phase I recurrent malignant gliomas

                    Canada

                    CompleteREO 002

                    Local monotherapy

                    T2 prostate cancer

                    Canada

                    CompleteREO 001

                    Local monotherapy

                    Phase I trial for various subcutaneous tumours

                    Canada

                    Complete






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U.K.
        Combination REOLYSIN® and Cyclophosphamide Trial

In
        October 2007, we received approval from the U.K. Medicines and Healthcare products
        Regulatory Agency (the "MHRA") to begin a clinical trial using intravenous administration
        of REOLYSIN® in combination with cyclophosphamide, a chemotherapeutic agent
        as well as immune modulator, in patients with advanced cancers. The Principal Investigators
        are Dr. James Spicer of King's College in London, Dr. Johann de Bono and Dr. Kevin
        Harrington of The Royal Marsden NHS Foundation Trust and The Institute of Cancer Research,
        London, and Professor Hardev Pandha of the Royal Surrey County Hospital NHS Trust, Surrey
        and Mount Alvernia Hospitals.

The
        trial (REO 012) is an open-label, dose-escalating, non-randomized trial of
        REOLYSIN® given intravenously with escalating doses of cyclophosphamide. A
        standard dose of REOLYSIN® is administered intravenously over five
        consecutive days, while an intravenous dose of cyclophosphamide is administered three days
        before REOLYSIN® treatment and continues through the course of the treatment
        cycle. The total number of patients studied will depend on the number of dose levels
        tested, but it is anticipated to be approximately 30 patients. Eligible patients include
        those who have been diagnosed with advanced or metastatic solid tumours including
        pancreatic, lung and ovarian cancers that are refractory (have not responded) to standard
        therapy or for which no curative standard therapy exists. The primary objectives of the
        trial include determining the Minimum Effective Immunomodulatory Dose (MED) of
        cyclophosphamide to obtain successful immune modulation. Secondary objectives include the
        safety profile of the combination and gathering any evidence of anti-tumour
        activity.

Phase Ia/Ib Combination REOLYSIN® and Radiation Clinical
        Trial

We
        announced positive interim results from our U.K. Phase Ia/Ib combination
        REOLYSIN® and radiation clinical trial for patients with advanced or
        metastatic cancers in the third quarter of 2007 and completed enrollment in the fourth
        quarter. At the time we announced our interim results, 22 patients had been treated with 15
        having completed the study. Five patients had withdrawn from the study, and two patients
        were still on study.



A total
        of 11 patients in the Ia portion of the trial received two intratumoural treatments of
        REOLYSIN® at dosages of 1x108, 1x109, or
        1x1010 TCID50 with a constant localized radiation dose of 20 Gy given
        in five fractions. Of these 11 patients, three patients (one with oesophageal, one with
        squamous skin carcinoma and one with squamous cell scalp cancer) experienced significant
        partial responses.



One
        month following treatment, the oesophageal patient experienced a 28.5% reduction in the
        target tumour, with stable disease noted in four, non-treated tumours. At two and three
        months, the target tumour had shrunk 64%, with stable disease continuing in the four
        non-treated tumours, including a 15% volume reduction in non-treated mediastinal disease
        that was maintained for more than six months. The squamous skin cancer patient experienced
        a 50% reduction in the target tumour, as well as stable disease in two, non-treated tumours
        at one, two and three months post treatment. The patient with squamous cell scalp cancer
        experienced stable disease in the target tumour for two months which then became a partial
        response at three months. This patient also experienced stable disease in one non-treated
        tumour measured at three months post-treatment.



Patients
        in the Ib portion of the trial received either two, four or six intratumoural doses of
        REOLYSIN® at 1x1010 TCID50 with a constant localized
        radiation dose of 36 Gy given in 12 fractions. Of the six patients who had completed the
        study, at the time, three patients (one with colorectal, one with melanoma and one with
        lung cancer) experienced tumour regression in the target tumour, as well as stable disease
        in non-treated tumours.



The
        patient with colorectal cancer experienced a partial response with a more than 50%
        regression in the target tumour as well as stable disease in four, non-treated tumours
        measured at one month following treatment. The patient with melanoma cancer experienced
        minor regression in the target tumour as well as stable disease in two, non-treated tumours
        at one and two months following treatment. The patient with lung cancer experienced minor
        regression in the target tumour, as well as stable disease in three, non-treated tumours at
        two months following treatment.



The
        treatment has been well tolerated, with mostly Grade 1 or 2 toxicities noted including
        fatigue, lymphopenia, fever, and neutropenia. Grade 3 toxicities including cellulitis,
        dysphasia and diarrhoea were related to disease progression and not to the combination
        treatment. Viral replication was unaffected by cellular irradiation.



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The
        primary objective of the Phase Ia/Ib trial was to determine the maximum tolerated dose
        (“MTD”), dose limiting toxicity (“DLT”), 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.
        Eligible patients include those who have been diagnosed with late stage advanced or
        metastatic solid tumours that are refractory (“have not responded”) to standard
        therapy or for which no curative standard therapy exists.



U.K.
        Combination REOLYSIN® and Docetaxel Clinical Trial

In July
        2007, we commenced patient enrolment in our U.K. clinical trial to evaluate the anti-tumour
        effects of systemic administration of REOLYSIN® in combination with
        docetaxel (Taxotere®) in patients with advanced cancers including bladder,
        prostate, lung and upper gastro-intestinal. In preclinical studies, the combination of
        REOLYSIN® and various taxanes including docetaxel has been shown to be
        synergistic against a variety of cancer cell lines.

The
        trial (REO 010) has two components. The first is an open-label, dose-escalating,
        non-randomized study of REOLYSIN® given intravenously with docetaxel every
        three weeks. A standard dosage of docetaxel will be delivered with escalating dosages of
        REOLYSIN® intravenously. A maximum of three cohorts will be enrolled in the
        REOLYSIN® dose escalation portion. The second component of the trial will
        immediately follow and will include the enrolment of a further 12 patients at the maximum
        dosage of REOLYSIN® in combination with a standard dosage of
        docetaxel.

U.S.
        Phase II Sarcoma Clinical Trial

In June
        2007, we announced that patient enrolment had commenced in our U.S. Phase II trial to
        evaluate the intravenous administration of REOLYSIN® in patients with
        various sarcomas that have metastasized to the lung. Patients are being enrolled at the
        Montefiore Medical Center/Albert Einstein College of Medicine in the Bronx, New York, the
        University of Michigan Comprehensive Cancer Center in Ann Arbor, and the Cancer Therapy and
        Research Center, Institute for Drug Development in San Antonio, Texas.

The
        trial (REO 014) is a Phase II, open-label, single agent study whose primary objective is to
        measure tumour responses and duration of response, and to describe any evidence of
        antitumour activity of intravenous, multiple dose REOLYSIN® in patients with
        bone and soft tissue sarcomas metastatic to the lung. REOLYSIN® will be
        given intravenously to patients at a dose of 3x1010 TCID50 for five
        consecutive days. Patients may receive additional five-day cycles of therapy every four
        weeks for a maximum of eight cycles. Up to 52 patients will be enrolled in the
        study.

U.K.
        Combination REOLYSIN® and Gemcitabine Clinical Trial

In June
        2007, we announced that we had commenced patient enrolment in our U.K. clinical trial to
        evaluate the anti-tumour effects of systemic administration of REOLYSIN® in
        combination with gemcitabine (Gemzar®) in patients with advanced cancers
        including pancreatic, lung and ovarian. The combination of reovirus and gemcitabine has
        been shown in preclinical studies to be more effective than gemcitabine or reovirus alone
        at killing certain cancer cell lines.

The
        trial (REO 009) has two components. The first is an open-label, dose-escalating,
        non-randomized study of REOLYSIN® given intravenously with gemcitabine every
        three weeks. A standard dosage of gemcitabine will be delivered with escalating dosages of
        REOLYSIN® intravenously. A maximum of three cohorts will be enrolled in the
        REOLYSIN® dose escalation portion. The second component of the trial will
        immediately follow and will include the enrolment of a further 12 patients at the maximum
        dosage of REOLYSIN® in combination with a standard dosage of
        gemcitabine.



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U.S.
        Phase I Systemic Administration Clinical Trial

We
        announced positive results from our U.S. Phase I clinical trial examining the systemic
        administration of REOLYSIN® in patients with advanced cancers. The results
        indicated that REOLYSIN® can be delivered systemically to patients with
        advanced and metastatic cancers and cause anti-tumour activity.



A total
        of 18 patients were treated in the escalating dosage trial to a maximum daily dose of
        3x1010 TCID50 in a one-hour infusion. Of the 18 patients treated,
        eight demonstrated stable disease or better, as measured by RECIST (“Response
        Evaluation Criteria in Solid Tumours” – a measure used by regulatory agencies
        in determining efficacy) including a patient with progressive breast cancer who experienced
        a 34% shrinkage in tumour volume.



The
        trial was originally designed to demonstrate the safety of a single, one-hour infusion of
        REOLYSIN®. During the treatment of the 4th cohort of patients, we applied
        for and were granted approval to allow subsequent patients to receive repeat monthly
        treatments of REOLYSIN®. Of the patients eligible for retreatment, three
        patients received a range of two to seven one-hour infusions of REOLYSIN®.
        Toxicities possibly related to REOLYSIN® treatment in this trial were
        generally mild (grade 1 or 2) and included chills, fever and fatigue.



The
        primary objective of this trial was to determine the Maximum Tolerated Dose
        (“MTD”), Dose-Limiting Toxicity (“DLT”), and safety profile of
        REOLYSIN® when administered systemically to patients. A secondary objective
        was to examine any evidence of anti-tumour activity. Eligible patients included those who
        had 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.



U.K.
        Combination REOLYSIN® and Paclitaxel/Carboplatin Trial

We
        commenced patient enrolment in our U.K. clinical trial to evaluate the anti-tumour effects
        of systemic administration of REOLYSIN® in combination with paclitaxel and
        carboplatin in patients with advanced cancers including head and neck, melanoma, lung and
        ovarian.



This
        trial has two components. The first is an open-label, dose-escalating, non-randomized study
        of REOLYSIN® given intravenously with paclitaxel and carboplatin every three
        weeks. Standard dosages of paclitaxel and carboplatin will be delivered with escalating
        dosages of REOLYSIN® intravenously. A maximum of three cohorts will be
        enrolled in the REOLYSIN® dose escalation portion. The second component of
        the trial will immediately follow and will include the enrolment of a further 12 patients
        at the maximum dosage of REOLYSIN® in combination with a standard dosage of
        paclitaxel and carboplatin.



Eligible
        patients include those who have been diagnosed with advanced or metastatic solid tumours
        such as head and neck, melanoma, lung and ovarian cancers that are refractory to standard
        therapy or for which no curative standard therapy exists. The primary objective of the
        trial is to determine the MTD, DLT, recommended dose and dosing schedule and safety profile
        of REOLYSIN® when administered in combination with paclitaxel and
        carboplatin. Secondary objectives include the evaluation of immune response to the drug
        combination, the body’s response to the drug combination compared to chemotherapy
        alone and any evidence of anti-tumour activity.



U.S.
        Phase II Melanoma Clinical Trial

In May
        2007, we announced that the U.S. National Cancer Institute (NCI) filed a protocol with the
        U.S. Food and Drug Administration (FDA) for a Phase 2 clinical trial for patients with
        metastatic melanoma using systemic administration of REOLYSIN®,
        Oncolytics’ proprietary formulation of the human reovirus. The NCI is sponsoring the
        trial under its Clinical Trials Agreement with Oncolytics, while Oncolytics will provide
        clinical supplies of REOLYSIN®.

The
        trial is expected to enroll up to 47 patients with metastatic melanoma. This cancer
        indication was selected after comprehensive preclinical studies carried out by the NCI
        indicated the reovirus can kill melanoma cells.



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Preclinical Program

We
        perform pre-clinical studies and engage in collaborations to help support our clinical
        trial programs and expand our intellectual property base. We continue with studies
        examining the interaction between the immune system and the reovirus, the use of the
        reovirus as a co-therapy with chemotherapeutics and radiation, the use of new RAS active
        viruses as potential therapeutics, and to consider other uses for the reovirus as a
        therapeutic.

We
        announced that a poster presentation entitled “Reovirus Infection of Human Melanoma
        Cells Supports Priming of Anti-Tumour Cytotoxic T Cell Immunity” was presented by Dr.
        Robin Prestwich of CR-UK Clinical Centre, Leeds Institute of Molecular Medicine, University
        of Leeds, U.K at the National Cancer Research Institute Cancer Conference in Birmingham,
        U.K. In this study, the investigators infected melanoma cell lines with reovirus. The
        reovirus-infected cell lines stimulated the maturation of dendritic cells, which in turn
        educated cancer-killing T cells to attack and kill the melanoma cells.



Dr.
        Maureen E. Lane et al. of Cornell University, New York, presented a poster entitled
        “In Vivo Synergy between Oncolytic Reovirus and Gemcitabine in Ras-Mutated Human
        HCT116 Xenografts” at the American Association for Cancer Research Annual Meeting in
        Los Angeles, CA. The researchers found that treatment of human colon cancer cell lines with
        the combination of REOLYSIN® and gemcitabine resulted in both
        in vitro and in
        vivo synergy. There was no additional toxicity associated with
        the combined treatment. Tumours treated with the combination were significantly smaller (by
        area and weight) than tumours in control groups or tumours treated with either agent alone.
        The researchers concluded that the synergistic combination of REOLYSIN® and
        gemcitabine is a promising therapeutic regimen for study in clinical trials.



An oral
        presentation entitled “Reovirus as a Potentially Immunogenic as well as Cytotoxic
        Therapy for Metastatic Colorectal Cancer” was given by one of our collaborators, Dr.
        Sheila Fraser of St. James’s University Hospital in Leeds, U.K. The investigators
        tested reovirus in vitro against
        recently resected colorectal cancer liver metastases. The results showed that a significant
        proportion of tumour cell cultures showed susceptibility to death following reovirus
        infection, and also demonstrated effective replication of reovirus within these cells. In
        addition, dendritic cells that prime the immune system to fight cancer cells were activated
        by exposure to the reovirus. The investigators concluded that the data supports the
        development of reovirus as a novel therapy for colorectal cancer, with the potential to
        direct the immune system to target cancer cells.



Professor Hardev Pandha of The Royal Surrey Hospital, U.K. presented a
        poster entitled “Synergistic Antitumour Activity of Oncolytic Reovirus and Cisplatin
        in Malignant Melanoma” at the 4th International Conference on Oncolytic Viruses as
        Cancer Therapeutics in Carefree, Arizona. The results of the preclinical study showed that
        the combination of reovirus and cisplatin was significantly more effective than cisplatin
        or reovirus alone at killing melanoma cancer cells in a mouse model. The investigators
        concluded that the addition of chemotherapeutic agents can enhance the efficacy of reovirus
        therapy.



Finally,
        Dr. Richard Vile of the Mayo College of Medicine, Rochester, Minnesota delivered an oral
        presentation at the 4th International Conference on Oncolytic Viruses as Cancer
        Therapeutics in Carefree, Arizona that covered a study of systemic administration of
        reovirus in combination with cyclophosphamide, an immune modulator. The work demonstrated
        that systemic administration of reovirus in combination with cyclophosphamide enhanced
        tumour regression in a melanoma animal model without increasing toxicity. In addition, the
        investigators were able to demonstrate that the addition of cyclophosphamide significantly
        increased the amount of reovirus replicating within the tumour. The investigators concluded
        that the addition of cyclophosphamide may lead to improved efficacy of
        REOLYSIN® treatment.



Manufacturing and Process Development

We are
        dependent on contract toll manufacturers to produce REOLSYIN® on commercial
        terms that are acceptable to us. In 2007, we completed multiple production runs to build up
        a supply of REOLYSIN® for our current clinical trial program. Our process
        development activity examined the scale up of our manufacturing process, increasing the
        batch size from our present cGMP scale of 20-litres to 40-litres and then to 100-litres.
        Finally, towards the end of 2007, we commenced the technology transfer of our 40-litre
        production run to a second toll manufacturer in the U.S.



17

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Patents and Trade Secrets

The
        patent positions and proprietary rights of pharmaceutical and biotechnology firms,
        including us, are generally uncertain and involve complex legal and factual questions. We
        believe there will continue to be significant litigation in the industry regarding patent
        and other intellectual property rights.



At the
        end of 2007, we had been issued over 160 patents including 25 U.S. patents. We had over 180
        patent applications filed in the U.S., Canada, and other jurisdictions, but we cannot be
        certain whether any given patent application filed by us will result in the issuance of a
        patent or if any given patent issued to us will later be challenged and invalidated. Nor
        can we be certain whether any given patent that may be issued to us will provide any
        significant proprietary protection to our product and business.



Litigation or other proceedings may also be necessary to enforce or defend
        our proprietary rights and patents. To determine who was first to make an invention claimed
        in a United States patent application or patent and thus be entitled to a patent, the
        United States Patent and Trademark Office, or USPTO, can declare an interference
        proceeding. In Europe, patents can be revoked through opposition or nullity proceedings. In
        the United States patents may be revoked or invalidated in court actions or in
        reexamination proceedings in the USPTO. Such litigation or proceedings could result in
        substantial cost or distraction to us, or result in an adverse decision as to our or our
        licensors’ patent applications and patents. We are not currently involved in any
        interference proceedings concerning our patent applications and patents. We may be involved
        in such proceedings in the future.



Our
        commercial success depends, in part, on not infringing the patents or proprietary rights of
        others and not breaching licenses granted to us. Competitors may have filed patent
        applications and obtained patents and may in the future file patent applications and obtain
        patents relevant to our product and technologies. We are not aware of competing
        intellectual property relating to our REOLYSIN® project. While we currently
        believe that we have the necessary freedom to operate in these areas, there can be no
        assurance that others will not challenge our position in the future. Litigation to defend
        our position could be costly and time consuming. We also cannot be certain that we will be
        successful. We may be required to obtain a license from the prevailing party in order to
        continue the portion of our business that relates to the proceeding. We may also be
        required to obtain licenses to other third-party technologies necessary in order to market
        our products. Such licenses may not be available to us on acceptable terms or on any terms
        and we may have to discontinue that portion of our business. Any failure to license any
        technologies required to commercialize our technologies or products at reasonable cost may
        have a material adverse effect on our business, results of operations, financial condition,
        cash flow and future prospects. We are not currently involved in any litigation concerning
        our competitors’ patent applications and patents. We may be involved in such
        litigation in the future.



We also
        rely on unpatented trade secrets and improvements, unpatented know-how and continuing
        technological innovation to develop and maintain our competitive position. No assurance can
        be given that others will not independently develop substantially equivalent proprietary
        information and techniques, or otherwise gain access to our trade secrets or disclose such
        technology, or that we can meaningfully protect our rights to our unpatented trade
        secrets.



We
        require our employees and consultants to execute confidentiality agreements upon the
        commencement of employment and consulting relationships with us. These agreements provide
        that all confidential information developed by or made known to an individual during the
        course of the employment or consulting relationship generally must be kept confidential. In
        the case of employees, the agreements provide that all inventions conceived by the
        individual, while employed by us, relating to our business are our exclusive property.
        While we have implemented reasonable business measurements to protect confidential
        information, these agreements may not provide meaningful protection for our trade secrets
        in the event of unauthorized use or disclosure of such information.



Business Strategy

Our
        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 we believe
        is best for our development. We intend to achieve our business strategy by focusing on
        these key areas:



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•

                    Develop REOLYSIN® by continuing to progress
                        the product through our clinical trial program assessing the safety and
                        efficacy in human subjects;


•

                    Establish collaborations with experts to assist us with
                        scientific and clinical developments of this new potential pharmaceutical
                        product;


•

                    Implement strategic alliances with selected pharmaceutical
                        and biotechnology companies and selected laboratories, at a time and in a
                        manner where such alliances may complement and expand our research and
                        development efforts on the product and provide sales and marketing
                        capabilities;


•

                    Utilize our broadening patent base and collaborator network
                        as a mechanism to meet our strategic objectives; and


•

                    Develop relationships with companies that could be
                        instrumental in assisting us to access other innovative
                        therapeutics.


Our
        business strategy is based on attaining a number of commercial objectives, which, in turn,
        are supported by a number of product development goals. Our new product development
        presently being conducted is primarily of a research and development nature. In the context
        of this Annual Information Form, statements of our "belief" are based primarily upon our
        results derived to date from our research and development program with animals, and early
        stage human trials, and upon which we believe that we have 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 us will occur.



At this
        time we do not intend to become a fully integrated pharmaceutical company with substantial
        in-house research and development, marketing and distribution or manufacturing
        capabilities. We are pursuing a strategy of establishing relationships with larger
        companies as strategic partners. We intend to partner or joint venture with larger
        pharmaceutical companies that have existing and relevant marketing capability for our
        products. It is anticipated that future clinical development into large international or
        pivotal trials 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 our products, the strategic partners would be expected to
        share in gross proceeds from the sale of our product or products and potentially share in
        various market or manufacturing opportunities. 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 current Good Manufacturing Practices and submit marketing
        materials before being allowed to market pharmaceutical products. While we plan to pursue
        or support the pursuit of the approval of our product, success in acquiring regulatory
        approval for any product is not assured.



In order
        to market our pharmaceutical product in Canada, the United States, Europe and other
        jurisdictions, we 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:



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•

                    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.


•

                    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. 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.




Marketing Approvals

The
        results of the preclinical and clinical testing, together with manufacturing and controls
        information, are submitted to regulatory agencies in order to obtain approval to commence
        commercial sales. In responding to such an application, regulatory agencies may grant
        marketing approval, request additional information or further research, or deny the
        application if they determine that the application does not satisfy their regulatory
        approval criteria. Approval for a pharmaceutical or biologic product may not be granted on
        a timely basis, if at all, or if granted may not cover all the clinical indications for
        which approval is sought, or may contain significant limitations in the form of warnings,
        precautions or contraindications with respect to conditions of use.

Satisfaction of pre-market approval requirements for new drugs and biologics
        typically takes several years, and the actual time required may vary substantially based
        upon the type, complexity and novelty of the product or targeted disease. Government
        regulation may delay or prevent marketing of potential products for a considerable period
        of time and impose costly procedures upon our activities. Success in early stage clinical
        trials or with prior versions of products does not assure success in later stage clinical
        trials. Data obtained from clinical activities are not always conclusive and may be
        susceptible to varying interpretations that could delay, limit or prevent regulatory
        approval.



Post-Marketing Regulations

Once
        approved, regulatory agencies may withdraw the product approval if compliance with pre-
        and/or post-marketing regulatory standards is not maintained or if problems occur after the
        product reaches the marketplace. In addition, they may require post-marketing studies,
        referred to as Phase 4 studies, to monitor the effect of an approved product, and may limit
        further marketing of the product based on the results of these post-market studies. The FDA
        and other foreign regulatory agencies have broad post-market regulatory and enforcement
        powers, including the ability to levy fines and penalties, suspend or delay issuance of
        approvals, seize or recall products, or withdraw approvals.



Manufacturing Regulations

We use
        contract toll manufacturers to produce REOLYSIN®. Our toll manufacturers are
        subject to periodic inspection by the FDA, the United States Drug Enforcement
        Administration, or DEA, and other domestic and foreign authorities where applicable, and
        must comply with cGMP regulations. Manufacturers of biologics also must comply with general
        biological product standards. Failure to comply with the statutory and regulatory
        requirements subjects the manufacturer to possible legal or regulatory action, such as
        suspension of manufacturing, seizure of product, or mandatory or voluntary recall of a
        product. Adverse experiences with the product must be reported to the FDA and foreign
        agencies and could result in the imposition of market restrictions through labeling changes
        or



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in
        product removal. Product approvals may be withdrawn if compliance with regulatory
        requirements is not maintained or if problems concerning safety or efficacy of the product
        occur following approval.



Advertising and Promotion Regulations

With
        respect to both pre- and post-market product advertising and promotion, the FDA and similar
        foreign agencies impose a number of complex regulations on entities that advertise and
        promote pharmaceuticals and biologics, which include, among other things, standards and
        regulations relating to direct-to-consumer advertising, off-label promotion, industry
        sponsored scientific and educational activities, and promotional activities involving the
        Internet. These agencies have very broad enforcement authority and failure to abide by
        these regulations can result in penalties including the issuance of a warning letter
        directing the entity to correct deviations from requisite standards, a requirement that
        future advertising and promotional materials be pre-cleared by the FDA or relevant foreign
        agencies, and foreign, state and federal civil and criminal investigations and
        prosecutions.



Other Government Regulations

We are
        subject to various laws and regulations regarding laboratory practices, the experimental
        use of animals, and the use and disposal of hazardous or potentially hazardous substances
        in connection with our research. In each of these areas, as above, the government has broad
        regulatory and enforcement powers, including the ability to levy fines and civil penalties,
        suspend or delay issuance of approvals, seize or recall products, and withdraw approvals,
        any one or more of which could have a material adverse effect upon us.



Market and Competition

According to estimates for 2007 from the American Cancer Society, 1.4
        million Americans are expected to be diagnosed with cancer in the year, and 559,650
        Americans are forecast to die of cancer. In the United States cancer accounts for 25% of
        all deaths, second only to heart 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 $206.3
        billion. Of this figure, $78.2 billion can be attributed to direct patient
        costs.



It has
        been estimated that approximately 30% of all tumours 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 tumours with activated Ras (either through direct activating
        mutation or mutation or over-expression of elements upstream of Ras) is approximately two
        thirds.



We face
        substantial competition in the development of products for cancer and other diseases. This
        competition from other manufacturers of the same types of products and from manufacturers
        of different types of products designed for the same uses is expected to continue in both
        U.S. and international markets. Oncolytic virus therapies, our primary focus area, are
        rapidly evolving areas in the biotechnology industry and are expected to undergo many
        changes in the coming years as a result of technological advances. We are currently aware
        of a number of groups that are developing oncolytic virus therapies including early-stage
        and established biotechnology companies, pharmaceutical companies, academic institutions,
        government agencies and research institutions. We face competition from these groups in
        areas such as recruiting employees, acquiring technologies that might enhance our ability
        to commercialize products, establishing relationships with certain research and academic
        institutions, enrolling patients in clinical trials and seeking program partnerships and
        collaborations with larger pharmaceutical companies. It is possible that our competitors
        could achieve earlier market commercialization, could have superior patent protection, or
        could have safer, more effective or more cost-effective products. These factors could
        render our potential products less competitive, which could adversely affect our
        business.





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Product Marketing Strategy

The
        markets for the cancer product being developed by us may be large and could require
        substantial sales and marketing capability. Before or upon successful completion of the
        development of a cancer product, we intend 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, we will establish
        arrangements with various partners for different geographical areas or specific
        applications at various times in the development process. Our management and consultants
        have relevant experience with the partnering process.



Seasonality of Business

Our
        results of operations have not been materially impacted by seasonality.



C.

                    Organizational Structure


On
        December 31, 2007, we had one wholly owned subsidiary Oncolytics Biotech (Barbados)
        Inc.

D.

                    Property, Plants and Equipment


We
        currently lease our head office in Calgary, Alberta, Canada. We do not own or lease any
        other office space, manufacturing facilities or equipment.

ITEM
        4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND
        PROSPECTS

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



The
        following information should be read in conjunction with our 2007 audited financial
        statements and notes thereto, which were prepared in accordance with Canadian
        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 (the “Exchange Act”).
        Forward-looking statements, including our belief as to the potential of
        REOLYSIN® as a cancer therapeutic and our expectations as to the success of
        our research and development and manufacturing programs in 2008 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 our 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, our ability to successfully commercialize
        REOLYSIN®, uncertainties related to the research, development and
        manufacturing of pharmaceuticals, uncertainties related to competition, changes in
        technology, the regulatory process and general changes to the economic environment.
        Investors should consult our 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. We do not undertake to update these
        forward-looking statements.



