Oncolytics Biotech Inc. Announces 2008 Second Quarter Results



    CALGARY, July 29 /CNW/ - 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, 2008.
    "Oncolytics experienced a strong second quarter with the reporting of
durable clinical responses to REOLYSIN(R) combination therapy treatment in
refractory head and neck cancer patients," said Dr. Brad Thompson, President
and CEO of Oncolytics. "We are enrolling increasing numbers of patients in our
clinical program for REOLYSIN(R), and the positive results from these trials
are helping us to plan the later-stage development program for REOLYSIN(R)."

    
    Second Quarter Highlights

    Significant Clinical Advances

    -  Presented positive interim U.S. Phase II sarcoma trial results at the
       American Society of Clinical Oncology (ASCO) annual meeting, showing 8
       of 16 evaluable patients experienced stable disease for periods
       ranging from two to more than ten, 28-day cycles.
    -  Presented positive interim results from a U.K. combination REOLYSIN(R)
       and paclitaxel/carboplatin trial at the British Society of Gene
       Therapy (BSGT) conference in Edinburgh. Three head and neck patients
       evaluated at that time had excellent clinical and radiological
       responses without appreciable toxicity. The dose escalation portion of
       this trial was completed in the second quarter.
    -  Received approval for U.K. and U.S. Phase II clinical trials
       investigating REOLYSIN(R) in combination with paclitaxel and
       carboplatin, and started patient enrolment in the U.K. trial.
    -  The U.S. National Cancer Institute started patient enrolment in a
       Phase I/II ovarian, peritoneal and fallopian tube cancer trial using
       systemic and intraperitoneal administration of REOLYSIN(R).
    -  Started patient enrolment in a U.K. combination REOLYSIN(R) and
       cyclophosphamide trial.
    -  Subsequent to the quarter end, announced that the 200th patient had
       been treated with REOLYSIN(R).

    Preclinical Advances

    -  Two presentations were delivered at the American Society of Gene
       Therapy (ASGT) meeting covering work using the reovirus against
       mesothelioma, and also to purge lymph nodes of tumor cells.
    -  Another two presentations were delivered at the American Association
       for Cancer Research (AACR) covering work using the reovirus in
       combination with radiation for pediatric sarcomas, and reovirus as a
       purging agent for autologous stem cell transplants.
    -  A paper covering preclinical work demonstrating that reovirus can kill
       melanoma cell lines and freshly resected tumour was published in Gene
       Therapy.
    -  A paper covering preclinical work demonstrating that reovirus can
       activate dendritic cells to promote innate, antitumor immunity was
       published in the Journal of Immunology.

    Manufacturing

    -  Successfully transferred cGMP production of REOLYSIN(R) at the
       40-litre batch size to SAFC Pharma(TM), a Division of Sigma-Aldrich
       Corporation. Yields at the 40-litre scale should provide sufficient
       doses to support future development plans leading to registration and
       also early-stage commercial requirements. Development work at the 100-
       litre scale is continuing.

    Intellectual Property

    -  One U.S. patent and one Canadian patent were secured in the second
       quarter. Oncolytics has secured more than 180 patents worldwide,
       including 27 U.S. patents and 9 Canadian patents.


       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 six months ended June 30, 2008 and 2007, 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, 2007. 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 2008 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 activities 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 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 2007 MD&A.

    REOLYSIN (R) Development Update for the Second Quarter of 2008

    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

    During the second quarter of 2008, our clinical trial program expanded to
eleven clinical trials of which nine are being conducted by us and two are
being sponsored by the U.S. National Cancer Institute ("NCI").

    Clinical Trials - Positive Interim Results

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

    In the second quarter of 2008, we announced positive interim results and
completed the dose escalation portion of our U.K. combination REOLYSIN(R) and
carboplatin/paclitaxel trial. Four of the first eight patients treated in the
study to date have a diagnosis of carcinoma of the head and neck. All three
head and neck patients evaluated to date have had excellent clinical and
radiological responses without appreciable toxicity. Preliminary assessment
after recruitment of the first two cohorts has suggested that patients with
head and neck carcinomas represent a group of patients for whom the
combination of carboplatin/paclitaxel and REOLYSIN(R) may prove effective.
    In the first cohort, the patient with head and neck cancer received 8
cycles of treatment (the maximum allowed) and achieved a clinical complete
response. In the second cohort, the two patients with head and neck cancers
with widespread disseminated disease have each received seven cycles of
treatment to date and both have achieved significant partial responses. Two of
the three patients, including the patient with the clinical complete response,
had previously received cisplatin/5-FU treatment and all three had previously
received radiotherapy.
    This clinical 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 were delivered to patients with escalating dosages of
REOLYSIN(R) intravenously. The second component of the trial includes the
enrolment of a further 9 patients for a total of 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 (have not responded) to standard therapy or for
which no curative standard therapy exists. The primary objective of the trial
is to determine the Maximum Tolerated Dose ("MTD"), Dose-Limiting Toxicity
("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.S. Phase II Sarcoma Clinical Trial

    During the second quarter of 2008, we announced interim results from our
Phase II study of intravenous REOLYSIN(R) in patients with sarcomas metastatic
to the lung which were presented at the American Society of Clinical Oncology
("ASCO") annual meeting. The presentation, entitled "A Phase II Study of
Intravenous REOLYSIN (Wild-type Reovirus) in the Treatment of Patients with
Bone and Soft Tissue Sarcomas Metastatic to the Lung" was delivered by Dr.
Monica Mita, the study principal investigator and her team at the Institute of
Drug Development (IDD), the Cancer Therapy and Research Center at the
University of Texas Health Science Center, (UTHSC), San Antonio, Texas.
    The interim results demonstrated that the treatment had been well
tolerated to date, with 8 of 16 evaluable patients experiencing stable disease
for periods ranging from two to more than twelve, 28-day cycles. As well, the
third patient treated in the study was demonstrated to have stable disease by
RECIST criteria for more than six months as measured by CT scan. A PET scan
taken at the same time showed that any residual mass was metabolically inert.

