Oncolytics Q3 2011 Message to Shareholders

Third Quarter Report

Oncolytics Biotech Inc.

Oncolytics Q3 2011 Message to Shareholders

We achieved a number of important milestones during the third quarter of 2011. We expanded enrollment in our Phase III head and neck cancer trial, reported positive interim results in our Phase II non-small cell lung cancer trial and published additional preclinical work on the interaction of REOLYSIN with approved chemotherapeutic agents.

Expansion of Enrolment in Our Phase III Head and Neck Cancer Trial

Completing enrollment in the first stage of our Phase III study in head and neck cancers will remain a key focus for the balance of 2011. We have increased the number of enrolling centres in both existing and new jurisdictions and currently have approval to conduct the trial in 12 countries: the United States (under a Special Protocol Assessment), Canada, the United Kingdom, Belgium, France, Germany, Spain, Italy, Greece, Hungary, Poland and Russia.

Positive Clinical Trial Results to Support Decisions on Additional Randomized Studies

In July, we presented positive interim results from our Phase II non-small cell lung cancer (NSCLC) trial at the 14th World Conference on Lung Cancer. The trial investigated the intravenous administration of REOLYSIN in combination with paclitaxel and carboplatin in patients with non-small cell lung cancer with Kras or EGFR-activated tumours.

The presentation was entitled "Phase II study of reovirus with paclitaxel (P) and carboplatin (C) in patients with metastatic non-small cell lung cancer (NSCLC) who have Kras or EGFR-activated tumours." The twenty-two patients in the study received intravenous REOLYSIN (3 x 1010TCID50) daily on days one through five, in combination with carboplatin and paclitaxel. Initial doses were carboplatin AUC 6 and paclitaxel 200 mg/m2 on day one of each twenty-one-day cycle. Doses were then reduced to carboplatin AUC 5 and paclitaxel 175 mg/m2.

At the time of reporting, the study had enrolled fifteen patients with Adenocarcinoma, three with Squamous Cell Carcinoma, one with Bronchioloalveolar Carcinoma and three with not otherwise specified non-small cell lung cancer. Molecular tumour demographics included nine Kras mutant, three EGFR mutant and 16 EGFR amplified tumours. Response evaluation in 21 patients showed six partial responses (PR; 28.6%), 13 stable disease (SD; 61.9%) and two progressive disease (PD; 9.5%). This signified a clinical benefit rate of 90.5% (complete response (CR) + PR + SD; in other words, the percentage of patients whose tumours had stabilized, regressed or disappeared) and a response rate of 28.6% (CR + PR). The investigators noted that the clinical benefit observed thus far was encouraging and warranted a follow-up randomized trial.

We have generated positive clinical data in a range of patient populations in the quarters since launching our clinical trial program. As we collect data from additional trials during the coming quarters, we will begin to make final decisions respecting further randomized studies to build upon our Phase III head and neck cancer study and our randomized Phase II ovarian and metastatic pancreatic cancer studies. These additional randomized studies will be directed at expanding the use of REOLYSIN beyond our expected first use for head and neck cancer.

Additional Preclinical Work Supportive of Our Chosen Treatment Combinations

In August, a report on a study investigating the timing of chemotherapy delivery to optimize the efficacy of systemic REOLYSIN appeared in the online version of Molecular Therapy, a publication of the American Society of Gene and Cell Therapy. The paper was authored by Kottke et al. and entitled "Precise Scheduling of Chemotherapy Primes VEGF-producing Tumors for Successful Systemic Oncolytic Virotherapy." It described when best to administer taxanes with reovirus to optimize viral delivery to the tumour mass. The researchers determined that this drug combination yielded superior results to either treatment alone, and were able to reproducibly cure nearly half of the treated animals by employing this optimized schedule of paclitaxel/REOLYSIN.

Paclitaxel is being used in combination with REOLYSIN and carboplatin in our randomized Phase III head and neck trial and our randomized Phase II ovarian and pancreatic cancer trials. It is also being used, in combination with both REOLYSIN and carboplatin, in a range of other trials.

Through our additional preclinical work, we continue to strengthen our understanding of how REOLYSIN interacts with a range of currently approved chemotherapeutics.

Looking to the Future

We are looking forward to receiving results from our three ongoing randomized clinical studies and initiating two other randomized studies in the near future. These studies are important in determining the indications for which our first product approvals will be sought.

