Oncolytics Biotech Inc. Announces 2007 Second Quarter Results

CALGARY, July 27 /PRNewswire-FirstCall/ - Oncolytics Biotech Inc. ("Oncolytics") (TSX:ONC, NASDAQ:ONCY) today announced its financial results and highlights for the three and six-month periods ended June 30, 2007.

    Second Quarter Highlights

    -   Announced positive results from a U.S. Phase I systemic
        administration trial for patients with advanced cancers;

    -   Commenced patient enrolment in a multi-centre, U.S. Phase II sarcoma
        trial;

    -   Commenced patient enrolment in two, multi-centre combination
        REOLYSIN(R) and chemotherapy trials in the U.K.;

    -   Announced that the U.S. National Cancer Institute had filed a
        protocol with the U.S. Food and Drug Administration (FDA) for a Phase
        II clinical trial for patients with metastatic melanoma;

    -   Successfully completed initial scale up of the REOLYSIN(R)
        manufacturing process to 40-litre batch size;

    -   Secured two additional U.S. patents and an additional Canadian
        patent;

    -   Presented encouraging preclinical work at the American Association
        for Cancer Research Annual Meeting showing both in vitro and in vivo
        synergy using the combination of REOLYSIN(R) and gemcitabine; and

    -   In July, commenced patient enrolment in a multi-centre combination
        REOLYSIN(R) and docetaxel trial in the U.K.

"We have entered an exciting phase of development for the Company this year, and particularly in the second quarter," said Dr. Brad Thompson, President and CEO of Oncolytics. "We are now conducting multi-centre Phase II trials in both the U.S. and the U.K., and are executing our clinical trial strategy for REOLYSIN(R) by expanding the scope and pace of development. We look forward to reporting the results of these and other ongoing trials in the quarters ahead."

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

This discussion and analysis should be read in conjunction with the unaudited financial statements of Oncolytics Biotech Inc. as at and for the three and six months ended June 30, 2007 and 2006, and should also be read in conjunction with the audited financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contained in our annual report for the year ended December 31, 2006. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP").

FORWARD-LOOKING STATEMENTS

The following discussion contains forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements, including our belief as to the potential of REOLYSIN(R) as a cancer therapeutic and our expectations as to the success of our research and development and manufacturing programs in 2007 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(R) as a cancer treatment, the success and timely completion of clinical studies and trials, our ability to successfully commercialize REOLYSIN(R), 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.

    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(R), 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 our 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.

    See also "RISK Factors Affecting Future Performance" in our 2006 MD&A.

    REOLYSIN(R) Development Update for the Second Quarter of 2007

We continue to develop our lead product REOLYSIN(R) as a potential cancer therapy. Our goal each year is to advance REOLYSIN(R) through the various steps and stages of development required for potential 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

In the second quarter of 2007, we announced positive clinical data from our U.S. Phase I REOLYSIN(R) systemic administration clinical trial. As well, we expanded our clinical trial program to include eight clinical trials of which seven are being conducted by us and one is being sponsored by the U.S. National Cancer Institute ("NCI").

Clinical Trial Results

In the second quarter of 2007, we announced positive results from our U.S. Phase I clinical trial examining the systemic administration of REOLYSIN(R) in patients with advanced cancers. The results indicated that REOLYSIN(R) 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 3x10(10) TCID(50) 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") 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(R). 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(R). Of the patients eligible for retreatment, three patients received a range of two to seven one-hour infusions of REOLYSIN(R). Toxicities possibly related to REOLYSIN(R) 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(R) 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

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

U.S. Phase II Sarcoma Clinical Trial

During the second quarter of 2007, we received approval to commence and initiated patient enrollment in our U.S. Phase II trial to evaluate the intravenous administration of REOLYSIN(R) 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(R) in patients with bone and soft tissue sarcomas metastatic to the lung. REOLYSIN(R) will be given intravenously to patients at a dose of 3x10(10) TCID(50) 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.

U.K. Combination REOLYSIN(R) Paclitaxel and Carboplatin Clinical Trial

In the second quarter of 2007, we commenced patient enrolment in our U.K. clinical trial to evaluate the anti-tumour effects of systemic administration of REOLYSIN(R) 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(R) given intravenously with paclitaxel and carboplatin every three weeks. Standard dosages of paclitaxel and carboplatin will be delivered with escalating dosages of REOLYSIN(R) intravenously. A maximum of three cohorts will be enrolled in the REOLYSIN(R) 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(R) 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(R) 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(R) Gemcitabine Clinical Trial

In the second quarter of 2007, we commenced patient enrolment in our U.K. clinical trial to evaluate the anti-tumour effects of systemic administration of REOLYSIN(R) in combination with gemcitabine (Gemzar(R)) 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(R) given intravenously with gemcitabine every three weeks. A standard dosage of gemcitabine will be delivered with escalating dosages of REOLYSIN(R) intravenously. A maximum of three cohorts will be enrolled in the REOLYSIN(R) 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(R) 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(R) 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.S. National Cancer Institute Phase II Melanoma Clinical Trial

In the second quarter of 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(R). The NCI is sponsoring the trial under our Clinical Trials Agreement that requires us to provide clinical supplies of REOLYSIN(R). The trial is expected to enroll up to 47 patients with metastatic melanoma.