    Clinical Trials - Actively Enrolling

    During the second quarter of 2008, we commenced enrollment in two
additional U.K. chemotherapeutic co-therapy clinical trials and the NCI began
to enroll in its Phase I/II ovarian cancer clinical trial in the U.S. At the
end of the second quarter of 2008, eight of our nine sponsored clinical trials
were enrolling patients along with one of the NCI sponsored clinical trials.

    Clinical Trials - Expanded Trial Program

    U.K. Phase II Combination REOLYSIN(R) with Paclitaxel and Carboplatin

    During the second quarter of 2008, we received a letter of approval from
the U.K. Medicines and Healthcare products Regulatory Agency for our Clinical
Trial Application ("CTA") to begin a Phase II clinical trial using intravenous
administration of REOLYSIN(R) in combination with paclitaxel and carboplatin
in patients with advanced head and neck cancers. The principal investigator is
Dr. Kevin Harrington of The Institute of Cancer Research and The Royal Marsden
NHS Foundation Trust.
    This trial is a 14 patient, single arm, open-label, dose-targeted,
non-randomized, multi-centre trial of REOLYSIN(R) given intravenously in
combination with a standard dosage of paclitaxel and carboplatin. Eligible
patients include those with advanced or metastatic head and neck cancer that
are refractory to standard therapy or for which no curative standard therapy
exists. The primary objective of the Phase II trial is to measure tumour
responses and duration of response, and to describe any evidence of antitumour
activity. The secondary objective is to determine the safety and tolerability
of REOLYSIN(R) when administered in combination with paclitaxel and
carboplatin to patients with advanced or metastatic head and neck cancer. The
trial began enrolling patients in June, 2008.

    U.S. Phase II Combination REOLYSIN(R) with Paclitaxel and Carboplatin

    During the second quarter of 2008, following a U.S. Food and Drug
Administration ("FDA") review, we initiated a U.S. Phase II clinical trial
using intravenous administration of REOLYSIN(R) in combination with paclitaxel
and carboplatin in patients with advanced head and neck cancers. The Principal
Investigator is Dr. Monica Mita of the CTRC at UTHSCSA.
    This trial is a 14-patient, single arm, open-label, dose-targeted,
non-randomized trial of REOLYSIN(R) given intravenously in combination with a
standard dosage of paclitaxel and carboplatin. Eligible patients include those
with advanced or metastatic head and neck cancers that are refractory to
standard therapy or for which no curative standard therapy exists. The primary
objective of the Phase II trial is to measure tumour responses and duration of
response, and to describe any evidence of antitumour activity. The secondary
objective is to determine the safety and tolerability of REOLYSIN(R) when
administered in combination with paclitaxel and carboplatin to patients with
advanced or metastatic head and neck cancers.

    Pre-Clinical Trial and Collaborative Program

    Presentations

    In the second quarter of 2008, Dr. Anders Kolb of the Nemours Center for
Childhood Cancer Research presented a poster entitled "Radiation in
Combination with Reolysin for Pediatric Sarcomas" at the American Association
for Cancer Research ("AACR") Annual Meeting.
    The poster covered preclinical work using reovirus in combination with
radiation in mice implanted with pediatric rhabdomyosarcoma and Ewing's
sarcoma tumours. The results demonstrated that the combination of reovirus and
radiation significantly enhanced efficacy compared to either treatment alone
in terms of tumour regression and event-free survival.
    As well, Dr. Chandini Thirukkumaran of the Tom Baker Cancer Centre,
Calgary, presented an oral presentation entitled "Targeting Multiple Myeloma
with Oncolytic Viral Therapy" at the AACR Annual Meeting.
    The presentation covered preclinical work using reovirus as a purging
agent during autologous (harvested from the patient themselves) hematopoietic
stem cell transplants for multiple myeloma. The results demonstrated that up
to 70% of multiple myeloma cell lines tested showed reovirus sensitivity and
reovirus induced cell death mediated through apoptosis. The investigators
concluded that this preclinical data supports initiating a Phase I purging
trial using reovirus against multiple myeloma.

    Publications

    In the April 10, 2008 online issue of Gene Therapy, Prof. Alan Melcher
and his research group at St. James's University Hospital in Leeds, U.K.
published the results of their work entitled "Inflammatory Tumour Cell Killing
by Oncolytic Reovirus for the Treatment of Melanoma."
    The investigators showed that reovirus effectively kills and replicates
in both human melanoma cell lines and freshly resected tumour. They
demonstrated that reovirus melanoma killing is more potent than, and distinct
from, chemotherapy or radiotherapy-induced cell death. They concluded that
reovirus is suitable for clinical testing in melanoma.
    In the May 1, 2008 online issue of the Journal of Immunology, Prof. Alan
Melcher and his research group at St. James's University Hospital in Leeds,
U.K. published the results of their work with reovirus in a paper entitled
"Reovirus Activates Human Dendritic Cells to Promote Innate Antitumor
Immunity."
    The researchers studied the ability of reovirus to activate human
dendritic cells ("DC"), key regulators of both innate and adaptive immune
responses. The data demonstrated that reovirus directly activates human DC,
which in turn stimulate innate killing of cancer cells by natural killer
("NK") and T cells, suggesting a novel potential role for T cells in oncolytic
virus-induced local tumor cell death. Combined with the virus's ability to
directly kill cancer cells, the researchers concluded that reovirus
recognition by DC may enhance the efficacy of reovirus as a therapeutic agent.