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Overview



Oncolytics Biotech Inc. is a Development Stage Company



Since
        our inception in April of 1998, Oncolytics Biotech Inc. has been a development stage
        company and we have focused our research and development efforts on the development of
        REOLYSIN®, our potential cancer therapeutic. We have not been profitable
        since our inception and expect to continue to incur substantial losses as we continue
        research and development efforts. We do not expect to generate significant revenues until,
        if and when, our 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 we 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 pharmaceutical product, we rely upon our 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 Oncolytics.



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REOLYSIN® Development Update For 2007



We have
        been developing our product REOLYSIN® as a possible cancer therapy since our
        inception in 1998. Our goal each year is to advance REOLYSIN® through the
        various steps and stages of development required for potential pharmaceutical products. In
        order to achieve this goal, we believe that we have to actively manage the development of
        our clinical trial program, our pre-clinical and collaborative programs, our manufacturing
        process and REOLYSIN® supply, and our intellectual property.



Clinical Trial Program



We began
        2007 with five clinical trials of which three were actively enrolling patients and two had
        been recently approved to commence. During the year, we received approval to commence
        another three clinical trials, commenced patient enrollment in four trials and completed
        enrollment in one trial. We exited 2007 with a clinical trial program of eight active
        clinical trials of which seven are being conducted by us and one is being sponsored by the
        U.S. National Cancer Institute (“NCI”). As well in 2007, we announced positive
        clinical trial results from two clinical trials.



2007
        Clinical Trial Results



U.K.
        Phase Ia/Ib Combination REOLYSIN® and Radiation Clinical
        Trial



We
        announced positive interim results from our U.K. Phase Ia/Ib combination
        REOLYSIN® and radiation clinical trial for patients with advanced or
        metastatic cancers in the third quarter of 2007 and completed enrollment in the fourth
        quarter. At the time we announced our interim results, 22 patients had been treated with 15
        having completed the study. Five patients had withdrawn from the study, and two patients
        were still on study.



A total
        of 11 patients in the Ia portion of the trial received two intratumoural treatments of
        REOLYSIN® at dosages of 1x108, 1x109, or
        1x1010 TCID50 with a constant localized radiation dose of 20 Gy given
        in five fractions. Of these 11 patients, three patients (one with oesophageal, one with
        squamous skin carcinoma and one with squamous cell scalp cancer) experienced significant
        partial responses.



One
        month following treatment, the oesophageal patient experienced a 28.5% reduction in the
        target tumour, with stable disease noted in four, non-treated tumours. At two and three
        months, the target tumour had shrunk 64%, with stable disease continuing in the four
        non-treated tumours, including a 15% volume reduction in non-treated mediastinal disease
        that was maintained for more than six months. The squamous skin cancer patient experienced
        a 50% reduction in the target tumour, as well as stable disease in two, non-treated tumours
        at one, two and three months post treatment. The patient with squamous cell scalp cancer
        experienced stable disease in the target tumour for two months which then became a partial
        response at three months. This patient also experienced stable disease in one non-treated
        tumour measured at three months post-treatment.



Patients
        in the Ib portion of the trial received either two, four or six intratumoural doses of
        REOLYSIN® at 1x1010 TCID50 with a constant localized
        radiation dose of 36 Gy given in 12 fractions. Of the six patients who had completed the
        study, at the time, three patients (one with colorectal, one with melanoma and one with
        lung cancer) experienced tumour regression in the target tumour, as well as stable disease
        in non-treated tumours.



The
        patient with colorectal cancer experienced a partial response with a more than 50%
        regression in the target tumour as well as stable disease in four, non-treated tumours
        measured at one month following treatment. The patient with melanoma cancer experienced
        minor regression in the target tumour as well as stable disease in two, non-treated tumours
        at one and two months following treatment. The patient with lung cancer experienced minor
        regression in the target tumour, as well as stable disease in three, non-treated tumours at
        two months following treatment.



The
        treatment has been well tolerated, with mostly Grade 1 or 2 toxicities noted including
        fatigue, lymphopenia, fever, and neutropenia. Grade 3 toxicities including cellulitis,
        dysphasia and diarrhoea were related to disease progression and not to the combination
        treatment. Viral replication was unaffected by cellular irradiation.



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The
        primary objective of the Phase Ia/Ib trial was to determine the maximum tolerated dose
        (“MTD”), dose limiting toxicity (“DLT”), 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.
        Eligible patients include those who have been diagnosed with late stage advanced or
        metastatic solid tumours that are refractory (“have not responded”) to standard
        therapy or for which no curative standard therapy exists.



U.S.
        Phase I Systemic Clinical Trial



We
        announced positive results from our U.S. Phase I clinical trial examining the systemic
        administration of REOLYSIN® in patients with advanced cancers. The results
        indicated that REOLYSIN® can be delivered systemically to patients with
        advanced and metastatic cancers and cause anti-tumour activity.



A total
        of 18 patients were treated in the escalating dosage trial to a maximum daily dose of
        3x1010 TCID50 in a one-hour infusion. Of the 18 patients treated,
        eight demonstrated stable disease or better, as measured by RECIST (“Response
        Evaluation Criteria in Solid Tumours” – a measure used by regulatory agencies
        in determining efficacy) including a patient with progressive breast cancer who experienced
        a 34% shrinkage in tumour volume.



The
        trial was originally designed to demonstrate the safety of a single, one-hour infusion of
        REOLYSIN®. During the treatment of the 4th cohort of patients, we applied
        for and were granted approval to allow subsequent patients to receive repeat monthly
        treatments of REOLYSIN®. Of the patients eligible for retreatment, three
        patients received a range of two to seven one-hour infusions of REOLYSIN®.
        Toxicities possibly related to REOLYSIN® treatment in this trial were
        generally mild (grade 1 or 2) and included chills, fever and fatigue.



The
        primary objective of this trial was to determine the Maximum Tolerated Dose
        (“MTD”), Dose-Limiting Toxicity (“DLT”), and safety profile of
        REOLYSIN® when administered systemically to patients. A secondary objective
        was to examine any evidence of anti-tumour activity. Eligible patients included those who
        had 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.



Clinical Trials – Actively Enrolling



Throughout 2007, we continued to enroll patients in our Phase II and Phase
        Ib combination
        REOLYSIN®/radiation
        clinical trials in the U.K. and in our Phase I/II recurrent malignant glioma clinical trial
        in the U.S. As well in 2007, we commenced enrollment in the following studies:



U.S.
        Phase II Sarcoma Clinical Trial



We
        received approval to commence and initiated patient enrollment in our U.S. Phase II trial
        to evaluate the intravenous administration of REOLYSIN® in patients with
        various sarcomas that have metastasized to the lung. Patients are being enrolled at the
        Montefiore Medical Center/Albert Einstein College of Medicine in the Bronx, New York, the
        University of Michigan Comprehensive Cancer Center in Ann Arbor, and the Cancer Therapy and
        Research Center, Institute for Drug Development in San Antonio, Texas.



This
        trial is a Phase II, open-label, single agent study whose primary objective is to measure
        tumour responses and duration of response, and to describe any evidence of antitumour
        activity of intravenous, multiple dose REOLYSIN® in patients with bone and
        soft tissue sarcomas metastatic to the lung. REOLYSIN® is being given
        intravenously to patients at a dose of 3x1010 TCID50 for five
        consecutive days. Patients may receive additional five-day cycles of therapy every four
        weeks for a maximum of eight cycles.



Up to 52
        patients will be enrolled in the study. Eligible patients must have a bone or soft tissue
        sarcoma metastatic to the lung deemed by their physician to be unresponsive to or
        untreatable by standard therapies.



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U.K.
        Combination REOLYSIN® Paclitaxel and Carboplatin Clinical
        Trial



We
        commenced patient enrolment in our U.K. clinical trial to evaluate the anti-tumour effects
        of systemic administration of REOLYSIN® in combination with paclitaxel and
        carboplatin in patients with advanced cancers including head and neck, melanoma, lung and
        ovarian.



This
        trial has two components. The first is an open-label, dose-escalating, non-randomized study
        of REOLYSIN® given intravenously with paclitaxel and carboplatin every three
        weeks. Standard dosages of paclitaxel and carboplatin will be delivered with escalating
        dosages of REOLYSIN® intravenously. A maximum of three cohorts will be
        enrolled in the REOLYSIN® dose escalation portion. The second component of
        the trial will immediately follow and will include the enrolment of a further 12 patients
        at the maximum dosage of REOLYSIN® in combination with a standard dosage of
        paclitaxel and carboplatin.



Eligible
        patients include those who have been diagnosed with advanced or metastatic solid tumours
        such as head and neck, melanoma, lung and ovarian cancers that are refractory to standard
        therapy or for which no curative standard therapy exists. The primary objective of the
        trial is to determine the MTD, DLT, recommended dose and dosing schedule and safety profile
        of REOLYSIN® when administered in combination with paclitaxel and
        carboplatin. Secondary objectives include the evaluation of immune response to the drug
        combination, the body’s response to the drug combination compared to chemotherapy
        alone and any evidence of anti-tumour activity.



U.K.
        Combination REOLYSIN® Gemcitabine Clinical Trial



We
        commenced patient enrolment in our U.K. clinical trial to evaluate the anti-tumour effects
        of systemic administration of REOLYSIN® in combination with gemcitabine
        (Gemzar®) in patients with advanced cancers including pancreatic, lung and
        ovarian. The combination of reovirus and gemcitabine has been shown in preclinical studies
        to be more effective than gemcitabine or reovirus alone at killing certain cancer cell
        lines.



This
        trial has two components. The first is an open-label, dose-escalating, non-randomized study
        of REOLYSIN® given intravenously with gemcitabine every three weeks. A
        standard dosage of gemcitabine will be delivered with escalating dosages of
        REOLYSIN® intravenously. A maximum of three cohorts will be enrolled in the
        REOLYSIN® dose escalation portion. The second component of the trial will
        immediately follow and will include the enrolment of a further 12 patients at the maximum
        dosage of REOLYSIN® in combination with a standard dosage of
        gemcitabine.



Eligible
        patients include those who have been diagnosed with advanced or metastatic solid tumours
        such as pancreatic, lung and ovarian cancers that are refractory to standard therapy or for
        which no curative standard therapy exists. The primary objective of the trial is to
        determine the MTD, DLT, recommended dose and dosing schedule and safety profile of
        REOLYSIN® when administered in combination with gemcitabine. Secondary
        objectives include the evaluation of immune response to the drug combination, the
        body’s response to the drug combination compared to chemotherapy alone and any
        evidence of anti-tumour activity.



U.K.
        Combination REOLYSIN® Docetaxel Clinical Trial



We
        commenced patient enrolment in our U.K. clinical trial to evaluate the anti-tumour effects
        of systemic administration of REOLYSIN® in combination with docetaxel
        (Taxotere®) in patients with advanced cancers including bladder, prostate,
        lung and upper gastro-intestinal. In preclinical studies, the combination of
        REOLYSIN® and various taxanes including docetaxel has been shown to be
        synergistic against a variety of cancer cell lines.



The
        trial has two components. The first is an open-label, dose-escalating, non-randomized study
        of REOLYSIN® given intravenously with docetaxel every three weeks. A
        standard dosage of docetaxel will be delivered with escalating dosages of
        REOLYSIN® intravenously. A maximum of three cohorts will be enrolled in the
        REOLYSIN® dose escalation portion. The second component of the trial will
        immediately follow and will include the enrolment of a further 12 patients at the maximum
        dosage of REOLYSIN® in combination with a standard dosage of
        docetaxel.



Eligible
        patients include those who have been diagnosed with advanced or metastatic solid tumours
        such as bladder, prostate, lung or upper gastro-intestinal cancers that are refractory to
        standard therapy or for which no curative



26

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standard
        therapy exists. The primary objective of the trial is to determine the MTD, DLT,
        recommended dose and dosing schedule and safety profile of REOLYSIN® when
        administered in combination with docetaxel. Secondary objectives include the evaluation of
        immune response to the drug combination, the body’s response to the drug combination
        compared to chemotherapy alone and any evidence of anti-tumour activity.



Clinical Trial – Approved to Commence



U.K.
        REOLYSIN® in Combination with
        Cyclophosphamide



In 2007,
        we announced receipt of a letter of approval to commence our clinical trial using
        intravenous administration of REOLYSIN® in combination with
        cyclophosphamide, a chemotherapeutic agent as well as immune modulator, in patients with
        advanced cancers.



The
        trial is an open-label, dose-escalating, non-randomized trial of REOLYSIN®
        given intravenously with escalating doses of cyclophosphamide. A standard dose of
        REOLYSIN® is administered intravenously over five consecutive days, while an
        intravenous dose of cyclophosphamide is administered three days before
        REOLYSIN® treatment and continues through the course of the treatment cycle.
        The total number of patients studied will depend on the number of dose levels tested, but
        it is anticipated to be approximately 30 patients.



Eligible
        patients include those who have been diagnosed with advanced or metastatic solid tumours
        including pancreatic, lung and ovarian cancers that are refractory to standard therapy or
        for which no curative standard therapy exists. The primary objectives of the trial include
        determining the Minimum Effective Immunomodulatory Dose of cyclophosphamide to obtain
        successful immune modulation. Secondary objectives include the safety profile of the
        combination and gathering any evidence of anti-tumour activity.



U.S.
        National Cancer Institute Phase II Melanoma Clinical Trial



In 2007,
        the NCI filed a protocol with the U.S. Food and Drug Administration for a Phase II clinical
        trial for patients with metastatic melanoma using systemic administration of
        REOLYSIN®. The NCI is sponsoring the trial under our Clinical Trials
        Agreement that requires us to provide clinical supplies of REOLYSIN®. The
        trial is expected to enroll up to 47 patients with metastatic melanoma.



Pre-Clinical Trial and Collaborative Program



We
        perform pre-clinical studies and engage in collaborations to help support our clinical
        trial programs and expand our intellectual property base. Throughout 2007, we continued
        with studies examining the interaction between the immune system and the reovirus, the use
        of the reovirus as a co-therapy with existing chemotherapeutics and radiation, the use of
        new RAS active viruses as potential therapeutics, and to investigate new uses for the
        reovirus in therapy. During 2007, in conjunction with our various collaborators, we
        reported the results of a number of research collaborations.



We
        announced that a poster presentation entitled “Reovirus Infection of Human Melanoma
        Cells Supports Priming of Anti-Tumour Cytotoxic T Cell Immunity” was presented by Dr.
        Robin Prestwich of CR-UK Clinical Centre, Leeds Institute of Molecular Medicine, University
        of Leeds, U.K at the National Cancer Research Institute Cancer Conference in Birmingham,
        U.K. In this study, the investigators infected melanoma cell lines with reovirus. The
        reovirus-infected cell lines stimulated the maturation of dendritic cells, which in turn
        educated cancer-killing T cells to attack and kill the melanoma cells.



Dr.
        Maureen E. Lane et al. of Cornell University, New York, presented a poster entitled
        “In Vivo Synergy between Oncolytic Reovirus and Gemcitabine in Ras-Mutated Human
        HCT116 Xenografts” at the American Association for Cancer Research Annual Meeting in
        Los Angeles, CA. The researchers found that treatment of human colon cancer cell lines with
        the combination of REOLYSIN® and gemcitabine resulted in both
        in vitro and in
        vivo synergy. There was no additional toxicity associated with
        the combined treatment. Tumours treated with the combination were significantly smaller (by
        area and weight) than tumours in control groups or tumours treated with either agent alone.
        The researchers concluded that the synergistic combination of REOLYSIN® and
        gemcitabine is a promising therapeutic regimen for study in clinical trials.



27

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An oral
        presentation entitled “Reovirus as a Potentially Immunogenic as well as Cytotoxic
        Therapy for Metastatic Colorectal Cancer” was given by one of our collaborators, Dr.
        Sheila Fraser of St. James’s University Hospital in Leeds, U.K. The investigators
        tested reovirus in vitro against
        recently resected colorectal cancer liver metastases. The results showed that a significant
        proportion of tumour cell cultures showed susceptibility to death following reovirus
        infection, and also demonstrated effective replication of reovirus within these cells. In
        addition, dendritic cells that prime the immune system to fight cancer cells were activated
        by exposure to the reovirus. The investigators concluded that the data supports the
        development of reovirus as a novel therapy for colorectal cancer, with the potential to
        direct the immune system to target cancer cells.



Professor Hardev Pandha of The Royal Surrey Hospital, U.K. presented a
        poster entitled “Synergistic Antitumour Activity of Oncolytic Reovirus and Cisplatin
        in Malignant Melanoma” at the 4th International Conference on Oncolytic Viruses as
        Cancer Therapeutics in Carefree, Arizona. The results of the preclinical study showed that
        the combination of reovirus and cisplatin was significantly more effective than cisplatin
        or reovirus alone at killing melanoma cancer cells in a mouse model. The investigators
        concluded that the addition of chemotherapeutic agents can enhance the efficacy of reovirus
        therapy.



Finally,
        Dr. Richard Vile of the Mayo College of Medicine, Rochester, Minnesota delivered an oral
        presentation at the 4th International Conference on Oncolytic Viruses as Cancer
        Therapeutics in Carefree, Arizona that covered a study of systemic administration of
        reovirus in combination with cyclophosphamide, an immune modulator. The work demonstrated
        that systemic administration of reovirus in combination with cyclophosphamide enhanced
        tumour regression in a melanoma animal model without increasing toxicity. In addition, the
        investigators were able to demonstrate that the addition of cyclophosphamide significantly
        increased the amount of reovirus replicating within the tumour. The investigators concluded
        that the addition of cyclophosphamide may lead to improved efficacy of
        REOLYSIN® treatment.



Manufacturing and Process Development



In 2007,
        we completed multiple production runs to build up a supply of REOLYSIN® for
        our current clinical trial program. Our process development activity examined the scale up
        of our manufacturing process, increasing the batch size from our present cGMP scale of
        20-litres to 40-litres and then to 100-litres. Finally, towards the end of 2007, we
        commenced the technology transfer of our 40-litre production run to a second toll
        manufacturer in the U.S.



Intellectual Property



During
        2007, eight U.S. and one Canadian patents were issued. At the end of 2007, we had been
        issued over 160 patents including 25 U.S. and six Canadian patents as well as issuances in
        other jurisdictions. We also have over 180 patent applications filed in the U.S., Canada
        and other jurisdictions.



Financing Activity



In 2007,
        we issued 4,600,000 units at a price of $3.00 per unit for net cash proceeds of
        $12,063,394. Each unit consisted of one common share and one-half of one common share
        purchase warrant. Each whole common share purchase warrant shall entitle the holder thereof
        to acquire one common share upon payment of $3.50 expiring on February 22, 2010. The net
        proceeds from this offering will be used for our clinical trial program, manufacturing
        activities in support of the clinical trial program and for general corporate
        purposes.



Financial Impact



We
        estimated at the beginning of 2007 that our monthly cash usage would be approximately
        $1,400,000 for 2007. Our cash usage for the year was $13,569,594 from operating activities
        and $944,719 for the purchases of intellectual property and capital assets which is in line
        with our estimate. Our net loss for the year was $15,642,191.



28

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REOLYSIN® Development For 2008



We plan
        to continue to enroll patients in our clinical trials throughout 2008 and expect to
        complete enrollment in our chemotherapy co-therapy trials in the U.K. and our sarcoma study
        in the U.S. We believe that the results from these trials will allow us to broaden our
        phase II clinical trial program. As well, we believe that the NCI will commence enrollment
        in its Phase II melanoma clinical trial and commence additional trials with
        REOLYSIN®.



We
        expect to complete the technology transfer of our 40-litre manufacturing process to our
        U.S. toll manufacturer and produce REOLYSIN® for our clinical trial program
        throughout 2008. We believe we will complete our 100-litre scale up studies and will begin
        to examine a lyophilization (freeze drying) process for
        REOLYSIN®.



We
        estimate, based on our expected activity for 2008 that our monthly cash usage will increase
        to $1,660,000 per month (see “Liquidity and Capital
        Resources”).



Clinical Trial Program



U.S.
        Phase II Interim Update



On
        January 31, 2008, we announced that we met the initial criteria to proceed to full
        enrolment in our U.S. Phase II trial to evaluate the intravenous administration of
        REOLYSIN® in patients with various sarcomas that have metastasized to the
        lung. According to the trial protocol, to proceed to full enrolment of 52 patients, we had
        to demonstrate that at least one patient in the first 38 patients treated experienced a
        complete or partial response, or stable disease for greater than six months. The third
        patient treated in the study was demonstrated to have stable disease by RECIST criteria for
        more than six months as measured by CT scan. A PET scan taken at the same time showed that
        any residual tumour mass examined was metabolically inert.



A total
        of 12 patients had received REOLYSIN® treatment at that time, with five
        remaining on study. The trial is a Phase II, open-label, single agent study whose primary
        objective is to measure tumour responses and duration of response, and to describe any
        evidence of antitumour activity of intravenous, multiple dose REOLYSIN® in
        patients with bone and soft tissue sarcomas metastatic to the lung.
        REOLYSIN® is delivered intravenously to patients at a dose of
        3x1010 TCID50 for five consecutive days. Patients may receive
        additional five-day cycles of therapy every four weeks for a maximum of eight
        cycles.



Eligible
        patients must have a bone or soft tissue sarcoma metastatic to the lung deemed by their
        physician to be unresponsive to or untreatable by standard therapies. These include
        patients with osteosarcoma, Ewing sarcoma family tumours, malignant fibrous histiocytoma,
        synovial sarcoma, fibrosarcoma and leiomyosarcoma.



U.S.
        National Cancer Institute Phase I/II Clinical Trial



On
        January 3, 2008, the U.S. National Cancer Institute (“NCI”) filed a protocol
        with the U.S. Food and Drug Administration for a Phase 1/2 clinical trial for patients with
        metastatic ovarian, peritoneal or fallopian tube cancers using concurrent systemic and
        intraperitoneal administration of REOLYSIN®. The NCI is sponsoring the trial
        under our Clinical Trials Agreement that requires us to provide clinical supplies of
        REOLYSIN®. The trial, which is being carried out at The Ohio State
        University Comprehensive Cancer Center, is expected to enroll up to 70 patients with
        metastatic ovarian, peritoneal or fallopian tube cancers.



Collaborative Program



On
        January 7, 2008, we reported that a research group led by Dr. Richard Vile of the Mayo
        Clinic College of Medicine in Rochester, Minnesota, published the results of their work
        testing the antitumor efficacy and safety of various combinations of reovirus and
        cyclophosphamide in vivo. The paper is
        entitled “Cyclophosphamide Facilitates Antitumor Efficacy against Subcutaneous Tumors
        following Intravenous Delivery of Reovirus” and appeared online in the January 1,
        2008 issue of Clinical Cancer
        Research.



The
        purpose of the research study was to investigate whether it was possible to use
        cyclophosphamide, an immune modulator, to enhance the delivery and replication of the
        reovirus when delivered intravenously. After testing



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various
        doses and dosing regimens of reovirus and cyclophosphamide in mice, a metronomic dosing
        regimen was developed that resulted in increased survival, high levels of reovirus
        recovered from regressing tumors, levels of neutralizing antibodies that were protective,
        and only very mild toxicities. The data support investigation in human clinical trials of
        the use of cyclophosphamide prior to systemic reovirus administration to modulate, but not
        ablate, the immune system.



On
        February 4, 2008, we reported that Dr. Kevin Harrington and his research group at The
        Institute of Cancer Research, London, U.K. published the results of their work testing
        combination treatment schedules of reovirus and radiation in human and murine tumour
        cells in vitro and
        in vivo. The paper, entitled
        “Enhanced In vitro and
        In vivo Cytotoxicity of Combined Reovirus and
        Radiotherapy” appeared online in the February 1, 2008 issue of
        Clinical Cancer Research. The effect of
        different schedules of reovirus and radiotherapy on viral replication and cytotoxicity was
        tested in vitro and the combination was assessed in three tumour models in vivo. The
        results demonstrated that combining reovirus and radiotherapy significantly increased
        cancer cell killing both in vitro
        and in vivo, particularly
        in cell lines with moderate susceptibility to reovirus alone.



Accounting Policies



Critical Accounting Policies and Estimates



In
        preparing our financial statements, we are required to make certain estimates, judgments
        and assumptions that we believe 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 our 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 we believe are the most critical to aid in fully
        understanding and evaluating our reported financial results include the
        following:



Research and Development



Our
        research and development costs are expensed as they are incurred. Under Canadian GAAP,
        development costs should be capitalized if certain criteria are met. Companies with
        products in clinical trials do not necessarily meet these criteria. Our 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), we have completed six Phase I clinical trials and are
        presently enrolling or have permission to commence six additional Phase I clinical trial
        studies for REOLYSIN®. We are also planning to add additional trials to our
        clinical trial program. 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, our development costs are expensed and not
        capitalized.



Capitalization and Amortization of Patent Costs



We treat
        third party costs incurred (primarily legal and registration costs) in the development of
        our Patent portfolio as limited-life intangible assets, and we amortize the costs related
        to these assets over the lesser of 17 years or their estimated useful life. We also review
        the valuation of our Patent costs for impairment when any events that might give rise to
        impairment are known to us. If there is an indication of impairment, we would assess the
        fair value of our Patents and would record a reduction if the fair value were less than the
        book value.



In
        capitalizing these costs, we are recognizing the inherent future benefit of our Patents,
        not only in protection of our own potential products, but also as a possible asset that
        could give rise to revenues in the future through licensing agreements. While Patent life
        varies in different jurisdictions, it is normally considered to be 20 years from date
        of



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application. With an assumption of an average of three years from initial
        Patent application to Patent issuance, we have set a maximum of 17 years to amortize the
        costs from the date of issuance. We have 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, we have 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 we experience a significant
        failure in our 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 we are successful in our product development and sales, or other parties enter
        into licensing agreements with us, 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

International Financial Reporting Standards

In
        2006, the CICA announced that accounting standards in Canada will converge with
        International Financial Standards (“IFRS”). The Company will need to begin
        reporting under IFRS in the first quarter of 2011 with comparative data for the prior year.
        IFRS uses a conceptual framework similar to GAAP, but there could be significant
        differences on recognition, measurement and disclosures that will need to be addressed. The
        Company is currently assessing the impact of these standards on its financial
        statements.

Capital Disclosures

The
        CICA has issued new accounting recommendations for capital disclosures which require
        disclosure of both qualitative and quantitative information that enables users of financial
        statements to evaluate the Company’s objectives, policies, and processes for managing
        capital. These recommendations are effective for the Company beginning January 1,
        2008.

Disclosure and Presentation of Financial Instruments

The
        CICA has issued new accounting recommendations for disclosure and presentation of financial
        instruments which require disclosures of both qualitative and quantitative information that
        enables users of financial statements to evaluate the nature and extent of risks arising
        from financial instruments to which the Company is exposed. These recommendations are
        effective for the Company beginning January 1, 2008.