We want to thank all of our stakeholders for their continued support through an exciting 2011.

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

BASIS OF PRESENTATION AND TRANSITION TO IFRS

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

This MD&A should be read in conjunction with our unaudited consolidated interim financial statements as at and for the period ending September 30, 2011 which have been prepared using IFRS and should also be read in conjunction with the audited consolidated financial statements, which were prepared using Canadian GAAP, and MD&A contained in our annual report for the year ended December 31, 2010.

FORWARD-LOOKING STATEMENTS

The following discussion contains forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended and under applicable Canadian provincial securities legislation. Forward-looking statements, including our belief as to the potential of REOLYSIN , a therapeutic reovirus, as a cancer therapeutic and our expectations as to the success of our research and development and manufacturing programs in 2011 and beyond, future financial position, business strategy and plans for future operations, and statements that are not historical facts, involve known and unknown risks and uncertainties, which could cause our actual results to differ materially from those in the forward-looking statements.

Such risks and uncertainties include, among others, the need for and availability of funds and resources to pursue research and development projects, the efficacy of REOLYSIN as a cancer treatment, the success and timely completion of clinical studies and trials, our ability to successfully commercialize REOLYSIN, uncertainties related to the research, development and manufacturing of pharmaceuticals, uncertainties related to competition, changes in technology, the regulatory process and general changes to the economic environment.

With respect to the forward-looking statements made within this MD&A, we have made numerous assumptions regarding among other things: our ability to obtain financing to fund our development program, our ability to receive regulatory approval to commence enrollment in our clinical trial program, the final results of our co-therapy clinical trials, our ability to maintain our supply of REOLYSIN and future expense levels being within our current expectations.

Investors should consult our quarterly and annual filings with the Canadian and U.S. securities commissions for additional information on risks and uncertainties relating to the forward-looking statements. Forward-looking statements are based on assumptions, projections, estimates and expectations of management at the time such forward-looking statements are made, and such assumptions, projections, estimates and/or expectations could change or prove to be incorrect or inaccurate. Investors are cautioned against placing undue reliance on forward-looking statements. We do not undertake to update these forward-looking statements except as required by applicable law.

Oncolytics Biotech Inc. is a Development Stage Company

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

General Risk Factors

Prospects for biotechnology companies in the research and development stage should generally be regarded as speculative. It is not possible to predict, based upon studies in animals, or early studies in humans, whether a new therapeutic will ultimately prove to be safe and effective in humans, or whether necessary and sufficient data can be developed through the clinical trial process to support a successful product application and approval.

If a product is approved for sale, product manufacturing at a commercial scale and significant sales to end users at a commercially reasonable price may not be successful. There can be no assurance that we will generate adequate funds to continue development, or will ever achieve significant revenues or profitable operations. Many factors (e.g. competition, patent protection, appropriate regulatory approvals) can influence the revenue and product profitability potential.

In developing a pharmaceutical product, we rely upon our employees, contractors, consultants and collaborators and other third party relationships, including the ability to obtain appropriate product liability insurance. There can be no assurance that these reliances and relationships will continue as required.

In addition to developmental and operational considerations, market prices for securities of biotechnology companies generally are volatile, and may or may not move in a manner consistent with the progress being made by Oncolytics.

REOLYSIN Development Update for the Third Quarter of 2011

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

Clinical Trial Program

We began the third quarter of 2011 with 13 clinical trials which includes three randomized studies (our randomized Phase III head and neck trial, our randomized Phase II ovarian cancer trial, and our randomized Phase II pancreatic cancer trial). Five of these 13 trials are funded by us with the remainder sponsored by the U.S. National Cancer Institute ("NCI"), the Cancer Therapy & Research Center at The University of Texas Health Center in San Antonio ("CTRC"), and the University of Leeds ("Leeds").

During the third quarter of 2011, interim results from our Phase II non-small cell lung cancer were presented at the 14th World Conference on Lung Cancer. Our interim results showed that 22 patients had been treated with REOLYSIN in combination with carboplatin and paclitaxel. Of the 22 patients treated, 21 patients had been evaluated showing a clinical benefit rate of 90.5% and a response rate of 28.6%.