    Manufacturing and Process Development

    During the second quarter of 2008, we successfully transferred our cGMP
manufacturing process for REOLYSIN(R) at the 40-litre batch size to SAFC
Pharma(TM), a Division of Sigma-Aldrich Corporation and commenced production.
Yields at the 40-litre scale should provide sufficient doses to support future
development plans leading to registration and also anticipated early stage
commercial requirements.
    During the second quarter of 2008, we continued our process development
work examining further scale-up to the 100-litre level and lyophilization.

    Intellectual Property

    During the second quarter of 2008, one U.S. patent and one Canadian
patent were issued. At the end of the second quarter of 2008, we had been
issued over 180 patents including 27 U.S. and nine Canadian patents as well as
issuances in other jurisdictions. We also have over 180 patent applications
filed in the U.S., Canada and other jurisdictions.

    Financial Impact

    We estimated at the beginning of 2008 that our average monthly cash usage
would be approximately $1,660,000 for 2008. Our cash usage for the six month
period ending June 30, 2008 was $7,224,814 from operating activities which
includes our intellectual property expenditures which is lower than our
expected monthly average but continues to be in line with our expectations for
2008. Our net loss for the six month period ending June 30, 2008 was
$8,648,903.

    Cash Resources

    We exited the second quarter of 2008 with cash resources totaling
$17,930,270 (see "Liquidity and Capital Resources").

    Expected REOLYSIN(R) Development for the Remainder of 2008

    We plan to continue to enroll patients in our clinical trials throughout
2008. We expect to complete enrollment in a number of our co-therapy trials in
the U.K. and our sarcoma study in the U.S. We believe that the results from
these trials will allow us to broaden our Phase II clinical trial program and
choose a pivotal trial path.
    We expect to produce REOLYSIN(R) for our clinical trial program
throughout 2008. We believe we will complete our 100-litre scale up activities
and will continue our examination of a lyophilization (freeze drying) process
for REOLYSIN(R).
    We continue to estimate, based on our expected activity for 2008 that our
average monthly cash usage will be $1,660,000 per month (see "Liquidity and
Capital Resources").

    INITIAL ADOPTION OF NEW ACCOUNTING STANDARD

    On April 1, 2008, we early adopted the new Canadian Institute of
Chartered Accountants' (the "CICA") Handbook Section 3064 "Goodwill and
Intangible Assets". Pursuant to the transitional provisions set out in Section
3064, we retroactively adopted this standard with restatement.
    The adoption of Section 3064 impacted the treatment of our patent costs.
Prior to Section 3064, we accounted for our patent costs as an intangible
asset under CICA Handbook Section 3450 "Research and Development Costs".
Section 3450 allowed us to capitalize our third party legal costs associated
with our patent portfolio as a limited-life intangible asset which was then
amortized over the estimated useful life of the patents. Section 3064 does not
permit the capitalization of these third party legal costs. Consequently, the
third party legal costs previously capitalized as intellectual property are
required to be expensed and any previously recorded related amortization
charges are to be reversed. The intellectual property costs which remain
capitalized and subject to amortization relate to the initial acquisition of
our business by SYNSORB Biotech Inc.
    In order for us to capitalize our intellectual property expenditures we
would be required to demonstrate all of the following:

    
    1.  The technical feasibility of completing the intangible asset so that
        it will be available for use or sale.
    2.  Our intention to complete the intangible asset and use or sell it.
    3.  Our ability to use or sell the intangible asset.
    4.  How the intangible asset will generate probable future economic
        benefits. Among other things, we are able to demonstrate the
        existence of a market for the output of the intangible asset or the
        intangible asset itself or, if it is to be used internally, the
        usefulness of the intangible asset.
    5.  The availability of adequate technical, financial and other resources
        to complete the development and to use or sell the intangible asset.
    6.  Our ability to measure reliably the expenditure attributable to the
        intangible asset during its development.
    

    Therefore, all of our future intellectual property expenditures will be
expensed as incurred until we meet all of the capitalization criteria set out
above. We plan to regularly monitor our research and development activity in
conjunction with these six criteria to ensure we record our intellectual
property expenditures in line with Section 3064.
    The impact of the early adoption of Section 3064 on our previously
reported consolidated balance sheets is as follows:

    
                                       March 31,   December 31,  December 31,
                                         2008          2007          2006
    Consolidated Balance Sheet             $             $
    -------------------------------------------------------------------------

    Intellectual Property
    Intellectual property,
     previously reported               5,006,297     5,026,540     5,079,805
      Adjustment, adoption of
       Section 3064                   (4,554,422)   (4,484,290)   (4,176,055)
    -------------------------------------------------------------------------
    Intellectual property, restated      451,875       542,250       903,750
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Deficit
    Deficit, previously reported     (83,846,498)  (80,522,257)  (65,030,066)
      Adjustment, adoption of
       Section 3064                   (4,554,422)   (4,484,290)   (4,176,055)
    -------------------------------------------------------------------------
    Deficit, restated                (88,400,920)  (85,006,547)  (69,206,121)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The impact of the early adoption of Section 3064 on our previously
reported consolidated statements of loss, comprehensive loss and cash flows is
as follows:

                                                                 Cumulative
                                                                    from
                          Three Month                           inception on
                             Period                                April 2,
                             Ending     Year Ended   Year Ended     1998
    Consolidated            March 31,    December     December   to December
    Statements of Loss        2008       31, 2007     31, 2006     31, 2007
    and Comprehensive Loss      $            $            $            $
    -------------------------------------------------------------------------
    Net loss and
     comprehensive loss,
     previously reported    3,324,241   15,642,191   14,297,524   80,522,257

      Adjustment, adoption
       of Section 3064         70,132      308,235      330,767    4,484,290
    -------------------------------------------------------------------------

    Net loss and
     comprehensive loss,
     restated               3,394,373   15,950,426   14,628,291   85,006,547
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted loss
     per share, previously
     reported                   (0.08)       (0.39)       (0.39)           -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted loss
     per share, restated        (0.08)       (0.39)       (0.40)           -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                                 Cumulative
                                                                    from
                          Three Month                           inception on
                             Period                                April 2,
                             Ending     Year Ended   Year Ended     1998
    Consolidated            March 31,    December     December   to December
    Statements of             2008       31, 2007     31, 2006     31, 2007
    Cash Flows                  $            $            $           $
    -------------------------------------------------------------------------

    Operating activities,
     previously reported   (2,991,234) (13,569,594) (12,155,372) (66,551,036)

      Adjustment,
       adoption of
       Section 3064          (257,304)    (852,498)    (842,610)  (6,351,778)
    -------------------------------------------------------------------------

    Operating activities,
     restated              (3,248,538) (14,422,092) (12,997,982) (72,902,814)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Investing activities,
     previously reported    3,602,844    4,678,785   11,894,126  (22,987,619)

      Adjustment,
       adoption of
       Section 3064           257,304      852,498      842,610    6,351,778
    -------------------------------------------------------------------------

    Investing activities,
     restated               3,860,148    5,531,283   12,114,394  (16,635,871)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    SECOND QUARTER RESULTS OF OPERATIONS
    (for the three months ended June 30, 2008 and 2007)

    Net loss for the three month period ending June 30, 2008 was $5,254,530
compared to $3,837,244 for the three month period ending June 30, 2007.

    Research and Development Expenses ("R&D")

                                                                     2007
                                                          2008         $
                                                            $      (Restated)
    -------------------------------------------------------------------------
    Manufacturing and related process development
     expenses                                          1,284,955     828,602
    Clinical trial expenses                            1,633,445     983,896
    Pre-clinical trial and research collaboration
     expenses                                             82,624     331,379
    Intellectual property expenditures (1)               401,468     325,331
    Other R&D expenses                                   644,412     562,498
    -------------------------------------------------------------------------
    Research and development expenses                  4,046,904   3,031,706
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Note

      1  Upon adoption of CICA Handbook Section 3064, intellectual property
         expenditures are now recorded as an expense for the period.

    For the second quarter of 2008, R&D increased to $4,046,904 compared to
$3,031,706 for the second quarter of 2007. The increase in R&D was due to the
following:

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

                                                         2008        2007
                                                           $           $
    -------------------------------------------------------------------------
    Product manufacturing expenses                     1,089,357     774,883
    Technology transfer expenses                               -           -
    Process development expenses                         195,598      53,719
    -------------------------------------------------------------------------
    Manufacturing and related process development
     expenses                                          1,284,955     828,602
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Our M&P expenses for the second quarter of 2008 increased to $1,284,955
compared to $828,602 for the second quarter of 2007.
    In the second quarter of 2008, we completed the 40-litre production run
that started earlier in the year and began the vial and packaging process. As
well, we commenced an additional 40-litre production run. In the second
quarter of 2007, we completed the 20-litre production runs that had been
scheduled earlier in 2007.
    Our process development activity in the second quarter of 2008, continues
to focus on scale up to 100-litre production runs and also includes
lyophilization (freeze drying) studies. In the second quarter of 2007, our
process development activity focused on completing our 40-litre scale up
studies.

    Clinical Trial Program

                                                         2008        2007
                                                           $           $
    -------------------------------------------------------------------------
    Direct clinical trial expenses                     1,603,171     913,360
    Other clinical trial expenses                         30,274      70,536
    -------------------------------------------------------------------------
    Clinical trial expenses                            1,633,445     983,896
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the second quarter of 2008, our direct clinical trial expenses
increased to $1,603,171 compared to $913,360 for the second quarter of 2007.
In the second quarter of 2008, we incurred direct patient costs in our eight
enrolling clinical trials compared to only six actively enrolling clinical
trials in the second quarter of 2007.

    Pre-Clinical Trial Expenses and Research Collaborations

                                                         2008        2007
                                                           $           $
    -------------------------------------------------------------------------
    Research collaboration expenses                       82,624     331,379
    Pre-clinical trial expenses                                -           -
    -------------------------------------------------------------------------
    Pre-clinical trial expenses and research
     collaborations                                       82,624     331,379
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the second quarter of 2008, our research collaboration expenses
were $82,624 compared to $331,379 for the second quarter of 2007. 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. In the second quarter of 2008, we
continued to review our collaborations, only renewing certain contracts. In
the second quarter of 2007, we incurred costs associated with a number of
previously contracted collaborations.