Pre-Clinical Trial and Collaborative Program

During the second quarter of 2007, we announced that a poster by Dr. Maureen E. Lane et al. of Cornell University, New York, entitled "In Vivo Synergy between Oncolytic Reovirus and Gemcitabine in Ras-Mutated Human HCT116 Xenografts" was presented 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(R) and gemcitabine resulted in both in vitro and in vivo synergy. There was no 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(R) and gemcitabine is a promising therapeutic regimen for study in clinical trials.

Manufacturing and Process Development

We continued to have REOLYSIN(R) manufactured in order to supply our current and future clinical trial program. In the second quarter of 2007, we successfully completed initial scale up of our manufacturing process for REOLYSIN(R). The process improvements and scale up to 40-litre batch size has resulted in increased total yields which are a result of advancements in the media formulation used in the primary production of REOLYSIN(R) and in the downstream processing steps required to generate finished product.

Intellectual Property

In the second quarter of 2007, two U.S. and one Canadian patents were issued. At the end of the second quarter of 2007, we had been issued a total of 21 U.S., six Canadian and three European patents as well as issuances in other jurisdictions. We also have other patent applications filed in the U.S., Europe and Canada and other jurisdictions.

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 first half of 2007 was $7,618,488 from operating activities and $525,363 for the purchases of intellectual property and capital assets which is in line with our estimate. Our net loss for the first six month of 2007 was $7,792,813.

Cash Resources

We exited the second quarter of 2007 with cash resources totaling $31,533,291 (see "Liquidity and Capital Resources").

Expected REOLYSIN(R) Development for the Remainder of 2007

We believe that we will commence enrollment in our third co-therapy clinical trial with docetaxel (see "Recent 2007 Progress") and continue to enroll patients in all seven of our clinical trials in 2007. We also believe that the NCI sponsored melanoma clinical trial will receive approval to commence in 2007. We believe we will complete enrollment in our U.K. Phase Ia/Ib and Phase II combination REOLYSIN(R)/radiation clinical trials by the end of 2007 and complete enrollment in our chemotherapy co-therapy studies in 2008. We expect to produce REOLYSIN(R) in 2007 to supply our clinical trial program.

Based on our expected activity in 2007, we continue to estimate our average monthly cash usage to be $1,400,000 per month (see "Liquidity and Capital Resources").

Recent 2007 Progress

On July 23, 2007, we commenced patient enrolment in our U.K. clinical trial to evaluate the anti-tumour effects of systemic administration of REOLYSIN(R) in combination with docetaxel (Taxotere(R)) in patients with advanced cancers including bladder, prostate, lung and upper gastro-intestinal.

The trial has two components. The first is an open-label, dose-escalating, non-randomized study of REOLYSIN(R) given intravenously with docetaxel every three weeks. A standard dosage of docetaxel will be delivered with escalating dosages of REOLYSIN(R) intravenously. A maximum of three cohorts will be enrolled in the REOLYSIN(R) 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(R) 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 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(R) 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.

SECOND QUARTER RESULTS OF OPERATIONS

(for the three months ended June 30, 2007 and 2006)

Net loss for the three month period ending June 30, 2007 was $3,679,582 compared to $2,987,714 for the three month period ending June 30, 2006.

    Research and Development Expenses ("R&D")

                                                             2007       2006
                                                               $          $
    -------------------------------------------------------------------------
    Manufacturing and related process
     development expenses                                 828,602    648,351
    Clinical trial expenses                               983,896    685,265
    Pre-clinical trial and research
     collaboration expenses                               331,379    235,302
    Other R&D expenses                                    562,498    391,701
    -------------------------------------------------------------------------
    Research and development expenses                   2,706,375  1,960,619
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

For the second quarter of 2007, R&D increased to $2,706,375 compared to $1,960,619 for the second quarter of 2006. The increase in R&D was due to the following:

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

                                                             2007       2006
                                                               $          $
    -------------------------------------------------------------------------
    Product manufacturing expenses                        774,883    124,110
    Technology transfer expenses                                -    273,214
    Process development expenses                           53,719    251,027
    -------------------------------------------------------------------------
    Manufacturing and related process
     development expenses                                 828,602    648,351
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Our M&P expenses for the second quarter of 2007 increased to $828,602 compared to $648,351 for the second quarter of 2006.

In the second quarter of 2007, our production activity increased compared to the second quarter of 2006 as we completed the production runs scheduled earlier in 2007. In the second quarter of 2006, our production activity was lower as we were focused on completing manufacturing process improvements and transferring changes in our production process to our cGMP manufacturer prior to commencing new production runs. Our process development activity in the second quarter of 2007 focused on completing our 40-litre scale up studies.

    Clinical Trial Program

                                                             2007       2006
                                                               $          $
    -------------------------------------------------------------------------
    Direct clinical trial expenses                        913,360    643,786
    Other clinical trial expenses                          70,536     41,479
    -------------------------------------------------------------------------
    Clinical trial expenses                               983,896    685,265
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

During the second quarter of 2007, our direct clinical trial expenses increased to $913,360 compared to $643,786 in the second quarter of 2006. In the second quarter of 2007, we incurred direct patient costs in our six actively enrolling clinical trials compared to only three enrolling clinical trial studies in the second quarter of 2006. As well in the second quarter of 2007, we incurred clinical site start up costs associated with our U.K. co-therapy and U.S. sarcoma clinical trials compared to incurring clinical site start up costs for our U.S. glioma study in the second quarter of 2006.

