Oncolytics Message to Shareholders

First Quarter Report

Oncolytics Biotech Inc.

Oncolytics Message to Shareholders

The progress we made in the first quarter of 2011 built upon the foundation of what we have achieved over the last decade at Oncolytics. In order to maximize the future commercial potential of REOLYSIN , we continued to broaden our clinical program, both alone and in partnership with leading industry groups; generate positive clinical results in multiple indications; and strengthen our balance sheet to ensure we had sufficient capital to fund a full range of initiatives going forward.

Positive Clinical Results in an Expanding Group of Indications

During the quarter we announced preliminary results from a U.S. Phase 2 clinical trial (REO 017) using intravenous administration of REOLYSIN in combination with gemcitabine (Gemzar ) in patients with advanced pancreatic cancer. The study's primary objective is to determine the clinical benefit rate (complete response + partial response + stable disease) of REOLYSIN in combination with gemcitabine in patients with advanced or metastatic pancreatic adenocarcinoma with measurable disease who have not received any prior chemotherapy or biotherapy. The secondary objectives are to determine progression-free survival, and the safety and tolerability of REOLYSIN when administered in combination with gemcitabine. Seventeen evaluable patients with pancreatic cancer were expected to be treated in the first stage and if three or more patients received clinical benefit, the study would then proceed to the next stage. This endpoint was met after just six evaluable patients were enrolled. All patients treated reported symptomatic improvement. Three of six patients showed stable disease for 12 weeks or greater. In addition, one patient had stable disease at nine weeks of treatment, but was taken off of the study for alternative treatment, and one patient had a partial response of less than 12 weeks duration, and then died from a medical issue unrelated to treatment.

Subsequent to quarter-end, we announced interim data from a U.K. translational clinical trial (REO 013) investigating intravenous administration of REOLYSIN in patients with metastatic colorectal cancer prior to surgical resection of liver metastases. On initial histological analysis of the 10 treated patients to date, there was evidence of selective delivery of virus to tumour versus normal liver and viral replication in the majority (seven) of patients. In two patients, only necrotic tumour was found; in one of these cases virus was detected in immune cells in the tumour. In six of 10 patients there was no evidence of virus in the normal liver surrounding the tumour, with virus found only rarely in liver cells in the other four patients. These data suggest reovirus can be intravenously administered as a monotherapy and successfully delivered specifically and selectively to colorectal liver metastases without affecting surrounding normal liver tissue. We expect to fully report the results of this study later in 2011.

Broadening the Clinical Program

These positive results supported our decisions to conduct additional trials in these difficult to treat indications which in the first quarter included the start of enrollment in a randomized Phase 2 study being sponsored by the National Cancer Insititute examining REOLYSIN in combination with carboplatin/paclitaxel in patients with metastatic pancreatic cancer and a U.S. Phase I study of REOLYSIN in combination with FOLFIRI (Folinic Acid (leucovorin) + Fluorouracil (5-FU) + Irinotecan) in patients with oxaliplatin refractory/intolerant Kras mutant colorectal cancer (REO 022). We also intend to conduct a further complementary translational study co-administering reovirus with FOLFIRI to patients with colorectal cancer metastatic to the liver, which would further build our knowledge of how to maximize the efficacy of this novel therapy in cancer patients.

During the quarter we also announced completion of enrollment in a U.S. Phase 2 clinical trial using intravenous administration of REOLYSIN in combination with paclitaxel and carboplatin in patients with advanced head and neck cancers (REO 015). We expect to fully report the results of this study later in 2011.

Strengthening the Balance Sheet

While we have collaborated with a number of groups, such as the NCI, to cost effectively expand the scope of our clinical program, we continue to work to ensure we have the necessary funds to support an increasingly broad range of initiatives that we are conducting ourselves. During the quarter, and pursuant to the acceleration of the expiry date of those warrants issued on November 23, 2009, the Company received proceeds of approximately US$6.8 million resulting from the exercise of 1,943,000 warrants. The Company received a further approximately $8.1 million from the exercise of 1,322,750 warrants, issued in connection with the financing that closed on November 8, 2010. As at March 31, 2011, we had approximately $53.5 million from which to fund operations.

Looking to the Future

For the balance of the year one of our key areas of focus remains completing enrollment in the first stage of our Phase 3 study in head and neck cancers. We also hope to announce two new additional randomized studies and report results from multiple trials before the end of 2011. In parallel, we expect to continue to advance our manufacturing program through process validation and begin conformity runs which are necessary to support a product submission. We want to thank all our stakeholders for their continued support in what promises to be an exciting time ahead.