    Intellectual Property Expenditures

    -------------------------------------------------------------------------
                                                                     2007
                                                         2008          $
                                                           $       (Restated)
    -------------------------------------------------------------------------
    Intellectual property expenditures                   401,468     325,331
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    In the second quarter of 2008, our intellectual property expenditures were
$401,468 compared to $325,331 for the second quarter of 2007. The change in
intellectual property expenditures reflects the timing of filing costs
associated with our expanded patent base. At the end of the second quarter of
2008, we had been issued over 180 patents including 27 U.S. and nine Canadian
patents as well as issuances in other jurisdictions. We also have over 180
patent applications filed in the U.S., Canada and other jurisdictions.

    Other Research and Development Expenses

                                                         2008        2007
                                                           $           $
    -------------------------------------------------------------------------
    R&D consulting fees                                   66,337      50,114
    R&D salaries and benefits                            449,330     395,166
    Other R&D expenses                                   128,745     117,218
    -------------------------------------------------------------------------
    Other research and development expenses              644,412     562,498
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Our R&D salaries and benefits costs in the second quarter of 2008 were
$449,330 compared to $395,166 in the second quarter of 2007. The increase is a
result of increases in staff levels during the second quarter of 2008 compared
to the second quarter of 2007.

    Operating Expenses

                                                         2008        2007
                                                           $           $
    -------------------------------------------------------------------------
    Public company related expenses                    1,066,933     719,501
    Office expenses                                      252,565     272,806
    -------------------------------------------------------------------------
    Operating expenses                                 1,319,498     992,307
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the second quarter of 2008, our public company related expenses
increased to $1,066,933 compared to $719,501 for the second quarter of 2007.
In the second quarter of 2008, we continued to incur additional professional
fees associated with the expansion of our corporate structure and an increase
in our investor relations activity.

    YEAR TO DATE RESULTS OF OPERATIONS
    (for the six months ended June 30, 2008 and 2007)

    Net loss for the six month period ending June 30, 2008 was $8,648,903
compared to $8,047,335 for the six month period ending June 30, 2007.

    Research and Development Expenses ("R&D")

                                                                     2007
                                                         2008          $
                                                           $       (Restated)
    -------------------------------------------------------------------------
    Manufacturing and related process development
     expenses                                          1,788,048   2,666,795
    Clinical trial expenses                            2,676,237   1,705,513
    Pre-clinical trial and research collaboration
     expenses                                             82,940     437,660
    Intellectual property expenditures (1)               669,054     562,809
    Other R&D expenses                                 1,224,022   1,114,643
    -------------------------------------------------------------------------
    Research and development expenses                  6,440,301   6,487,420
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Note:

      1.  Upon adoption of CICA Handbook Section 3064, intellectual property
          expenditures are now recorded as an expense for the period.

    For the six month period ending June 30, 2008, our R&D expenses were
$6,440,301 compared to $6,487,420 for the six month period ending June 30,
2007. The change in R&D was due to the following:

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

                                                         2008        2007
                                                           $           $
    -------------------------------------------------------------------------
    Product manufacturing expenses                     1,705,017   2,523,301
    Process development expenses                          83,031     143,494
    -------------------------------------------------------------------------
    Manufacturing and related process development
     expenses                                          1,788,048   2,666,795
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Our M&P expenses for the six month period ending June 30, 2008 decreased
to $1,788,048 compared to $2,666,795 for the six month period ending June 30,
2007.
    During the six month period ending June 30, 2008, we completed a 40-litre
cGMP production run of REOLYSIN(R) that will be used to supply our clinical
trial program. As well, towards the end of the first half of 2008, we began
the fill and packaging process of this 40-litre run and commenced an
additional 40-litre production run. During the first half of 2007, we
completed and initiated production runs at the 20-litre scale.
    Our process development expenses for the six month period ending June 30,
2008 were $83,031 compared to $143,494 for the six month period ending June
30, 2007. During the first half of 2008, we continued examining further scale
up to the 100-litre level and lyophilization. During the first half of 2007,
our process development focus was on our earlier 40-litre scale up studies.
    We now expect that our M&P expenses for 2008 will decrease compared to
2007. We are realizing the benefit of our increased scale and better
production yields resulting from our prior process development activities
allowing us to reduce the number of production runs for 2008. We initiated our
final 40-litre production run for 2008 which we expect will be completed in
the third quarter. We plan to fill and package enough REOLYSIN(R) to meet our
immediate clinical trial requirements during the third quarter. We still
expect to finalize our 100-litre scale up studies and continue the examination
of a lyophilization process for REOLYSIN(R) in 2008.

    Clinical Trial Program

                                                         2008        2007
                                                           $           $
    -------------------------------------------------------------------------
    Direct clinical trial expenses                     2,597,818   1,596,467
    Other clinical trial expenses                         78,419     109,046
    -------------------------------------------------------------------------
    Clinical trial expenses                            2,676,237   1,705,513
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the six month period ending June 30, 2008, our direct clinical
trial expenses increased to $2,597,818 compared to $1,596,467 for the six
month period ending June 30, 2007. In the first half of 2008, we incurred
direct patient costs in our eight enrolling clinical trials of which six were
enrolling throughout the six month period. During the first half of 2007, we
were actively enrolling in six clinical trials of which only three had been
enrolling throughout the six month period.
    We still expect our clinical trial expenses to increase in 2008 compared
to 2007. The increase in these expenses is expected to arise from continued
enrollment and continued re-treatments in our existing clinical trials.