Goodwill and Intangible Assets

The
        CICA has issued new accounting recommendations for the treatment of goodwill and intangible
        assets that are intended to reduce the differences between IFRS in the accounting for
        intangible assets and results in closer alignment with U.S. GAAP. The objectives of these
        recommendations are to reinforce the principle-based approach to the recognition of assets
        only in accordance with the definition of an asset and the criteria for asset recognition;
        and clarify the application of the concept of matching revenues and expenses such that the
        current practice of recognizing asset items that do not meet the definition and recognition
        criteria is eliminated. The standard also provides guidance for the recognition of
        internally developed intangible assets, whether separately acquired or internally
        developed. These changes are effective for fiscal years beginning on or after October 1,
        2008, with early adoption encouraged. The Company is evaluating the effects of adopting
        these recommendations.



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Fair
        Presentation



We
        prepare our financial statements in accordance with Canadian GAAP. As a result of complying
        with Canadian GAAP, we believe that the following should be mentioned in an effort to
        understand and fairly present our financial information:



Stock
        Based Compensation



As
        required by the fair value based method for measuring stock based compensation, we use the
        Black Scholes Option Pricing Model (“Black Scholes” or the “Model”)
        to calculate the fair value of our 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, we have concluded
        that Black Scholes is the appropriate option pricing model to use for our stock options at
        this time.



Black
        Scholes uses inputs in its calculation of fair value that requires us to make certain
        estimates and assumptions.



For
        2007, we used the following weighted average assumptions:



2007Risk-free interest rate

                    3.91%Expected hold period to exercise

                    3.5 yearsVolatility in the price of the our shares

                    56%Dividend yield

                    Zero




A change
        in these estimates and assumptions will impact the value calculated by the Model. For
        instance, the volatility in the price of our shares is based on the quoted trading price.
        We assume that weekly trading prices best reflects our 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 we were to use daily
        trading prices, volatility would increase 17%, resulting in an option value increase of 20%
        from that calculated from the stated volatility. If we were to use monthly trading prices
        over the same period, volatility would increase 16%, resulting in an option value increase
        of 20%. 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. When
        we are estimating the expected hold period to exercise we take into consideration past
        history, the current trading price and volatility of our common shares and have concluded
        that 3.5 years is an appropriate estimate. However, our options have a 10 year life and
        given the fluctuations in our 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 our stock
        based compensation expense.



Consequently, in complying with Canadian GAAP and selecting what we believe
        are the most appropriate assumptions under the circumstances, we have recorded non-cash
        employee stock based compensation expense for the year of $539,156. However, given the
        above discussion this expense could have been increased by 20% and still be in accordance
        with Canadian GAAP.



Warrant Values



Since
        inception, we have raised cash through the issue of units and the exercise of warrants and
        options. Each issued unit consisted of one common share and one half 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. Canadian 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. The fair value of our 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.



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For
        reasons discussed above under “Stock Based Compensation”, the Model can produce
        a wide range of calculated values for our warrants.



Initial Value of Our Intellectual Property



In 1999,
        we were acquired by SYNSORB Biotech Inc. (“SYNSORB”) through the purchase of
        all of our share capital for $2,500,000. In connection with this acquisition, the basis of
        accounting for the assets and liabilities was changed to reflect SYNSORB’s cost of
        acquiring these assets and liabilities. This was achieved through the application of
        “push down” accounting. At the time, our major asset was our intellectual
        property; therefore the $2,500,000 was allocated to this asset with the corresponding
        credit to contributed surplus. This accounting treatment, permitted under Canadian GAAP,
        increased the value of our assets and shareholders’ equity. As of December 31, 2007,
        the net book value of our original intellectual property was $333,333. Consequently,
        without the application of push down accounting the value of our intellectual property and
        shareholders’ equity would be $333,333 lower than presented in the 2007 audited
        financial statements.



Selected Financial Data

2007

                        $

                    2006

                        $

                    2005

                        $Revenues

                    —

                    —

                    —Net loss, Canadian
                        GAAP(2)

                    15,642,191

                    14,297,524

                    12,781,831Net loss, U.S.
                        GAAP(2)

                    15,280,691

                    13,936,024

                    12,420,331Basic and diluted
                        loss per share, Canadian GAAP(2), (3)

                    0.39

                    0.39

                    0.39Basic and diluted
                        loss per share, U.S. GAAP(2), (3)

                    0.38

                    0.38

                    0.38Total assets,
                        Canadian GAAP (1), (3)

                    30,781,857

                    33,565,692

                    46,294,326Total assets, U.S.
                        GAAP(1), (3)

                    30,239,607

                    32,661,942

                    45,029,076Shareholders’
                        equity, Canadian GAAP

                    27,960,630

                    30,799,271

                    44,451,845Shareholders’
                        equity, U.S. GAAP

                    27,418,380

                    29,895,521

                    43,186,595Cash dividends
                        declared per share(5)

                    Nil

                    Nil

                    NilWeighted average
                        number of common shares outstanding

                    40,428,825

                    36,346,266

                    32,804,540


Notes:

(1)

                    Subsequent to the acquisition of Oncolytics Biotech Inc. by
                        SYNSORB in April 1999, we applied push down accounting. See note 2 to the
                        audited financial statements for 2007.


(2)

                    Included in net loss and net loss per share is stock based
                        compensation expense of $539,156 (2006 – $403,500; 2005 –
                        $64,104).


(3)

                    We issued 4,660,000 common shares for cash proceeds of
                        $12,114,394 (2006 – 284,000 common shares for cash proceeds of
                        $241,400; 2005 – 4,321,252 common shares for cash proceeds of
                        $18,780,189).


(4)

                    The long-term debt recorded represents repayable loans from
                        the Alberta Heritage Foundation. On January 1, 2007, in conjunction with
                        the adoption of the CICA Handbook section 3855 “Financial
                        Instruments”, this loan was recorded at fair value (see note 3 of the
                        December 31, 2007 audited financial statements).


(5)

                    We have not declared or paid any dividends since
                        incorporation.






33

---



A.

                    Results of Operations




Our
        audited financial statements have been prepared in accordance with Canadian generally
        accepted accounting principles. Our accounting policies are, in all material respects, in
        accordance with United States generally accepted accounting principles except as disclosed
        in note 21 of the audited financial statements.



Net loss
        for the year ended December 31, 2007 was $15,642,191 compared to $14,297,524 and
        $12,781,831 for 2006 and 2005, respectively.



Research
        and Development Expenses (“R&D”)

2007

                        $

                    2006

                        $

                    2005

                        $Manufacturing and related process development
                        expenses

                    4,325,271

                    4,508,882

                    4,706,203Clinical trial expenses

                    3,897,235

                    2,726,331

                    1,880,059Pre-clinical trial expenses and collaborations

                    822,891

                    1,127,612

                    786,488Quebec scientific research and experimental development
                        refund

                    (56,562)

                    (52,344)

                    —Other R&D expenses

                    2,326,253

                    2,225,208

                    1,936,227Research and development expenses

                    11,315,088

                    10,535,689

                    9,308,977




In 2007,
        R&D expenses were $11,315,088 compared to $10,535,689 and $9,308,977 in 2006 and 2005,
        respectively.



Manufacturing & Related Process Development
        (“M&P”)



M&P
        expenses include product manufacturing expenses and process development. Product
        manufacturing expenses include third party direct manufacturing costs, quality control
        testing, fill and packaging costs. Process development expenses include costs associated
        with studies that examine components of our manufacturing process looking for improvements
        and costs associated with the creation and testing of our master and working viral and cell
        banks.



2007

                        $

                    2006

                        $

                    2005

                        $Product manufacturing expenses

                    3,113,832

                    3,050,647

                    4,326,577Technology transfer expenses

                    388,673

                    457,975

                    —Process development expenses

                    822,766

                    1,000,260

                    379,626Manufacturing and related process development
                        expenses

                    4,325,271

                    4,508,882

                    4,706,203




Our
        M&P expenses for 2007 were $4,325,271 compared to $4,508,882 and $4,706,203 for 2006
        and 2005, respectively. At the beginning of 2007, we completed the production runs that had
        commenced at the end of 2006 and initiated additional production runs to manufacture
        REOLYSIN®. These runs provided us with sufficient product to supply our
        clinical trial program in 2007. Also, as a result of the increased viral yields from the
        process development activity in 2006, we incurred additional vial filling and packaging
        costs compared to 2006. We incurred technology transfer costs towards the end of 2007
        related to the transfer of our 40-litre production process to a second cGMP manufacturer
        located in the U.S.



In 2006,
        we completed the production runs that were ongoing at the end of 2005, providing us with
        sufficient product to complete our U.K. Phase II combination
        REOLYSIN®/radiation clinical trial and our existing Phase I clinical trials.
        At the same time, our process development activity helped improve virus yields from our
        manufacturing process which we subsequently transferred to our cGMP manufacturer in the
        U.K.



Our
        process development expenses for 2007 were $822,766 compared to $1,000,260 and $379,626 for
        2006 and 2005, respectively. In 2007, our main process development focus was on the scale
        up of our production process, which has included scale up studies at 40 and 100 litres. In
        2006, our process development activity included viral yield and scale up studies along with
        the validation of our fill process.



We
        expect that our M&P expenses for 2008 will increase compared to 2007. We expect to
        finalize the technology transfer of our 40-litre production run during the first part of
        2008. We will then initiate a number of 40-litre



34

---



production runs that we expect will be used in our clinical trial program in
        2008 and will also build up a level of stock for future use. We also expect that our
        process development activity will include finalizing our 100-litre scale up studies and
        commencing the examination of a lyophilization process for REOLYSIN® in
        2008. Once our 100-litre process development studies are complete we expect to transfer our
        100-litre manufacturing process to our cGMP manufacturers.



Clinical Trial Program



Clinical
        trial expenses include those costs associated with our clinical trial program in the U.S.,
        U.K. and Canada as well as those incurred in the preparation of commencing other clinical
        trials. Included in clinical trial expenses are direct patient costs, contract research
        organization (“CRO”) expenses, clinical trial site costs and other costs
        associated with our clinical trial program.



2007

                        $

                    2006

                        $

                    2005

                        $Direct clinical trial expenses

                    3,680,730

                    2,378,211

                    1,683,120Other clinical trial expenses

                    216,505

                    348,120

                    196,939Clinical trial expenses

                    3,897,235

                    2,726,331

                    1,880,059




In 2007,
        our direct clinical trial expenses were $3,680,730 compared to $2,378,211 and $1,683,120 in
        2006 and 2005, respectively. During 2007, we incurred direct patient costs in our seven
        ongoing clinical trials and completed patient enrollment in our Phase Ia/Ib
        REOLYSIN®/radiation clinical trial. As well, we incurred clinical site start up costs
        for our four co-therapy trials in the U.K. and our Phase II sarcoma clinical trial in the
        U.S.



In 2006,
        we incurred direct patient costs in four ongoing clinical trials along with clinical site
        start up costs associated with our U.S. recurrent malignant glioma trial and our
        chemotherapeutic co-therapy and radiation combination clinical trials in the
        U.K.



We
        expect our clinical trial expenses will continue to increase in 2008 compared to 2007. The
        increase in these expenses is expected to arise from continued enrollment and continued
        re-treatments in our existing clinical trials.



Pre-Clinical Trial Expenses and Research Collaborations



Pre-clinical trial expenses include toxicology studies and are incurred by
        us in support of expanding our clinical trial program into other indications, drug
        combinations and jurisdictions. Research collaborations are intended to expand our
        intellectual property related to reovirus and other viruses and identify potential
        licensing opportunities arising from our technology base.



2007

                        $

                    2006

                        $

                    2005

                        $Research collaboration expenses

                    785,760

                    1,064,692

                    652,393Pre-clinical trial expenses

                    37,131

                    62,920

                    134,095Pre-clinical trial expenses and research
                        collaborations

                    822,891

                    1,127,612

                    786,488




In 2007,
        our research collaboration expenses were $785,760 compared to $1,064,692 and $652,393 in
        2006 and 2005, respectively. In 2007, we completed those collaborations that began in 2006
        relating to the interaction of the immune system and the reovirus, the use of the reovirus
        as a co-therapy with existing chemotherapeutics, the use of new RAS active viruses as
        potential therapeutics, and to investigate new uses of the reovirus as a therapeutic. As
        well, we only extended certain collaborations in 2007, reducing the number of
        collaborations in 2007 compared to 2006.



In 2006,
        we expanded the number of collaborations we entered into in an effort to examine the
        interaction of the immune system and the reovirus, the use of the reovirus as a co-therapy
        with existing chemotherapeutics, the use of new RAS active viruses as potential
        therapeutics and to investigate new uses of the reovirus as a therapeutic.



35

---



We
        expect that pre-clinical trial expenses and research collaborations in 2008 will remain
        consistent with 2007. We expect to complete our ongoing collaborative program carried over
        from 2007 and will continue to be selective in the types of new collaborations we enter
        into in 2008.



Other
        Research and Development Expenses



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



2007

                        $

                    2006

                        $

                    2005

                        $R&D consulting fees

                    241,811

                    321,659

                    675,530R&D salaries and benefits

                    1,713,849

                    1,548,418

                    1,018,144Other R&D expenses

                    370,593

                    355,131

                    242,553Other research and development expenses

                    2,326,253

                    2,225,208

                    1,936,227




In 2007,
        our R&D consulting fees were $241,811 compared to $321,659 and $675,530 in 2006 and
        2005, respectively. In 2007, we incurred consulting activity associated with our ongoing
        clinical trials and assistance with our clinical trial regulatory applications which was
        consistent with 2006.



Our
        R&D salaries and benefits were $1,713,849 compared to $1,548,418 and $1,018,144 in 2006
        and 2005, respectively. The increase is a result of increases in salary levels along with
        the hiring of our Vice President of Intellectual Property.



In 2008,
        we expect that our Other R&D expenses will remain consistent with 2007. We expect that
        salaries and benefits will increase in 2008 to reflect increasing compensation levels. Our
        R&D consulting fees should remain consistent with 2007 levels. However, we may choose
        to engage additional consultants to assist us in the development of protocols and
        regulatory filings as the need may arise possibly causing our R&D consulting expenses
        to increase.



Operating Expenses



2007

                        $

                    2006

                        $

                    2005

                        $Public company related expenses

                    2,739,593

                    2,494,803

                    2,156,614Office expenses

                    1,248,095

                    1,135,341

                    926,758Operating expenses

                    3,987,688

                    3,630,144

                    3,083,372




In 2007,
        we incurred operating expenses of $3,987,688 compared to $3,630,144 and $3,083,372 in 2006
        and 2005, respectively. The reason for the change is as follows:



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 our
        U.S. and Canadian stock listings. In 2007, we incurred public company related expenses of
        $2,739,593 compared to $2,494,803 and $2,156,614 in 2006 and 2005, respectively. The
        increase in public company related expenses has been a result of incurring additional
        professional fees associated with the examination and anticipated expansion of our
        corporate structure and increased legal fees associated with protecting our portfolio of
        patents.



Office
        expenses include compensation costs (excluding stock based compensation), office rent, and
        other office related costs. In 2007, we incurred office expenses of $1,248,095 compared to
        $1,135,341 and $926,758 in 2006 and 2005, respectively. Our office expense activity has
        remained consistent over the last three years with increases mainly due to increased
        compensation levels and a general increase in office costs.





36

---



Stock
        Based Compensation



2007

                        $

                    2006

                        $

                    2005

                        $Stock based compensation

                    539,156

                    403,550

                    64,104




Non-cash
        stock based compensation recorded for 2007 was $539,156 compared to $403,550 and $64,104 in
        2006 and 2005, respectively. This expense is associated with the granting of stock options
        to our employees, directors, and certain consultants and in 2007 there were more options
        granted compared to 2006 and 2005.



Foreign Exchange Loss



2007

                        $

                    2006

                        $

                    2005

                        $Foreign exchange loss

                    8,862

                    35,270

                    253,608




We
        acquire investments in foreign currency to pay for anticipated expenses that are to be
        incurred in the U.S. and the U.K. As a result of fluctuations in the Canadian dollar
        relative to the U.S. dollar and British pound, we recorded a foreign exchange loss of
        $8,862 compared to $35,270 and $253,608 in 2006 and 2005, respectively.



Commitments



As at
        December 31, 2007, we are committed to payments totaling $960,000 during 2008 for
        activities related to clinical trial activity and collaborations. All of these committed
        payments are considered to be part of our normal course of business.



Summary
        of Quarterly Results



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



2007

                        $

                    

                    2006

                        $Dec.

                    Sept.

                    June

                    March

                    

                    Dec.

                    Sept.

                    June

                    MarchRevenue

                    —

                    —

                    —

                    —

                    

                    —

                    —

                    —

                    —Interest
                        income

                    265

                    319

                    359

                    268

                    

                    286

                    320

                    335

                    292Net loss
                        (3)

                    4,085

                    3,764

                    3,680

                    4,113

                    

                    4,890

                    3,425

                    2,988

                    2,995Basic and diluted
                        loss per common share(3)

                    0.13

                    0.09

                    0.09

                    0.11

                    

                    0.13

                    0.09

                    0.08

                    0.08Total
                        assets(1), (4)

                    30,782

                    33,897

                    37,670

                    41,775

                    

                    33,566

                    37,980

                    40,828

                    43,660Total cash(2),
                        (4)

                    25,214

                    28,191

                    31,533

                    35,681

                    

                    27,614

                    31,495

                    34,501

                    37,687Total long-term
                        debt(5)

                    —

                    —

                    —

                    —

                    

                    150

                    150

                    150

                    150Cash dividends
                        declared(6)

                    Nil

                    Nil

                    Nil

                    Nil

                    

                    Nil

                    Nil

                    Nil

                    Nil


Notes:

1)

                    Subsequent to the acquisition of Oncolytics Biotech Inc. by
                        SYNSORB in April 1999, we applied push down accounting. See note 2 to the
                        audited financial statements for 2007.


2)

                    Included in total cash are cash and cash equivalents plus
                        short-term investments.


3)

                    Included in net loss and loss per common share between
                        December 2007 and January 2005 are quarterly stock based compensation
                        expenses of $396,278, $38,909, $82,573, $21,396, $109,670, $34,671,
                        $222,376, and $36,833, respectively.




37

---



4)

                    We issued 4,600,000 units for net cash proceeds of
                        $12,063,394 during 2007 with each unit consisting of one common share and
                        one half of one common share purchase warrant. (2006 – 284,000 common
                        shares for cash proceeds of $241,400).


5)

                    The long-term debt recorded represents repayable loans from
                        the Alberta Heritage Foundation. On January 1, 2007, in conjunction with
                        the adoption of the CICA Handbook section 3855 “Financial
                        Instruments”, this loan was recorded at fair value (see note 3 of the
                        December 31, 2007 audited financial statements).


6)

                    We have not declared or paid any dividends since
                        incorporation.




Fourth
        Quarter



Statement of loss for the three month period ended December 31, 2007 and
        2006:



2007

                        (unaudited)

                        $

                    2006

                        (unaudited)

                        $ExpensesResearch and development expenses

                    2,499,833

                    3,953,002Operating expenses

                    1,189,058

                    840,497Stock based compensation

                    396,278

                    109,670Foreign exchange loss

                    6,033

                    37,973Amortization – intellectual property

                    248,540

                    226,150Amortization – property and equipment

                    10,653

                    9,2584,350,395

                    5,176,550Interest income

                    (264,918)

                    (286,445)Net loss

                    4,085,477

                    4,890,105




Fourth Quarter – Review of Operations



For the
        three month period ended December 31, 2007, our net loss was $4,085,477 compared to
        $4,890,105 for the three month period ended December 31, 2006. The reasons for the decrease
        are as follows:



Research
        and Development Expenses (“R&D”)



2007

                        (unaudited)

                        $

                    2006

                        (unaudited)

                        $Manufacturing and related process development expenses
                        (“M&P”)

                    778,539

                    1,757,675Clinical trial expenses

                    913,547

                    805,864Pre-clinical trial expenses and research
                        collaborations

                    91,446

                    436,058Other R&D expenses

                    716,301

                    953,405Research and development expenses

                    2,499,833

                    3,953,002




Our
        R&D expenses were $2,499,833 in the fourth quarter of 2007 compared to $3,953,002 in
        the fourth quarter of 2006.



38

---







Manufacturing & Related Process Development
        (“M&P”)



2007

                        (unaudited)

                        $

                    2006

                        (unaudited)

                        $Product manufacturing expenses

                    291,280

                    1,491,554Technology transfer expenses

                    373,715

                    —Process development expenses

                    113,544

                    266,121Manufacturing and related process development
                        expenses

                    778,539

                    1,757,675




Our
        M&P expenses were $778,539 in the fourth quarter of 2007 compared to $1,757,675 in the
        fourth quarter of 2006. In the fourth quarter of 2007, our M&P activity focused on the
        transfer of our 40-litre manufacturing process to a second cGMP toll manufacturer in the
        U.S. Our production activity in the fourth quarter of 2007 related to the final fill,
        packaging and testing of the production runs that were completed earlier in 2007. In the
        fourth quarter of 2006, we commenced a number of production runs after having completed the
        transfer of our manufacturing process with improved viral yields earlier in
        2006.



Our
        process development costs were $113,544 in the fourth quarter of 2007 compared to $266,121
        in the fourth quarter of 2006. In the fourth quarter of 2007, our process development
        activity continued to examine scaling up our manufacturing process to 100-litres. During
        the fourth quarter of 2006, we initiated research that examined the scale up of our
        manufacturing process after having completed studies that improved our viral yields earlier
        in 2006.



Clinical Trial Program



2007

                        (unaudited)

                        $

                    2006

                        (unaudited)

                        $Direct clinical trial expenses

                    882,706

                    595,072Other clinical trial expenses

                    30,841

                    210,792Clinical trial expenses

                    913,547

                    805,864




Our
        clinical trial expenses for the fourth quarter of 2007 were $913,547 compared to $805,864
        for the fourth quarter of 2006. In the fourth quarter of 2007, we were actively enrolling
        patients in seven clinical trials. In the fourth quarter of 2006, we were enrolling
        patients in three clinical trials and incurred costs associated with new clinical trial
        applications and clinical trial site selection.



Pre-Clinical Trial Expenses and Research Collaborations



2007

                        (unaudited)

                        $

                    2006

                        (unaudited)

                        $Research collaboration expenses

                    91,446

                    430,493Pre-clinical trial expenses

                    —

                    5,565Pre-clinical trial expenses and research
                        collaborations

                    91,446

                    436,058




Our
        pre-clinical trial expenses and research collaborations were $91,446 in the fourth quarter
        of 2007 compared to $436,058 in the fourth quarter of 2006. In the fourth quarter of 2007
        and 2006, our research collaboration activity continued to focus on the interaction of the
        immune system and the reovirus and the use of the reovirus as a co-therapy with
        chemotherapeutics and radiation. The number of collaborations decreased in the fourth
        quarter of 2007 compared to the fourth quarter of 2006.





39

---



Other
        Research and Development Expenses



2007

                        (unaudited)

                        $

                    2006

                        (unaudited)

                        $R&D consulting fees

                    61,768

                    187,009R&D salaries and benefits

                    604,140

                    641,303Quebec scientific research and experimental development
                        refund

                    (40,634)

                    —Other R&D expenses

                    91,027

                    125,093Other research and development expenses

                    716,301

                    953,405




Our
        other research and development expenses were $716,301 in the fourth quarter of 2007
        compared to $953,405 in the fourth quarter of 2006. In the fourth quarter of 2006, we
        incurred increased consulting activity associated with our co-therapy trials regulatory
        applications. We did not incur this activity in the fourth quarter of 2007. Our R&D
        salaries in the fourth quarter of 2007 were $604,140 compared to $641,303 in the fourth
        quarter of 2006. The decrease related to a reduction in annual cash bonuses paid to
        officers offset by the addition of our Vice President of Intellectual Property earlier in
        2007.



Operating Expenses



2007

                        (unaudited)

                        $

                    2006

                        (unaudited)

                        $Public company related expenses

                    783,690

                    487,338Office expenses

                    405,368

                    353,159Operating expenses

                    1,189,058

                    840,497




Our
        operating expenses in the fourth quarter of 2007 were $1,189,058 compared to $840,497 in
        the fourth quarter of 2006. In the fourth quarter of 2007, we incurred additional
        professional fees associated with our examination and anticipated expansion of our
        corporate structure which did not occur in the fourth quarter of 2006.



Stock
        Based Compensation



2007

                        (unaudited)

                        $

                    2006

                        (unaudited)

                        $Stock based compensation

                    396,278

                    109,670




Our
        non-cash stock based compensation expense recorded in the fourth quarter of 2007 was
        $396,278 compared to $109,670 for the fourth quarter of 2006. The stock based compensation
        expense in the fourth quarter of 2007 related to the granting of options to directors,
        officers and employees. In the fourth quarter of 2006, options were only granted to
        directors and employees.



Financing Activities



In 2007,
        we issued 4,600,000 units at a price of $3.00 per unit for net cash proceeds of
        $12,063,394. Each unit consisted of one common share and one-half of one common share
        purchase warrant. Each whole common share purchase warrant shall entitle the holder thereof
        to acquire one common share upon payment of $3.50 expiring on February 22, 2010. The net
        proceeds from this offering will be used for our clinical trial program, manufacturing
        activities in support of the clinical trial program and for general corporate
        purposes.



As well
        in 2007, we issued 60,000 common shares for cash proceeds of $51,000 relating to the
        exercise of stock options. In 2006 we issued 284,000 common shares for cash proceeds of
        $241,400 relating to the exercise of stock options.



40

---



B.

                    Liquidity and Capital Resources




Liquidity



Our
        sources of liquidity have primarily come from the issue of additional share capital through
        common share offerings, unit offerings, the exercise of warrants and the exercise of stock
        options.



As at
        December 31, 2007, we had cash and cash equivalents (including short-term investments) and
        working capital positions of $25,213,829 and $22,732,987, respectively, compared to
        $27,613,748 and $25,719,870, respectively for 2006. The decrease in 2007 reflects the cash
        usage from operating activities and the expenditures on intellectual property and capital
        assets of $13,569,594, $852,498, and $92,221, respectively with cash inflows of $12,114,394
        from the issue of common shares and the exercise of stock options. This is in line with our
        2007 estimate of cash usage of less than $1,400,000 per month.



We
        desire to maintain adequate cash and short-term investment reserves to support our planned
        activities which include our clinical trial program, product manufacturing, administrative
        costs, and our intellectual property expansion and protection. In 2008, we are expecting to
        continue to enroll patients in our various clinical trials and we also expect to continue
        with our collaborative studies pursuing support for our clinical trial program. We will
        therefore need to ensure that we have enough REOLYSIN® to supply our
        clinical trial and collaborative programs. We presently estimate the cash usage in 2008 to
        increase to $1,660,000 per month and we believe our existing capital resources are adequate
        to fund our current plans for research and development activities well into 2009. Factors
        that will affect our anticipated monthly burn rate include, but are not limited to, the
        number of manufacturing runs required to supply our 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 we choose to seek additional capital, we will look to fund additional capital
        requirements primarily through the issue of additional equity. We recognize the challenges
        and uncertainty inherent in the capital markets and the potential difficulties we might
        face in raising additional capital. Market prices and market demand for securities in
        biotechnology companies are volatile and there are no assurances that we will have the
        ability to raise funds when required.



Capital Expenditures



We spent
        $852,498 on intellectual property in 2007 compared to $842,610 in 2006. The change in
        intellectual property expenditures reflects the timing of filing costs associated with our
        expanded patent base. As well, we have benefited from fluctuations in the Canadian dollar
        as our patent costs are typically incurred in U.S. currency. At the end of 2007, we had
        been issued over 160 patents, including 25 U.S. and six Canadian patents as well as
        issuances in other jurisdictions. We also have over 180 patent applications filed in the
        U.S., Canada and other jurisdictions.