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

BASIS OF PRESENTATION AND TRANSITION TO IFRS

On January 1, 2011, we adopted International Financial Reporting Standards ("IFRS") for Canadian publicly accountable enterprises. Prior to the adoption of IFRS, we followed Canadian Generally Accepted Accounting Principles ("Canadian GAAP"). While IFRS has many similarities to Canadian GAAP, some of our accounting policies have changed as a result of our transition to IFRS. The most significant accounting policy changes that have had an impact on the results of our operations are discussed in more detail in the Accounting Changes section of this Management Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").

This MD&A should be read in conjunction with our unaudited consolidated interim financial statements as at and for the period ending March 31, 2011 which have been prepared using IFRS and should also be read in conjunction with the audited consolidated financial statements, which were prepared using Canadian GAAP, and MD&A contained in our annual report for the year ended December 31, 2010.

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 2011 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.

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 expectations.

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 except as required by applicable law.

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.

REOLYSIN Development Update for the First Quarter of 2011

We continue to develop our lead product REOLYSIN as a potential cancer therapy. Our goal each year is to advance REOLYSIN through the various steps and stages of development required for pharmaceutical products. In order to achieve this goal, we actively manage the development of our clinical trial program, our pre-clinical and collaborative programs, our manufacturing process and supply, and our intellectual property.

Clinical Trial Program

We began 2011 with eleven clinical trials which included two randomized studies (our randomized Phase III head and neck trial and our randomized Phase II ovarian cancer trial). Five of these eleven trials are funded by us and the remainder are sponsored by the U.S. National Cancer Institute ("NCI"), the Cancer Therapy & Research Center at The University of Texas Health Center in San Antonio ("CTRC"), and the University of Leeds ("Leeds").

During the first quarter of 2011, we expanded our clinical trial program to include an additional randomized U.S. Phase II pancreatic cancer study and commenced related enrollment. We also commenced enrollment in our U.S. Phase I colorectal cancer study and completed enrollment in our U.K. translational metastatic colorectal cancer trial and our U.S. Phase II head and neck cancer trial. Finally, we met the primary endpoint for the first part of our non-randomized U.S. Phase II pancreatic cancer trial.

We exited the first quarter of 2011 with 12 clinical trials which includes three randomized studies (our randomized Phase III head and neck trial, our randomized Phase II ovarian cancer trial and our randomized Phase II pancreatic cancer trial). Five of the 12 trials are funded by us with the remainder sponsored by the NCI, CTRC, and Leeds. Our clinical trial program currently encompasses various cancer indications including head and neck, non-small cell lung, ovarian, pancreatic, colorectal, melanoma, and squamous cell carcinoma of the lung among others.

Clinical Trial - Randomized Phase III Head and Neck Pivotal Trial

Our randomized Phase III head and neck pivotal trial continues to enroll patients. During the first quarter of 2011, we expanded the number of enrolling clinical sites through the addition of other jurisdictions and identifying additional sites within these jurisdictions that we expect will add patients in this trial.

Clinical Trial - Program Expansion

Randomized Phase II Pancreatic Cancer Trial

During the first quarter of 2010, the Cancer Therapy Evaluation Program, Division of Cancer Treatment and Diagnosis, U.S. National Cancer Institute, which is part of the National Institutes of Health, agreed to sponsor a 2-Arm randomized Phase II study of carboplatin, paclitaxel plus REOLYSIN versus carboplatin and paclitaxel alone in the first line treatment of patients with recurrent or metastatic pancreatic cancer. The NCI is sponsoring the trial under our Clinical Trials Agreement with them. The Principal Investigator is Dr. Tanios Bekaii-Saab of The Ohio State University Comprehensive Cancer Center - Arthur G. James Cancer Hospital and Richard J. Solove Research Institute.

The study is an open-label, multi-institution, 2-arm Phase II randomized study of patients with metastatic pancreatic cancer. Patients will be randomized to receive either carboplatin, paclitaxel plus REOLYSIN (Arm A) or carboplatin and paclitaxel alone (Arm B). Patients in both arms will receive treatment every three weeks (21-day cycles). Patients in both arms will be receiving standard intravenous doses of paclitaxel and carboplatin on day one only. In Arm A, patients will also receive intravenous REOLYSIN at a dose of 3x1010 TCID50 on days one through five. Tumor response assessment will be done by CT scan and conducted every eight weeks. Patients that progress on carboplatin and paclitaxel (Arm B) will have REOLYSIN added. If patients experience significant toxicity related to carboplatin and/or paclitaxel they may continue with single agent REOLYSIN.