    Pre-Clinical Trial Expenses and Research Collaborations

                                                             2007       2006
                                                               $          $
    -------------------------------------------------------------------------
    Research collaboration expenses                       331,379    235,302
    Pre-clinical trial expenses                                 -          -
    -------------------------------------------------------------------------
    Pre-clinical trial expenses and
     research collaborations                              331,379    235,302
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

During the second quarter of 2007, our research collaboration expenses were $331,379 compared to $235,302 for the second quarter of 2006. Our research collaboration activity continues to focus on 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.

    Other Research and Development Expenses

                                                             2007       2006
                                                               $          $
    -------------------------------------------------------------------------
    R&D consulting fees                                    50,114     31,371
    R&D salaries and benefits                             395,166    286,767
    Other R&D expenses                                    117,218     73,563
    -------------------------------------------------------------------------
    Other research and development expenses               562,498    391,701
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Our R&D salaries and benefits costs were $395,166 in the second quarter of 2007 compared to $286,767 in the second quarter of 2006. The increase is a result of increases in salary and staff levels along with the addition of our Vice President of Intellectual Property in 2007.

    Operating Expenses

                                                             2007       2006
                                                               $          $
    -------------------------------------------------------------------------
    Public company related expenses                       753,949    664,917
    Office expenses                                       257,806    240,176
    -------------------------------------------------------------------------
    Operating expenses                                  1,011,755    905,093
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

During the second quarter of 2007, our public company related expenses increased to $753,949 compared to $664,917 for the second quarter of 2006. In the second quarter of 2007, we increased our investor relations activity in the United States and Europe compared to the second quarter of 2006.

    Stock Based Compensation

                                                             2007       2006
                                                               $          $
    -------------------------------------------------------------------------
    Stock based compensation                               82,573    222,376
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Stock based compensation for the second quarter of 2007 was $82,573 compared to $222,376 in the second quarter of 2006. In the second quarter of 2007, we incurred stock based compensation associated with the vesting of previously granted stock options. In the second quarter of 2006, we incurred stock based compensation associated with the issue and immediate vesting of stock options to our two newly appointed directors and the vesting of previously granted options.

YEAR TO DATE RESULTS OF OPERATIONS

(for the six months ended June 30, 2007 and 2006)

Net loss for the six month period ending June 30, 2007 was $7,792,813 compared to $5,982,250 for the six month period ending June 30, 2006.

    Research and Development Expenses ("R&D")

                                                             2007       2006
                                                               $          $
    -------------------------------------------------------------------------
    Manufacturing and related process
     development expenses                               2,666,795  1,491,490
    Clinical trial expenses                             1,705,513  1,232,033
    Pre-clinical trial and research
     collaboration expenses                               437,660    390,388
    Other R&D expenses                                  1,114,643    763,030
    -------------------------------------------------------------------------
    Research and development expenses                   5,924,611  3,876,941
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

For the six month period ending June 30, 2007, R&D increased to $5,924,611 compared to $3,876,941 for the six month period ending June 30, 2006. The increase in R&D was due to the following:

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

                                                             2007       2006
                                                               $          $
    -------------------------------------------------------------------------
    Product manufacturing expenses                      2,523,301    767,532
    Technology transfer expenses                                -    273,214
    Process development expenses                          143,494    450,744
    -------------------------------------------------------------------------
    Manufacturing and related process
     development expenses                               2,666,795  1,491,490
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

For the six month period ending June 30, 2007, our production and vial filling activity increased compared to 2006. During the first half of 2007, we completed production runs that commenced in 2006 and initiated additional production runs to manufacture REOLYSIN(R) at the beginning of 2007. As well, we incurred costs associated with vial filling and packaging of these production runs.

For the six month period ending June 30, 2006, we completed the production runs that were ongoing at the end of 2005 for our Phase I trials. At the same time, our process development activity helped improve the virus yields from our manufacturing process. These improvements were then transferred to our cGMP manufacturer in the second quarter of 2006.

Our process development expenses for the six month period ending June 30, 2007 were $143,494 compared to $450,744 for the six month period ending June 30, 2006. During the six month period ending June 30, 2007, our main process development focus was on our scale up to 40-litre studies which were completed in the second quarter of 2007. During the six month period ending June 30, 2006, our process development activity included scale up studies and the validation of the fill process used in our manufacturing process.

We now expect that our overall manufacturing and related process development expenses for 2007 will be in line with 2006. We expect to complete the vial filling of our planned 2007 production runs in the third quarter of 2007. We also expect that our process development activity will begin to examine the commercial formulation of REOLYSIN(R).

We are also examining ways to reduce our economic dependence resulting from having only a single cGMP manufacturer. This might include building up a level of inventory, increasing the scale of each production run, engaging another cGMP manufacturer or manufacturing REOLYSIN(R) ourselves. Depending on how we mitigate our risk of economic dependence our expectation of our 2007 M&P expenses may change.

