Oncolytics' Q3 2010 Message to Shareholders

Third Quarter Report

Oncolytics Biotech Inc.

Oncolytics' Q3 2010 Message to Shareholders

In the third quarter, we continued to support a broad range of activities critical to moving REOLYSIN towards becoming an approved cancer therapeutic. To this end, our focus is on moving forward the key elements of our program including clinical development, manufacturing, and intellectual property. While we have progressed to Phase III clinical studies for a first indication, the breadth of our clinical program will help support better decisions with respect to other additional indications we may investigate in the future. Subsequent to quarter end, we also took steps to strengthen our balance sheet raising gross proceeds of $28.77 million in a bought deal financing.

Phase III Clinical Trial Enrolling Patients

During the quarter we announced that we had received a No Objection Letter from Health Canada to expand enrollment of our Phase III study in head and neck cancer in Canada. We are now enrolling into the first stage of the trial at centres in the U.S., U.K., Belgium and Canada although we may elect to add additional jurisdictions as the trial advances. Canadian centres are expected to join those that are already enrolling in the other three jurisdictions in the fourth quarter. Conducting the trial in multiple jurisdictions allows us to work with leading physicians internationally and access a broad patient population, obtaining data that could ultimately support regulatory submissions in a range of countries.

Broadening Our Clinical Program

During the quarter we announced that the Gynecologic Oncology Group (GOG) intended to conduct a randomized Phase II trial of weekly paclitaxel versus weekly paclitaxel with REOLYSIN in patients with persistent or recurrent, ovarian, fallopian tube or primary peritoneal cancer (GOG186H). The study will be sponsored by the Cancer Therapy Evaluation Program, Division of Cancer Treatment and Diagnosis, U.S. National Cancer Institute (NCI), which is part of the National Institutes of Health, under its Clinical Trials Agreement with Oncolytics. Oncolytics will provide clinical supplies of REOLYSIN for this study. The Study Chair will be Dr. David E. Cohn of The Ohio State University Comprehensive Cancer Center - Arthur G. James Cancer Hospital and Richard J. Solove Research Institute. We expect this study to begin enrolling patients in the near term.

These types of collaborations play an important role in our clinical program as they allow us to cost effectively expand our clinical program into indications beyond the ones we are advancing and increase the number of patients we have overall safety, and increasingly efficacy, data on. This trial is our second randomized study.

Additional Early Clinical and Preclinical Results

Subsequent to quarter end, we announced that 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 was presented at the International Symposium on Cytotoxic T-lymphocytes (CTL) and Immunostimulation being held in Pamplona, Spain. On histological analysis of six patients to date, there was evidence of replication and tumour cell death in the tumours of four of six patients, two of which had confirmed Kras mutations in codon 12 (the most common ras mutation). The researchers concluded that reovirus can be successfully delivered specifically to colorectal liver metastases following intravenous administration as a monotherapy and that pre-operative treatment was safe, suggesting that application of oncolytic viral therapy can be widened to the neoadjuvant setting. Further translational studies with biological endpoints, particularly co-administering reovirus with chemotherapy, would further inform how to maximize the efficacy of this novel biotherapy in cancer patients. The interim findings from this study are further supportive of our decision to conduct a Phase I study of REOLYSIN in combination with FOLFIRI in patients with oxaliplatin refractory/intolerant Kras mutant colorectal cancer, which we expect to begin enrolling in the near term.

Recently, we also announced an abstract, entitled "REOLYSIN induces endoplasmic reticular stress in multiple myeloma and enhances the activity of bortezomib", indicating that the combination of REOLYSIN and bortezomib significantly reduced tumor burden in both xenograft and syngeneic multiple myeloma mouse models. The authors concluded that REOLYSIN is a promising anticancer agent that displays activity against multiple myeloma alone and in combination with bortezomib and warrants further investigation for the treatment of multiple myeloma and other malignancies. This work demonstrates our ongoing commitment to expanding our clinical program into additional cancer types, beyond the work done to date in solid tumors.

Strengthening the Balance Sheet

In November, we closed a bought deal financing issuing 6,256,000 units of the Company at a price of $4.60 per unit for gross proceeds to the Company of approximately $28.77million. Securing these funds substantially strengthens our balance sheet and should provide us with the ability to complete our first Phase III study without the need for outside assistance while also advancing our broader clinical program.

Our fundamentals continue to strengthen as our clinical program gathers momentum. Our focus in the near-term remains on completing enrollment in the first 80-patient stage of our Phase III study as additional centres begin enrolling patients. We expect 2011 to be an exciting year for the Company as we advance and report on an array of clinical initiatives. I would like to thank all stakeholders for their ongoing support and I look forward to reporting on our progress in the future.