Investing Activities



Under
        our Investment Policy, we are permitted to invest in short-term instruments with a rating
        no less than R-1 (DBRS) with terms less than two years. Our portfolio mainly consists of
        bankers’ acceptances and discount bond notes payable. As of December 31, 2007, we had
        $18,498,733 invested under this policy, currently earning interest at an effective rate of
        4.26%.



C.

                    Research and Development




See
        discussion of research and development in MD&A and Results of Operations discussed
        above in Item 5.





41

---



D.

                    Trend Information




It is
        important to note that historical patterns of expenditures cannot be taken as an indication
        of future expenditures. The amount and timing of expenditures and availability of capital
        resources vary substantially from period to period, depending on the level of research and
        development activity being undertaken at any one time and the availability of funding from
        investors and prospective commercial partners. Over the past three years, our level of
        expenditures has increased due to our expanded clinical trial and manufacturing
        programs.

Except
        as disclosed elsewhere in our annual report, we know of no trends, uncertainties, demands,
        commitments or events that are reasonably likely to have a material effect on our liquidity
        or capital resources or that would cause reported financial information not necessarily to
        be indicative of future operating results or financial conditions.



E.

                    Off-Balance Sheet Arrangements




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



F.

                    Contractual Obligations




We have
        the following contractual obligations as at December 31, 2007:



Contractual Obligations

                    Payments Due by
                        PeriodTotal
                        $

                    Less than 1
                        year
                        $

                    1 -3 years
                        $

                    4 – 5
                        years
                        $

                    After 5
                        years
                        $Alberta Heritage Foundation(1)

                    150,000

                    —

                    —

                    —

                    150,000Capital lease obligations

                    Nil

                    —

                    —

                    —

                    —Operating leases (2)

                    305,553

                    178,860

                    126,693

                    —

                    —Purchase obligations

                    960,000

                    960,000

                    —

                    —

                    —Other long term obligations

                    Nil

                    —

                    —

                    —

                    —Total contractual obligations

                    1,415,553

                    1,138,860

                    126,693

                    —

                    150,000




Note:

1)

                    Our Alberta Heritage Foundation obligation requires
                        repayments upon the realization of sales (see note 7 of our audited 2007
                        financial statements).


2)

                    Our operating leases are comprised of our office lease and
                        exclude our portion of operating costs.




We
        intend to fund our capital expenditure requirements and commitments with existing working
        capital.



Transactions with Related Parties



In 2007 and
        2006, we did not enter into any related party transactions.



Financial Instruments and Other Instruments



We do not
        use financial derivatives or “other financial instruments”.



Other
        MD&A Requirements



We have
        41,180,748 common shares outstanding at March 5, 2008. If all of our warrants (4,220,000)
        and options (3,870,493) were exercised we would have 49,271,241 common shares
        outstanding.



Our 2007
        Annual Information Form is available on www.sedar.com.





42

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ITEM
        6. DIRECTORS, SENIOR MANAGEMENT AND
        EMPLOYEES

A.

                    Directors and Senior Management




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



Name and Municipality of Residence

                    Position with the Corporation

                    Principal Occupation

                    Director of the Company SinceBradley G. ThompsonPh.D(2)Calgary, Alberta

                    Chief Executive Officer and Chairman of the Board

                    Executive Chairman of the Board, President and Chief
                        Executive Officer since April 1999.

                    April 21, 1999Douglas A. Ball C.A.Calgary, Alberta

                    Chief Financial Officer and Director

                    Chief Financial Officer since May 2000. Mr. Ball was Vice
                        President, Finance and Chief Financial Officer of SYNSORB from June 1997 to
                        May 2000. Prior to this, he was the Vice President, Finance and
                        Administration and Chief Financial Officer of ECL Group of Companies Ltd.
                        Mr. Ball held this position from December 1995 until May 1997. Prior to
                        ECL, he was Controller and then Vice President and Controller of Canadian
                        Airlines International Ltd. from June 1993 until August 1995.

                    April 21, 1999William A. Cochrane, OC, M.D. (2),(3)

                        Calgary, Alberta

                    Director

                    President of W.A. Cochrane & Associates, Inc. (a
                        consulting company) since 1989 and Chairman of Resverlogix Corp. (a public
                        biopharmaceutical company) since 2000, and is a director of Sernova Corp..
                        Dr. Cochrane is an Officer of the Order of Canada and a 2002 recipient of
                        the Queens Golden Jubilee Medal. Dr. Cochrane also served as the Deputy
                        Minister of Health Services for the Province of Alberta from 1973 to 1974
                        and President of the University of Calgary from 1974 to 1978.

                    October 31, 2002Matthew C. Coffey Ph.D.Calgary, Alberta

                    Chief Scientific Officer

                    Chief Scientific Officer of the Corporation since December
                        2004, Vice-President of Product Development from July 1999 to December 2004
                        and Chief Financial Officer from September 1999 to May 2000.

                    N/A






43

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Name and Municipality of Residence

                    Position with the Corporation

                    Principal Occupation

                    Director of the Company SinceRobert B. Schultz, F.C.A. (1)Toronto, Ontario

                    Lead Director

                    Former Chairman and Director of Rockwater Capital
                        Corporation formerly McCarvill Corporation (a financial services company).
                        Chairman and Chief Executive Officer of Merrill Lynch Canada from August
                        1998 until his retirement on May 1, 2000. Prior to this appointment, Mr.
                        Schultz was Chief Executive Officer at Midland Walwyn since 1990. Since
                        joining the investment industry in 1971, Mr. Schultz has held a variety of
                        senior positions, and has participated on various industry-related boards
                        and committees including Director and Chairman of the Investment Dealers
                        Association of Canada.

                    June 30, 2000Fred A. Stewart,
                        Q.C.(1)(2),Calgary, Alberta

                    Director

                    President of Fred Stewart & Associates Inc. (a
                        government and corporate relations consulting company) since March 1996.
                        Prior to that, Mr. Stewart was an associate with Milner Fenerty, Barristers
                        and Solicitors from June 1993 to March 1996. Mr. Stewart served as Member
                        of the Legislative Assembly of the Province of Alberta, and as Minister of
                        Technology, Research and Telecommunications from 1986 to 1993.

                    August 27, 1999J. Mark Lievonen C.A.(3)Markham, Ontario

                    Director

                    President of Sanofi Pasteur Limited, a vaccine development,
                        manufacturing and marketing company, since October 1998 and holding
                        various positions with Sanofi Pasteur Limited and its predecessors since
                        1983.  Mr. Lievonen serves on a number of industry and community
                        boards and councils including BIOTECanada, the Ontario Genomics Institute,
                        the Ontario Institute for Cancer Research, and York
                        University.

                    April 5, 2004Karl Mettinger, M.D., Ph.DBerkeley, CA

                    Chief Medical Officer

                    Dr. Mettinger has been involved in clinical and regulatory
                        affairs with various pharmaceutical companies since 1985. Prior to joining
                        Oncolytics, he was Senior Vice President and Chief Medical Officer with
                        SuperGen Inc. Prior to that, he was Executive Director, Clinical Research
                        at IVAX/Baker Norton, the new drug subsidiary of IVAX Corporation. He
                        began his career in the industry as a Medical Director with KABI in Sweden.
                        Dr. Mettinger holds an MD from the University of Lund in Sweden and a PhD
                        (hematology/stroke) from the Karolinska Institute/Karolinska
                        Hospital in Stockholm, Sweden, where he was a physician and an
                        Associate Professor. He has overseen the global development and
                        approval of a number of products including several in oncology.

                    N/AJim Dinning(1)

                        Calgary, Alberta

                    Director

                    Chair of Western Financial Group since September 2004. Mr.
                        Dinning was Executive Vice President of TransAlta Corporation (power
                        generation and wholesale marketing company) from 1997 to 2004 and served as
                        Member of the Legislative Assembly of the Province of Alberta from 1986 to
                        1997. Mr. Dinning is the Chair of Export Development Canada and Director of
                        Russel Metals as well as other public and private companies.

                    March 24, 2004






44

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Name and Municipality of Residence

                    Position with the Corporation

                    Principal Occupation

                    Director of the Company SinceGer van Amersfoort,(2)Oakville, Ont

                    Director

                    President and Chief Executive Officer of Novartis Canada, a
                        pharmaceutical company with in excess of $1 billion in annual sales and a
                        workforce of 1,500, until his retirement in 2001. Before joining Novartis,
                        he was President and Chief Executive Officer of the U.K. SmithKline Beecham
                        operations from 1997 until managing the merger with Novartis in 1999. From
                        1990 to 1997, Mr. van Amersfoort headed up SmithKline Beecham operations in
                        Canada as President and Chief Executive Officer. Prior to that, he held
                        managing director positions with Beecham and The Boots Company, and sales
                        positions with Bristol Myers in Holland. He is a recipient of the Paul
                        Harris Medal and the Commemorative Medal of the Queen for outstanding
                        services to the community. He has served on the Board of the Pharmaceutical
                        Manufacturers Association of Canada (now Rx and D) for more than nine
                        years, serving as chairman in 1996.

                    June 15, 2006Ed Levy, Ph.D, (3)Lund, BC

                    Director

                    Adjunct professor at the W. Maurice Young Centre for Applied
                        Ethics at the University of British Columbia since retiring from QLT Inc.
                        in late 2002. From 1988 to 2002, Dr. Levy was with Vancouver-based
                        biotechnology company QLT Inc., most recently as Senior Vice President from
                        1998. In these roles, he was primarily responsible for negotiating and
                        managing QLT’s strategic alliances, led strategic planning and
                        oversaw the company’s intellectual property. Dr. Levy served on the
                        board of BIOTECanada from 1999-2002, and he has served on the boards of
                        several technology companies and not-for-profits. Dr. Levy holds a PhD in
                        the History and Philosophy of Science from Indiana University and taught
                        philosophy of science at UBC from 1967-1988.

                    May 17, 2006Mary Ann Dillahunty, JD, MBAHalf Moon Bay, CA

                    Vice President, Intellectual Property

                    Ms. Dillahunty was a principal in the law firm of Fish &
                        Richardson, a leading intellectual property firm in the U.S. In 1992, she
                        joined the law firm of Burns, Doane, Swecker & Mathis (now part of
                        Buchanan Ingersoll & Rooney), and subsequently became a partner in the
                        firm. During 1996-1997, Ms. Dillahunty held the position of patent counsel
                        to the Implant Division of ALZA Corporation. Before joining Burns Doane,
                        she was a patent agent and law clerk with the law firm of Heller, Ehrman,
                        White & McAuliffe. Prior to focusing her career on patent law, Ms.
                        Dillahunty held numerous positions in the biotechnology, pharmaceutical and
                        medical device industries, including responsibilities in regulatory affairs
                        and research science. Ms. Dillahunty holds a B.S. in Microbiology from
                        Michigan State University, an MBA from George Washington University, and a
                        JD degree from Stanford Law School.

                    N/A




45

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Name and Municipality of Residence

                    Position with the Corporation

                    Principal Occupation

                    Director of the Company SinceGeorge M. Gill, M.D.

                        Alexandria, VA

                    Senior Vice President, Clinical and Regulatory
                        Affairs

                    Dr. Gill has been a consultant in clinical research and
                        regulatory affairs to the pharmaceutical and biotechnology industries since
                        he retired from Ligand Pharmaceuticals in 1999. During his 38 years in the
                        industry, he also served in senior executive positions with ICI
                        Pharmaceuticals (now AstraZeneca), Bristol-Myers Squibb, and Hoffmann-La
                        Roche. Dr. Gill holds a B.Sc. in chemistry from Dickinson College in
                        Pennsylvania and an M.D. from the School of Medicine of the University of
                        Pennsylvania in Philadelphia.

                    N/A


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. Mr.
                        Stewart 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, 793,201 of our common shares, representing 1.9% of the issued and
        outstanding common shares.



Certain
        of our directors are associated with other companies, which may give rise to conflicts of
        interest. In accordance with theABCA, directors who have a material interest in any person
        who is a party to a material contract or a proposed material contract with us 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 Oncolytics Biotech
        Inc.



B.

                    Executive Compensation


Directors

The
        following table sets forth information concerning the total compensation paid in 2007 to
        each director.



Annual Compensation

                    Long TermCompensationDirector

                    Board Attendance Fees($)

                    Committee Attendance Fees($)

                    All Other Compensation($)

                    Securities Under Options Granted(1)

                        (#)

                    Exercise Price($)

                    Expiry DateBob Schultz

                    10,500

                    6,000

                    —

                    17,500

                    2.22

                    Dec. 12, 2017Fred Stewart

                    10,500

                    8,000

                    —

                    17,500

                    2.22

                    Dec. 12, 2017William Cochrane

                    10,500

                    2,250

                    —

                    17,500

                    2.22

                    Dec. 12, 2017Jim Dinning

                    10,500

                    6,000

                    —

                    17,500

                    2.22

                    Dec. 12, 2017Mark Lievonen

                    10,500

                    750

                    —

                    17,500

                    2.22

                    Dec. 12, 2017






46

---



Annual Compensation

                    Long TermCompensationDirector

                    Board Attendance Fees($)

                    Committee Attendance Fees($)

                    All Other Compensation($)

                    Securities Under Options Granted(1)

                        (#)

                    Exercise Price($)

                    Expiry DateEd Levy

                    10,500

                    750

                    —

                    17,500

                    2.22

                    Dec. 12, 2017Ger van Amersfoort

                    10,500

                    1,500

                    —

                    17,500

                    2.22

                    Dec. 12, 2017 Notes: (1) The securities covered by the options are common
                            shares of the Company.
  Summary Compensation Table The
            following table sets forth information concerning the total compensation paid to our
            officers in 2007.  Annual Compensation

                        Long Term

                            CompensationName and Principal Position

                        Year

                        Salary

                            ($)

                        Bonus

                            ($)

                        Other Annual

                            Compensation(1)

                            ($)

                        Securities Under

                            Options Granted

                            (#)(3)

                        All Other Compensation

                            ($)Dr. Bradley G. Thompson President and Chief Executive
                            Officer

                        2007

                        $364,681

                        $72,206

                        $19,000

                        149,160

                        $15,881Douglas A. BallChief Financial Officer

                        2007

                        $246,240

                        $53,917

                        $19,000

                        33,333

                        $12,374Dr. Matthew CoffeyChief Scientific Officer

                        2007

                        $246,240

                        $53,917

                        $19,000

                        33,333

                        $10,574Dr. Karl Mettinger (2)Chief Medical Officer

                        2007

                        $309,000

                        $53,356

                        Nil

                        33,333

                        $34,880Mary Ann Dillahunty (2)Vice-President, Intellectual Property

                        2007

                        $150,000

                        $26,678

                        Nil

                        116,667

                        $14,516
 Notes: (1)

                        Perquisites and other personal benefits received in the
                            respective periods did not exceed the lesser of $50,000 and 10% of the
                            total annual salary and bonuses for any of the named executive
                            officers. The dollar amounts set forth under this column relate to RRSP
                            contributions made by the Company on behalf of the Named Executive
                            Officer.
 (2)

                        US employees paid in US dollars, all amounts for each US
                            Employee are indicated in US dollars. Dr. Mettinger joined the
                            Corporation in September 2005 and Ms. Dillahunty joined the Corporation
                            on February 1, 2007.
 (3)

                        See “Stock Options”for details of
                            exercise price and expiry.
  There are no long term incentive, benefit or actuarial plans in place.
            The Company does not currently have a stock appreciation rights plan.   47   Stock Options  Option Grants During the Year Ended December 31,
            2007 Stock options granted to the Named Executive Officers during the
            financial year ended December 31, 2007 were as follows:  Common Shares Under Options Granted

                        % of Total Options Granted in Fiscal Year

                        Exercise Price

                        Closing Market Price on Date of Grant

                        Expiry DateDr. Bradley G. Thompson

                        149,160

                        28%

                        2.22

                        2.22

                        December 12, 2017Douglas A. Ball

                        33,333

                        6%

                        2.22

                        2.22

                        December 12, 2017Dr. Matthew Coffey

                        33,333

                        6%

                        2.22

                        2.22

                        December 12, 2017Dr. Karl Mettinger

                        33,333

                        6%

                        2.22

                        2.22

                        December 12, 2017
 Mary Ann Dillahunty

                        100,00016,667

                        19%3%

                        3.282.22

                        3.282.22

                        February 1, 2017

                            December 12, 2017
  Aggregated Option Exercises During the Year Ended December 31,
            2007 and Financial Year-End Option Values The
            following table sets forth certain information respecting the numbers and accrued value
            of unexercised stock options as at December 31, 2007 and options exercised by the Named
            Executive Officers during the financial year ended December 31, 2007:  Securities Acquired on Exercise

                            (#)

                        Aggregate Value Realized

                            ($) (1)

                        Unexercised Options at

                            December 31, 2007

                            (#)

                        Value of Unexercised

                            in-the-Money Options at

                            December 31, 2007

                            ($) (2)Exercisable

                        Unexercisable

                        Exercisable

                        UnexercisableDr. Bradley G.  Thompson

                        Nil

                        Nil

                        786,160

                        -

                        -

                        -Douglas A. Ball

                        Nil

                        Nil

                        674,833

                        -

                        $4,250

                        -Dr. Matthew Coffey

                        60,000

                        $90,000

                        650,883

                        -

                        $190,018

                        -Dr. Karl Mettinger

                        Nil

                        Nil

                        133,333

                        100,000

                        -

                        -Mary Ann Dillahunty

                        Nil

                        Nil

                        41,667

                        75,000

                        -

                        -
 Notes: 1)

                        The aggregate value realized represents the dollar value
                            equal to the difference between the exercise price of the options
                            exercised and the market value of the Common Shares on the Toronto
                            Stock Exchange on the date the options were exercised, multiplied by
                            the number of options exercised.
 2)

                        The value of the unexercised "in-the-money" options has
                            been determined by subtracting the exercise price of the options from
                            the closing Common Share price of $1.70 on December 31, 2007, as
                            reported by the Toronto Stock Exchange, and multiplying by the number
                            of Common Shares that may be acquired upon the exercise of the
                            options.
  Employment Contracts with Executive Officers We
            have entered into employment agreements with each of the Executive Officers (each an
            "Employment Agreement"). Pursuant to the terms of the Employment Agreements, Dr.
            Thompson is entitled to an annual salary of $444,996 for the calendar year 2008, Mr.
            Ball is entitled to an annual salary of $257,567 for the calendar year 2008, Dr. Coffey
            is entitled to an annual salary of $326,224 for the calendar year 2008, Dr. Mettinger
            is entitled to an annual salary of US$318,270 for the calendar year 2008 and Ms.
            Dillahunty is entitled to US$231,750 for the calendar year 2008. Further, each Named
            Executive Officer is entitled to additional benefits and performance-based bonuses. The
            Employment Agreements provide that each Named Executive Officer is subject to certain
            confidentiality and non-competition restrictions during and following the course of
            their respective employment with the Company. Each Employment Agreement shall continue
            until terminated by either party in accordance with the notice provisions
            thereof.  48   Termination of Employment or Change of Control If
            the Employment Agreements of Dr. Thompson, Mr. Ball or Dr. Coffey are terminated by the
            Company other than for cause, then all unexercised and unvested stock options then held
            by each shall forthwith vest and become exercisable. Mr. Ball and Dr. Coffey shall be
            entitled to 12 months pay in lieu of notice; and Dr. Thompson shall be entitled to 18
            months pay in lieu of notice. If the Employment Agreements of Dr. Mettinger and Ms.
            Dillahunty are terminated by the Company other than for cause, then all unexercised and
            unvested stock options then held by each are governed by the terms of the
            Company’s stock option plan. Dr. Mettinger shall be entitled to not more than 9
            months pay in lieu of notice and Ms. Dillahunty shall be entitled to not more than 12
            months pay lieu of notice. Further, if there is a change of control of the Company and
            Dr. Thompson, Mr. Ball, Dr. Coffey, Dr. Mettinger or Ms. Dillahunty are terminated
            without cause within one year following such change of control, then Dr.
            Thompson shall be entitled to 36 months pay in lieu of notice,
            Mr. Ball and Dr. Coffey shall be entitled to 24 months pay in lieu of notice, and Dr.
            Mettinger and Ms. Dillahunty shall be entitled to not more than 24 months pay in lieu
            of notice.  C.

                        Board Practices
 Our
            directors 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.  Name and Municipality of Residence

                        Position with the Corporation

                        Director of the Corporation Since

                        Date of Expiration of Current Term of
                            OfficeBradley G. ThompsonPh.D(2)Calgary, Alberta

                        President, Chief Executive Officer and Chairman of the
                            Board

                        April 21, 1999

                        Date of 2009 Annual General Meeting of the
                            ShareholdersDouglas A. Ball C.A.Calgary, Alberta

                        Chief Financial Officer and Director

                        April 21, 1999

                        Date of 2009 Annual General Meeting of the
                            ShareholdersWilliam A. Cochrane, OC, M.D.
                            (2),(3)

                            Calgary, Alberta

                        Director

                        October 31, 2002

                        Date of 2009 Annual General Meeting of the
                            ShareholdersRobert B. Schultz, F.C.A. (1)Toronto, Ontario

                        Lead Director

                        June 30, 2000

                        Date of 2009 Annual General Meeting of the
                            ShareholdersFred A. Stewart,
                            Q.C.(1)(2),Calgary, Alberta

                        Director

                        August 27, 1999

                        Date of 2009 Annual General Meeting of the
                            ShareholdersJ. Mark Lievonen C.A.(3)Markham, Ontario

                        Director

                        April 5, 2004

                        Date of 2009 Annual General Meeting of the
                            ShareholdersJim Dinning(1)

                            Calgary, Alberta

                        Director

                        March 24, 2004

                        Date of 2009 Annual General Meeting of the
                            Shareholders
  49   Name and Municipality of Residence

                        Position with the Corporation

                        Director of the Corporation Since

                        Date of Expiration of Current Term of
                            OfficeGer van Amersfoort,(2)Oakville, Ont

                        Director

                        June 15, 2006

                        Date of 2009 Annual General Meeting of the
                            ShareholdersEd Levy, Ph.D, (3)Lund, BC

                        Director

                        May 17, 2006

                        Date of 2009 Annual General Meeting of the
                            Shareholders
 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.
                            Mr. Stewart 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.
  Directors’ Contracts We
            receive a director’s consent from each of the independent directors upon their
            acceptance of their director’s position. We also enter into an Indemnity
            Agreement and Directors Confidentiality and Intellectual Property Assignment Agreement
            with each director.  The
            Company does not have any contracts with any of its directors which provide for
            benefits upon the termination of employment.  Compensation of Directors Each
            director who is not a salaried employee of the Company was entitled to a fee of $1,500
            per board meeting attended and $750 per committee meeting attended ($1,500 in respect
            of audit committee meetings attended). We also grant to directors, from time to time,
            stock options in accordance with the the Company’s stock option plan and the
            reimbursement of any reasonable expenses incurred by them while acting in their
            directors' capacity.  Following a review by the Compensation Committee and an independent
            compensation consultant, the independent directors’ compensation will be
            increased to $1,750 per board and committee meeting attended for 2008. An annual
            retainer fee of $15,000 will be paid for service during 2008 and the lead director will
            receive an additional annual $10,000 retainer. The Chair of the Audit Committee will
            receive an additional annual retainer of $6,000.  Compensation Committee The
            Corporation has formed a Compensation Committee consisting of three outside directors
            Mr. Stewart, Mr. van Amersfoort and Dr. Cochrane, none of whom are nor have been
            employees or officers of the Company or any of its affiliates. Mr. Stewart is presently
            the Chair of the Compensation Committee.  In
            arriving at its compensation decisions, the Compensation Committee considers the
            long-term interests of the Company as well as its current stage of development. Based
            on these considerations, compensation is focused on performance-based factors. The
            Compensation Committee undertakes market comparisons and provides advice to the Board
            of Directors on developing appropriate compensation arrangements, based on information
            from other corporations, published data and reports from external consultants. The
            Compensation Committee also makes specific recommendations to the board of directors of
            Oncolytics with respect to compensation paid to the Company’s executive and
            senior officers.  The
            objectives of the Corporation's compensation arrangements are: (i) to attract and
            retain key personnel; (ii) to encourage commitment to the Corporation and its goals;
            (iii) to align executive interests with those of its   50    shareholders; (iv) to reward executives for performance in relation to
            predetermined and quantifiable goals; and (v) to identify and focus executives on key
            business factors that affect shareholder value.  Compensation Committee Mandate  This
            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,
            April 23, 2003 and March 5, 2004. This Mandate is effective from and after December 13,
            2005.  1. Policy Statement It
            is the policy of Oncolytics Biotech Inc. (the "Corporation") to establish and maintain
            a Compensation Committee (the "Committee"), composed entirely of independent directors,
            to assist the Board of Directors of the Corporation (the "Board") in carrying out its
            responsibility for the Corporation’s human resources and compensation policies
            and processes. The 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 Committee, it will have the discretion to investigate and conduct reviews of any human resource
            or compensation matter including the standing authority to retain experts and, with
            approval of the Board, special counsel.  2. Composition of Committee a.

                        The Committee shall consist of a minimum of two (2)
                            directors, at least half of whom shall be resident Canadians. The Board
                            shall appoint the members of the Committee and may seek the advice and
                            assistance of the Corporate Governance and Nominating Committee in
                            identifying qualified candidates. The Board shall appoint one member of
                            the Committee to be the Chair of the Committee, or delegate such
                            authority to appoint the Chair of the Committee to the
                            Committee.
 b.

                        The Chair of the Committee shall be responsible for the
                            leadership of the Committee, including preparing or approving the
                            agenda, presiding over the meetings, and making committee
                            assignments.
 c.

                        Each director appointed to the Committee by the Board
                            shall be an outside director who is unrelated. An outside, unrelated
                            director is a director who meets the requirements of NASDAQ Rule 4200
                            and National Instrument 58-101 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.
 d.

                        A director appointed by the Board to the Committee shall
                            be a member of the Committee until replaced by the Board or until his
                            or her resignation.
 3. Meetings of the Committee a.

                        The Committee shall convene a minimum of two times each
                            year at such times and places as may be designated by the Chair of the
                            Committee and whenever a meeting is requested by the Board, a member of
                            the Committee, or the Chief Executive Officer of the Corporation (the
                            "CEO").
 b.

                        Notice of each meeting of the Committee shall be given
                            to each member of the Committee and the CEO, who shall each be entitled
                            to attend each meeting of the Committee and shall attend whenever
                            requested to do so by a member of the Committee.
   51    c.

                        Notice of a meeting of the 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
 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
                            Committee may permit.
 d.

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

                    A member or members of the Committee may participate in a
                        meeting of the 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 Committee, the members of
                        the Committee shall choose one of the members present to be Chair of the
                        meeting. In addition, the members of the Committee shall choose one of the
                        persons present to be the Secretary of the meeting.


g.

                    Minutes shall be kept of all meetings of the Committee and
                        shall be signed by the Chair and the Secretary of the meeting.


4.
        Duties and Responsibilities of the Committee

a.

                    The 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.


b.

                    The Committee’s primary duties and responsibilities
                        are to review and make recommendations to the Board in respect
                        of:


i.

                    human resource policies, practices and structures (to
                        monitor consistency with the Corporation’s goals and near and
                        long-term strategies, support of operational effectiveness and efficiency,
                        and maximization of human resources potential);


ii.

                    compensation policies and guidelines;


iii.

                    management incentive and perquisite plans and any
                        non-standard remuneration plans;


iv.

                    senior management, executive and officer appointments and
                        their compensation;


v.

                    management succession plans, management training and
                        development plans, termination policies and termination
                        arrangements;


vi.

                    the Corporation’s senior human resource
                        (organizational) structure;
                        and


vii.