    Clinical Trial Program

                                                             2007       2006
                                                               $          $
    -------------------------------------------------------------------------
    Direct clinical trial expenses                      1,596,467  1,143,420
    Other clinical trial expenses                         109,046     88,613
    -------------------------------------------------------------------------
    Clinical trial expenses                             1,705,513  1,232,033
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

During the six month period ending June 30, 2007, our direct clinical trial expenses were $1,705,513 compared to $1,145,420 for the six month period ending June 30, 2006. In the first half of 2007, we incurred direct patient costs in our six ongoing clinical trials. As well, we incurred clinical site start up costs for our three co-therapy trials in the U.K. and our Phase II sarcoma clinical trial in the U.S. which were recently approved to commence. In the first half of 2006, we incurred direct patient costs in three ongoing clinical trials along with clinical site start up costs associated with our U.S. recurrent malignant glioma trial.

We expect our clinical trial expenses will continue to increase for the remainder of 2007 compared to 2006. We expect that our third U.K. co-therapy clinical trial will commence enrollment in the third quarter of 2007 increasing the number of ongoing clinical trials to seven.

    Pre-Clinical Trial Expenses and Research Collaborations

                                                             2007       2006
                                                               $          $
    -------------------------------------------------------------------------
    Research collaboration expenses                       400,530    381,738
    Pre-clinical trial expenses                            37,130      8,650
    -------------------------------------------------------------------------
    Pre-clinical trial expenses and
     research collaborations                              437,660    390,388
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

During the six month period ending June 30, 2007, our research collaboration expenses were $400,530 compared to $381,738 for the six month period ending June 30, 2006. Our research collaboration activity continues to focus on 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.

During the six month period ending June 30, 2007, our pre-clinical trial expenses were $37,130 compared to $8,650 for the six month period ending June 30, 2006. The frequency of our pre-clinical trial expenses change from period to period as we move through our clinical trial program. As well, we may increase our pre-clinical activity depending on the results of our research collaborations.

For the remainder of 2007, we still expect that pre-clinical trial expenses and research collaborations will decline compared to 2006. We expect to continue with our various collaborations in order to provide support for our expanding clinical trial program. As well, we may expand our collaborative activities to include other viruses.

    Other Research and Development Expenses

                                                             2007       2006
                                                               $          $
    -------------------------------------------------------------------------
    R&D consulting fees                                   141,891     64,326
    R&D salaries and benefits                             767,553    607,892
    Quebec scientific research and
     experimental development refund                      (15,927)   (52,344)
    Other R&D expenses                                    221,126    143,156
    -------------------------------------------------------------------------
    Other research and development expenses             1,114,643    763,030
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

During the six month period ending June 30, 2007, our R&D consulting fees were $141,891 compared to $64,326 for the six month period ending 2006. In the first half of 2007, we incurred consulting activity associated with our ongoing clinical trials and assistance with our clinical trial applications. In the first half of 2006, our consulting activity related to our ongoing clinical trials.

Our R&D salaries and benefits costs were $767,553 for the first half of 2007 compared to $607,892 for the first half of 2006. The increase is a result of increases in salary and staff levels along with the addition of our Vice President of Intellectual Property in 2007.

We now expect that our other research and development expenses for the remainder of 2007 will increase compared to 2006. We expect that salaries and benefits will increase to reflect increased compensation levels and the salary and benefit costs for our Vice President of Intellectual Property. Our R&D consulting fees are expected to remain consistent with 2006. However, we may choose to engage additional consultants to assist us in the development of protocols and regulatory filings for our additional combination therapy and phase II clinical trial studies, possibly causing our R&D consulting expenses to increase.

    Operating Expenses

                                                             2007       2006
                                                               $          $
    -------------------------------------------------------------------------
    Public company related expenses                     1,335,826  1,499,636
    Office expenses                                       582,646    523,393
    -------------------------------------------------------------------------
    Operating expenses                                  1,918,472  2,023,029
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

During the six month period ending June 30, 2007, our public company related expenses were $1,335,826 compared to $1,499,636 for the six month period ending June 30, 2006. In the first half of 2007, our financial advisory expenses decreased compared to the first half of 2006. This decrease was offset by an increase in expenses associated with our investor relations activity in the U.S. and Europe and professional fees during the six month period ending June 30, 2007 compared to 2006.

In the first half of 2007, our office expenses were $582,646 compared to $523,393 in the first half of 2006. Our office expense activity has remained consistent in 2007 to date compared to 2006 with increases mainly due to increased compensation levels and a general increase in office costs.

    Stock Based Compensation

                                                             2007       2006
                                                               $          $
    -------------------------------------------------------------------------
    Stock based compensation                              103,969    259,209
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

Stock based compensation for the six month period ending June 30, 2007 was $103,969 compared to $259,209 for the six month period ending June 30, 2006. In the first half of 2007, we incurred stock based compensation associated with the vesting of options granted previously. In the first half of 2006, we incurred stock based compensation associated with the issue and immediate vesting of stock options to our two newly appointed directors and the vesting of previously granted options.