The primary objective of the trial is to assess improvement in progression-free survival with REOLYSIN, carboplatin and paclitaxel relative to carboplatin and paclitaxel alone in patients with metastatic pancreatic cancer. The primary endpoint is progression free survival in both arms. Secondary endpoints include overall response rate and overall survival. The study is expected to enroll approximately 70 patients.

Clinical Trial - Results

U.S. Phase II Pancreatic Cancer Trial (non-randomized)

During the first quarter of 2011 we reported preliminary results from our non-randomized U.S. Phase II clinical trial using intravenous administration of REOLYSIN in combination with gemcitabine (Gemzar ) in patients with advanced pancreatic cancer. The trial is being conducted at the CTRC and the Principal Investigator is Dr. Monica Mita.

The trial is a single arm, open-label, Phase II study of REOLYSIN given intravenously with gemcitabine every three weeks. The study's primary objective is to determine the clinical benefit rate (complete response (CR) + partial response (PR) + stable disease (SD)) of REOLYSIN in combination with gemcitabine in patients with advanced or metastatic pancreatic adenocarcinoma with measurable disease who have not received any prior chemotherapy or biotherapy. The secondary objectives are to determine progression-free survival, and the safety and tolerability of REOLYSIN when administered in combination with gemcitabine. Seventeen evaluable patients with pancreatic cancer were expected to be treated in the first stage and if three or more patients received clinical benefit, the study would then proceed to the next stage. This endpoint was met after six evaluable patients were enrolled. All patients treated reported symptomatic improvement. Three of six patients showed SD for 12 weeks or greater. In addition, one patient had stable disease at nine weeks of treatment, but was taken off of the study for alternative treatment, and one patient had a PR of less than 12 weeks duration, and then died from a medical issue unrelated to treatment.

Clinical Trial - Enrollment

U.S. Phase I Colorectal Cancer Trial

During the first quarter of 2011, patient enrollment commenced in our U.S. Phase I study of REOLYSIN in combination with FOLFIRI (Folinic Acid (leucovorin) + Fluorouracil (5-FU) + Irinotecan) in patients with oxaliplatin refractory/intolerant Kras mutant colorectal cancer. The principal investigator is Dr. Sanjay Goel of the Montefiore Medical Center at The Albert Einstein College of Medicine in New York.

This trial is a Phase I dose escalation study with three dose levels, comprising cohorts of three to six patients, to determine a maximum tolerated dose and dose-limiting toxicities with the combination of REOLYSIN and FOLFIRI. FOLFIRI will be administered on the first day of a two week (14-day) cycle, while REOLYSIN will be administered on days one through five of a four week (28-day) cycle.

Eligible patients include those with histologically confirmed cancer of the colon or rectum with Kras mutation and measurable disease. They must have progressed on or within 190 days after last dose of oxaliplatin regimen as front-line therapy in the metastatic setting or be intolerant to oxaliplatin. The study is expected to enroll 12 to 20 patients.

The rationale for conducting the study is based on signals of efficacy seen in a range of preclinical and clinical work with REOLYSIN. This includes a National Cancer Institute screen of seven colorectal cancer cell lines (four with ras mutations), all of which were susceptible to REOLYSIN; preclinical research into the efficacy of REOLYSIN in combination with various chemotherapeutic agents in colorectal cancer cell lines; observation of CEA responses and stable disease in colorectal patients in a phase I study of REOLYSIN as a monotherapy; and interim results from a translational study with REOLYSIN as a monotherapy, which showed evidence of viral replication and tumour cell death in four of six patients with metastatic colorectal cancer analyzed to date, two of which had confirmed Kras mutations in codon 12.

U.K. Colorectal Cancer Translation Clinical Trial

During the first quarter of 2011, we completed enrollment in our U.K. translational clinical trial investigating intravenous administration of REOLYSIN in patients with metastatic colorectal cancer prior to surgical resection of liver metastases. The principal investigator is Professor Alan Melcher of St. James's University Hospital and the trial is sponsored by the University of Leeds, UK.

