Oncolytics BIOTECH INC technology changing life annual report 2009 Oncolytics Biotech Inc. is focused on the development of oncolytic viruses as a novel and effective approach to cancer treatment. Oncolytics clinical pro

technology changing life

Biotech Inc. is focused on the development of oncolytic viruses as a novel and effective approach to cancer treatment. Oncolytics clinical program includes a variety of human trials including a Phase III trial in head and neck cancers

using REOLYSIN , its proprietary formulation of the human reovirus.

Oncolytics trades on the Toronto Stock

(symbol ONC) and on the NASDAQ (symbol ONCY).

Letter to Shareholders 1

Management s Discussion and Analysis 4

Statement of Management s Responsibility 36

Financial Statements 39

Notes to Financial Statements 42

Annual and Special Meeting

The Annual and Special Meeting of the Shareholders will be held at the Hilton Toronto Hotel, 145 Richmond Street West,

Toronto, Ontario at 4:30 pm Eastern Time on Tuesday, May 11, 2010.

2009 Message to Shareholders

In the last 12 months Oncolytics has made substantial clinical progress, strengthened our intellectual property position and balance sheet, and scaled up

manufacturing to near commercial levels. We have executed on our business plan focused on preparing the Company for late stage clinical testing and ultimately commercial launch.

Transitioning to Late Stage Clinical Testing

In 2009, Oncolytics clinical program took a

major step forward as we announced we had reached an agreement with the U.S. Food and Drug Administration (FDA) under the Special Protocol Assessment (SPA) process for the design of a Phase 3 trial examining REOLYSIN in combination with paclitaxel and carboplatin in patients with platinum-refractory head and neck cancers. The SPA process generates an agreement between Oncolytics and the

FDA, confirming that the design and planned analyses of the Phase 3 study is adequate to provide the necessary data that, depending upon outcome, could support a license application submission for REOLYSIN.

We intend to conduct the first stage of the trial, at up to 25 centres in multiple jurisdictions including the United States, U.K., and Belgium and, on that basis,

also secured approval from the U.K. Medicines and Healthcare products Regulatory Agency (MHRA) subsequent to year-end. Conducting the trials in these markets allows us to access many of the physicians and centres that have already completed clinical

trial work with REOLYSIN as well as head and neck cancer specialists like Dr. Jan Vermorken at the University Hospital in Antwerp. We are currently awaiting approval from the Belgian authorities, which does not impact our ability to commence

enrollment in other jurisdictions.

We believe we are the first company to reach an agreement with the FDA on a Phase 3 trial design for an

intravenously-administered oncolytic virus under the SPA process. As specified in the SPA agreement, the randomized, two-arm, double-blind, multicentre, two-stage, adaptive Phase 3 trial will assess the intravenous administration of REOLYSIN with

the chemotherapy combination of paclitaxel and carboplatin versus chemotherapy alone in patients with metastatic or recurrent squamous cell carcinoma of the head and neck (SCCHN), or squamous cell cancer of the nasopharynx, who have progressed on or

after prior platinum-based chemotherapy.

The decision to pursue a Phase 3 trial in head and neck cancers was predicated on positive results seen in the

Company s U.K. Phase I and Phase II combination REOLYSIN and paclitaxel/carboplatin clinical trials, as well as significant preclinical work demonstrating synergy in combination with taxane or platinum-based drugs. Updated results reported in

November 2009, confirmed that REOLYSIN was well tolerated when administered intravenously in combination with paclitaxel and carboplatin. Of 19 evaluable patients with head and neck cancer, mostly SCCHN refractory to prior platinum-based

chemotherapy for recurrent/metastatic disease, eight experienced partial responses and six had stable disease. The total clinical benefit rate observed in head and neck cancer patients in the trial was 74%. Of four patients with malignant melanoma

on the trial, one experienced a partial response and one had stable disease.

Growing Clinical Success

These were not the only positive clinical results we reported in the last year. In March 2009, we presented updated clinical results from our U.K. combination REOLYSIN

and docetaxel clinical trial for patients with advanced cancers (REO 010). Twenty-four patients were treated in the trial, with 17 evaluable for response. Fifteen of the 17 evaluable patients experienced Stable Disease (SD) or better, including five

patients who experienced minor and Partial Responses (PR), giving a clinical benefit rate (SD + PR + CR) of 88%. These results were especially compelling given how difficult heavily pre-treated patients are to treat and the robust nature of the

response rate, which included a significant objective tumour response.

In April, we announced positive results from our U.K. Phase II clinical trial to

evaluate the objective tumour response rate of REOLYSIN in combination with low-dose radiation in patients with advanced cancers. A total of 16 heavily pretreated patients with advanced cancer were treated. Of 14 patients evaluable for response, 13

patients had stable disease or better in the treated target lesions. Of these, partial responses were observed in four patients (lung, melanoma (2) and gastric) and minor responses were observed in two patients (thyroid, ovarian), for a total

disease control rate (SD + PR + CR) of 93% in the treated lesions and suggesting that REOLYSIN is broadly active. This represents another very high disease control rate in patients that were previously treated with other therapies. In addition, the

combination was well tolerated, with only mild (Grade 1 or 2) toxicities noted.