Commitments

As at June 30, 2007, we are committed to payments totaling $1,021,000 during the remainder of 2007 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                    2005
    -------------------------------------------------------------------------
               June   March     Dec.   Sept.   June   March     Dec.   Sept.
    -------------------------------------------------------------------------
    Revenue        -       -       -       -       -       -       -       -
    -------------------------------------------------------------------------
    Interest
     income      359     268     286     320     335     292     160     211
    -------------------------------------------------------------------------
    Net
     loss(3),  3,680   4,156   4,890   3,425   2,988   2,995   3,941   3,510
    -------------------------------------------------------------------------
    Basic and
     diluted
     loss per
     common
     share(3)  $0.09   $0.11   $0.13   $0.09   $0.08   $0.08   $0.12   $0.11
    -------------------------------------------------------------------------
    Total
     assets
     (1),(4)  37,670  41,775  33,566  37,980  40,828  43,660  46,294  34,538
    -------------------------------------------------------------------------
    Total
     cash
     (2),(4)  31,533  35,681  27,614  31,495  34,501  37,687  40,406  28,206
    -------------------------------------------------------------------------
    Total
     long-term
     debt(5)       -       -     150     150     150     150     150     150
    -------------------------------------------------------------------------
    Cash
     dividends
     declared
     (6)         Nil     Nil     Nil     Nil     Nil     Nil     Nil     Nil
    -------------------------------------------------------------------------
    (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 2006.
    (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 June 2007 and
        July 2005 are quarterly stock based compensation expenses of $82,573,
        $21,396, $109,670, $34,671, $222,376, $36,833, $38,152, and $4,173,
        respectively.
    (4) We issued 4,600,000 common shares for net cash proceeds of
        $12,063,394 during 2007 (2006 - 284,000 common shares for cash
        proceeds of $241,400; 2005 - 4,321,252 common shares for cash
        proceeds of $18,789,596).
    (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 1 of the
        June 30, 2007 interim financial statements).
    (6) We have not declared or paid any dividends since incorporation.

    LIQUIDITY AND CAPITAL RESOURCES

    Liquidity

As at June 30, 2007, we had cash and cash equivalents (including short-term investments) and working capital positions of $31,533,291 and $30,002,209, respectively compared to $27,613,748 and $25,719,870, respectively for December 31, 2006. The increase in 2007 reflects the cash inflow from financing activities of $12,063,394 offset by cash usage from operating activities and additions to our intellectual property of $7,618,488 and $487,058, respectively.

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. For the remainder of 2007, we are expecting to commence patient enrollment in our third co-therapy trial and to continue to enroll patients in our existing trials throughout 2007. We also expect to continue to expand our clinical trial program. As well, we expect to continue with our collaborative studies pursuing support for our future clinical trial program. We will therefore need to ensure that we have enough REOLYSIN(R) to supply our clinical trial and collaborative programs. We continue to expect our cash usage in 2007 to be $1,400,000 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, additional activities reducing our economic dependence on a single supplier, 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 $487,058 on intellectual property in the first half of 2007 compared to $365,036 in the first half of 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 a stronger Canadian dollar as our patent costs are typically incurred in U.S. currency. In the second quarter of 2007, two U.S. patents and one Canadian patent were issued bringing our total patents issued to 21 in the U.S., six in Canada and three in Europe.

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. We have $24,356,007 invested under this policy and we are currently earning interest at an effective rate of 4.14% (2006 - 3.86%).

OTHER MD&A REQUIREMENTS

We have 41,120,748 common shares outstanding at July 26, 2007. If all of our warrants (4,972,000) and options (3,497,950) were exercised we would have 49,590,698 common shares outstanding.

    Additional information relating to Oncolytics Biotech Inc. is available on
SEDAR at www.sedar.com.


                           Oncolytics Biotech Inc.

                               BALANCE SHEETS
                                 (unaudited)

    As at,
                                                      June 30,   December 31,
                                                        2007         2006
                                                          $            $
    -------------------------------------------------------------------------
    ASSETS
    Current
    Cash and cash equivalents                         6,923,889    3,491,511
    Short-term investments (note 7)                  24,609,402   24,122,237
    Accounts receivable                                  46,717       84,003
    Prepaid expenses                                    798,191      638,540
    -------------------------------------------------------------------------
                                                     32,378,199   28,336,291

    Property and equipment                              168,037      149,596

    Intellectual property                             5,153,575    5,079,805
    -------------------------------------------------------------------------

                                                     37,699,811   33,565,692
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    LIABILITIES AND SHAREHOLDERS' EQUITY
    Current
    Accounts payable and accrued liabilities          2,375,990    2,616,421
    -------------------------------------------------------------------------
    Alberta Heritage Foundation loan
     (notes 1 and 8)                                          -      150,000
    -------------------------------------------------------------------------

    Shareholders' equity
    Share capital (note 2)
      Authorized: unlimited number of
       common shares
      Issued: 41,120,748 (December 31, 2006
       - 36,520,748)                                 92,708,665   83,083,271
    Warrants (note 2)                                 6,654,740    4,216,740
    Contributed surplus (note 4)                      8,633,295    8,529,326
    Deficit (notes 1 and 5)                         (72,672,879) (65,030,066)
    -------------------------------------------------------------------------
                                                     35,323,821   30,799,271
    -------------------------------------------------------------------------

                                                     37,699,811   33,565,692
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes



                           Oncolytics Biotech Inc.