    Pre-Clinical Trial Expenses and Research Collaborations

                                                         2008        2007
                                                           $           $
    -------------------------------------------------------------------------
    Research collaboration expenses                       82,940     400,530
    Pre-clinical trial expenses                                -      37,130
    -------------------------------------------------------------------------
    Pre-clinical trial expenses and research
     collaborations                                       82,940     437,660
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the six month period ending June 30, 2008, our research
collaboration expenses were $82,940 compared to $400,530 for the six month
period ending June 30, 2007. 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 first half of 2008, we have been reviewing our collaborations and
renewing only certain contracts which has resulted in fewer ongoing
collaborations compared to the first half of 2007.
    We now expect that our pre-clinical trial expenses and research
collaborations in 2008 will be less than 2007.

    Intellectual Property Expenditures

                                                                     2007
                                                         2008          $
                                                           $       (Restated)
    -------------------------------------------------------------------------
    Intellectual property expenditures                   669,054     562,809
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the first half of 2008, our intellectual property expenditures were
$669,054 compared to $562,809 for the first half of 2007. The change in
intellectual property expenditures reflects the timing of filing costs
associated with our expanded patent base. As well, we have benefited from
fluctuations in the Canadian dollar as our patent costs are typically incurred
in U.S. currency. At the end of the second quarter of 2008, we had been issued
over 180 patents including 27 U.S. and nine Canadian patents as well as
issuances in other jurisdictions. We also have over 180 patent applications
filed in the U.S., Canada and other jurisdictions.

    Other Research and Development Expenses

                                                         2008        2007
                                                           $           $
    -------------------------------------------------------------------------
    R&D consulting fees                                   93,746     141,891
    R&D salaries and benefits                            927,448     767,553
    Quebec scientific research and experimental
     development refund                                        -     (15,927)
    Other R&D expenses                                   202,828     221,126
    -------------------------------------------------------------------------
    Other research and development expenses            1,224,022   1,114,643
    -------------------------------------------------------------------------

    During the six month period ending June 30, 2008, our R&D consulting fees
were $93,746 compared to $141,891 for the six month period ending June 30,
2007. During the first half of 2007, we incurred consulting activity
associated with our co-therapy clinical trial applications that was not
incurred in the first half of 2008.
    During the six month period ending June 30, 2008, our R&D salaries and
benefits costs were $927,448 compared to $767,553 for the six month period
ending June 30, 2007. The increase is a result of increases in staff and
salary levels for 2008 compared to 2007.
    We now expect that our Other R&D expenses will increase compared to 2007
due to increases in our staff levels.

    Operating Expenses

                                                         2008        2007
                                                           $           $
    -------------------------------------------------------------------------
    Public company related expenses                    1,793,543   1,301,377
    Office expenses                                      576,849     597,646
    -------------------------------------------------------------------------
    Operating expenses                                 2,370,392   1,899,023
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the six month period ending June 30, 2008, our public company
related expenses were $1,793,543 compared to $1,301,377 for the six month
period ending June 30, 2007. During the first half of 2008, we incurred an
increase in professional fees associated with the expansion of our corporate
structure and an increase in our investor relations activity.
    During the six month period ending June 30, 2008, our office expenses were
$576,849 compared to $597,646 for the six month period ending June 30, 2007.
Our office expense activity has remained consistent in the first half of 2008
compared to the first half of 2007.

    Stock Based Compensation

                                                         2008        2007
                                                           $           $
    -------------------------------------------------------------------------
    Stock based compensation                              37,616     103,969
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Stock based compensation for the six month period ending June 30, 2008 was
$37,616 compared to $103,969 for the six month period ending June 30, 2007. In
the first half of 2008 and 2007, we incurred stock based compensation
associated with the vesting of options previously granted.

    Commitments

    As at June 30, 2008, we are committed to payments totaling $1,992,000 for
activities related to manufacturing, 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:

    -------------------------------------------------------------------------
                   2008                    2007                    2006

    -------------------------------------------------------------------------
               June    March   Dec.    Sept.   June    March   Dec.    Sept.
                (1)     (1)     (1)     (1)     (1)     (1)     (1)     (1)

    -------------------------------------------------------------------------
    Revenue                -       -       -       -       -       -       -
    -------------------------------------------------------------------------
    Interest
     income      174     180     265     319     359     268     286     320
    -------------------------------------------------------------------------
    Net
     loss(3)   5,255   3,394   4,116   3,786   3,837   4,210   4,907   3,460
    -------------------------------------------------------------------------
    Basic and
     diluted
     loss per
     common
     share(3)  $0.13   $0.10   $0.10   $0.09   $0.09   $0.11   $0.13   $0.09
    -------------------------------------------------------------------------
    Total
     assets
     (4)      19,011  22,854  26,298  29,444  33,269  37,502  29,390  33,911
    -------------------------------------------------------------------------
    Total
     cash(2),
     (4)      17,930  21,963  25,214  28,191  31,533  35,681  27,614  31,495
    -------------------------------------------------------------------------
    Total
     long-term
     debt(5)       -       -       -       -       -       -     150     150
    -------------------------------------------------------------------------
    Cash
     dividends
     declared(6) Nil     Nil     Nil     Nil     Nil     Nil     Nil     Nil
    -------------------------------------------------------------------------