                    Board compensation matters.






52

---





c.

                    In carrying out its duties and responsibilities, the
                        Committee shall:


viii.

                    annually assess and make a recommendation to the Board with
                        regard to the competitiveness and appropriateness of the compensation
                        package of the CEO, all other officers of the Corporation and such other
                        key employees of the Corporation or any subsidiary of the Corporation as
                        may be identified by the CEO and approved by the Committee (collectively,
                        the "Designated Employees");


ix.

                    annually review the performance goals and criteria for the
                        CEO and evaluate the performance of the CEO against such goals and criteria
                        and recommend to the Board the amount of regular and incentive compensation
                        to be paid to the CEO;


x.

                    annually, review and make a recommendation to the Board
                        regarding the CEO’s performance evaluation of Designated Employees
                        and his recommendations with respect to the amount of regular and incentive
                        compensation to be paid to such Designated Employees;


xi.

                    review and make a recommendation to the Board regarding any
                        employment contracts or arrangements with each of the Designated Employees,
                        including any retiring allowance arrangements or any similar arrangements
                        to take effect in the event of a termination of employment;


xii.

                    periodically, review the compensation philosophy statement
                        of the Corporation and make recommendations for change to the Board as
                        considered necessary;


xiii.

                    from time to time, review and make recommendations to the
                        Board in respect of the design, benefit provisions, investment options and
                        text of applicable pension, retirement and savings plans or related
                        matters;


xiv.

                    annually, in conjunction with the Corporation’s
                        general and administrative budget, review and make recommendations to the
                        Board regarding compensation guidelines for the forthcoming budget
                        period;


xv.

                    when requested by the CEO, review and make recommendations
                        to the Board regarding short term incentive or reward plans and, to the
                        extent delegated by the Board, approve awards to eligible
                        participants;


xvi.

                    review and make recommendations to the Board regarding
                        incentive stock option plans or any other long term incentive plans and to
                        the extent delegated by the Board, approve grants to participants and the
                        magnitude and terms of their participation;


xvii.

                    as required, fulfill the obligations assigned to the
                        Committee pursuant to any other employee benefit plans approved by the
                        Board;


xviii.

                    annually, prepare or review the report on executive
                        compensation required to be disclosed in the Corporation’s
                        information circular or any other human resource or compensation matter
                        required to be publicly disclosed by the Corporation;


xix.

                    periodically, but at least every third year, review and make
                        a recommendation to the Board regarding the compensation of the Board of
                        Directors;


xx.

                    as required, retain independent advice in respect of human
                        resources and compensation matters and, if deemed necessary by the
                        Committee, meet separately with such advisors; and






53

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xxi.

                    assess, on an annual basis, the adequacy of this Mandate and
                        the performance of the Committee.


d.

                    In addition to the foregoing, the Committee shall undertake
                        on behalf of the Board such other initiatives as may be necessary or
                        desirable to assist the Board in discharging its responsibility to ensure
                        that appropriate human resources development, performance evaluation,
                        compensation and succession planning programs are in place and operating
                        effectively.




Audit Committee

The
        Corporation has formed an Audit Committee consisting of three independent directors: Mr.
        Fred Stewart, Mr. Jim Dinning and Mr. Robert Schultz, none of whom are nor have been
        employees or officers of the Company or any of its affiliates. Mr. Stewart is presently the
        Chair of the Audit Committee. Each Audit Committee member is financially
        literate.



Mandate of the Audit Committee



This
        Mandate was initially approved by the Company’s board of directors on September 3,
        1999. Subsequent to that date, the Board has amended and restated this Mandate on each of
        December 13, 2002 April 23, 2003, March 5, 2004 and December 8, 2004. This Mandate is
        effective from and after December 14, 2006.



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.



Composition of the Committee

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 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.

The
        Chair of the Committee shall be responsible for leadership of the Committee, including
        preparing or approving the agenda, presiding over the meetings, and making committee
        assignments.

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 meets the requirements of
        NASDAQ Rule 4200 and Multilaterial Instrument 52-110. A director appointed to the audit
        committee shall also meet the requirements of NASDAQ Rule 4350 (d)(2)(A)(ii) and Exchange
        Act Rule 10A-3(b)(1). Such director shall be independent of management and 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 abovementioned rules and any applicable revisions thereto, and
        any additional relevant then current legislation, rules, policies and instruments of
        applicable regulatory authorities.

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



54

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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 GAAP. 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, which for further
        clarification, shall include but not be limited to the definition of “financial
        expert” as defined by the U.S. Securities and Exchange Commission rule.

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.

Meetings of the Committee



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.

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.

Notice
        of a meeting of the Audit Committee shall:

a.

                    be in writing, including by electronic communication
                        facilities;


b.

                    state the nature of the business to be transacted at the
                        meeting in reasonable detail;


c.

                    to the extent practicable, be accompanied by copies of
                        documentation to be considered at the meeting; and


d.

                    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.


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.

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.

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.

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.

Minutes
        shall be kept of all meetings of the Audit Committee and shall be signed by the Chair and
        the Secretary of the meeting.



55

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Duties and Responsibilities of the Committee

The
        Audit Committee’s primary duties and responsibilities are to:

a.

                    identify and monitor the management of the principal risks
                        that could impact the financial reporting of the Corporation ;


b.

                    monitor the integrity of the Corporation’s financial
                        reporting process and system of internal controls regarding financial
                        reporting and accounting compliance;


c.

                    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 ;


d.

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


e.

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


f.

                    provide an avenue of communication among the external
                        auditors, management and the Board;


g.

                    carry out a review designed to ensure that an effective
                        "whistle blowing" procedure exists to permit stakeholders to express any
                        concerns regarding accounting, internal controls, auditing matters or
                        financial matters to an appropriately independent individual;


h.

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


i.

                    ensure financial disclosure incorporates inclusion of any
                        material correcting adjustments required by the external auditors;
                        and


j.

                    require and ensure that the external auditors are directly
                        responsible to the Audit Committee, to whom they report


The
        Audit Committee shall have the authority to:

a.

                    inspect any and all of the books and records of the
                        Corporation and its affiliates;


b.

                    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;


c.

                    engage independent counsel and other advisors as it
                        determines necessary to carry out its duties; and


d.

                    to set and pay the compensation for any advisors employed by
                        the Audit Committee.


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.

The
        Audit Committee shall:

56

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a.

                    review the audit plan with the Corporation’s external
                        auditors and with management;


b.

                    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;


c.

                    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;


d.

                    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;


e.

                    review with senior management the process of identifying,
                        monitoring and reporting the principal risks affecting financial
                        reporting;


f.

                    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.


g.

                    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;


h.

                    review with financial management and the external auditors
                        the quarterly unaudited financial statements and management discussion and
                        analysis before release to the public;


i.

                    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


j.

                    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.


The
        Audit Committee shall:

57

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a.

                    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.;


b.

                    consider the recommendations of management in respect of the
                        appointment of the external auditors;


c.

                    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 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;


d.

                    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;


e.

                    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


f.

                    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.


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.

The
        Audit Committee shall periodically review with management the need for an internal audit
        function.

The
        Audit Committee shall review the Corporation’s accounting and reporting of costs,
        liabilities and contingencies.

The
        Audit Committee shall establish and maintain procedures for:

a.

                    the receipt, retention and treatment of complaints received
                        by the Corporation regarding accounting controls, or auditing matters;
                        and


b.

                    the confidential, anonymous submission by employees of the
                        Corporation or concerns regarding questionable accounting or auditing
                        matters.


The
        Audit Committee shall review and approve the Corporation's hiring policies regarding
        employees and former employees of the present and former external auditors.

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.



58

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The
        Audit Committee shall assess, on an annual basis, the adequacy of this Mandate and the
        performance of the Audit Committee.



D.

                    Employees


The following table sets out the number of our employees at the end of each
        of the last three fiscal years.

2007

                    2006

                    2005Research and development

                    9

                    7

                    7Operating

                    5

                    5

                    5


Total

                    14

                    12

                    12




E.

                    Share Ownership


The following table sets out the share ownership of our directors and
        offices.

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Common Shares

                    Percentage of Ownership(1)

                    Options(2)

                    Exercise Price

                    Expiry Date

                    Percentage of Outstanding (1)(3)OfficersBrad Thompson

                    652,900

                    1.58%

                    15,000

                    12.15

                    Dec 14, 201018,000

                    9.76

                    Jun 20, 201125,000

                    7.25

                    Dec 17, 201150,000

                    2.70

                    May 16, 201210,000

                    2.00

                    Dec 13, 201259,000

                    3.33

                    Aug 5, 201380,000

                    4.50

                    Dec 11, 201330,000

                    8.10

                    May 28, 2014350,000

                    5.00

                    Dec 9, 2014149,160

                    2.22

                    Dec 12, 2017786,160

                    

                    

                    3.42%Matt Coffey

                    60,000

                    **

                    223,550

                    0.85

                    Nov 8, 200915,000

                    12.15

                    Dec 14, 201018,000

                    9.76

                    Jun 20, 201120,000

                    7.25

                    Dec 17, 201137,500

                    2.70

                    May 16, 201210,000

                    2.00

                    Dec 13, 201253,500

                    3.33

                    Aug 5, 201340,000

                    4.50

                    Dec 11, 201320,000

                    8.10

                    May 28, 2014180,000

                    5.00

                    Dec 9, 201433,333

                    2.22

                    Dec 12, 2017650,883

                    

                    

                    1.69%Doug Ball

                    3,000

                    **

                    5,000

                    0.85

                    Nov 8, 2009250,000

                    9.50

                    May 17, 201015,000

                    12.15

                    Dec 14, 201027,000

                    9.76

                    Jun 20, 201120,000

                    7.25

                    Dec 17, 201137,500

                    2.70

                    May 16, 201210,000

                    2.00

                    Dec 13, 201237,000

                    3.33

                    Aug 5, 201340,000

                    4.50

                    Dec 11, 201320,000

                    8.10

                    May 28, 2014180,000

                    5.00

                    Dec 9, 201433,333

                    2.22

                    Dec 12, 2017674,833

                    

                    

                    1.61%Mary Ann Dillahunty

                    2,201

                    **

                    100,000

                    3.28

                    Feb 1, 201716,667

                    2.22

                    Dec 12, 2007116,667

                    

                    

                    **Karl Mettinger

                    2,000

                    **

                    200,000

                    3.18

                    Sept 23, 201533,333

                    2.22

                    Dec 12, 2017233,333

                    

                    

                    **George Gill

                    —

                    **

                    20,000

                    7.50

                    Oct 18, 2011






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|              | Common Shares | Percentage of Ownership(1) | Options(2) | Exercise Price | Expiry Date  | Percentage of Outstanding (1)(3)
|------------- | ------------- | -------------------------- | ---------- | -------------- | ------------ | --------------------------------
|              |               |                            | 100,000    | 1.85           | Oct 10, 2012 |                                 
|              |               |                            | 17,000     | 3.33           | Aug 5, 2013  |                                 
|              |               |                            | 40,000     | 4.50           | Dec 11, 2013 |                                 
|              |               |                            | 7,500      | 8.10           | May 28, 2014 |                                 
|              |               |                            | 12,500     | 5.00           | Dec 9, 2014  |                                 
|              |               |                            | 16,667     | 2.22           | Dec 12, 2017 |                                 
|              |               |                            | 213,667    |                |              | **                              
|              |               |                            |            |                |              |                                 
|Directors     |               |                            |            |                |              |                                 
|Bob Schultz   | 10,000        | **                         | 50,000     | 13.50          | Jul 11, 2010 |                                 
|              |               |                            | 15,000     | 12.15          | Dec 14, 2010 |                                 
|              |               |                            | 9,000      | 9.76           | Jun 20, 2011 |                                 
|              |               |                            | 10,000     | 7.25           | Dec 17, 2011 |                                 
|              |               |                            | 7,500      | 2.70           | May 16, 2012 |                                 
|              |               |                            | 10,000     | 2.00           | Dec 13, 2012 |                                 
|              |               |                            | 34,000     | 3.33           | Aug 5, 2013  |                                 
|              |               |                            | 10,000     | 4.50           | Dec 11, 2013 |                                 
|              |               |                            | 5,000      | 8.10           | May 28, 2014 |                                 
|              |               |                            | 22,500     | 5.00           | Dec 9, 2014  |                                 
|              |               |                            | 10,000     | 2.25           | Dec 15, 2016 |                                 
|              |               |                            | 17,500     | 2.22           | Dec 12, 2017 |                                 
|              |               |                            | 200,500    |                |              | **                              
|              |               |                            |            |                |              |                                 
|              |               |                            |            |                |              |                                 
|Fred Stewart  | 24,000        | **                         | 30,000     | 0.85           | Nov 8, 2009  |                                 
|              |               |                            | 15,000     | 12.15          | Dec 14, 2010 |                                 
|              |               |                            | 9,000      | 9.76           | Jun 20, 2011 |                                 
|              |               |                            | 10,000     | 7.25           | Dec 17, 2011 |                                 
|              |               |                            | 7,500      | 2.70           | May 16, 2012 |                                 
|              |               |                            | 10,000     | 2.00           | Dec 13, 2012 |                                 
|              |               |                            | 21,000     | 3.33           | Aug 5, 2013  |                                 
|              |               |                            | 10,000     | 4.50           | Dec 11, 2013 |                                 
|              |               |                            | 5,000      | 8.10           | May 28, 2014 |                                 
|              |               |                            | 22,500     | 5.00           | Dec 9, 2014  |                                 
|              |               |                            | 10,000     | 2.25           | Dec 15, 2016 |                                 
|              |               |                            | 17,500     | 2.22           | Dec 12, 2017 |                                 
|              |               |                            | 167,500    |                |              | **                              
|              |               |                            |            |                |              |                                 
|Jim Dinning   | 20,000        | **                         | 50,000     | 6.90           | Mar 29, 2014 |                                 
|              |               |                            | 5,000      | 8.10           | May 28, 2014 |                                 
|              |               |                            | 22,500     | 5.00           | Dec 9, 2014  |                                 
|              |               |                            | 10,000     | 2.25           | Dec 15, 2016 |                                 
|              |               |                            | 17,500     | 2.22           | Dec 12, 2017 |                                 
|              |               |                            | 105,000    |                |              | **                              
|              |               |                            |            |                |              |                                 
|Mark Lievonen | 3,000         | **                         | 50,000     | 9.38           | Apr 5, 2014  |                                 
|              |               |                            | 5,000      | 8.10           | May 28, 2014 |                                 
|              |               |                            | 22,500     | 5.00           | Dec 9, 2014  |                                 
|              |               |                            | 10,000     | 2.25           | Dec 15, 2016 |                                 
|              |               |                            | 17,500     | 2.22           | Dec 12, 2017 |                                 
|              |               |                            | 105,000    |                |              | **                              





61

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|              | Common Shares | Percentage of Ownership(1) | Options(2) | Exercise Price | Expiry Date | Percentage of Outstanding (1)(3)
|------------- | ------------- | -------------------------- | ---------- | -------------- | ----------- | --------------------------------
|Bill Cochrane | 6,000         | **                         | 47,000     | 1.79           | Nov 4, 2012 |                                 



4,000

                    3.33

                    Aug 5, 201310,000

                    4.50

                    Dec 11, 20135,000

                    8.10

                    May 28, 201422,500

                    5.00

                    Dec 9, 201410,000

                    2.25

                    Dec 15, 201617,500

                    2.22

                    Dec 12, 2017116,000

                    

                    

                    **Ed Levy

                    5,100

                    **

                    50,000

                    4.10

                    May 16, 201610,000

                    2.25

                    Dec 15, 201617,500

                    2.22

                    Dec 12, 201777,500

                    

                    

                    **Ger van Amersfoort

                    5,000

                    **

                    50,000

                    3.60

                    Jun 15, 201610,000

                    2.25

                    Dec 15, 201617,500

                    2.22

                    Dec 12, 201777,500

                    

                    

                    **TOTAL:

                    793,201

                    

                    3,524,543


** Less
        than 1% ownership

Notes:

1)

                    Based on 41,180,748 common shares issued and outstanding on
                        December 31, 2007


2)

                    Options exercisable to acquire common shares


3)

                    Ownership percentage assumes aggregate beneficial ownership
                        of common shares and common shares acquirable upon exercise of
                        options




ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
        TRANSACTIONS

A.

                    Major Shareholders


We are
        not directly or indirectly owned or controlled by another corporation(s) or by any foreign
        government. The information set forth below is based on 41,180,748 common shares issued and
        outstanding as of December 31, 2007. To the knowledge of our directors and senior officers,
        at December 31, 2007, set out below are the only persons/entities who beneficially owned,
        directly or indirectly, or exercised control or direction over, our common shares carrying
        more than 5% of the voting rights attached to all our outstanding common shares. As used in
        the table below, "beneficial ownership" means sole or shared power to vote or direct the
        voting of the security, or the sole or shared investment power with respect to a security
        (i.e., the power to dispose, or direct a disposition, of a security). A person is deemed at
        any date to have "beneficial ownership" of any security that the person has a right to
        acquire within 60 days. More than one person may be deemed to have beneficial ownership of
        the same securities.



Name of Shareholder

                    

                    Approximate Number of Common Shares Beneficially Owned,
                        Directly or Indirectly, or over which Control or Direction is
                        Exercised

                    Percentage of Outstanding Common Shares
                        RepresentedThe Bank of New York Mellon Corporation, New York, New
                        York

                    2007

                    6,512,978

                    15.81%2006

                    6,761,884

                    18.51%2005

                    3,716,799

                    10.25%




The
        shareholder set forth above does not have different voting rights from the other
        shareholders.





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The
        following table indicates, as of May 22, 2008, the total number of common shares issued and
        outstanding, the approximate total number of holders of record of common shares, the number
        of holders of record of common shares with U.S. addresses, the portion of the
        outstanding common shares held by U.S. holders of record, and the percentage of common
        shares held by U.S. holders of record. This table does not indicate beneficial
        ownership of common shares.





Total Number of Holders of Record

                    

                    Total Number of Common Sharesissued andOutstanding

                    

                    Number of U.S. Holders of Record

                    

                    Number of Common Shares Held by U.S. Holders of
                        Record

                    

                    Percentage of Common Shares Held by U.S. Holders of
                        Record186

                    

                    41,180,748

                    

                    50

                    

                    249,755

                    

                    0.6%




B.

                    Related Party Transactions


We have
        not entered into any related party transactions with the major shareholder disclosed above.
        We have entered into employment contracts with each of our officers (see Item 6). We have
        not entered into any other related party transactions and we do not have any loans
        outstanding with any officer, director or major shareholder.

C.

                    Interests of Experts and Council


Not
        Applicable

ITEM 8. FINANCIAL INFORMATION

A.

                    Consolidated Statements and Other Financial
                        Statements


The
        financial statements filed as part of this annual report are filed under Item
        18.

B.

                    Significant Changes


There
        have been no significant changes to our annual financial statements.

ITEM
        9. THE OFFER AND LISTING

A.

                    Offering and Listing Details




Our
        Common Shares are traded on the TSX and on the NASDAQ under the symbol "ONC" and
        “ONCY”, respectivley. The last reported sales price of our common shares on May
        22, 2008 on the TSX was Cdn$1.99 and on the NASDAQ Capital Market was $1.95. The
        following table sets forth the high and low per share sales prices for our common shares on
        the NASDAQ and TSX for the periods indicated.



Common SharesNASDAQ

                    TSXHigh

                    Low

                    High

                    Low2003

                    4.60

                    1.00

                    6.07

                    1.532004

                    8.68

                    3.05

                    11.45

                    4.002005

                    5.57

                    2.51

                    6.66

                    2.982006

                    5.16

                    1.81

                    6.05

                    2.11Quarter 1

                    5.16

                    4.04

                    6.05

                    4.63Quarter 2

                    5.12

                    2.85

                    6.00

                    4.63






63

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Quarter 3

                    3.27

                    2.24

                    3.67

                    2.52Quarter 4

                    2.68

                    1.81

                    3.01

                    2.112007

                    2.90

                    1.46

                    3.40

                    1.50Quarter 1

                    2.90

                    1.82

                    3.40

                    2.10Quarter 2

                    2.28

                    1.88

                    2.59

                    2.08Quarter 3

                    2.04

                    1.46

                    2.17

                    1.50Quarter 4

                    2.71

                    1.72

                    2.53

                    2.15November

                    2.71

                    2.17

                    2.53

                    2.15December

                    2.31

                    1.72

                    2.38

                    1.702008

                    2.1301

                    1.71

                    2.15

                    1.70January

                    1.98

                    1.71

                    2.02

                    1.70February

                    2.1301

                    1.94

                    2.15

                    1.90March

                    1.9894

                    1.75

                    1.99

                    1.74April

                    2.038

                    1.78

                    2.04

                    1.79






Market Price Volatility of Common Shares



Market
        prices for the securities of biotechnology companies, including our securities, have
        historically been highly volatile, and the market has from time to time experienced
        significant price and volume fluctuations that are unrelated to the operating performance
        of particular companies. Factors, such as fluctuations in our operating results, the
        aftermath of our public announcements, and general market conditions, can have an adverse
        effect on the market price of our common shares and other securities.



B.

                    Plan of Distribution


Not
        Applicable



C.

                    Markets


Our
        common shares, no par value, are traded on the NASDAQ Capital Market and the TSX under the
        symbol “ONCY" and “ONC”, respectively.



D.

                    Selling Shareholders


Not
        Applicable



E.

                    Dilution


Not
        Applicable



F.

                    Expenses of the Issue


Not
        Applicable



ITEM
        10. ADDITIONAL INFORMATION

A.

                    Share Capital


Not
        Applicable





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B.

                    Memorandum and Articles of Association


Articles of Continuance



We are
        governed by our amended articles of incorporation (the "Articles") under the Business
        Corporations Act of Alberta (the “Act”) and by our by-laws
        (the "By-laws"). Our Alberta corporate access number is 207797382. Our Articles
        provide that there are no restrictions on the business we may carry on or on the powers we
        may exercise. Companies incorporated under the Act are not required to include specific
        objects or purposes in their articles or by-laws.



Directors



Subject
        to certain exceptions, including in respect of voting on any resolution to approve a
        contract that relates primarily to the director's remuneration, directors may not vote on
        resolutions to approve a material contract or material transaction if the director is a
        party to such contract or transaction. The directors are entitled to remuneration as shall
        from time to time be determined by the Board of Directors with no requirement for a quorum
        of independent directors. The directors have the ability under the Act to exercise our
        borrowing power, without authorization of the shareholders. The Act permits shareholders to
        restrict this authority through a company's articles or by-laws (or through a unanimous
        shareholder agreement), but no such restrictions are in place for us. Our Articles and
        By-laws do not require directors to hold shares for qualification.



Rights, Preferences and Dividends Attaching to Shares



The
        holders of common shares have the right to receive dividends if and when declared. Each
        holder of common shares, as of the record date prior to a meeting, is entitled to attend
        and to cast one vote for each common share held as of such record date at such annual
        and/or special meeting, including with respect to the election or re-election of directors.
        Subject to the provisions of our By-laws, all directors may, if still qualified to serve as
        directors, stand for re-election. The numbers of our Board of Directors are not replaced at
        staggered intervals but are elected annually.



On a
        distribution of assets on a winding-up, dissolution or other return of capital (subject to
        certain exceptions) the holders of common shares shall have a right to receive their
        pro
        rata share of such distribution. There are no
        sinking fund or redemption provisions in respect of the common shares. Our shareholders
        have no liability to further capital calls as all shares issued and outstanding are fully
        paid and non-assessable.



No other
        classes of shares are currently permitted to be issued.



Action Necessary to Change the Rights of Shareholders



The
        rights attaching to the different classes of shares may be varied by special resolution
        passed at a meeting of that class's shareholders.



Annual and Special Meetings of Shareholders



Under
        the Act and our By-laws, we are required to mail a Notice of Meeting and Management
        Information Circular to registered shareholders not less than 21 days and not more
        than 50 days prior to the date of the meeting. Such materials must be filed concurrently
        with the applicable securities regulatory authorities in Canada and the U.S. Subject to
        certain provisions of the By-laws, a quorum of two or more shareholders in person or
        represented by proxy holding or representing by proxy not less than five (5%) percent of
        the total number of issued and outstanding shares enjoying voting rights at such meeting is
        required to properly constitute a meeting of shareholders. Shareholders and their duly
        appointed proxies and corporate representatives are entitled to be admitted to our annual
        and/or special meetings.



Limitations on the Rights to Own Shares



The
        Articles do not contain any limitations on the rights to own shares. Except as described
        below, there are currently no limitations imposed by Canadian federal or provincial laws on
        the rights of non-resident or foreign owners of Canadian securities to hold or vote the
        securities held. There are also no such limitations imposed by the Articles and By-laws
        with respect to our common shares.



65

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Disclosure of Share Ownership



In
        general, under applicable securities regulation in Canada, a person or company who
        beneficially owns, directly or indirectly, voting securities of an issuer or who exercises
        control or direction over voting securities of an issuer or a combination of both, carrying
        more than 10% of the voting rights attached to all the issuer's outstanding voting
        securities is an insider and must, within 10 days of becoming an insider, file a
        report in the required form effective the date on which the person became an insider. The
        report must disclose any direct or indirect beneficial ownership of, or control or
        direction over, securities of the reporting issuer. Additionally, securities regulation in
        Canada provides for the filing of a report by an insider of a reporting issuer whose
        holdings change, which report must be filed within 10 days from the day on which the
        change takes place.



The
        rules in the U.S. governing the ownership threshold above which shareholder ownership must
        be disclosed are more stringent than those discussed above. Section 13 of the Exchange Act
        imposes reporting requirements on persons who acquire beneficial ownership (as such term is
        defined in Rule 13d-3 under the Exchange Act) of more than 5% of a class of an equity
        security registered under Section 12 of the Exchange Act. In general, such persons must
        file, within 10 days after such acquisition, a report of beneficial ownership with the
        SEC containing the information prescribed by the regulations under Section 13 of the
        Exchange Act. This information is also required to be sent to the issuer of the securities
        and to each exchange where the securities are traded.



Other
        Provisions of Articles and By-laws



There
        are no provisions in the Articles or By-laws:



•

                    delaying or prohibiting a change in control of our company
                        that operate only with respect to a merger, acquisition or corporate
                        restructuring;


•

                    discriminating against any existing or prospective holder of
                        shares as a result of such shareholder owning a substantial number
                        of shares;


•

                    requiring disclosure of share ownership; or


•

                    governing changes in capital, where such provisions are more
                        stringent than those required by law.




C.

                    Material Contracts


We have
        employment contracts with each of our officers as summarized in Item 6b. Other than these
        employment contracts, we have not entered into any other contract other than in the
        ordinary course of business over the last two years.



D.

                    Exchange Controls




Canada
        has no system of exchange controls. There are no Canadian restrictions on the repatriation
        of capital or earnings of a Canadian public company to non-resident investors. There are no
        laws in Canada or exchange restrictions affecting the remittance of dividends, profits,
        interest, royalties and other payments to non-resident holders of our securities, except as
        discussed below in Section E,
        Taxation.



Restrictions on Share Ownership by Non-Canadians



There
        are no limitations under the laws of Canada or in our organizational documents on the right
        of foreigners to hold or vote securities of our company, except that the
        Investment Canada Act (the "Investment Canada
        Act") may require review and approval by the Minister of Industry (Canada) of certain
        acquisitions of "control" of our Company by a "non-Canadian."