                  STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
                                 (unaudited)

                                                                 Cumulative
                                                                    from
                  Six Month   Six Month  Three Month Three Month  inception
                    Period      Period      Period      Period   on April 2,
                    Ending      Ending      Ending      Ending     1998 to
                   June 30,    June 30,    June 30,    June 30,    June 30,
                     2007        2006        2007        2006        2007
                      $           $           $           $           $
    -------------------------------------------------------------------------

    Revenue
    Rights revenue         -           -           -           -     310,000
    -------------------------------------------------------------------------
                           -           -           -           -     310,000
    -------------------------------------------------------------------------

    Expenses
    Research and
     development   5,924,611   3,876,941   2,706,375   1,960,619  49,145,805
    Operating      1,918,472   2,023,029   1,011,755     905,093  18,689,053
    Stock based
     compensation
     (note 3)        103,969     259,209      82,573     222,376   4,269,618
    Foreign
     exchange
     loss/gain       (16,088)     (7,832)    (10,855)      2,219     632,760
    Amortization -
     intellectual
     property        469,588     427,119     238,596     216,679   4,506,422
    Amortization -
     property and
     equipment        19,864      30,694      10,009      15,416     427,547
    -------------------------------------------------------------------------
                   8,420,416   6,609,160   4,038,453   3,322,402  77,671,205
    -------------------------------------------------------------------------

    Loss before
     the
     following:    8,420,416   6,609,160   4,038,453   3,322,402  77,361,205

    Interest
     income         (627,603)   (626,910)   (358,871)   (334,688) (5,430,608)

    Gain on sale
     of BCY
     LifeSciences
     Inc.                  -           -           -           -    (299,403)

    Loss on sale of
     Transition
     Therapeutics
     Inc.                  -           -           -           -   2,156,685
    -------------------------------------------------------------------------

    Loss before
     taxes         7,792,813   5,982,250   3,679,582   2,987,714  73,787,879

    Future income
     tax recovery          -           -           -           -  (1,115,000)
    -------------------------------------------------------------------------

    Net loss and
     comprehensive
     loss for
     the period    7,792,813   5,982,250   3,679,582   2,987,714  72,672,879
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and
     diluted loss
     per share          0.20        0.16        0.09        0.08
    -------------------------------------------------------------
    -------------------------------------------------------------

    Weighted
     average
     number of
     shares
     (basic and
     diluted)     39,701,859  36,250,836  41,120,748  36,264,770
    -------------------------------------------------------------
    -------------------------------------------------------------

    See accompanying notes



                           Oncolytics Biotech Inc.

                          STATEMENTS OF CASH FLOWS
                                 (unaudited)

                                                                 Cumulative
                                                                    from
              Six Month    Six Month   Three Month  Three Month   inception
                Period       Period       Period       Period    on April 2,
                Ending       Ending       Ending       Ending      1998 to
               June 30,     June 30,     June 30,     June 30,     June 30,
                 2007         2006         2007         2006         2007
                  $            $            $            $            $
    -------------------------------------------------------------------------
    OPERATING
     ACTIVITIES
    Net loss
     for the
     period   (7,792,813)  (5,982,250)  (3,679,582)  (2,987,714) (72,672,879)
    Deduct
     non-cash
     items
      Amortization
       - intell-
       ectual
       property  469,588      427,119      238,596      216,679    4,506,422
      Amortization
       - property
       and
       equipment  19,864       30,694       10,009       15,416      427,547
      Stock based
       compen-
       sation    103,969      259,209       82,573      222,376    4,269,618
      Other
       non-cash
       items
       (note 6)        -            -            -            -    1,383,537
    Net changes
     in non-cash
     working
     capital
     (note 6)   (419,096)    (296,360)    (522,374)    (567,132)   1,485,825
    -------------------------------------------------------------------------
              (7,618,488)  (5,561,588)  (3,870,778)  (3,100,375) (60,599,930)
    -------------------------------------------------------------------------

    INVESTING
     ACTIVITIES
    Intellectual
     property   (487,058)    (365,036)    (268,881)    (134,088)  (5,986,338)
    Other
     capital
     assets      (38,305)     (21,048)      (3,558)       6,333     (661,653)
    Purchase of
     short-term
     invest-
     ments      (487,165)    (539,878)    (253,395)    (290,435) (48,606,632)
    Redemption
     of short-
     term
     invest-
     ments             -   10,158,000            -    4,258,000   23,578,746
    Investment
     in BCY
     LifeSciences
     Inc.              -            -            -            -      464,602
    Investment in
     Transition
     Therapeutics
     Inc.              -            -            -            -    2,532,343
    -------------------------------------------------------------------------
              (1,012,528)   9,232,038     (525,834)   3,839,810  (28,678,932)
    -------------------------------------------------------------------------
    FINANCING
     ACTIVITIES
    Proceeds from
     exercise of
     warrants
     and stock
     options           -       42,500            -       42,500   15,208,468
    Proceeds from
     private
     placements        -            -            -            -   38,137,385
    Proceeds from
     public
     offerings
     (note 2) 12,063,394            -       (4,778)           -   42,856,898
    -------------------------------------------------------------------------
              12,063,394       42,500       (4,778)      42,500   96,202,751
    -------------------------------------------------------------------------
    Increase
     (decrease)
     in cash
     and cash
     equivalents
     during
     the
     period    3,432,378    3,712,950    4,401,390      781,935    6,923,889

    Cash and
     cash
     equivalents,
     beginning
     of
     the
     period    3,491,511    3,511,357   11,325,279    6,442,372            -
    -------------------------------------------------------------------------
    Cash and
     cash
     equivalents,
     end of
     the
     period    6,923,889    7,224,307    6,923,889    7,224,307    6,923,889
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes



                           Oncolytics Biotech Inc.