Late in the year, we reported updated results from a Phase 2 study of

intravenous REOLYSIN in patients with sarcomas metastatic to the lung (REO 014). The investigators reported that the treatment had been well tolerated to date, and that 19 of 44 evaluable patients experienced stable disease ranging from two to

20 months, resulting in a total clinical benefit rate of 43%. The response objective for the study was three or more patients having prolonged stabilization of disease (>6 months) or better, for the agent to be considered. The trial exceeded

its established objective with six patients experiencing stable disease for more than six months. Two patients had experienced stable disease for more than 19 months. One had synovial cell sarcoma that relapsed following surgery, while the

other has Ewing s Sarcoma and had previously progressed following multiple treatments.

Evolving Clinical Program

While we continued to conclude trials and report data, we also started enrollment on a number of other trials. During the year we started

enrollment on a U.K. translational clinical trial investigating intravenous administration of REOLYSIN in patients with metastatic colorectal cancer prior to surgical resection of liver metastases (REO 013); a U.S. Phase 2 clinical trial using

intravenous administration of REOLYSIN in combination with paclitaxel and carboplatin in patients with non-small cell lung cancer (NSCLC) with Kras or

EGFR-activated tumours (REO 016); and a U.S. Phase 2 clinical trial using intravenous administration of REOLYSIN in combination with paclitaxel and carboplatin in patients with metastatic melanoma being conducted by the Cancer Therapy &

Research Center at the University of Texas Health Science Center in San Antonio (CTRC at UTHSCSA).

While our own clinical program continues to evolve,

we have been able to cost effectively expand it by leveraging relationships with groups like the National Cancer Institute and St. James Hospital in the U.K., who conduct trials using REOLYSIN provided by Oncolytics. In 2009, we entered into an

expanded relationship with the CTRC. The clinical collaboration involves up to five, open-label, Phase 2 studies exploring the use of REOLYSIN in combination with chemotherapy for various cancer indications. These indications are expected to

include, pancreatic cancer, squamous cell lung, liver and Kras mutated colorectal cancers in combination with standard chemotherapeutics, in addition to the trial in melanoma that is already enrolling.

Strengthened Balance Sheet

Obtaining adequate funding to advance our

increasingly late stage clinical program remains a core focus. Despite poor economic conditions through much of 2009, we conducted two financings raising gross proceeds of Cdn$6.9 million and US$14.7 million. We also raised an additional Cdn$14.8

million through the exercise of warrants as we accelerated their expiry dates based on meeting certain trading criteria. Early in the year, we successfully completed the acquisition of an inactive private company with net cash of $2.1 million by

issuing 1,875,121 common shares. In total we raised 37.1 million in 2009 and our strong efforts in this regard, have given us sufficient resources to fund the enrollment and data analysis for the first 80-patient phase of our Phase 3 head and

Advancing Toward the Commercial Endpoint

In an effort to support our mid-term objective of attracting a large pharmaceutical partner, we appointed Dr. Alan Warrander to the role of Senior Vice President, Global Licensing and Business Development. In his 32-year career, Alan

has held a number of progressively senior positions within the biotechnology and pharmaceutical industries, most recently as Director, Global Licensing, AstraZeneca.

One of our most important assets remains our intellectual property portfolio and we were able to add two new U.S. patents during the year, bringing our total issued to 33, with more than 200 issued worldwide.

Bringing REOLYSIN to market will require commercial scale manufacturing capability. During the year, with the support of contract

manufacturer, SAFC Pharma , a division of Sigma-Aldrich Corporation, we successfully completed an initial 100-litre production run of REOLYSIN under cGMP conditions. This

run is anticipated to be the first of a series to be completed over the next several years as we work to support our clinical program and advance toward commercial launch of REOLYSIN. We also successfully completed our lyophilization (freeze-drying)

formulation development program.

Looking to the Future

Looking ahead, our primary focus remains moving through our first Phase 3 clinical trial. With enrollment expected to commence in the near-term, we hope to complete the first 80-patient phase of the study in late 2010 or early 2011. Our

decision to move into head and neck cancer was based on signals of efficacy observed in earlier-stage trials. A secondary goal for 2010 remains the identification of additional indications we can advance into late stage clinical testing and we

expect to announce results from a number of Phase II trials, including our study in non-small cell lung cancer. These results will inform our decisions with respect to next steps in our clinical program as we work to find the most commercially

viable indications. Finally, we will make decisions on which other indications we want to take into the clinic focusing on synergies between our broadly active agent and currently approved therapies, identified through our preclinical work.

2010 promises to be another exciting year for Oncolytics and I would like to thank all our stakeholders for their continued support through our

substantial recent progress. I look forward to updating you in the quarters ahead.

MANAGEMENT S DISCUSSION &

MANAGEMENT S DISCUSSION AND ANALYSIS

Management s Discussion and Analysis

of Financial Condition and Results of Operations

The following information should be read in conjunction with our 2009 audited consolidated financial statements and notes thereto, which were prepared in accordance with Canadian generally accepted accounting

principles ( GAAP ).

Forward-Looking Statements

The following discussion contains forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended and under applicable Canadian provincial securities

legislation. Forward-looking statements, including our belief as to the potential of REOLYSIN , a therapeutic reovirus, as

a cancer therapeutic and our expectations as to the success of our research and development and manufacturing programs in 2010 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 REOLYSIN , uncertainties related to competition, changes in technology, the regulatory process and

general changes to the economic environment.

With respect to the forward-looking statements made within this MD&A, we have made

numerous assumptions regarding among other things: our ability to obtain financing to fund our development program, our ability to receive regulatory approval to commence enrollment in our clinical trial program, the final results of our co-therapy

clinical trials, our ability to maintain our supply of REOLYSIN and future expense levels being within our current

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