The trial was an open-label, non-randomized, single centre study of REOLYSIN given intravenously to patients for five consecutive days in advance of their scheduled operations to remove colorectal cancer deposits metastatic to the liver. After surgery, the tumour and surrounding liver tissue were assessed for viral status and anti-tumour effects.

The primary objectives of the trial are to assess the presence, replication and anti-cancer effects of reovirus within liver metastases after intravenous administration of REOLYSIN by examination of the resected tumour. Secondary objectives include assessing the anti-tumour activity and safety profile of REOLYSIN, and monitoring the humoral and cellular immune response to REOLYSIN.

Eligible patients included those with histologically proven colorectal cancer, planned for potentially curative surgical resection of liver metastases. A total of 10 patients were treated in the study.

Manufacturing and Process Development

During the first quarter of 2011, we completed the fill and packaging of the 100-litre cGMP production runs from 2010. Our process development activity for the first quarter of 2011 continued to focus on process validation and formulation studies.

Intellectual Property

At the end of the first quarter of 2011, we had been issued over 250 patents including 41 U.S. and 11 Canadian patents as well as issuances in other jurisdictions. We also have approximately 200 patent applications filed in the U.S., Canada and other jurisdictions. We have an extensive patent portfolio covering the oncolytic reovirus that we use in our clinical trial program including a composition of matter patent that expires in 2028. Our patent portfolio also includes methods for treating proliferative disorders using modified adenovirus, HSV, parapoxvirus and vaccinia virus.

In December 2010, and in conjunction with the terms of our warrant indenture, we accelerated the expiry date of our U.S.$3.50 warrants issued in November 2009 to January 24, 2011. By January 24, 2011, we had received U.S.$6.4 million from the exercise of 1,833,600 of our U.S.$3.50 warrants. As well, during the first quarter of 2011, we received proceeds of $8.1 million from the exercise of 1,322,750 warrants with an exercise price of $6.15. These warrants were issued in connection with the financing that closed on November 8, 2010.

During the first quarter of 2011, we received cash proceeds of $0.2 million with respect to the exercise of 92,666 stock options.

We estimated at the beginning of 2011 that our cash requirements to fund our operations would be approximately $29,000,000. Our cash usage for the first quarter of 2011 was $3,855,801 from operating activities and $15,276 for the purchases of property and equipment. Our net loss for the first quarter of 2011 was $3,971,116.

We exited the first quarter of 2011 with cash and short-term investments totaling $53,522,119 (see "Liquidity and Capital Resources").

Expected REOLYSIN Development for the Remainder of 2011

Our planned development activity for REOLYSIN in 2011 is made up of clinical, manufacturing, intellectual property and collaboration programs. Our 2011 clinical program continues to include the anticipated completion of stage 1 (approximately 80 patients) of our Phase III head and neck clinical trial and commencement of stage 2. As well, we still expect to complete enrollment in our non-small cell lung cancer trial and support those clinical trials that are sponsored by CTRC, Leeds and the NCI.

Our 2011 manufacturing program still includes several 100-litre cGMP production runs along with the related fill, labeling, packaging and shipping of REOLYSIN to the various clinical sites. As well, we plan on performing smaller process development studies examining formulation, stability and additional scale up. Our intellectual property program includes filings for additional patents along with monitoring activities required to protect our patent portfolio. Finally, our 2011 collaboration program will finish the studies in place at the end of 2010 and contemplates the addition of future studies that may be required.

We still estimate that the cash requirements to fund our operations for 2011 will be approximately $29,000,000 (see "Liquidity and Capital Resources").

On January 1, 2011, we adopted IFRS for Canadian publicly accountable enterprises, as required by the Accounting Standards Board of Canada. Prior to the adoption of IFRS, we followed Canadian GAAP. The most significant change to our accounting policies relates to the treatment of our warrants with an exercise price denominated in U.S. dollars. The impact of this change has been fully disclosed in Note 3 of our unaudited interim consolidated financial statements. There was no change in how we account for our research and development or operating activities and there was no impact on our cash, cash equivalents or short-term investment balances.