We exited the third quarter with 13 clinical trials. Our clinical trial program currently encompasses various cancer indications including head and neck, non-small cell lung, ovarian, pancreatic, colorectal, melanoma, and squamous cell carcinoma of the lung among others.

Clinical Trial - Randomized Phase III Head and Neck Pivotal Trial

Our randomized Phase III head and neck pivotal trial continues to expand into additional jurisdictions and enroll patients. We are now approved to enroll patients in 12 countries within North America and Europe including the U.S., under a Special Protocol Assessment, Canada, the U.K. and Belgium.

Clinical Trial - Results

U.S. Phase II Non-Small Cell Lung Cancer ("NSCLC") Clinical Trial

During the third quarter of 2011, we announced that a presentation covering interim preliminary results from our Phase II clinical trial using intravenous administration of REOLYSIN in combination with paclitaxel and carboplatin in patients with NSCLC with Kras or EGFR-activated tumours was made at the International Association for the Study of Lung Cancer World Conference on Lung Cancer.

The presentation, entitled "Phase II study of reovirus with paclitaxel (P) and carboplatin (C) in patients with metastatic non-small cell lung cancer (NSCLC) who have Kras or EGFR-activated tumors", was given by Dr. Miguel Villalona-Calero, principal investigator for the study, and indicated that 22 patients had received REOLYSIN (3x1010 TCID50) intravenously daily on days one to five, in combination with carboplatin and paclitaxel.

As of the date of the presentation, the study had enrolled patients with Adenocarcinoma (15), Squamous Cell Carcinoma (three), Bronchioloalveolar Carcinoma (one), and not otherwise specified non-small cell lung cancer (three). Molecular tumor demographics included: nine Kras mutant, three EGFR mutant, 16 EGFR amplified. Response evaluation in 21 patients showed six partial responses ("PR") (28.6%), 13 stable disease ("SD") (61.9%), two progressive disease ("PD") (9.5%). This translated into a clinical benefit rate (complete response ("CR")+PR+SD) of 90.5% and a response rate (CR+PR) of 28.6%. The investigators noted that the clinical benefit noted so far is encouraging and that a follow up randomized clinical trial appears warranted.

Manufacturing and Process Development

During the third quarter of 2011, we completed the testing associated with the 100-litre cGMP production run from earlier in the year. Our process development activity for the second quarter of 2011 continued to focus on process validation and formulation studies. Our process development activities for the third quarter of 2011 focused on our master validation plan and included optimization and validation studies of our upstream and downstream processes.

Intellectual Property

At the end of the third quarter of 2011, we had been issued over 280 patents including 44 U.S. and 11 Canadian patents as well as issuances in other jurisdictions. We also have approximately 240 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.

We estimated at the beginning of 2011 that our cash requirements to fund our operations would be approximately $29,000,000. Our cash usage for the nine month period ending September 30, 2011 was $15,345,716 from operating activities and $111,194 for the acquisition of property and equipment. Our net loss for the nine month period ending September 30, 2011 was $17,367,378.

We exited the third quarter of 2011 with cash and short-term investments totaling $42,172,608 (see "Liquidity and Capital Resources").

Updated REOLYSIN Development for the Remainder of 2011

Our development activity for REOLYSIN for the remainder of 2011 continues to be made up of clinical, manufacturing, intellectual property and collaboration programs. With the additional jurisdictions and clinical sites that have been added over the course of 2011, we still anticipate that we can complete stage 1 (approximately 80 patients) of our Phase III head and neck clinical trial. We now expect that the commencement of stage 2 will occur in early 2012. As well, we still expect to complete enrollment in our non-small cell lung cancer trial and support those clinical trials that are sponsored by CTRC, Leeds and the NCI.

Our 2011 manufacturing program continues to include an additional 100-litre cGMP production run along with the related fill, labeling, packaging and shipping of REOLYSIN to the various clinical sites. As well, we plan on performing smaller process development studies examining formulation, stability and additional scale up as required by our master validation plan. Our intellectual property program will remain in place for the remainder of 2011 and will include filings for additional patents along with monitoring activities required to protect our patent portfolio. Finally, our 2011 collaboration program will selectively add studies and research that may be necessary to potentially expand our clinical program.

We now estimate that the cash requirements to fund our operations for 2011 will be approximately $24,000,000 (see "Liquidity and Capital Resources").