Investment Canada Act



Under
        the Investment Canada Act, transactions exceeding certain financial thresholds, and which
        involve the acquisition of control of a Canadian business by a non-Canadian, are subject to
        review and cannot be implemented unless the Minister of Industry and/or, in the case of a
        Canadian business engaged in cultural activities, the Minister



66

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of
        Canadian Heritage, are satisfied that the transaction is likely to be of "net benefit to
        Canada". If a transaction is subject to review (a "Reviewable Transaction"), an
        application for review must be filed with the Investment Review Division of Industry Canada
        and/or the Department of Canadian Heritage prior to the implementation of the Reviewable
        Transaction. The responsible Minister is then required to determine whether the Reviewable
        Transaction is likely to be of net benefit to Canada taking into account, among other
        things, certain factors specified in the Investment Canada Act and any written undertakings
        that may have been given by the applicant. The Investment Canada Act contemplates an
        initial review period of up to 45 days after filing; however, if the responsible
        Minister has not completed the review by that date, the Minister may unilaterally extend
        the review period by up to 30 days (or such longer period as may be agreed to by
        the applicant and the Minister) to permit completion of the review. Direct acquisitions of
        control of most Canadian businesses by or from World Trade Organization ("WTO") investors
        are reviewable under the Investment Canada Act only if, in the case of an acquisition of
        voting securities, the value of the worldwide assets of the Canadian business or, in the
        case of an acquisition of substantially all the assets of a Canadian business, the value of
        those assets exceed C$295 million for the year 2008 (this figure is adjusted annually to
        reflect inflation). Indirect acquisitions (e.g., an acquisition of a U.S. corporation with
        a Canadian subsidiary) of control of such businesses by or from WTO investors are not
        subject to review, regardless of the value of the Canadian businesses' assets.
        Significantly lower review thresholds apply where neither the investor nor the Canadian
        business is WTO investor controlled or where the Canadian business is engaged in uranium
        mining, certain cultural businesses, financial services or transportation
        services.



Even if
        the transaction is not reviewable because it does not meet or exceed the applicable
        financial threshold, the non-Canadian investor must still give notice to Industry Canada
        and, in the case of a Canadian business engaged in cultural activities, Canadian Heritage,
        of its acquisition of control of a Canadian business within 30 days of its
        implementation.



Competition Act



The Competition Act
        (Canada) (the "Competition Act") requires that a pre-merger
        notification filing be submitted to the Commissioner of Competition
        (the "Commissioner") in respect of proposed transactions that exceed certain financial
        and other thresholds. If a proposed transaction is subject to pre-merger notification, a
        pre-merger notification filing must be submitted to the Commissioner and a waiting period
        must expire or be waived by the Commissioner before the transaction may be completed. The
        parties to a proposed transaction may choose to submit either a short-form filing
        (in respect of which there is a 14-day statutory waiting period) or a long-form filing
        (in respect of which there is a 42-day statutory waiting period). However, where the
        parties choose to submit a short-form filing, the Commissioner may, within 14 days,
        require that the parties submit a long-form filing, in which case the proposed transaction
        generally may not be completed until 42 days after the long-form filing is submitted
        by the parties.



The
        Commissioner may, upon request, issue an advance ruling certificate ("ARC") in respect of a
        proposed transaction where she is satisfied that she would not have sufficient grounds on
        which to apply to the Competition Tribunal for an order under the merger provisions of the
        Competition Act. If the Commissioner issues an ARC in respect of a proposed transaction,
        the transaction is exempt from the pre-merger notification provisions. In addition, if the
        transaction to which the ARC relates is substantially completed within one year after the
        ARC is issued, the Commissioner cannot seek an order of the Competition Tribunal under the
        merger provisions of the Competition Act in respect of the transaction solely on the basis
        of information that is the same or substantially the same as the information on the basis
        of which the ARC was issued.



If the
        Commissioner is unwilling to issue an ARC, she may nevertheless issue a "no action" letter
        waiving notification and confirming that she is of the view that grounds do not then exist
        to initiate proceedings before the Competition Tribunal under the merger provisions of the
        Competition Act with respect to the proposed transaction, while preserving, during the
        three years following completion of the proposed transaction, her authority to initiate
        proceedings should circumstances change.



Regardless of whether pre-merger notification is required, the Commissioner
        may apply to the Competition Tribunal (a special purpose tribunal) for an order under the
        merger provisions of the Competition Act. If the Competition Tribunal finds that the
        transaction is or is likely to prevent or lessen competition substantially, it may order
        that the parties not proceed with the transaction or part of it or, in the event that the
        transaction has already been completed,



67

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order
        its dissolution or the disposition of some of the assets or shares involved. In addition,
        the Competition Tribunal may, with the consent of the person against whom the order is
        directed and the Commissioner, order that person to take any other action as is deemed
        necessary to remedy any substantial lessening or prevention of competition that the
        Competition Tribunal determines would or would likely result from the
        transaction.



E.

                    Taxation


Canadian Federal Income Taxation



The
        following discussion is a summary of the principal Canadian federal income tax
        considerations generally applicable to a holder of our common shares who, at all relevant
        times, for purposes of the Income
        Tax Act
        (Canada) (the "Canadian Tax Act") deals at arm's length with, and
        is not affiliated with, us, holds its common shares as capital property and does not use or
        hold and is not deemed to use or hold such common shares in carrying on a business in
        Canada and who, at all relevant times, for purposes of the Canadian Tax Act and the
        Canada-U.S. Income Tax Convention (the "U.S. Treaty") is resident in the
        U.S., is not, and is not deemed to be, resident in Canada and is eligible for benefits
        under the U.S. Treaty (a "U.S. holder"). Special rules, which are not
        discussed in this summary, may apply to a non-resident holder that is an insurer that
        carries on an insurance business in Canada and elsewhere. Limited liability companies
        ("LLCs") that are not taxed as corporations pursuant to the provisions of the
        [Canadian tax code] do not qualify as
        resident in the U.S. for purposes of the U.S. Treaty. Under changes to the
        U.S. Treaty proposed in the Fifth Protocol to the U.S. Treaty, dated
        September 21, 2007 but not yet in force (the "Protocol"), a resident of the
        United States who is a member of such an LLC will generally be entitled to claim
        treaty benefits in respect of income, profits or gains derived through the LLC. Such
        entitlement will commence on the first day of the second month that begins after the
        Protocol enters into force for withholding tax, and on the first day of the calendar year
        beginning after the calendar year in which the Protocol enters into force for other taxes.
        The Protocol will also introduce limitation on benefits rules that will restrict the
        ability of certain persons who are resident in the United States to claim any or all
        benefits under the U.S. Treaty. Residents of the United States should consult
        their own tax advisors with respect to their eligibility for benefits under the
        U.S. Treaty, having regard to the Protocol.



This
        summary is based upon the current provisions of the U.S. Treaty, the Canadian
        Tax Act and the regulations thereunder and our understanding of the current
        administrative policies and practices of the Canada Revenue Agency published in writing
        prior to the date hereof. This summary takes into account all specific proposals to amend
        the U.S. Treaty, the Canadian Tax Act and the regulations thereunder publicly
        announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof
        (the "Tax Proposals"). This summary does not otherwise take into account or anticipate
        changes in law or administrative practice, whether by judicial, regulatory, administrative
        or legislative decision or action, nor does it take into account provincial, territorial or
        foreign tax legislation or considerations, which may differ from those discussed
        herein.



This
        summary is of a general nature only and is not intended to be, nor should it be construed
        to be, legal or tax advice generally or to any particular holder. U.S. Holders should
        consult their own tax advisors with respect to their own particular
        circumstances.



Gains
        on Disposition of Common Shares



In
        general, a U.S. holder will not be subject to Canadian tax on capital gains arising on
        the disposition of such holder's common shares unless the common shares are "taxable
        Canadian property" to the U.S. holder and are not "treaty-protected
        property".



Generally, a common share will not be taxable Canadian property to a
        U.S. holder at a particular time; provided
        that (1) such common share is listed on a prescribed stock exchange or,
        under the Tax Proposals, a designated stock exchange (both of which currently include the
        NASDAQ and the TSX), (2) the U.S. holder, persons with whom the U.S. holder
        does not deal with at arm's length, or the U.S. holder together with all such persons,
        have not owned 25% or more of the issued shares of any class or series of the capital stock
        of our company at any time during the 60-month period that ends at that time, and
        (3) the common share is not otherwise deemed to be taxable Canadian property for
        purposes of the Canadian Tax Act.



68

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common
        shares will be treaty-protected property where the U.S. holder is exempt from Canadian
        income tax on the disposition of common shares because of the U.S. Treaty. common
        shares owned by a U.S. holder will generally be treaty-protected property where the
        value of the common shares is not derived principally from real property situated
        in Canada.



Dividends on Common Shares



Dividends paid or credited on the Common Shares or deemed to be paid or
        credited on the common shares to a U.S. holder that is the beneficial owner of such
        dividends will generally be subject to non-resident withholding tax under the Canadian
        Tax Act and the U.S. Treaty at the rate of (1) 5% of the amounts paid or
        credited if the U.S. holder is a company that owns (or is deemed to own) at least
        10% of our voting stock or (2) 15% of the amounts paid or credited in all other cases.
        The rate of withholding under the Canadian Tax Act in respect of dividends paid to
        non-residents of Canada is 25% where no tax treaty applies.



U.S. Federal
        Income Taxation



F. U.S. Federal Income Tax Consequences

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

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

Notice Pursuant To IRS Circular 230: Anything contained in this summary
        concerning any U.S. federal tax issue is not intended or written to be used, and it cannot
        be used by a U.S. Holder, for the purpose of avoiding federal tax penalties under the
        Internal Revenue Code. This summary was written to support the promotion or marketing of
        the transactions or matters addressed by this Form 20-F. Each U.S. Holder should seek U.S.
        federal tax advice, based on such U.S. Holder’s particular circumstances, from an
        independent tax advisor.

Scope of this Summary

Authorities

This
        summary is based on the Internal Revenue Code of 1986, as amended (the “Code”),
        Treasury Regulations (whether final, temporary, or proposed), published rulings of the
        Internal Revenue Service (“IRS”), published administrative positions of the
        IRS, the Convention Between Canada and the United States of America with Respect to Taxes
        on Income and on Capital, signed September 26, 1980, as amended (the “Canada-U.S. Tax
        Convention”), and U.S. court decisions that are applicable and, in each case, as in
        effect and available, as of the date of this Form 20-F. Any of the authorities on which
        this summary is based could be changed in a material and adverse manner at any time, and
        any such change could be applied on a retroactive basis. This summary does not discuss the
        potential effects, whether adverse or beneficial, of any proposed legislation that, if
        enacted, could be applied on a retroactive basis.

U.S.
        Holders

For
        purposes of this summary, a “U.S. Holder” is a beneficial owner of Common
        Shares acquired in this offering that, for U.S. federal income tax purposes, is (a) an
        individual who is a citizen or resident of the U.S., (b) a corporation, or any other
        entity classified as a corporation for U.S. federal income tax purposes, that is created or
        organized in or under the laws of the U.S. or any state in the U.S., including the District
        of Columbia, (c) an estate if



69

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the
        income of such estate is subject to U.S. federal income tax regardless of the source of
        such income, or (d) a trust if (i) such trust has validly elected to be treated
        as a U.S. person for U.S. federal income tax purposes or (ii) a U.S. court is able to
        exercise primary supervision over the administration of such trust and one or more U.S.
        persons have the authority to control all substantial decisions of such trust.

Non-U.S. Holders

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

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

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

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

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

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



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

Distributions on Common Shares

General Taxation of Distributions

A U.S.
        Holder that receives a distribution, including a constructive distribution, with respect to
        the Common Shares will be required to include the amount of such distribution in gross
        income as a dividend (without reduction for any foreign income tax withheld from such
        distribution) to the extent of the current or accumulated “earnings and
        profits” of the Company. To the extent that a distribution exceeds the current and
        accumulated “earnings and profits” of the Company, such distribution will be
        treated (a) first, as a tax-free return of capital to the extent of a U.S.
        Holder’s tax basis in the Common Shares and, (b) thereafter, as gain from the
        sale or exchange of such Common Shares. (See more detailed discussion at “Disposition
        of Common Shares” below). Dividends paid on the Common Shares generally will not be
        eligible for the “dividends received deduction.”

Reduced Tax Rates for Certain Dividends

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

The
        Company generally will be a “qualified foreign corporation” under
        Section 1(h)(11) of the Code (a “QFC”) if (a) the Company is
        incorporated in a possession of the U.S., (b) the Company is eligible for the benefits
        of the Canada-U.S. Tax Convention, or (c) the Common Shares are readily tradable on an
        established securities market in the U.S. However, even if the Company satisfies one or
        more of such requirements, the Company will not be treated as a QFC if the Company is a
        “passive foreign investment company” (as defined below) for the taxable year
        during which the Company pays a dividend or for the preceding taxable year.

As
        discussed below, the Company believes that it qualified as a PFIC for the taxable year
        ended December 31, 2007, and based on current business plans and financial projections, the
        Company anticipates that it may qualify as a PFIC for subsequent taxable years. (See more
        detailed discussion at “Additional Rules that May Apply to U.S. Holders—Passive
        Foreign Investment Company” below).

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

Distributions Paid in Foreign Currency

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

Disposition of Common Shares

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



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

Foreign Tax Credit

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

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

Information Reporting; Backup Withholding Tax For Certain
        Payments

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

Additional Rules that May Apply to U.S. Holders

If the
        Company is a “controlled foreign corporation” under Section 957 of the Code or
        a “passive foreign investment company” (as defined below), the preceding
        sections of this summary may not describe the U.S. federal income tax consequences to U.S.
        Holders of the acquisition, ownership, and disposition of Common Shares.

Passive Foreign Investment Company

The
        Company generally will be a “passive foreign investment company” under
        Section 1297 of the Code (a “PFIC”) if, for a taxable year, (a) 75%
        or more of the gross income of the Company for such taxable year is passive income or
        (b) 50% or more of the assets held by the Company either produce passive income or are
        held for the production of passive income, based on the fair market value of such assets
        (or on the adjusted tax basis of such assets, if the Company is not regularly traded on a
        public exchange or other market approved by the Secretary of the Treasury and either is a
        “controlled foreign corporation” or makes an election). “Gross
        income” generally means all revenues less cost of goods sold. “Passive
        income” includes, for example, dividends, interest, certain rents and royalties,
        certain gains from the sale of stock and securities, and certain gains from commodities
        transactions. However, for transactions entered into after December 31, 2004, gains arising
        from the sale of commodities generally are excluded from passive income if substantially
        all of a foreign corporation’s commodities are (a) stock in trade of



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such
        foreign corporation or other property of a kind which would properly be included in
        inventory of such foreign corporation, or property held by such foreign corporation
        primarily for sale to customers in the ordinary course of business, (b) property used in
        the trade or business of such foreign corporation that would be subject to the allowance
        for depreciation under Section 167 of the Code, or (c) supplies of a type regularly used or
        consumed by such foreign corporation in the ordinary course of its trade or
        business.

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

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

The
        Company believes that it qualified as a PFIC for the taxable year ended December 31, 2007,
        and based on current business plans and financial projections, the Company anticipates that
        it may qualify as a PFIC for subsequent taxable years. The determination of whether the
        Company will be a PFIC for a taxable year depends, in part, on the application of complex
        U.S. federal income tax rules, which are subject to differing interpretations. In addition,
        whether the Company will be a PFIC for its current taxable year depends on the assets and
        income of the Company over the course of each such taxable year and, as a result, cannot be
        predicted with certainty as of the date of this Form 20-F. Accordingly, there can be no
        assurance that the IRS will not challenge the determination made by the Company concerning
        its PFIC status.

Default PFIC Rules Under Section
        1291 of the Code

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

A
        Non-Electing U.S. Holder will be subject to the rules of Section 1291 of the Code with
        respect to (a) any gain recognized on the sale or other taxable disposition of Common
        Shares and (b) any excess distribution paid on the Common Shares. A distribution
        generally will be an “excess distribution” to the extent that such distribution
        (together with all other distributions received in the current taxable year) exceeds 125%
        of the average distributions received during the three preceding taxable years (or during a
        U.S. Holder’s holding period for the Common Shares, if shorter).

Under
        Section 1291 of the Code, any gain recognized on the sale or other taxable disposition
        of Common Shares, and any excess distribution paid on the Common Shares, must be ratably
        allocated to each day in a Non-Electing U.S. Holder’s holding period for the Common
        Shares. The amount of any such gain or excess distribution allocated to prior years of such
        Non-Electing U.S. Holder’s holding period for the Common Shares (other than years
        prior to the first taxable year of the Company beginning after December 31, 1986 for which
        the Company was not a PFIC) will be subject to U.S. federal income tax at the highest tax
        applicable to ordinary income in each such prior year. A Non-Electing U.S. Holder will be
        required to pay interest on the resulting tax liability for each such prior
        year,



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calculated as if such tax liability had been due in each such prior year.
        Such a Non-Electing U.S. Holder that is not a corporation must treat any such interest paid
        as “personal interest,” which is not deductible. The amount of any such gain or
        excess distribution allocated to the current year of such Non-Electing U.S. Holder’s
        holding period for the Common Shares will be treated as ordinary income in the current
        year, and no interest charge will be incurred with respect to the resulting tax liability
        for the current year.

If the
        Company is a PFIC for any taxable year during which a Non-Electing U.S. Holder holds Common
        Shares, the Company will continue to be treated as a PFIC with respect to such Non-Electing
        U.S. Holder, regardless of whether the Company ceases to be a PFIC in one or more
        subsequent years. A Non-Electing U.S. Holder may terminate this deemed PFIC status by
        electing to recognize gain (which will be taxed under the rules of Section 1291 of the
        Code discussed above) as if such Common Shares were sold on the last day of the last
        taxable year for which the Company was a PFIC.

QEF
        Election

A U.S.
        Holder that makes a QEF Election generally will not be subject to the rules of
        Section 1291 of the Code discussed above. However, a U.S. Holder that makes a QEF
        Election will be subject to U.S. federal income tax on such U.S. Holder’s pro rata
        share of (a) the net capital gain of the Company and each Subsidiary PFIC, which will
        be taxed as long-term capital gain to such U.S. Holder, and (b) and the ordinary
        earnings of the Company and each Subsidiary PFIC, which will be taxed as ordinary income to
        such U.S. Holder. Generally, “net capital gain” is the excess of (a) net
        long-term capital gain over (b) net short-term capital loss, and “ordinary
        earnings” are the excess of (a) “earnings and profits” over
        (b) net capital gain. A U.S. Holder that makes a QEF Election will be subject to U.S.
        federal income tax on such amounts for each taxable year in which the Company is a PFIC,
        regardless of whether such amounts are actually distributed to such U.S. Holder by the
        Company. However, a U.S. Holder that makes a QEF Election may, subject to certain
        limitations, elect to defer payment of current U.S. federal income tax on such amounts,
        subject to an interest charge. If such U.S. Holder is not a corporation, any such interest
        paid will be treated as “personal interest,” which is not
        deductible.

A U.S.
        Holder that makes a QEF Election generally (a) may receive a tax-free distribution
        from the Company to the extent that such distribution represents “earnings and
        profits” of the Company that were previously included in income by the U.S. Holder
        because of such QEF Election and (b) will adjust such U.S. Holder’s tax basis in
        the Common Shares to reflect the amount included in income or allowed as a tax-free
        distribution because of such QEF Election. In addition, a U.S. Holder that makes a QEF
        Election generally will recognize capital gain or loss on the sale or other taxable
        disposition of Common Shares.

The
        procedure for making a QEF Election, and the U.S. federal income tax consequences of making
        a QEF Election, will depend on whether such QEF Election is timely. A QEF Election will be
        treated as “timely” if such QEF Election is made for the first year in the U.S.
        Holder’s holding period for the Common Shares in which the Company was a PFIC. A U.S.
        Holder may make a timely QEF Election by filing the appropriate QEF Election documents at
        the time such U.S. Holder files a U.S. federal income tax return for such first year in
        respect of the Company and each Subsidiary PFIC, if any. However, if the Company was a PFIC
        in a prior year, then in addition to filing the QEF Election documents, a U.S. Holder must
        elect to recognize (a) gain (which will be taxed under the rules of Section 1291
        of the Code discussed above) as if the Common Shares were sold on the qualification date or
        (b) if the Company was also a CFC, such U.S. Holder’s pro rata share of the
        post-1986 “earnings and profits” of the Company as of the qualification date.
        The “qualification date” is the first day of the first taxable year in which
        the Company was a QEF with respect to such U.S. Holder. The election to recognize such gain
        or “earnings and profits” can only be made if such U.S. Holder’s holding
        period for the Common Shares includes the qualification date. By electing to recognize such
        gain or “earnings and profits,” such U.S. Holder will be deemed to have made a
        timely QEF Election. In addition, under very limited circumstances, a U.S. Holder may make
        a retroactive QEF Election if such U.S. Holder failed to file the QEF Election documents in
        a timely manner.

A QEF
        Election will apply to the taxable year for which such QEF Election is made and to all
        subsequent taxable years, unless such QEF Election is invalidated or terminated or the IRS
        consents to revocation of such QEF Election. If a U.S. Holder makes a QEF Election and, in
        a subsequent taxable year, the Company ceases to be a PFIC, the QEF Election will remain in
        effect (although it will not be applicable) during those taxable years in which the Company
        is not a PFIC. Accordingly, if the Company becomes a PFIC in another subsequent taxable
        year, the



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QEF
        Election will be effective and the U.S. Holder will be subject to the QEF rules described
        above during any such subsequent taxable year in which the Company qualifies as a PFIC. In
        addition, the QEF Election will remain in effect (although it will not be applicable) with
        respect to a U.S. Holder even after such U.S. Holder disposes of all of such U.S.
        Holder’s direct and indirect interest in the Common Shares. Accordingly, if such U.S.
        Holder reacquires an interest in the Company, such U.S. Holder will be subject to the QEF
        rules described above for each taxable year in which the Company is a PFIC.

For
        each taxable year that Oncolytics qualifies as a PFIC, Oncolytics will make available to
        each U.S. Holder that has made a QEF Election, upon written request, a "PFIC Annual
        Information Statement" as described in Treasury Regulation Section 1.1295-1(g) (or any
        successor Treasury Regulation) and use commercially reasonable efforts to provide all
        additional information that such U.S. Holder is required to obtain in connection with
        maintaining such QEF Election with regard to Oncolytics.

Mark-to-Market Election

A U.S.
        Holder may make a Mark-to-Market Election only if the Common Shares are marketable stock.
        The Common Shares generally will be “marketable stock” if the Common Shares are
        regularly traded on (a) a national securities exchange that is registered with the
        Securities and Exchange Commission, (b) the national market system established
        pursuant to section 11A of the Securities and Exchange Act of 1934, or (c) a foreign
        securities exchange that is regulated or supervised by a governmental authority of the
        country in which the market is located, provided that (i) such foreign exchange has
        trading volume, listing, financial disclosure, and other requirements and the laws of the
        country in which such foreign exchange is located, together with the rules of such foreign
        exchange, ensure that such requirements are actually enforced and (ii) the rules of
        such foreign exchange ensure active trading of listed stocks.

A U.S.
        Holder that makes a Mark-to-Market Election generally will not be subject to the rules of
        Section 1291 of the Code discussed above. However, if a U.S. Holder makes a
        Mark-to-Market Election after the beginning of such U.S. Holder’s holding period for
        the Common Shares and such U.S. Holder has not made a timely QEF Election, the rules of
        Section 1291 of the Code discussed above will apply to certain dispositions of, and
        distributions on, the Common Shares.

A U.S.
        Holder that makes a Mark-to-Market Election will include in ordinary income, for each
        taxable year in which the Company is a PFIC, an amount equal to the excess, if any, of
        (a) the fair market value of the Common Shares as of the close of such taxable year
        over (b) such U.S. Holder’s tax basis in such Common Shares. A U.S. Holder that
        makes a Mark-to-Market Election will be allowed a deduction in an amount equal to the
        lesser of (a) the excess, if any, of (i) such U.S. Holder’s adjusted tax
        basis in the Common Shares over (ii) the fair market value of such Common Shares as of
        the close of such taxable year or (b) the excess, if any, of (i) the amount
        included in ordinary income because of such Mark-to-Market Election for prior taxable years
        over (ii) the amount allowed as a deduction because of such Mark-to-Market Election
        for prior taxable years.

A U.S.
        Holder that makes a Mark-to-Market Election generally also will adjust such U.S.
        Holder’s tax basis in the Common Shares to reflect the amount included in gross
        income or allowed as a deduction because of such Mark-to-Market Election. In addition, upon
        a sale or other taxable disposition of Common Shares, a U.S. Holder that makes a
        Mark-to-Market Election will recognize ordinary income or loss (not to exceed the excess,
        if any, of (a) the amount included in ordinary income because of such Mark-to-Market
        Election for prior taxable years over (b) the amount allowed as a deduction because of
        such Mark-to-Market Election for prior taxable years).

A
        Mark-to-Market Election applies to the taxable year in which such Mark-to-Market Election
        is made and to each subsequent taxable year, unless the Common Shares cease to be
        “marketable stock” or the IRS consents to revocation of such election. Each
        U.S. Holder should consult its own financial advisor, legal counsel, or accountant
        regarding the availability of, and procedure for making, a Mark-to-Market
        Election.

Although a U.S. Holder may be eligible to make a Mark-to-Market Election
        with respect to the Common Shares, no such election may be made with respect to the stock
        of any Subsidiary PFIC that such U.S. Holder is treated as owning because such stock is not
        marketable. Hence, the Mark-to-Market Election will not be effective to eliminate the
        interest charge described above.



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Other PFIC Rules

Under
        Section 1291(f) of the Code, the IRS has issued proposed Treasury Regulations that,
        subject to certain exceptions, would cause a U.S. Holder that had not made a timely QEF
        Election to recognize gain (but not loss) upon certain transfers of Common Shares that
        would otherwise be tax-deferred (e.g., gifts and exchanges pursuant to corporate
        reorganizations). However, the specific U.S. federal income tax consequences to a U.S.
        Holder may vary based on the manner in which Common Shares are transferred.

Certain
        additional adverse rules will apply with respect to a U.S. Holder if the Company is a PFIC,
        regardless of whether such U.S. Holder makes a QEF Election. For example under
        Section 1298(b)(6) of the Code, a U.S. Holder that uses Common Shares as security for
        a loan will, except as may be provided in Treasury Regulations, be treated as having made a
        taxable disposition of such Common Shares.

Special
        rules also apply to the amount of foreign tax credit that a U.S. Holder may claim on a
        distribution from a PFIC.

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



F.

                    Dividends and Paying Agents


Not
        Applicable



G.

                    Statements by Experts


Not
        Applicable



H.

                    Documents on Display


We are
        subject to the informational requirements of the Exchange Act and file reports and other
        information with the SEC. You may read and copy any of our reports and other information
        at, and obtain copies upon payment of prescribed fees from, the Public Reference Room
        maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. In
        addition, the SEC maintains a Website that contains reports, proxy and information
        statements and other information regarding registrants that file electronically with the
        SEC at http://www.sec.gov. The public may obtain information on the operation of the Public
        Reference Room by calling the SEC at 1-800-SEC-0330.



We are
        required to file reports and other information with the securities commissions in Canada.
        You are invited to read and copy any reports, statements or other information, other than
        confidential filings, that we file with the provincial securities commissions. These
        filings are also electronically available from the Canadian System for Electronic Document
        Analysis and Retrieval ("SEDAR") (http://www.sedar.com), the Canadian equivalent of the
        SEC's electronic document gathering and retrieval system.