Although we adopted IFRS on January 1, 2011, we were required to restate our comparative 2010 annual and interim financial positions and results of operations, effective from January, 1, 2010. The 2010 comparative amounts have not been audited by our external auditor. Note 4 of our unaudited interim consolidated financial statements as at and for the three months ended March 31, 2011 outlines our IFRS accounting policies and Note 3 provides a complete list of our IFRS 1 elections; detailed reconciliations between Canadian GAAP and IFRS of shareholders' equity as at January 1, March 31, and Dec. 31, 2010, respectively, and of net earnings and comprehensive income for the three and twelve months ending March 31, and December 31, 2010, respectively; and information regarding the impacts of IFRS transition on our cash flows. A summary of the changes are outlined below in the following tables and respective notes:

Consolidated Statement of Cash Flows

In transitioning to IFRS, there was no impact on our net change in cash for the three month period ending March 31, 2010 or for the year ending December 31, 2010.

IFRS Transitional Arrangements

When preparing our consolidated statement of financial position under IFRS at January 1, 2010, our date of transition, the following optional exemptions from full retrospective application of IFRS accounting policies have been adopted:

Cumulative translation differences - cumulative translation differences resulting from the translation of the financial statements of our U.S. subsidiary have been set to zero at January 1, 2010.

IFRS requires warrants with an exercise price denominated in a currency other than the entity's functional currency to be treated as a liability measured at fair value. Changes in fair value are to be recorded in the consolidated statement of loss and comprehensive loss.

Classification of expenses within the statement of loss and comprehensive loss

Under IFRS, we have chosen to present our expenses based on the function of each expense rather than the nature of each expense. As a result, stock based compensation, depreciation of capital assets, and foreign currency gains and losses are no longer separately presented on the statement of loss and comprehensive loss. There is no impact on our net loss or comprehensive loss as a result of these classifications.

Foreign currency translation

Under IFRS, we record the impact of fluctuations in foreign currency exchange rates relating to our net investment in our U.S. subsidiary and any foreign currency effects on the translation of our U.S. subsidiaries financial statements as a separate component of equity and other comprehensive income. Under CGAAP we treated our U.S. subsidiary as an integrated subsidiary with foreign currency translation differences recorded as part of our statement of loss. The result of the transition to IFRS is a reclassification of the related foreign currency gains and losses from net loss to other comprehensive income. There is no impact on our net comprehensive loss as a result of these re-classifications.

RESULTS OF OPERATIONS

Net loss for the three month period ending March 31, 2011 was $4,007,116 compared to $4,537,793 for the three month period ending March 31, 2010.

Research and Development Expenses ("R&D")

Clinical Trial Program

During the first quarter of 2011, our clinical trial expenses increased to $1,040,507 compared to $876,935 for the first quarter of 2010. In the first quarter of 2011, we incurred direct patient expenses related to the five clinical trials that we are sponsoring compared to four clinical trials in the first quarter of 2010. We also continue to incur start costs relating to our randomized Phase III head and neck cancer trial as we increase the number of jurisdictions and clinical sites initiated to enroll patients.

We expect our clinical trial expenses to increase in 2011 compared to 2010. We expect to complete enrollment in stage 1 of our Phase III pivotal trial and enter into stage 2. We also still expect to complete enrollment in our Phase II NSCLC study. Finally, we will continue to support our clinical research collaboration with CTRC, our Clinical Agreement with the NCI and our clinical trial with Leeds.

Manufacturing & Related Process Development ("M&P")

In the first quarter of 2011, our M&P expenses were $608,744 compared to $1,235,627 for the first quarter of 2010. During the first quarter of 2011, we completed the fill and packaging of the 100-litre cGMP production runs from 2010. As well, we incurred shipping and storage activities as we supply our Phase III clinical trial with REOLYSIN. During the first quarter of 2010, our production activity included the completion of the bulk harvest of one 100-litre cGMP production run along with vial and labeling costs associated with the 100-litre production run completed at the end of 2009.

Our process development expenses for the first quarter of 2011 were $452,645 compared to $104,762 for the first quarter of 2010. Our process development activity for the first quarter of 2011 focused on optimization and validation studies anticipated to be required in support of product registration.

We still expect our M&P expenses for 2011 to increase compared to 2010. We expect to complete several 100-litre cGMP production runs including fill and finish activities in 2011. We also expect to continue to perform a number of small scale process development studies focusing on formulation, process validation, and stability.

Intellectual Property Expenses

Our intellectual property expenses for the first quarter of 2011 were $213,803 compared to $216,836 for the first quarter of 2010. The change in intellectual property expenditures reflects the timing of filing costs associated with our patent base. At the end of the first quarter of 2011, we had been issued over 250 patents including 41 U.S. and 11 Canadian patents, as well as issuances in other jurisdictions. We also have approximately 200 patent applications filed in the U.S., Canada and other jurisdictions.