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

Although we adopted IFRS on January 1, 2011, we were required to restate our comparative 2010 annual and interim financial positions and results of operations, effective from January, 1, 2010. The 2010 comparative amounts have not been audited by our external auditor. Note 4 of our unaudited interim consolidated financial statements as at and for the nine months ended September 30, 2011 outlines our IFRS accounting policies and Note 3 provides a complete list of our IFRS 1 elections; detailed reconciliations between Canadian GAAP and IFRS of shareholders' equity as at January 1, September 30, and Dec. 31, 2010, respectively, and of net earnings and comprehensive income for the three and nine month periods ending September 30, 2010 and the twelve months ending December 31, 2010; and information regarding the impacts of IFRS transition on our cash flows. A summary of the changes are outlined below in the following tables and respective notes:

Consolidated Statement of Cash Flows

In transitioning to IFRS, there was no impact on our net change in cash for the three and nine month periods ending September 30, 2010 or for the year ending December 31, 2010.

IFRS Transitional Arrangements

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

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

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

Classification of expenses within the statement of loss and comprehensive loss

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

Foreign currency translation

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

THIRD QUARTER RESULTS OF OPERATIONS

(for the three months ended September 30, 2011 and 2010)

Net loss for the three month period ending September 30, 2011 was $6,232,024 compared to $6,523,223 for the three month period ending September 30, 2010.

Research and Development Expenses ("R&D")

Clinical Trial Program

During the third quarter of 2011, our clinical trial expenses increased to $3,364,450 compared to $1,082,323 for the third quarter of 2010. In the third quarters of 2011 and 2010, we incurred direct patient expenses related to the clinical trials that we are directly sponsoring. We also continue to incur start up costs relating to our randomized Phase III head and neck cancer trial as we increase the number of jurisdictions and clinical sites initiated to enroll patients. At the end of the third quarter of 2011, we were approved to commence enrollment in 12 countries throughout North America and Europe.

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

In the third quarter of 2011, our product manufacturing expenses were $553,997 compared to $456,971 for the third quarter of 2010. During the third quarter of 2011, we completed the testing of the 100-litre cGMP production run completed earlier in 2011 and continued to incur costs associated with the storage and shipping of our supply of REOLYSIN. In the third quarter of 2010, we completed the fill and packaging process for the 100-litre cGMP run that was completed earlier in 2010 in addition to incurring shipping costs associated with supplying our clinical trial program.

Our process development expenses for the third quarter of 2011 were $388,102 compared to $157,231 for the third quarter of 2010. Our process development activity for the third quarter of 2011 focused on optimization and validation studies of our upstream and downstream processes. These studies are in support of our master validation plan anticipated to be required for product registration. Our process development expenses for the third quarter of 2010 focused on optimization and validation studies.

Intellectual Property Expenses

Our intellectual property expenses for the third quarter of 2011 were $144,777 compared to $352,965 for the third quarter of 2010. 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 2011, we had been issued over 280 patents including 44 U.S. and 11 Canadian patents, as well as issuances in other jurisdictions. We also have over 240 patent applications filed in the U.S., Canada and other jurisdictions.

Research Collaborations

During the third quarter of 2011, our research collaboration expenses were $48,128 compared to $141,499. 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.

Other Research and Development Expenses

During the third quarter of 2011, our Other Research and Development expenses were $829,027 compared to $597,124 for the third quarter of 2010. In the third quarter of 2011, our salaries and benefits costs increased compared to the third quarter of 2010 as we increased the number of employees and consultants in order to support our randomized Phase III head and neck clinical trial along with our other clinical trials.

Scientific Research and Development Repayment (Refund)

During the third quarter of 2011, we were required to repay a portion of the Alberta scientific research and development refund we received in 2010. As a result of a review of our Scientific Research and Experimental Development claim by the Canadian tax authorities, a portion of our claim relating to overhead and administrative costs was denied reducing our claim and the associated Alberta 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.

Foreign Exchange (Gain) Loss

During the third quarter of 2011, our foreign exchange gain was $254,288 compared to a foreign exchange loss of $209,110 for the third quarter of 2010. The foreign exchange loss/(gain) is primarily a result of the fluctuations in the U.S. dollar exchange rate used on the translation of our U.S. currency that was received from our U.S. denominated financing in 2009 and the exercise of U.S. denominated warrants in 2011.

Stock Based Compensation