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

This discussion and analysis should be read in conjunction with the unaudited interim consolidated financial statements of Oncolytics Biotech Inc. as at and for the three and nine months ended September 30, 2010 and 2009, and should also be read in conjunction with the audited consolidated 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, 2009. 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 and under applicable Canadian provincial securities legislation. Forward-looking statements, including our belief as to the potential of REOLYSIN , a therapeutic reovirus, as a cancer therapeutic and our expectations as to the success of our research and development and manufacturing programs in 2010 and beyond, future financial position, business strategy and plans for future operations, and statements that are not historical facts, involve known and unknown risks and uncertainties, which could cause our actual results to differ materially from those in the forward-looking statements.

Such risks and uncertainties include, among others, the need for and availability of funds and resources to pursue research and development projects, the efficacy of REOLYSIN as a cancer treatment, the success and timely completion of clinical studies and trials, our ability to successfully commercialize REOLYSIN , uncertainties related to the research, development and manufacturing of 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 activities 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 our research and development. 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 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 2009 MD&A.

REOLYSIN Development Update for the Third Quarter of 2010

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 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

We began the third quarter of 2010 with ten clinical trials, either enrolling patients or approved to commence enrollment. We currently sponsor four of these trials which includes our randomized Phase III head and neck clinical trial associated with our Special Protocol Assessment agreement with the U.S. Food and Drug Administration ("FDA"). The other six clinical trials are sponsored by other institutions including 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 third quarter of 2010, we expanded our clinical trial program to include a second randomized study as the Gynecologic Oncology Group received approval to commence a randomized Phase II ovarian cancer clinical study that will be sponsored by the NCI.

We exited the third quarter of 2010 with eleven clinical trials. Four of the eleven are funded by us and the remainder are sponsored by the NCI, CTRC, and Leeds. Our clinical trial program is currently examining 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 Trials - Second Randomized Clinical Trial

U.S. Randomized Phase II Combination REOLYSIN Paclitaxel Clinical Trial for Ovarian Cancer

During the third quarter of 2010, the Gynecologic Oncology Group (GOG) received approval to commence a randomized Phase II trial of weekly paclitaxel versus weekly paclitaxel with REOLYSIN in patients with persistent or recurrent, ovarian, fallopian tube or primary peritoneal cancer (GOG186H). The study will be sponsored by the Cancer Therapy Evaluation Program, Division of Cancer Treatment and Diagnosis, U.S. National Cancer Institute (NCI), which is part of the NCI, under our Clinical Trials Agreement. The Study Chair will be Dr. David E. Cohn of The Ohio State University Comprehensive Cancer Center - Arthur G. James Cancer Hospital and Richard J. Solove Research Institute.

This study is a randomized Phase II trial of weekly paclitaxel versus weekly paclitaxel with REOLYSIN in patients with persistent or recurrent ovarian, fallopian tube, or primary peritoneal cancer. Patients will be randomized to receive either paclitaxel alone or paclitaxel plus REOLYSIN . Patients in both arms will receive treatment with paclitaxel, with the second arm also receiving intravenous REOLYSIN . Patients will receive standard doses of paclitaxel on days one, eight, and 15 every 28 days. In the second arm, patients will also receive, on days one through five of each 28-day cycle, intravenous REOLYSIN at a dose of 3x1010 TCID50.

The primary objectives of this trial are to estimate the progression-free survival hazard ratio of the combination of weekly paclitaxel with REOLYSIN to weekly paclitaxel alone in patients with persistent or recurrent ovarian, fallopian tube, or primary peritoneal cancer and to determine the frequency and severity of adverse events associated with treatment with weekly paclitaxel alone and weekly paclitaxel with REOLYSIN as assessed by Common Terminology Criteria for Adverse Events (CTCAE). The secondary objectives are to estimate the progression-free survival and overall survival of patients treated with weekly paclitaxel alone and weekly paclitaxel with REOLYSIN ; to estimate (and compare) the proportion of patients who respond to the regimen on each arm of the study (according to RECIST 1.1 with measurable patients and by CA-125 for those patients with detectable disease only); and to characterize and compare progression-free survival and overall survival in patients with measurable disease (RECIST 1.1 criteria) and patients with detectable (nonmeasurable) disease. The study is expected to enroll up to 150 patients.