We
        "incorporate by reference" information that we file with the SEC, which means that we can
        disclose important information to you by referring you to those documents. The information
        incorporated by reference is an important part of this Form 20-F and more recent
        information automatically updates and supersedes more dated information contained or
        incorporated by reference in this Form 20-F.



As a
        foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the
        furnishing and content of proxy statements to shareholders.



We will
        provide without charge to each person, including any beneficial owner, to whom a copy of
        this annual report has been delivered, on the written or oral request of such person, a
        copy of any or all documents referred to above which have been or may be incorporated by
        reference in this annual report (not including exhibits to such incorporated
        information that are not specifically incorporated by reference into such information).
        Requests for



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such
        copies should be directed to us at the following address: Oncolytics Biotech Inc., 210
        – 1167 Kensington Crescent, NW, Calgary, Alberta, Canada, T2N 1X7, Attention: Doug
        Ball. Telephone (403) 670 - 7377. Facsimile (403) 283-0858 EMAIL:
        info@oncolytics.ca.



I.

                    Subsidiary Information


The
        Company currently does not have any active subsidiaries.



ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
        ABOUT MARKET RISK.

Credit risk

Credit
        risk is the risk of financial loss if a counterparty to a financial instrument fails to
        meet its contractual obligations. We are exposed to credit risk on our cash and cash
        equivalents and short-term investments in the event of non-performance by counterparties,
        but do not anticipate such non-performance. The maximum exposure to credit risk at the end
        of the period is the carrying value of our cash and cash equivalents and short-term
        investments.

We
        mitigate our exposure to credit risk by maintaining our primary operating and investment
        bank accounts with Schedule I banks in Canada. For our foreign domiciled bank accounts, we
        use referrals or recommendations from our Canadian banks to open foreign bank accounts and
        these accounts are used solely for the purpose of settling accounts payable or
        payroll.

We also
        mitigate our exposure to credit risk by restricting our portfolio to investment grade
        securities with short term maturities and by monitoring the credit risk and credit standing
        of counterparties.

Interest rate risk

Interest rate risk is the risk that future cash flows of a financial
        instrument will fluctuate because of changes in market interest rates. We are exposed to
        interest rate risk through our cash and cash equivalents and our portfolio of short-term
        investments. We mitigate this risk through our investment policy that only allows
        investment of our excess cash resources in investment grade vehicles while matching
        maturities with our operational requirements.

Fluctuations in market rates of interest do not have a significant impact on
        our results of operations due to the short term to maturity of the investments
        held.

Currency risk

Currency risk is the risk that future cash flows of a financial instrument
        will fluctuate because of changes in foreign exchange rates. We are exposed to currency
        risk from the purchase of goods and services primarily in the U.S. and the U.K. We mitigate
        our foreign exchange risk through the purchase of foreign currencies in sufficient amounts
        to settle our foreign accounts payable.

Balances in foreign currencies at December 31, 2007 are as
        follows:



U.S. dollars

                        $

                    British pounds

                        £Cash and cash equivalents

                    354,435

                    34,326Accounts payable

                    138,183

                    122,167216,252

                    (87,841)




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Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in
        meeting obligations associated with financial liabilities. The Company manages liquidity
        risk through the management of its capital structure as outlined in note 6 to the unaudited
        financial statements.

Accounts payable are all due within the current operating period.



ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY
        SECURITIES.

Not Applicable



78

---



PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND
        DELINQUENCIES.

Not
        Applicable



ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF
        SECURITY HOLDERS AND USE OF PROCEEDS.

A.

                    Modification of Instruments Defining Rights of Security
                        Holders.


Not
        Applicable

B.

                    Modification or Issuance of Other Class of
                        Securities.


Not
        Applicable

C.

                    Withdrawal or Substitution of Security


Not
        Applicable

D.

                    Change of Trustee or Paying Agent


Not
        Applicable

E.

                    Use of Proceeds


Not
        Applicable

ITEM 15. CONTROLS AND PROCEDURES

A.

                    Evaluation of Disclosure Controls and
                        Procedures




It is
        the conclusion of our Chief Executive Officer and Chief Financial Officer that our
        Company's disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e)
        and 15d-15(e)), based on their evaluation of these controls and procedures as of the end of
        the period covered by this annual report, are effective in ensuring that information
        required to be disclosed by us in the reports that we file or submit under the Exchange Act
        is recorded, processed, summarized and reported within the time periods specified in the
        Securities and Exchange Commission’s rules and forms, and that information required
        to be disclosed by us in the reports that we file or submit under the Exchange Act is
        accumulated and communicated to the our management, including its Chief Executive Officer
        and Chief Financial Officer, or persons performing similar functions, as appropriate to
        allow timely decisions regarding required disclosure.



B.

                    Management’s Annual Report on Internal Control Over
                        Financial Reporting


Our
        management is responsible for establishing and maintaining adequate internal control over
        financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over
        financial reporting is a process designed by, or under the supervision of, our Chief
        Executive Officer and Chief Financial Officer and effected by the board of directors,
        management and other personnel, to provide reasonable assurance regarding the reliability
        of financial reporting and the preparation of financial statements for external purposes in
        accordance with Canadian GAAP, including a reconciliation to U.S. GAAP, and includes those
        policies and procedures that (i) pertain to the maintenance of records that in reasonable
        detail accurately and fairly reflect the transactions and dispositions of our assets; (ii)
        provide reasonable assurance that transactions are recorded as necessary to permit
        preparation of financial



79

---



statements in accordance with Canadian GAAP, and that receipts and
        expenditures of the Company are being made only in accordance with authorizations of our
        management and directors; and (iii) provide reasonable assurance regarding prevention or
        timely detection of unauthorized acquisition, use or disposition of our assets that could
        have a material effect on the financial statements. Because of its inherent limitations,
        internal control over financial reporting may not prevent or detect
        misstatements.



Management, including the Company’s Chief Executive Officer and Chief
        Financial Officer, assessed the effectiveness of the Company’s internal control over
        financial reporting as of December 31, 2007. In making this assessment, management used the
        criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
        (COSO) in Internal Control-Integrated Framework. Based on this assessment, management
        believes that, as of December 31, 2007, the Company’s internal control over financial
        reporting was effective based on those criteria.



C.

                    Attestation report of the register public accounting
                        firms


The
        Company is required to provide an auditor’s attestation report on internal control
        over financial reporting for the fiscal year ended December 31, 2007. In this report, the
        Company’s independent registered auditor, Ernst & Young LLP, must state its
        opinion as to the effectiveness of the Company’s internal control over financial
        reporting as of December 31, 2007. Ernst & Young LLP has audited the Company’s
        financial statements included in this annual report on Form 20-F and has issued an
        attestation report on the Company’s internal control over financial reporting.
        The Auditor Attestation Report is included in the Ernst & Young LLP
        Independent Auditor’s Report, included in the Company’s financial statements,
        beginning on page F-1 of this annual report on Form 20-F.



D.

                    Changes in Internal Controls over Financial
                        Reporting




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



ITEM 16A. AUDIT COMMITTEE FINANCIAL
        EXPERT

Our
        board of directors has determined that each of the Audit Committee members, Fred Stewart,
        Robert Schultz and Jim Dining, is a financial expert.



ITEM 16B. CODE OF ETHICS

Our
        Board of Directors has adopted a Code of Ethics for our CEO, CFO and Accounting Officer
        that applies to our CEO, CFO, and Controller. A copy of this Code of Ethics may be found on
        the Company’s website at http://www.oncolyticsbiotech.com. Requests for such copies
        should be directed to us at the following address: Oncolytics Biotech Inc., 210 –
        1167 Kensington Crescent, NW, Calgary, Alberta, Canada, T2N 1X7, Attention: Doug Ball.
        Telephone (403) 670 - 7377. Facsimile (403) 283-0858 EMAIL:
        info@oncolytics.ca.



80

---





ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND
        SERVICES

Audit
        Fees and Services



During
        the financial years ended December 31, 2007, 2006, and 2005, Ernst & Young LLP received
        the following fees:



December
                        31,Item

                    2007

                        $

                    2006

                        $

                    2005

                        $Audit fees

                    50,825

                    79,900

                    63,500Audit-related fees (1),(3),

                    82,628

                    32,260

                    20,250Tax fees (2)

                    11,608

                    8,214

                    9,048All other fees (4)

                    146,893

                    —

                    —


Notes:

1)

                    Includes review of interim financial statements, accounting
                        consultations and subscription to on-line accounting services.


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 2007.


4)

                    Includes fees associated with the examination and
                        anticipated expansion of our corporate structure.




Audit Fees

Audit
        fees were for professional services rendered by Ernst & Young, LLP for the audit of our
        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

Other
        fees are for products and services other than those described under the headings Audit
        Fees, Audit-Related Fees and Tax Fees above.



The
        Audit Committee pre-approves all audit services to be provided to us by our independent
        auditors. The Audit Committee’s policy regarding the pre-approval of non-audit
        services to be provided to us by our 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 us by our
        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.





81

---



ITEM
        16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not
        Applicable



ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER
        AND AFFILIATED PURCHASES

Not
        Applicable



82

---



PART
        III



ITEM 17. FINANCIAL STATEMENTS.

We have
        elected to provide financial statements pursuant to Item 18.



ITEM
        18 FINANCIAL STATEMENTS



The
        financial statements appear on pages F-1 through F-30.



ITEM 19. EXHIBITS.

The following exhibits are filed as part of this annual report:

Exhibit No.

                    DescriptionConstating Documents1.1*

                    Articles of Incorporation1.2*

                    By-lawsMaterial Contracts4.1

                    Services Agreement, dated October 16, 2002,
                        between the Company and its Senior Vice President, Clinical and Regulatory
                        Affairs, George Gill4.2

                    Amending Agreement No. 1, dated January 6,
                        2005, to the Services Agreement between the Company and its Senior Vice
                        President, Clinical and Regulatory Affairs, George Gill, dated October 16,
                        20014.3

                    Employment Agreement, dated January 12, 2007,
                        between the Company and its Vice President, Intellectual Property, Mary Ann
                        Dillahunty4.4

                    Executive Employment Agreement, dated May 29, 2007, between
                        the Company and its Chief Scientific Officer, Matthew Coffey4.5

                    Executive Employment Agreement, dated May 29, 2007, between
                        the Company and its Chief Medical Officer, Dr. Karl Mettinger4.6

                    Executive Employment Agreement, dated May 30, 2007, between
                        the Company and its Chief Financial Officer, Douglas Ball4.7

                    Executive Employment Agreement, dated June 6, 2007, between
                        the Company and its Chief Executive Officer, Bradley Thompson4.8

                    Amending Agreement No. 1, dated December 3, 2007, to the
                        Employment Agreement between the Company and its Vice President,
                        Intellectual Property, Mary Ann Dillahunty, dated January 12,
                        20074.9

                    Amendment No. 1, dated March 7, 2008, to the Executive
                        Employment Agreement between the Company and its Chief Financial Officer,
                        Douglas Ball, dated May 30, 20074.10

                    Amendment No.1, dated March 7, 2008, between the Company and
                        its Chief Scientific Officer, Matthew Coffey, dated May 29, 20074.11

                    Amendment No. 1, dated March 7, 2008, to the Executive
                        Employment Agreement between the Company and its Chief Executive Officer,
                        Bradley Thompson, dated June 6, 20074.12

                    Amendment No. 1, dated March 20, 2008, to the Employment
                        Agreement between the Company and its Vice President, Intellectual
                        Property, Mary Ann Dillahunty, dated January 12, 20074.13

                    Amendment No. 1, dated March 28, 2008, to the Executive
                        Employment Agreement between the Company and its Chief Medical Officer, Dr.
                        Karl Mettinger, dated May 29, 20074.14

                    Amendment No. 2, dated March 31, 2008, to the Services
                        Agreement between the Company and its Senior Vice President, Clinical and
                        Regulatory Affairs, George Gill, dated October 16, 2001Certifications12.1

                    Certificate of the Chief Executive Officer pursuant to
                        Section 302 of the Sarbanes-Oxley Act of 200212.2

                    Certificate of the Chief Financial Officer pursuant to
                        Section 302 of the Sarbanes-Oxley Act of 200213.1

                    Certificate of the Chief Executive Officer pursuant to
                        Section 906 of the Sarbanes-Oxley Act of 200213.2

                    Certificate of the Chief Financial Officer pursuant to
                        Section 906 of the Sarbanes-Oxley Act of 2002




(1) Previously filed with the SEC on Form 20-F on June 14, 2002.



83

---





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

Date:  May  22, 2008



**Oncolytics Biotech Inc.**





/s/ Brad Thompson
                        ________________________________

                    /s/ Doug Ball
                        __________________________________


Brad Thompson, Ph.D

                    Doug Ball, CA


Chief Executive Officer

                    Chief Financial Officer






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



84

---



Financial
        Statements



Oncolytics Biotech Inc.

December
        31, 2007 and 2006



























---

STATEMENT OF MANAGEMENT’S RESPONSIBILITY



Management is responsible for the preparation and presentation of the
        financial statements, Management’s Discussion and Analysis (“MD&A”)
        and all other information in the Annual Report.



In
        management’s opinion, the accompanying financial statements have been properly
        prepared with reasonable limits of materiality and within the appropriately selected
        Canadian generally accepted accounting principles and policies consistently applied and
        summarized in the financial statements.



The
        MD&A has been prepared in accordance with the requirements of securities regulators as
        applicable to Oncolytics Biotech Inc.



The
        financial statements and information in the MD&A generally include estimates that are
        necessary when transactions affecting the current accounting period cannot be finalized
        with certainty until future periods. Based on careful judgments by management, such
        estimates have been properly reflected in the accompanying financial statements and
        MD&A. The MD&A also includes information regarding the impact of current
        transactions and events, sources of liquidity and capital resources and risks and
        uncertainty. Actual results in the future may differ materially from our present assessment
        of this information because future events and circumstances may not occur as
        expected.



Systems
        of internal controls, including organizational and procedural controls and internal
        controls over financial reporting, assessed as reasonable and appropriate in the
        circumstances, are designed and maintained by management to provide reasonable assurance
        that assets are safeguarded from loss or unauthorized use and to produce reliable records
        for financial purposes.



We, as
        the Chief Executive Officer and Chief Financial Officer will certify to our annual filings
        with the CSA and the SEC as required in Canada by Multilateral Instrument 52-109
        (certification of Disclosure in Issuers’ Annual Interim Filings) and in the United
        States by the Sarbanes-Oxley Act.



The
        external auditors conducted an independent examination of corporate and accounting records
        in accordance with generally accepted auditing standards to express their opinion on the
        financial statements. Their examination included such tests and procedures as they
        considered necessary to provide reasonable assurance that the financial statements are
        presented fairly. The external auditors have full and free access to our Board of Directors
        and its Committees to discuss audit, financial reporting and related matters.



The
        Board of Directors is responsible for ensuring that management fulfills its
        responsibilities for financial reporting and internal control. The Board exercises this
        responsibility through the Audit Committee of the Board. This Committee meets with
        management and the external auditors to satisfy itself that management’s
        responsibilities are properly discharged and to review the financial statements and
        MD&A before they are presented to the Board of Directors for approval.



/s/ Brad Thompson

                    /s/ Doug Ball




Brad Thompson, PhD

                    Doug Ball, CA


Chairman, President and CEO

                    Chief Financial Officer






F-1



---

Oncolytics
        Biotech Inc.



INDEPENDENT AUDITORS’ REPORT ON FINANCIAL STATEMENTS

Under
        Canadian Generally Accepted Auditing Standards and the Standards of the Public Company
        Accounting Oversight Board (United States)



To the
        Board of Directors and Shareholders of



Oncolytics Biotech Inc.



We have
        audited the Consolidated Balance Sheets of Oncolytics Biotech
        Inc. as at December 31, 2007, and 2006 and the Consolidated
        Statements of loss and comprehensive loss, and cash flows for each of the years in the
        three-year period ended December 31, 2007, 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 Canadian Generally Accepted Auditing Standards and
        the standards of the Public Company Accounting Oversight Board (United States). Those
        standards require that we plan and perform an audit to obtain reasonable assurance about
        whether the financial statements are free of material misstatement. An audit includes
        examining, on a test basis, evidence supporting the amounts and disclosures in the
        financial statements. An audit also includes assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall financial
        statement presentation. We believe that our audits provide a reasonable basis for our
        opinion.



In our
        opinion, these Consolidated Financial Statements present fairly, in all material respects,
        the financial position of Oncolytics Biotech Inc. as at December 31, 2007 and 2006 and the
        results of its operations and its cash flows for each of the years in the three-year period
        ended December 31, 2007, and the cumulative period from inception on April 2, 1998, in
        accordance with Canadian Generally Accepted Accounting Principles.



We have
        also audited, in accordance with the standards of the Public Company Accounting Oversight
        Board (United States), the effectiveness of Oncolytics Biotech Inc.’s internal
        control over financial reporting as of December 31, 2007, based on criteria established in
        Internal Control – Integrated Framework issued by the Committee of Sponsoring
        Organizations of the Treadway Commission and our report dated April 18, 2008 expressed an
        unqualified opinion thereon.





Calgary,
        Canada

April
        18, 2008







Chartered Accountants



F-2



---

Oncolytics
        Biotech Inc.



INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL
        OVER

FINANCIAL REPORTING

Under the
        Standards of the Public Company Accounting Oversight Board (United States)



To the
        Board of Directors and Shareholders of



Oncolytics Biotech Inc.



We have
        audited Oncolytics Biotech Inc.’s internal control over financial reporting as of
        December 31, 2007, based on criteria established in Internal Control – Integrated
        Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
        (the COSO criteria). Oncolytics Biotech Inc.’s management is responsible for
        maintaining effective internal control over financial reporting, and for its assessment of
        the effectiveness of internal control over financial reporting included in the accompanying
        Management Report on Internal Control over Financial Reporting. Our responsibility is to
        express an opinion on the Company’s internal control over financial reporting based
        on our audit.



We
        conducted our audit in accordance with the standards of the Public Company Accounting
        Oversight Board (United States). Those standards require that we plan and perform the audit
        to obtain reasonable assurance about whether effective internal control over financial
        reporting was maintained in all material respects. Our audit included obtaining an
        understanding of internal control over financial reporting, assessing the risk that a
        material weakness exists, testing and evaluating the design and operating effectiveness of
        internal control based on the assessed risk, and performing such other procedures as we
        considered necessary in the circumstances. We believe that our audit provides a reasonable
        basis for our opinion.



A
        company’s internal control over financial reporting is a process designed to provide
        reasonable assurance regarding the reliability of financial reporting and the preparation
        of financial statements for external purposes in accordance with generally accepted
        accounting principles. A company’s internal control over financial reporting includes
        those policies and procedures that (1) pertain to the maintenance of records that, in
        reasonable detail, accurately and fairly reflect the transactions and dispositions of the
        assets of the company; (2) provide reasonable assurance that transactions are recorded as
        necessary to permit preparation of financial statements in accordance with generally
        accepted accounting principles, and that receipts and expenditures of the company are being
        made only in accordance with authorizations of management and directors of the company; and
        (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
        acquisition, use, or disposition of the company’s assets that could have a material
        effect on the financial statements.



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



In our
        opinion, Oncolytics Biotech Inc. maintained, in all material respects, effective internal
        control over financial reporting as of December 31, 2007, based on the COSO
        criteria.





F-3



---

We also
        have audited, in accordance with Canadian generally accepted auditing standards and the
        standards of the Public Company Accounting Oversight Board (United States), the
        consolidated balance sheets of Oncolytics Biotech Inc. as at December 31, 2007 and 2006 and
        the consolidated statements of loss and comprehensive loss, and cash flows for each of the
        years in the three-year period ended December 31, 2007, and for the cumulative period from
        inception on April 12, 1998, and our report dated April 18, 2008, expressed an unqualified
        opinion thereon.



Calgary,
        Canada

April
        18, 2008







Chartered Accountants



F-4



---

Oncolytics Biotech Inc.



BALANCE SHEETS





As at
        December 31







2007

                        $

                    2006

                        $ASSETSCurrentCash and cash equivalents

                    6,715,096

                    3,491,511Short-term investments [note
                        16]

                    18,498,733

                    24,122,237Accounts receivable

                    80,085

                    84,003Prepaid expenses

                    260,300

                    638,54025,554,214

                    28,336,291Property and equipment
                        [note 5]

                        Intellectual property
                        [note 6]

                    201,103

                        5,026,540

                    149,596

                        5,079,80530,781,857

                    33,565,692LIABILITIES AND SHAREHOLDERS' EQUITYCurrentAccounts payable and accrued liabilities

                    2,821,227

                    2,616,421Alberta Heritage Foundation loan
                        [notes 3 and 7]

                    —

                    150,000Commitments and contingency
                        [notes 7, 8, 9 and 15]Shareholders' equityShare capital [note
                        10]Authorized: unlimitedIssued: 41,180,748 (2006 – 36,520,748)

                    92,759,665

                    83,083,271Warrants [note 10]

                    5,346,260

                    4,216,740Contributed surplus [notes 2, 10,
                        11 and 12]

                    10,376,962

                    8,529,326Deficit [note 4]

                    (80,522,257)

                    (65,030,066)27,960,630

                    30,799,27130,781,857

                    33,565,692


See
        accompanying notes



On behalf of the Board:

                    /s/ Fred Stewart

                    /s/ Jim Dinning




Director

                    Director






F-5



---

Oncolytics Biotech Inc.



STATEMENTS OF LOSS AND COMPREHESIVE LOSS



For the
        periods ended December 31





2007$

                    2006$

                    2005$

                    Cumulative from inception on April 2,1998 to December 31, 2007$RevenueRights revenue

                    —

                    —

                    —

                    310,000—

                    —

                    —

                    310,000ExpensesResearch and development [note
                        9]

                    11,315,088

                    10,535,689

                    9,308,977

                    54,536,282Operating

                    3,987,688

                    3,630,144

                    3,083,372

                    20,758,269Stock based compensation [note
                        11]

                    539,156

                    403,550

                    64,104

                    4,704,805Foreign exchange loss

                    8,862

                    35,270

                    253,608

                    657,710Amortization – intellectual property

                    962,427

                    874,043

                    786,459

                    4,999,261Amortization – capital assets

                    40,714

                    52,637

                    69,532

                    448,39716,853,935

                    15,531,333

                    13,566,052

                    86,104,724Loss before the following

                    16,853,935

                    15,531,333

                    13,566,052

                    85,794,724Interest income

                    (1,211,744)

                    (1,233,809)

                    (783,456)

                    (6,014,749)Gain on sale of BCY LifeSciences Inc.
                        [note 20]

                    —

                    —

                    (765)

                    (299,403)Loss on sale of Transition Therapeutics
                        Inc.

                    —

                    —

                    —

                    2,156,685Loss before income taxes

                    15,642,191

                    14,297,524

                    12,781,831

                    81,637,257Future income tax recovery
                        [notes 14 and 19]

                    —

                    —

                    —

                    (1,115,000)Net loss and comprehensive loss for the
                        period

                    15,642,191

                    14,297,524

                    12,781,831

                    80,522,257Basic and diluted loss per share
                        [note 13]

                    (0.39)

                    (0.39)

                    (0.39)




See
        accompanying notes



F-6





---

Oncolytics Biotech Inc.



STATEMENTS OF CASH FLOWS



For the periods ended December 31

2007$

                    2006$

                    2005$

                    Cumulative from   
                                inception on April 2,1998 to December 31,
                        2007
                        $OPERATING ACTIVITIESNet loss and comprehensive loss for the period

                    (15,642,191)

                    (14,297,524)

                    (12,781,831)

                    (80,522,257)Add/ (deduct) non-cash itemsAmortization – intellectual property

                    962,427

                    874,043

                    786,459

                    4,999,261Amortization – capital assets

                    40,714

                    52,637

                    69,532

                    448,397Stock based compensation [note
                        11]

                    539,156

                    403,550

                    64,104

                    4,704,805Other non-cash items [note
                        19]

                    —

                    —

                    224,508

                    1,383,537Net change in non-cash working
                        capital [note19]

                    530,300

                    811,922

                    584,766

                    2,435,221Cash used in operating activities

                    (13,569,594)

                    (12,155,372)

                    (11,052,462)

                    (66,551,036)INVESTING ACTIVITIESIntellectual property

                    (852,498)

                    (842,610)

                    (1,033,035)

                    (6,351,778)Capital assets

                    (92,221)

                    (35,837)

                    (61,309)

                    (715,569)Purchase of short-term investments

                    (949,496)

                    (1,035,427)

                    (22,195,253)

                    (49,068,963)Redemption of short-term investments

                    6,573,000

                    13,808,000

                    6,656,746

                    30,151,746Investment in BCY LifeSciences Inc.

                    —

                    —

                    7,965

                    464,602Investment in Transition Therapeutics
                        Inc.

                    —

                    —

                    —

                    2,532,343Cash provided by (used in) investing activities

                    4,678,785

                    11,894,126

                    (16,624,886)

                    (22,987,619)FINANCING ACTIVITIESProceeds from exercise of stock options and
                        warrants

                    51,000

                    241,400

                    3,384,787

                    15,259,468Proceeds from private placements

                    —

                    —

                    15,395,402

                    38,137,385Proceeds from public offerings

                    12,063,394

                    —

                    —

                    42,856,898Cash provided by financing activities

                    12,114,394

                    241,400

                    18,780,189

                    96,253,751Net increase (decrease) in cash and cash equivalents
                        during the period

                    3,223,585

                    (19,846)

                    (8,897,159)

                    6,715,096Cash and cash equivalents, beginning of the
                        period

                    3,491,511

                    3,511,357

                    12,408,516

                    —Cash and cash equivalents, end of the
                        period

                    6,715,096

                    3,491,511

                    3,511,357

                    6,715,096Cash interest received

                    1,392,866

                    940,100

                    993,097


See accompanying notes



F-7



---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



1.

                    INCORPORATION AND NATURE OF OPERATIONS


Oncolytics Biotech Inc. (the “Company” or
        “Oncolytics”) 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. This 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 (see note 20). 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 21. The financial statements have, in management’s opinion, been properly
        prepared within reasonable limits of materiality and within the framework of the
        significant 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.



F-8



---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



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

                    20%Medical equipment

                    20%Computer equipment

                    30%Leasehold improvements

                    Straight-line over the term of the lease


Intellectual property

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 the shorter of seventeen years or the 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.

Foreign currency translation

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 period.

Research and development costs

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.



F-9



---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



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 Company calculates the fair value of each stock option grant using the Black
        Scholes Option Pricing Model and the fair value 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:



2007

                        $

                    2006

                        $

                    2005

                        $Reported net loss

                    15,642,191

                    14,297,524

                    12,781,831Compensation expense

                    —

                    —

                    983Pro forma net loss

                    15,642,191

                    14,297,524

                    12,782,814Reported basic and diluted net loss per share

                    (0.39)

                    (0.39)

                    (0.39)Pro forma basic and diluted net loss per share

                    (0.39)

                    (0.39)

                    (0.39)




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 and laws 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.



F-10



---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



Adoption of New Accounting Policies



Financial Instruments



On
        January 1, 2007, the Company adopted, without restatement, CICA Handbook Section
        3855 “Financial Instruments – Recognition and
        Measurement” and Section 1530
        “Other Comprehensive Income”.
        Pursuant to the transitional provisions of Section 3855, the Company classified its
        short-term investments as held-to-maturity fixed income securities and recorded its Alberta
        Heritage Foundation interest free loan at fair value. As a result, there were no
        adjustments made to short-term investments or other comprehensive income and there was a
        decrease in the Alberta Heritage Foundation loan of $150,000 with a corresponding decrease
        of $150,000 in the Company’s deficit.