                        NOTES TO FINANCIAL STATEMENTS

    June 30, 2007 (unaudited)

    1.  ACCOUNTING POLICIES

    These unaudited interim financial statements have been prepared in
    accordance with Canadian generally accepted accounting principles. The
    notes presented in these unaudited interim financial statements include
    only significant events and transactions occurring since the Company's
    last fiscal year end and are not fully inclusive of all matters required
    to be disclosed in the Company's annual audited financial statements.
    Accordingly, these unaudited interim financial statements should be read
    in conjunction with the Company's most recent annual financial
    statements. The information as at and for the year ended December 31,
    2006 has been derived from the Company's audited financial statements.

    The accounting policies used in the preparation of these unaudited
    interim financial statements conform with those used in the Company's
    most recent annual financial statements except the following:

    Adoption of New Accounting Policy

    Financial Instruments

    On January 1, 2007, the Company prospectively 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.

    2.  SHARE CAPITAL

    Authorized:

    Unlimited number of common shares

    Issued:                      Shares                 Warrants
    -------------------------------------------------------------------------
                                            Amount                  Amount
                                 Number        $         Number        $
    -------------------------------------------------------------------------
    Balance, December 31,
     2005                     36,236,748  82,841,871   2,784,800   4,429,932
    Exercise 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   4,216,740
    Issued for cash pursuant
     to February 22, 2007
     public offering(a)        4,600,000  11,362,000   2,300,000   2,438,000
    Share issue costs                     (1,736,606)          -           -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Balance, June 30, 2007    41,120,748  92,708,665   4,972,000   6,654,740
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (a) 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:

                                                                        2007
    -------------------------------------------------------------------------

    Risk-free interest rate                                            4.08%
    Expected hold period to exercise                                 3 years
    Volatility in the price of the Company's shares                    62.8%
    Dividend yield                                                         -
    -------------------------------------------------------------------------

    There were no warrants issued during the six month period ending
    June 30, 2006.

    The following table summarizes the Company's outstanding warrants as at
    June 30, 2007:

                                                                    Weighted
                                                                     Average
                                                                    Remaining
            Outstanding, Granted   Exercised  Expired                Contrac-
             Beginning    During     During   During    Outstanding,   tual
    Exercise   of the       the        the      the        End of      Life
    Price      Period     Period     Period   Period       Period     (years)
    -------------------------------------------------------------------------
    $3.50            -  2,300,000          -        -    2,300,000      2.65
    $5.65      320,000          -          -        -      320,000      1.50
    $6.15    1,600,000          -          -        -    1,600,000      1.50
    $8.00      752,000          -          -        -      752,000      0.40
    -------------------------------------------------------------------------
             2,672,000  2,300,000          -        -    4,972,000      1.87
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    3.  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:

                                           2007                   2006
    -------------------------------------------------------------------------
                                             Weighted               Weighted
                                              Average                Average
                                               Share                  Share
                                    Stock      Price       Stock      Price
                                   Options       $        Options       $
    -------------------------------------------------------------------------
    Outstanding, January 1        3,537,950     4.88     3,634,550     4.66
    Granted during period           100,000     3.28       100,000     3.85
    Exercised during period               -        -       (50,000)    0.85
    ----------------------------------------            -----------
    Outstanding, June 30          3,637,950     4.84     3,684,550     4.69
    ----------------------------------------            -----------
    ----------------------------------------            -----------
    Options exercisable,
     June 30, 2007                3,380,450     4.96     3,452,050     4.79
    ----------------------------------------            -----------
    ----------------------------------------            -----------

    The following table summarizes information about the stock options
    outstanding and exercisable at June 30, 2007:

                                  Weighted
                                   Average    Weighted              Weighted
                                  Remaining   Average               Average
    Range of                     Contractual  Exercise              Exercise
    Exercise           Number       Life       Price    Number       Price
    Prices           Outstanding   (years)       $    Exercisable      $
    -------------------------------------------------------------------------

    $0.75 - $1.00      348,550       2.3        0.85    348,550       0.85
    $1.65 - $2.37      368,400       6.4        1.95    348,400       1.95
    $2.70 - $3.50      828,750       6.9        3.15    603,750       3.13
    $4.00 - $5.00    1,240,750       7.3        4.86  1,228,250       4.86
    $6.77 - $9.76      708,500       4.7        8.66    708,500       8.66
    $12.15 - $13.50    143,000       3.3       12.63    143,000      12.63
    -------------------------------------------------------------------------
                     3,637,950       6.0        4.84  3,380,450       4.96
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Options granted vest immediately or annually over one, three or four
    years at the discretion of the Board. The outstanding options vest
    annually or after the completion of certain milestones. The Company has
    reserved 4,052,075 common shares for issuance relating to outstanding
    stock options.