Clinical Trial - Phase III Head and Neck Pivotal Trial

During the third quarter of 2010, we continued to expand the number of jurisdictions of our Phase III head and neck pivotal trial to include Canada. In the third quarter of 2010, we received a No Objection Letter from Health Canada to conduct our Phase III pivotal trial examining REOLYSIN in combination with paclitaxel and carboplatin in patients with platinum-refractory head and neck cancers. We now have authorization to commence this trial in four jurisdictions including the U.S., the U.K. and Belgium.

Intellectual Property

At the end of the third quarter of 2010, we had been issued over 250 patents including 40 U.S. and 11 Canadian patents as well as issuances in other jurisdictions. We also have over 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.

At the beginning of the third quarter of 2010, we estimated that our cash requirements for 2010 will be approximately $21 million. Our cash usage for the nine month period ending September 30, 2010 was $14,218,124 from operating activities and $52,199 for the purchases of capital assets. Our net loss for the nine month period ending September 30, 2010 was $12,502,207.

We exited the third quarter of 2010 with cash and short term investments totaling $19,708,009 (see "Liquidity and Capital Resources").

Expected REOLYSIN Development for the Remainder of 2010

Our planned development activity for REOLYSIN for the remainder of 2010 is made up of clinical, manufacturing, intellectual property and collaboration programs. Our 2010 clinical program includes continuing patient enrollment in our Phase 3 head and neck clinical trial. As well, we continue to expect to complete our non-small cell lung cancer trial and support those clinical trials that are sponsored by CTRC, Leeds and the NCI.

Our 2010 manufacturing program has been expanded to include three 100-litre production runs along with the related fill, labeling, packaging and shipping of REOLYSIN to the various clinical sites as required, and performing smaller process development studies examining formulation, validation and additional scale up.

Clinical Trial Program - Results

U.K. Transitional Colorectal Cancer Clinical Trial Study

On October 26, 2010 we announced interim data from our U.K. translational clinical trial investigating intravenous administration of REOLYSIN in patients with metastatic colorectal cancer prior to surgical resection of liver metastases was presented at the International Symposium on Cytotoxic T-lymphocytes (CTL) and Immunostimulation being held in Pamplona, Spain. The presentation was given by principal investigator Professor Alan Melcher of Leeds Institute of Molecular Medicine, University of Leeds, UK.

The trial is 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. Patients were treated with intravenous REOLYSIN at 1x1010 TCID50, one to three weeks prior to planned surgery. After surgery, the tumour and surrounding liver tissue was assessed for viral status and anti-tumour effects.

On histological analysis of six patients, there was evidence of replication and tumour cell death in the tumours of four of six patients, two of which had confirmed Kras mutations in codon 12 (the most common ras mutation). The other two of these four patients' samples were still being analyzed for Kras status. There was no evidence of replication in samples analyzed from two of the six patients. The researchers concluded that reovirus can be successfully delivered specifically to colorectal liver metastases following intravenous administration as a monotherapy and that pre-operative treatment was safe, suggesting that application of oncolytic viral therapy can be widened to the neoadjuvant setting.

Bought Deal Financing

On November 8, 2010, we announced that we had closed our previously announced $25 million financing in which we entered into an agreement with a syndicate of underwriters pursuant to which they purchased, on a bought deal basis, 5,440,000 units (the "Units") of the Company at a price of $4.60 per Unit for gross proceeds of approximately $25 million (the "Offering"). The Offering was conducted through a syndicate of underwriters led by Paradigm Capital Inc., and including RBC Dominion Securities Inc., Canaccord Genuity Corp., and Bloom Burton & Co. Inc. (collectively the "Underwriters").

In connection with the Offering, the Underwriters also exercised in full an option (the "Over-Allotment Option") to purchase an additional 816,000 Units sold under the Offering at a price of $4.60 per Unit, on the same terms and conditions as the Offering. With the Over-Allotment Option exercised in full, the aggregate gross proceeds of the Offering was approximately $28.77 million. Each Unit consists of one common share and one-half of one common share purchase warrant (each whole common share purchase warrant, a "Warrant"). Each Warrant entitles the holder to acquire one common share at a price of $6.15 at any time until November 8, 2012.

We intend to use the net proceeds from the Offering to fund our ongoing Phase III combination REOLYSIN and paclitaxel/carboplatin clinical trial for patients with platinum-failed head and neck cancers, our other clinical activities, manufacturing activities in support of our clinical trial program, and for general corporate and working capital purposes.