Financial Assets



Financial assets are comprised of cash and cash equivalents, accounts
        receivable (mainly goods and service tax receivable), and short-term
        investments.



Cash
        and cash equivalents

Cash and
        cash equivalents consist of cash on hand and interest bearing deposits with the
        Company’s bank.



Short-term investments

The
        Company determines the appropriate classification of its short-term investments at the time
        of purchase and reevaluates such designation as of each balance sheet date. Short-term
        investments can be classified as held-for-trading, available-for-sale or held-to-maturity.
        Currently, the Company has classified all of its short-term investments as held-to-maturity
        as it has the positive intent and ability to hold the securities to maturity.
        Held-to-maturity securities are stated at original cost, adjusted for amortization of
        premiums and accretion of discounts to maturity computed under the effective interest rate
        method. Such amortization and interest on securities classified as held-to-maturity are
        included in interest income.



Financial Liabilities



Financial
        liabilities are comprised of trade accounts payable and accrued liabilities.

Future Accounting Changes

International Financial Reporting Standards

In
        2006, the CICA announced that accounting standards in Canada will converge with
        International Financial Standards (“IFRS”). The Company will need to begin
        reporting under IFRS in the first quarter of 2011with comparative data for the prior year.
        IFRS uses a conceptual framework similar to GAAP, but there could be significant
        differences on recognition, measurement and disclosures that will need to be addressed. The
        Company is currently assessing the impact of these standards on its financial
        statements.



F-11



---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



Capital Disclosures

The
        CICA has issued new accounting recommendations for capital disclosures which require
        disclosure of both qualitative and quantitative information that enables users of financial
        statements to evaluate the Company’s objectives, policies, and processes for managing
        capital. These recommendations are effective for the Company beginning January 1,
        2008.

Disclosure and Presentation of Financial Instruments

The
        CICA has issued new accounting recommendations for disclosure and presentation of financial
        instruments which require disclosures of both qualitative and quantitative information that
        enables users of financial statements to evaluate the nature and extent of risks arising
        from financial instruments to which the Company is exposed. These recommendations are
        effective for the Company beginning January 1, 2008.

Goodwill and Intangible Assets

The
        CICA has issued new accounting recommendations for the treatment of goodwill and intangible
        assets that are intended to reduce the differences between IFRS in the accounting for
        intangible assets and results in closer alignment with U.S. GAAP. The objectives of these
        recommendations are to reinforce the principle-based approach to the recognition of assets
        only in accordance with the definition of an asset and the criteria for asset recognition;
        and clarify the application of the concept of matching revenues and expenses such that the
        current practice of recognizing asset items that do not meet the definition and recognition
        criteria is eliminated. The standard also provides guidance for the recognition of
        internally developed intangible assets, whether separately acquired or internally
        developed. These changes are effective for fiscal years beginning on or after October 1,
        2008, with early adoption encouraged. The Company is evaluating the effects of adopting
        these recommendations.

4.

                    DEFICIT




Amount$Balance, December 31, 2005

                    50,732,542Net loss for the year

                    14,297,524Balance, December 31, 2006

                    65,030,066Adjustment – Alberta Heritage Foundation loan
                        [notes 3 and 7]

                    (150,000)Net loss and comprehensive loss for the year

                    15,642,191Balance, December 31, 2007

                    80,522,257




F-12





---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006





5.

                    PROPERTY AND EQUIPMENT


2007Cost

                        $

                    Accumulated Amortization

                        $

                    Net Book Value

                        $Medical equipment

                    100,816

                    21,016

                    79,800Office equipment

                    34,965

                    22,445

                    12,520Office furniture

                    99,730

                    61,860

                    37,870Computer equipment

                    202,845

                    131,932

                    70,913Leasehold improvements

                    99,830

                    99,830

                    —538,186

                    337,083

                    201,1032006Cost

                        $

                    Accumulated Amortization

                        $

                    Net Book Value

                        $Medical equipment

                    30,201

                    11,382

                    18,819Office equipment

                    32,818

                    19,758

                    13,060Office furniture

                    97,160

                    55,999

                    41,161Computer equipment

                    185,955

                    109,399

                    76,556Leasehold improvements

                    99,830

                    99,830

                    —445,964

                    296,368

                    149,596


6.

                    INTELLECTUAL PROPERTY


2007Cost

                    Accumulated Amortization

                    Net Book ValueIntellectual property

                    10,025,799

                    4,999,259

                    5,026,540




2006Cost

                    Accumulated Amortization

                    Net Book ValueIntellectual property

                    9,116,637

                    4,036,832

                    5,079,805




F-13





---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



7.

                    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.

8.

                    COMMITMENTS


The
        Company is committed to payments totaling $960,000 during 2008 for activities related to
        its clinical trial program and collaborations.

The
        Company is committed to monthly rental payments (excluding the Company’s portion of
        operating costs) of $7,453 under the terms of a lease for office premises, which expires on
        May 31, 2011.

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, 2007, 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 income 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 been





F-14



---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



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 no par value common shares

Issued:

                    Shares

                    

                    WarrantsNumber

                    Amount$

                    Number

                    Amount$Balance, December 31, 1998

                    2,145,300

                    4

                    —

                    —Issued on exercise of stock options

                    76,922

                    77

                    —

                    —2,222,222

                    81

                    —

                    —July 29, 1999 share split (a)

                    6,750,000

                    81

                    —

                    —Issued for cash pursuant to July 30, 1999 private placement
                        (net of share issue costs of $45,000) (b)

                    1,500,000

                    855,000

                    —

                    —Issued for cash pursuant to August 24, 1999 private
                        placement

                    1,399,997

                    1,049,998

                    —

                    —Issued on initial public offering (net of share issue costs
                        of $317,897) (c)

                    4,000,000

                    3,082,103

                    —

                    —Issued for cash pursuant to exercise of share purchase
                        warrants

                    20,000

                    15,000

                    —

                    —Balance, December 31, 1999

                    13,669,997

                    5,002,182

                    —

                    —Issued on exercise of stock options and warrants

                    573,910

                    501,010

                    —

                    —Issued for cash pursuant to July 17, 2000 private placement
                        (d)

                    244,898

                    2,998,645

                    —

                    —Issued on public offering (net of share issue costs of
                        $998,900) (e)

                    3,000,000

                    13,101,100

                    —

                    —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

                    —

                    —






F-15





---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006





Issued:

                    Shares

                    

                    WarrantsIssued on acquisition of the interest in Transition
                        Therapeutics Inc.

                    1,913,889

                    4,689,028

                    —

                    —Issued for cash pursuant to December 11, 2002 private
                        placement (f)

                    1,000,000

                    1,896,714

                    550,000

                    114,286Share issue costs

                    —

                    (241,123)

                    —

                    —Balance, December 31, 2002

                    22,145,284

                    30,191,572

                    550,000

                    114,286Issued for cash pursuant to February 10, 2003 private
                        placement (g)

                    140,000

                    265,540

                    77,000

                    16,000Issued for cash pursuant to June 19, 2003 private placement
                        (h)

                    2,120,000

                    5,912,113

                    1,272,000

                    543,287Issued for cash pursuant to August 21, 2003 private
                        placement (i)

                    1,363,900

                    3,801,778

                    813,533

                    349,176Issued for cash pursuant to October 14, 2003 public offering
                        (j)

                    1,200,000

                    5,528,972

                    720,000

                    617,428Exercise of options

                    64,700

                    149,615

                    —

                    —Exercise of warrants

                    174,378

                    593,194

                    (174,378)

                    (41,927)Share issue costs

                    —

                    (1,730,195)

                    —

                    —Balance, December 31, 2003

                    27,208,262

                    44,712,589

                    3,258,155

                    1,598,250Issued for cash pursuant to April 7, 2004 private
                        placement(k)

                    1,077,100

                    5,924,050

                    646,260

                    1,028,631Issued for cash pursuant to pursuant to November 23, 2004
                        public offering(l)

                    1,504,000

                    8,693,120

                    864,800

                    1,521,672Issued pursuant to cancellation of contingentpayment [note 9]

                    21,459

                    150,000

                    —

                    —Exercise of warrants

                    1,907,175

                    8,178,546

                    (1,907,175)

                    (798,096)Expired warrants

                    —

                    —

                    (6,700)

                    (2,827)Exercise of options

                    197,500

                    778,951

                    —

                    —Share issue costs

                    —

                    (1,796,758)

                    —

                    —Balance, December 31, 2004

                    31,915,496

                    66,640,498

                    2,855,340

                    3,347,630Issued for cash pursuant to December 29, 2005 private
                        placement(m)

                    3,200,000

                    14,176,000

                    1,920,000

                    2,908,800






F-16





---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006





Issued:

                    Shares

                    

                    WarrantsExercise of warrants

                    771,252

                    3,417,271

                    (771,252)

                    (329,984)Expired warrants

                    —

                    —

                    (1,219,288)

                    (1,496,514)Exercise of options

                    350,000

                    297,500

                    —

                    —Share issue costs

                    —

                    (1,689,398)

                    —

                    —Balance, December 31, 2005

                    36,236,748

                    82,841,871

                    2,784,800

                    4,429,932Exercise of options

                    284,000

                    241,400

                    —

                    —Expired warrants

                    —

                    —

                    (112,800)

                    (213,192)Balance, December 31, 2006

                    36,520,748

                    83,083,271

                    2,672,000

                    4,216,740Issued for cash pursuant to February 22, 2007 public
                        offering (n)

                    4,600,000

                    11,362,000

                    2,300,000

                    2,438,000Exercise of options

                    60,000

                    51,000

                    —

                    —Expired warrants

                    —

                    —

                    (752,000)

                    (1,308,480)Share issue costs

                    

                    (1,736,606)

                    —

                    —Balance, December 31, 2007

                    41,180,748

                    92,759,665

                    4,220,000

                    5,346,260




(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-17



---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



|(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 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.




F-18



---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



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 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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(m) | Pursuant to a private placement, 3,200,000 units were issued at
                    an issue price of $5.15 per unit net of issue costs of $1,689,398. Each unit
                    included one common share (ascribed value of $4.43) and one-half of one common
                    share purchase warrant (ascribed value of $0.72) for a total of 1,600,000
                    warrants. Each whole common share purchase warrant entitles the holder to
                    acquire one common share in the capital of the Company upon payment of $6.15
                    per share until December 29, 2008. In addition, the Company issued 320,000
                    common share purchase warrants with an exercise price of $5.65 expiring on
                    December 29, 2008. The ascribed value of these broker warrants was $604,800
                    ($1.89 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(n) | Pursuant to a public offering, 4,600,000 units were issued at an
                    issue price of $3.00 per unit for gross proceeds of $13,800,000. Each unit
                    included one common share (ascribed value of $2.47) and one-half of one common
                    share purchase warrant (ascribed value of $0.53) for a total of 2,300,000
                    warrants. The ascribed value was determined using the relative fair value
                    method. Each whole common share purchase warrant entitles the holder to acquire
                    one common share in the capital of the Company upon payment of $3.50 per share
                    until February 22, 2010. Share issue costs for this offering were
                    $1,736,606.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
        following table summarizes the weighted average assumptions used in the Black Scholes Model
        with respect to the valuation of warrants and broker warrants issued in those
        years:



F-19





---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006





2007

                    2006

                    2005

                    2004

                    2003

                    2002Risk-free interest rate

                    4.08%

                    —

                    3.82%

                    2.82%

                    3.01%

                    3.41%Expected hold period to exercise

                    3.00

                    —

                    1.92

                    1.39

                    0.76

                    1.00Volatility in the price of the Company’s
                        shares

                    63%

                    —

                    66%

                    71%

                    72%

                    57%Dividend yield

                    Zero

                    —

                    Zero

                    Zero

                    Zero

                    Zero


The
        following table summarizes the Company’s outstanding warrants as at December 31,
        2007:



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)$3.50

                    —

                    2,300,000

                    —

                    —

                    2,300,000

                    2.15$5.65

                    320,000

                    —

                    —

                    —

                    320,000

                    1.00$6.15

                    1,600,000

                    —

                    —

                    —

                    1,600,000

                    1.00$8.00

                    752,000

                    —

                    —

                    752,000

                    —

                    —2,672,000

                    2,300,000

                    —

                    752,000

                    4,220,000

                    1.38


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:

2007

                    2006Stock Options

                    Weighted Average Share Price$

                    Stock Options

                    Weighted Average Share Price$Outstanding at beginning of year

                    3,537,950

                    4.88

                    3,634,550

                    4.66Granted during year

                    532,543

                    2.43

                    187,400

                    3.08Cancelled during year

                    (140,000)

                    2.90

                    —

                    —Exercised during year

                    (60,000)

                    0.85

                    (284,000)

                    0.85Outstanding at end of year

                    3,870,493

                    4.61

                    3,537,950

                    4.88Options exercisable at end of year

                    3,661,943

                    4.69

                    3,355,450

                    4.98




F-20





---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



The
        following table summarizes information about the stock options outstanding and exercisable
        at December 31, 2007:



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

                    258,550

                    1.8

                    0.85

                    258,550

                    0.85$1.65 - $2.37

                    790,943

                    8.1

                    2.10

                    769,893

                    2.10$2.70 - $3.33

                    800,250

                    6.4

                    3.15

                    625,250

                    3.13$4.00 - $5.00

                    1,208,250

                    6.8

                    4.86

                    1,195,750

                    4.86$6.77 - $9.76

                    684,500

                    4.1

                    8.67

                    684,500

                    8.67$12.15 - $13.50

                    128,000

                    2.8

                    12.69

                    128,000

                    12.693,870,493

                    6.1

                    4.62

                    3,661,943

                    4.70


The
        outstanding options vest annually or after the completion of certain milestones. The
        Company has reserved 3,992,075 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 $539,156
        (2006 – $403,550; 2005 – $43,886) and $nil (2006 - $nil; 2005 – $20,218)
        respectively with an offsetting credit to contributed surplus.

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:



2007

                    2006

                    2005Risk-free interest rate

                    3.91%

                    4.08%

                    3.27%Expected hold period to exercise

                    3.5 years

                    3.5 years

                    3.5 yearsVolatility in the price of the Company’s
                        shares

                    56%

                    63%

                    64%Dividend yield

                    Zero

                    Zero

                    ZeroWeighted average fair value of options

                    $0.94

                    $1.46

                    $1.51






F-21



---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



12.

                    CONTRIBUTED SURPLUS


The
        following table summarizes the change in contributed surplus as at and for the year ended
        December 31:

2007

                    2006Balance, beginning of year

                    8,529,326

                    7,912,584Stock based compensation

                    539,156

                    403,550Expired warrants

                    1,308,480

                    213,192Exercise of stock options

                    —

                    —Balance end of year

                    10,376,962

                    8,529,326


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, 2007 of 40,428,825 (2006 – 36,346,266;
        2005 – 32,804,540). 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.



14.

                    INCOME TAXES


The
        recovery of 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:

2007$

                    2006$

                    2005$Loss before income taxes

                    (15,642,191)

                    (14,297,524)

                    (12,781,831)Statutory Canadian corporate tax rate

                    32.12%

                    29.00%

                    33.60%Anticipated tax recovery

                    (5,024,272)

                    (4,146,282)

                    (4,294,695)Non-taxable portion of net capital loss (gain)

                    —

                    —

                    (129)Employee stock based compensation

                    156,355

                    117,030

                    21,539Change in tax rate

                    465,321

                    2,276,597

                    102,309Tax return adjustment

                    (314,156)

                    (5,414)

                    78,995Non-deductible expenses

                    9,311

                    10,440

                    8,113Change in valuation allowance

                    4,707,441

                    1,747,629

                    4,083,868Future income tax recovery

                    —

                    —

                    —


As at December 31, 2007, the Company has non-capital losses for income tax
        purposes of approximately $56,112,000 which are available for application against future
        taxable income and expire



F-22



---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



in 2008 ($2,898,000), 2009 ($4,483,000), 2010 ($4,483,000), 2014
        ($9,075,000), 2015 ($11,550,000), 2026 ($11,103,000) and 2027 (12,520,000). As of December
        31, 2007, the Company has non-refundable federal investment tax credits of approximately
        $3,054,000 (2006 - $2,170,000) which are available to reduce future taxes payable. The
        Company has unclaimed scientific research and experimental development expenditures
        available to reduce future year’s taxable income of approximately $13,504,000 (2006 -
        $9,325,000) over an indefinite future period. The Company has not recorded the potential
        benefits of these tax pools in the financial statements.

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



2007$

                    2006$Non-capital loss carryforwards

                    16,045,857

                    13,378,880Scientific research and development

                    3,376,086

                    2,704,290Investment tax credits

                    2,290,784

                    1,540,443Net capital loss carryforwards

                    249,189

                    244,966Undepreciated capital costs in excess

                        of book value of capital assets and intellectual
                        property

                    727,205

                    553,156Share issue costs

                    523,919

                    428,965Valuation allowance

                    (23,213,040)

                    (18,850,700)Future tax asset

                    —

                    —




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.



F-23



---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



16.
        SHORT-TERM INVESTMENTS



Short-term investments, consisting of Government of Canada treasury bills,
        are liquid investments that are readily convertible to known amounts of cash and are
        subject to an insignificant risk of changes in value. The objectives for holding short-term
        investments are to invest the Company’s excess cash resources in investment vehicles
        that provide a better rate of return compared to the Company’s interest bearing bank
        account with limited risk to the principal invested. The Company also intends to match the
        maturities of these short-term investments with the cash requirements of the
        Company’s activities.



Original Cost

                    Accrued Interest

                    Carrying

                        Value

                    Fair

                        Value

                    Effective Interest RateDecember 31, 2007Short-term investments

                    18,230,340

                    268,393

                    18,498,733

                    18,499,173

                    4.26%December 31, 2006Short-term investments

                    23,672,719

                    449,518

                    24,122,237

                    24,124,810

                    3.95%




Fair
        value is determined by using published market prices provided by the Company’s
        investment advisor.



17.  FINANCIAL INSTRUMENTS

Financial instruments of the Company consist of cash and cash equivalents,
        short-term investments, accounts receivable, accounts payable and accrued liabilities. As
        at December 31, 2007, there are no significant differences between the carrying values of
        these amounts and their estimated market values.

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 risk

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



F-24



---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



18.

                    ECONOMIC DEPENDENCE


The
        Company contracts the production and currently receives its supply of
        REOLYSIN® for use in its clinical trial program from one toll manufacturer
        based in the U.K. The Company is in the process of transferring its technology it another
        toll manufacturer in the U.S., but has not produced clinical grade REOLYSIN®
        from this second toll manufacturer. As a result, any significant disruption of the services
        provided by the Company’s toll manufacturer in the U.K. has the potential to delay
        the progress of the Company’s clinical trial program.

19.

                    ADDITIONAL CASH FLOW DISCLOSURE


Net
        Change In Non-Cash Working Capital

2007

                        $

                    2006

                        $

                    2005

                        $

                    Cumulative from inception on April 2,

                        1998 to December 31, 2007

                        $Change in:Accounts receivable

                    3,918

                    (36,613)

                    377

                    (80,085)Prepaid expenses

                    378,240

                    (98,172)

                    (290,003)

                    (260,300)Accounts payable and accrued liabilities

                    204,806

                    923,940

                    743,223

                    2,821,227Change in non-cash working capital

                    586,964

                    789,155

                    453,597

                    2,480,842Net change associated with investing activities

                    (56,664)

                    22,767

                    131,169

                    (45,621)Net change associated with operating activities

                    530,300

                    811,922

                    584,766

                    2,435,221




Other Non-Cash Items

                    2007

                        $

                    2006

                        $

                    2005

                        $

                    Cumulative from inception on April 2,

                        1998 to December 31, 2006

                        $Foreign exchange loss

                    —

                    —

                    159,204

                    425,186Donation of medical equipment

                    —

                    —

                    66,069

                    66,069Loss on sale of Transition Therapeutics Inc.

                    —

                    —

                    —

                    2,156,685Gain on sale of BCY LifeSciences Inc.

                    —

                    —

                    (765)

                    (299,403)


Cancellation of contingent payment obligation settled in
                        common shares [note 9]

                    —

                    —

                    —

                    150,000Future income tax recovery

                    —

                    —

                    —

                    (1,115,000)—

                    —

                    224,508

                    1,383,537








F-25



---

Oncolytics Biotech Inc.



NOTES TO FINANCIAL STATEMENTS



December 31, 2007 and 2006







|20. | BCY LIFESCIENCES INC.
|--- | ---------------------

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. 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 these
        transactions, the Company held a total of 2,394,445 BCY shares which were all subsequently
        sold for net cash proceeds of $591,725 recording a gain on sale of investment of
        $299,403.



21.

                    RECONCILIATION OF CANADIAN GAAP TO U.S.
                        GAAP


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



Year Ended December 31

                    Cumulative from inception on April 2, 1998 to December 31, 2007$Notes

                    2007$

                    2006$

                    2005$Net loss - Canadian GAAP

                    (2)

                    15,642,191

                    14,297,524

                    12,781,831

                    80,522,257Amortization of intellectual property

                    (1)

                    (361,500)

                    (361,500)

                    (361,500)

                    (3,072,750)Future income tax recovery

                    (1)

                    —

                    —

                    —

                    1,115,000Net and comprehensive loss – U.S. GAAP

                    

                    15,280,691

                    13,936,024

                    12,420,331

                    78,564,507Basic and diluted loss per common share – U.S.
                        GAAP

                    

                    (0.38)

                    (0.38)

                    (0.38)

                    —


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



F-26



---

Oncolytics Biotech Inc.



NOTES TO FINANCIAL STATEMENTS



December 31, 2007 and 2006



Balance
        sheet items in accordance with U.S. GAAP are as follows:

December 31, 2007

                    December 31, 2006Notes

                    Canadian GAAP

                    U.S.GAAP

                    Canadian GAAP

                    U.S.GAAPIntellectual property

                    (1)

                    5,026,540

                    4,484,290

                    5,079,805

                    4,176,055Future income taxes

                    (1)

                    —

                    —

                    —

                    —Contributed surplus

                    (1)

                    10,376,962

                    7,876,962

                    8,529,326

                    6,029,326Deficit

                    (1)

                    80,522,257

                    78,564,507

                    65,030,066

                    63,433,816


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 U.S. GAAP, this would not be
        capitalized on acquisition.



As a result of removing the $2,500,000 from intellectual property in 1999
        for U.S. GAAP purposes, the amortization of the intellectual property, the future income
        tax recovery, future income tax liability and contributed surplus amounts recorded for
        Canadian GAAP purposes have been reversed.

2.

                    Presentation of Stock Based Compensation
                        Expense


Under U.S. GAAP, stock based compensation expense is to be presented within
        the appropriate category of expenses on the statements of loss. As a result, stock based
        compensation on the statement of loss would be reduced by $539,156 in 2007 (2006 –
        $403,550; 2005 - $64,104) and research and development and operating expenses would
        increase by $375,156 and $164,000, respectively (2006 – $131,890 and $271,660,
        respectively; 2005 – $59,974 and $4,130, respectively). Cumulative from inception
        stock based compensation would be reduced by $4,704,805 and cumulative from inception
        research and development and operating expenses would increase by $2,671,085 and
        $2,033,720, respectively. There is no impact on the Company’s net loss.

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 subsequent to this date.

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 U.S. 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.





F-27



---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



The
        following additional pro-forma disclosure would be provided under U.S. 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:



2001Risk free interest rate

                    5.0%Dividend yield

                    0%Volatility factors of expected market price

                    87%Weighted average expected life of the options

                    2 years


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.



2007$

                    2006$

                    2005$Net Loss

                    Pro forma – Canadian GAAP

                    15,642,191

                    14,297,524

                    12,782,814As reported – US GAAP

                    15,280,691

                    13,936,024

                    12,420,331Pro forma – US GAAP

                    15,280,691

                    13,936,024

                    12,421,314Basic and diluted net loss per common share

                    Pro forma – Canadian GAAP ($/share)

                    (0.39)

                    (0.39)

                    (0.39)As reported – US GAAP

                    (0.38)

                    (0.38)

                    (0.38)Pro forma – US GAAP ($/share)

                    (0.38)

                    (0.38)

                    (0.38)


Additional Stock Based Payment Disclosure

As at
        December 31, 2007, the aggregate intrinsic value of the stock options outstanding and the
        stock options exercisable were $222,018 and $222,018, respectively. The total intrinsic
        value of the options exercised in 2007 was $90,000 (2006 –$618,960; 2005 –
        $1,223,400).



F-28



---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



A
        summary of the Company’s non-vested options as at December 31, 2007 and changes
        during the year ended December 31, 2007 is as follows:

2007Stock Options

                    Weighted Average Grant Date Fair Value$Non-vested at beginning of year

                    182,500

                    1.38Granted during year

                    76,050

                    0.94Vested during year

                    (50,000)

                    1.51Forfeited during year

                    —

                    —Non-vested at end of year

                    208,550

                    1.19


As at
        December 31, 2007, there was $93,929 of total unrecognized compensation costs related to
        non-vested stock options granted under the Company’s stock option plan. This cost is
        expected to be recognized over a weighted average period of 1.48 years. The total fair
        value of shares vested during the years ended December 31, 2007, 2006, and 2005 was
        $75,500, $129,276, and $59,630, respectively.

The
        Company issues shares from treasury to satisfy any exercises of stock options.



Adoption of New Accounting Standard

The
        Financial Accounting Standards Board (“FASB”) issued FASB Interpretation
        (“FIN”) No. 48 “Accounting for Uncertainty in Income Taxes - an
        interpretation of FASB Statement 109”. FIN 48 establishes a single model to address
        accounting for uncertain tax positions and clarifies the accounting for income taxes by
        prescribing a minimum recognition threshold a tax position is required to meet before being
        recognized in the financial statements. FIN 48 also provides guidance on de-recognition,
        measurement classification, interest and penalties, accounting in interim periods,
        disclosure and transition.

On
        January 1, 2007, the Company adopted the provisions of FIN 48. The Company made no
        adjustments to retained earnings related to adoption, there have been no material changes
        in the amount of unrecognized tax benefits since adoption, and the Company anticipates no
        significant changes in the next 12 months.

The tax
        years 2001 – 2006 remain open for audit examination by the Canadian taxing
        jurisdictions to which the Company is subject to.

Future Accounting Changes

SFAS
        No. 157, Fair Value Measurements,
        defines fair value, establishes a framework for measuring fair value and expands
        disclosures about fair value measurements. The statement applies also to other accounting
        pronouncements which require or permit fair value measurements. The standard is effective
        for fiscal years beginning after November 15, 2007. The Company is evaluating the effects
        of adopting this standard.



F-29



---

Oncolytics Biotech Inc.



NOTES
        TO FINANCIAL STATEMENTS



December
        31, 2007 and 2006



SFAS
        No. 159, The Fair Value Option for Financial Assets and Financial
        Liabilities, including an amendment to SFAS No. 115, permits
        entities to choose to measure many financial instruments and certain other items at fair
        value. Most of the provisions of this Statement apply only to entities that elect the fair
        value option. However, the amendment to SFAS No. 115, Accounting
        for Certain Investments in Debt and Equity Securities, applies to
        all entities with available for sale and held-for-trading securities. SFAS No. 159 is
        effective as of the beginning of an entity’s fiscal year that begins after November
        15, 2007. The adoption of this standard is not expected to have a material impact on the
        Company’s financial statements.



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