    As the Company is following the fair value based method of accounting for
    stock options, the Company recorded compensation expense of $82,573 and
    $103,969 for the three and six month periods ending June 30, 2007,
    respectively (June 30, 2006 $222,376 and $259,209, respectively) with
    respect to the granting of options in the period and vesting of options
    issued in prior periods with an offsetting credit to contributed surplus.

    The estimated fair value of stock options issued during the six month
    period ending June 30, 2007 was determined using the Black-Scholes model
    using the following weighted average assumptions and fair value of
    options:

                                                            2007        2006
    -------------------------------------------------------------------------
    Risk-free interest rate                                4.11%       4.24%
    Expected hold period to exercise                   3.5 years   3.5 years
    Volatility in the price of the Company's shares          63%         64%
    Dividend yield                                          Zero        Zero
    Weighted average fair value of options                 $1.56       $1.86
    -------------------------------------------------------------------------

    4.  CONTRIBUTED SURPLUS

                                                                     Amount
                                                                        $
    -------------------------------------------------------------------------
    Balance, December 31, 2005                                     7,912,584
    Expired warrants                                                 213,192
    Stock based compensation                                         403,550
    Exercise of stock options                                              -
    -------------------------------------------------------------------------
    Balance, December 31, 2006                                     8,529,326
    Stock based compensation                                         103,969
    -------------------------------------------------------------------------
    Balance, June 30, 2007                                         8,633,295
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    5.  DEFICIT

                                                                    Amount
                                                                       $
    -------------------------------------------------------------------------
    Balance, December 31, 2005                                    50,732,542
    Net loss for the year                                         14,297,524
    -------------------------------------------------------------------------
    Balance, December 31, 2006                                    65,030,066
    Adjustment - Alberta Heritage Foundation loan (note 1)          (150,000)
    Net loss and comprehensive loss, June 30, 2007                 7,792,813
    -------------------------------------------------------------------------
    Balance, June 30, 2007                                        72,672,879
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    6.  ADDITIONAL CASH FLOW DISCLOSURE

    Net Change In Non-Cash Working Capital

    For the periods ending:

                                                                 Cumulative
                                                                    from
                  Six Month   Six Month  Three Month Three Month  inception
                    Period      Period      Period      Period   on April 2,
                    Ending      Ending      Ending      Ending     1998 to
                   June 30,    June 30,    June 30,    June 30,    June 30,
                     2007        2006        2007        2006        2007
                      $           $           $           $           $
    -------------------------------------------------------------------------
    Change in:
    Accounts
     receivable       37,286      (6,757)      4,231      63,164     (46,717)
    Prepaid
     expenses       (159,651)   (457,410)    (16,234)   (470,182)   (798,191)
    Accounts
     payable and
     accrued
     liabilities    (240,431)    214,240    (473,371)   (109,214)  2,375,990
    -------------------------------------------------------------------------
    Change in
     non-cash
     working
     capital        (362,796)   (249,927)   (485,374)   (516,232)  1,531,082
    Less portion
     related to
     investing
     activities      (56,300)    (46,433)    (37,000)    (50,900)     45,257
    -------------------------------------------------------------------------
    Net change
     associated
     with operating
     activities     (419,096)   (296,360)   (522,374)   (567,132)  1,485,825
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Other Non-Cash Items

                                                                 Cumulative
                                                                    from
                  Six Month   Six Month  Three Month Three Month  inception
                    Period      Period      Period      Period   on April 2,
                    Ending      Ending      Ending      Ending     1998 to
                   June 30,    June 30,    June 30,    June 30,    June 30,
                     2007        2006        2007        2006        2007
                      $           $           $           $           $
    -------------------------------------------------------------------------
    Foreign
     exchange
     loss                  -           -           -           -     425,186
    Donation of
     medical
     equipment             -           -           -           -      66,069
    Loss on sale of
     Transition
     Therapeutics Inc.     -           -           -           -   2,156,685
    Gain on sale
     of BCY
     LifeSciences Inc.     -           -           -           -    (299,403)
    Cancellation of
     contingent
     payment
     obligation
     settled in
     common shares         -           -           -           -     150,000
    Future income
     tax recovery          -           -           -           -  (1,115,000)
    -------------------------------------------------------------------------
                           -           -           -           -   1,383,537
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    7.  SHORT-TERM INVESTMENTS

    Short-term investments, mainly 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.


                                                                   Effective
                      Original    Accrued    Carrying               Interest
                        Cost     Interest     Value     Fair Value    Rate
    -------------------------------------------------------------------------
    June 30, 2007
    Short-term
     investments     24,287,868   321,534   24,609,402  24,574,467     4.14%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    December 31,
     2006
    Short-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.

    8.  ALBERTA HERITAGE LOAN

    The Company received an interest free 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.

    9.  COMPARATIVE FIGURES

    Certain comparative figures have been reclassified to conform with the
    current period's presentation.

    About Oncolytics Biotech Inc.

Oncolytics is a Calgary-based biotechnology company focused on the development of oncolytic viruses as potential cancer therapeutics. Oncolytics' clinical program includes a variety of Phase I and Phase II human trials using REOLYSIN(R), its proprietary formulation of the human reovirus, alone and in combination with radiation or chemotherapy. For further information about Oncolytics, please visit www.oncolyticsbiotech.com.

SOURCE Oncolytics Biotech Inc.