U.S. Qualifying Therapeutic Discovery Tax Refund

On November 2, 2010, we received a cash grant of approximately U.S.$244,000 under the U.S. Government's Qualifying Therapeutic Discovery Project program ("QTDP") for our oncology program. The QTDP was created by Congress in March 2010 as part of the Patient Protection and Affordable Care Act and provides a tax credit or grant equal to 50% of eligible costs and expenses for tax years 2009 and 2010. The Department of Treasury allocated these credits and grants among qualified applicants since the program was oversubscribed.

THIRD QUARTER RESULTS OF OPERATIONS

(for the three months ended September 30, 2010 and 2009)

Net loss for the three month period ending September 30, 2010 was $4,009,022 compared to $2,693,992 for the three month period ending September 30, 2009.

Research and Development Expenses ("R&D")

Clinical Trial Program

During the third quarter of 2010, our direct clinical trial expenses increased to $601,180 compared to $536,168 for the third quarter of 2009. In the third quarter of 2010, we incurred direct patient expenses related to the four clinical trials we are sponsoring compared to the three clinical trials in the third quarter of 2009. We also continued to incur start up costs in the third quarter of 2010 related to our randomized Phase III head and neck clinical trial that were not incurred during the third quarter of 2010.

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

During the third quarter of 2010, our M&P expenses increased to $614,200 compared to $431,405 for the third quarter of 2009. In the third quarter of 2010, we completed the fill and packaging process for the 100 litre cGMP run that was completed in the second quarter of 2010. As well, there was an increase in our shipping activity in the third quarter of 2010 compared to the third quarter of 2009, as we supplied our expanding clinical trial sites with REOLYSIN . In the third quarter of 2009, we completed the fill and packaging process of the 100 litre cGMP production run that was completed at the end of the second quarter of 2009.

Our process development expenses for the third quarter of 2010 were $157,231 compared to $53,364 for the third quarter of 2009. During the third quarter of 2010, our process development activity continued to focus on optimization and validation studies. In the third quarter of 2009, we were focused on process validation studies.

Intellectual Property Expenses

Our intellectual property expenses for the third quarter of 2010 were $352,966 compared to $217,668 for the third quarter of 2009. The change in intellectual property expenditures reflects the timing of filing costs associated with our expanded patent base. At the end of the third quarter of 2010, we had been issued over 250 patents including 40 U.S. and 11 Canadian patents, as well as issuances in other jurisdictions. We also have over 200 patent applications filed in the U.S., Canada and other jurisdictions.

Research Collaborations

Our research collaboration activity continues to focus on the interaction of the immune system and the reovirus and the use of the reovirus as a co-therapy with existing chemotherapeutics and radiation. During the third quarters of 2010 and 2009, we continued to selectively enter into collaborations and also incurred costs for collaborative studies that were already ongoing.

Scientific Research and Development Refund

During the third quarter of 2010, we received scientific research and development refunds totaling $287,506 from the Alberta and Quebec governments.

Other Research and Development Expenses

During the third quarter of 2010, our other research and development expenses decreased to $588,429 compared to $636,864 for the third quarter of 2009. During the third quarter of 2009, we incurred additional R&D consulting costs relating to our Special Protocol Assessment and U.S. randomized Phase III filings that did not occur in the third quarter of 2010. As well, we incurred additional salaries and benefit costs relating to our increased staff levels required to support our randomized Phase III pivotal clinical trial.

During the third quarter of 2010, our public company related expenses were $586,781 compared to $400,439 for the third quarter of 2009. In the third quarter of 2010, our investor relations, public relations, and business development activities increased compared to the third quarter of 2009.

Our office expense activity during the third quarter of 2010 remained consistent compared to the third quarter of 2009.

Stock Based Compensation

Stock based compensation for the third quarter of 2010 was $397,675 compared to $7,982 for the third quarter of 2009. During the third quarter of 2010, we incurred stock based compensation associated with the grant of 300,000 stock options which vested upon issuance along with the vesting of options previously granted. During the third quarter of 2009 there was no grant of stock options.

Foreign Exchange (Gain) Loss

During the third quarter of 2010, our foreign exchange loss was $216,859 compared to a foreign exchange gain of $16,793 for the third quarter of 2009. We currently hold U.S.$5,399,882. The foreign exchange loss is primarily a result of the strengthening of the Canadian dollar compared to the U.S. dollar during the third quarter of 2010.

YEAR TO DATE RESULTS OF OPERATIONS

(for the nine months ended September 30, 2010 and 2009)

Net loss for the nine month period ending September 30, 2010 was $12,502,207 compared to $10,986,395 for the nine month period ending September 30, 2009.

Research and Development Expenses ("R&D")

Clinical Trial Program