    (1)  Subsequent to the adoption of CICA Section 3064 "Goodwill and
         Intangible Assets". See note 2 to the unaudited interim consolidated
         financial statements for June 30, 2008.
    (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 2008 and
         July 2006 are quarterly stock based compensation expenses of
         $18,023, $19,593, $396,278, $38,909, $82,573, $21,396, $109,670, and
         $34,671, respectively.
    (4)  We issued 4,600,000 units for net cash proceeds of $12,063,394
         during 2007 with each unit consisting of one common share and one
         half of one common share purchase warrant. (2006 - 284,000 common
         shares for cash proceeds of $241,400)
    (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 3 of
         the December 31, 2007 audited financial statements).
    (6)  We have not declared or paid any dividends since incorporation.
    

    LIQUIDITY AND CAPITAL RE

SOURCES Liquidity As at June 30, 2008, we had cash and cash equivalents (including short-term investments) and working capital positions of $17,930,270 and $14,267,085, respectively compared to $25,213,829 and $22,732,987, respectively for December 31, 2007. The decrease in our cash and cash equivalent position reflects the cash usage from our operating activities which includes intellectual property expenditures for the six month period ending June 30, 2008. The larger decrease in our working capital position during the first half of 2008 reflects the increase in our accounts payable and accrued liabilities at June 30, 2008. During the second quarter of 2008, our clinical trial and manufacturing activities increased compared to the first quarter of 2008. As a result of the growth in our operating activities, our accrued expenses increased as we have yet to receive the related invoices from our suppliers. All of our trade accounts payable are current. 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. In 2008, we expect to continue to enroll patients in our various clinical trials and we also expect to continue with our collaborative studies pursuing support for our clinical trial program. We will therefore need to ensure that we have enough REOLYSIN(R) to supply our clinical trial and collaborative programs. We still expect our average monthly cash usage to be $1,660,000 in 2008 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, 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. To manage the risk of availability of raising additional capital, we filed a base shelf prospectus on June 16, 2008 which qualifies for distribution up to $150,000,000 of common shares, subscription receipts, warrants, debt securities and/or units. Establishing a base shelf provides us with additional flexibility when seeking additional capital as, under certain circumstances, it shortens the time period to close a financing and is expected to increase the number of potential investors that may be prepared to invest in our company. As of June 30, 2008, we have not registered or distributed any securities under this shelf. 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 $9,750,929 invested under this policy and we are currently earning interest at an effective rate of 3.77% (2007 - 4.08%). INITIAL ADOPTION OF ACCOUNTING POLICIES Capital Disclosures On January 1, 2008, we adopted the new recommendations of the Canadian Institute of Chartered Accountants ("CICA") for disclosure of our objectives, policies and processes for managing capital (CICA Handbook Section 1535), as discussed further in Note 6 of our interim consolidated financial statements. Financial Instruments - Disclosures On January 1, 2008, we adopted the new recommendations of the CICA for disclosures about financial instruments, including disclosures about fair value and the credit, liquidity and market risks associated with financial instruments (CICA Handbook Section 3862), as discussed further in Notes 7 and 8 of our interim consolidated financial statements. Financial Instruments - Presentation On January 1, 2008, we adopted the new recommendations of the CICA for presentation of financial instruments (CICA Handbook Section 3863). Adoption of this standard had no impact on the Company's financial instrument related presentation disclosures. Goodwill and Intangible Assets On April 1, 2008, we early adopted the new recommendations of the CICA for the accounting for goodwill and intangible assets (CICA Handbook Section 3064). The impact of adopting Section 3064 is further discussed under "Initial Adoption of New Accounting Standard" and in Note 2 of our June 30, 2008 interim consolidated financial statements. OTHER MD&A REQUIREMENTS We have 41,180,748 common shares outstanding at July 29, 2008. If all of our warrants (4,220,000) and options (3,870,493) were exercised we would have 49,271,241 common shares outstanding. Additional information relating to Oncolytics Biotech Inc. is available on SEDAR at www.sedar.com. Controls and Procedures There were no changes in our internal controls over financial reporting during the quarter ended June 30, 2008 that materially affected or are reasonably likely to materially affect, internal controls over financial reporting. Oncolytics Biotech Inc. CONSOLIDATED BALANCE SHEETS (unaudited) As at, December 31, 2007 June 30, $ 2008 (Restated $ see note 2) ------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 8,179,341 6,715,096 Short-term investments (note 7) 9,750,929 18,498,733 Accounts receivable 47,283 80,085 Prepaid expenses 435,727 260,300 ------------------------------------------------------------------------- 18,413,280 25,554,214 Property and equipment 236,468 201,103 Intellectual property (note 2) 361,500 542,250 ------------------------------------------------------------------------- 19,011,248 26,297,567 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and accrued liabilities 4,146,195 2,821,227 ------------------------------------------------------------------------- Shareholders' equity Share capital Authorized: unlimited number of common shares Issued: 41,180,748 (December 31, 2007 - 41,180,748) 92,759,665 92,759,665 Warrants 5,346,260 5,346,260 Contributed surplus (note 3) 10,414,578 10,376,962 Deficit (notes 2 and 4) (93,655,450) (85,006,547) ------------------------------------------------------------------------- 14,865,053 23,476,340 ------------------------------------------------------------------------- 19,011,248 26,297,567 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes Oncolytics Biotech Inc. CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS (unaudited) Cumulative from inception Three Month Six Month on April 2, Period Period 1998 Three Month Ending June Six Month Ending June to June Period 30, 2007 Period 30, 2007 30, 2008 Ending June $ Ending June $ $ 30, 2008 (Restated 30, 2008 (Restated (Restated $ see note 2) $ see note 2) see note 2) ------------------------------------------------------------------------- Revenue Rights revenue - - - - 310,000 ------------------------------------------------------------------------- - - - - 310,000 ------------------------------------------------------------------------- Expenses Research and development 4,046,904 3,031,706 6,440,301 6,487,420 67,540,017 Operating 1,319,498 992,307 2,370,392 1,899,023 22,976,028 Stock based compensation 18,023 82,573 37,616 103,969 4,742,421 Foreign exchange loss/gain (58,347) (10,855) (49,085) (16,088) 608,625 Amortization - intellectual property 90,375 90,375 180,750 180,750 3,253,500 Amortization - property and equipment 12,194 10,009 23,380 19,864 471,777 ------------------------------------------------------------------------- 5,428,647 4,196,115 9,003,354 8,674,938 99,592,368 ------------------------------------------------------------------------- Loss before the following: 5,428,647 4,196,115 9,003,354 8,674,938 99,282,368 Interest income (174,117) (358,871) (354,451) (627,603) (6,369,200) Gain on sale of BCY LifeSciences Inc. - - - - (299,403) Loss on sale of Transition Therapeutics Inc. - - - - 2,156,685 ------------------------------------------------------------------------- Loss before income taxes 5,254,530 3,837,244 8,648,903 8,047,335 94,770,450 Future income tax recovery - - - - (1,115,000) ------------------------------------------------------------------------- Net loss and comprehensive loss for the period (note 2) 5,254,530 3,837,244 8,648,903 8,047,335 93,655,450 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted loss per share 0.13 0.09 0.21 0.20 ------------------------------------------------------------- ------------------------------------------------------------- Weighted average number of shares (basic and diluted) 41,180,748 41,120,748 41,180,748 39,701,859 ------------------------------------------------------------- ------------------------------------------------------------- See accompanying notes Oncolytics Biotech Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Cumulative from inception Three Month Six Month on April 2, Period Period 1998 Three Month Ending June Six Month Ending June to June Period 30, 2007 Period 30, 2007 30, 2008 Ending June $ Ending June $ $ 30, 2008 (Restated 30, 2008 (Restated (Restated $ see note 2) $ see note 2) see note 2) ------------------------------------------------------------------------- OPERATING ACTIVITIES Net loss for the period (5,254,530) (3,837,244) (8,648,903) (8,047,335)(93,655,450) Deduct non- cash items Amorti- zation - intellectual property 90,375 90,375 180,750 180,750 3,253,500 Amorti- zation - property and equipment 12,194 10,009 23,380 19,864 471,777 Stock based compensation 18,023 82,573 37,616 103,969 4,742,421 Other non-cash items (note 5) - - - - 1,383,537 Net changes in non-cash working capital (note 5) 1,157,662 (485,372) 1,182,343 (362,794) 3,663,185 ------------------------------------------------------------------------- (3,976,276 (4,139,659) (7,224,814) (8,105,546)(80,141,030) ------------------------------------------------------------------------- INVESTING ACTIVITIES Capital assets (56,080) (3,558) (58,745) (38,305) (760,912) Purchase of short-term investments (115,009) (253,395) (252,196) (487,165)(49,321,159) Redemption of short-term investments 5,000,000 - 9,000,000 - 39,151,746 Investment in BCY LifeSciences Inc. - - - - 464,602 Investment in Transition Therapeutics Inc. - - - - 2,532,343 ------------------------------------------------------------------------- 4,828,911 (256,953) 8,689,059 (525,470) (7,933,380) ------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from exercise of warrants and stock options - - - - 15,259,468 Proceeds from private placements - - - - 38,137,385 Proceeds from public offerings - (4,778) - 12,063,394 42,856,898 ------------------------------------------------------------------------- - (4,778) - 12,063,394 96,253,751 ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents during the period 852,635 (4,401,390) 1,464,245 3,432,378 8,179,341 Cash and cash equivalents, beginning of the period 7,326,706 11,325,279 6,715,096 3,491,511 - ------------------------------------------------------------------------- Cash and cash equivalents, end of the period 8,179,341 6,923,889 8,179,341 6,923,889 8,179,341 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes Oncolytics Biotech Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) June 30, 2008 1. INCORPORATION AND NATURE OF OPERATIONS Oncolytics Biotech Inc. (the "Company" or "Oncolytics") was incorporated on April 2, 1998 under the Business Corporations Act (Alberta) as 779738 Alberta Ltd. On April 8, 1998, we changed our name to Oncolytics Biotech Inc. We are a development stage biopharmaceutical company that focuses on the discovery and development of pharmaceutical products for the treatment of cancers that have not been successfully treated with conventional therapeutics. Our product under development may represent a novel treatment for Ras mediated cancers which can be used as an alternative to existing cytotoxic or cytostatic therapies, as an adjuvant therapy to conventional chemotherapy, radiation therapy, or surgical resections, or to treat certain cellular proliferative disorders for which no current therapy exists. 2. ACCOUNTING POLICIES These unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The notes presented in these unaudited interim consolidated financial statements include only significant events and transactions occurring since our last fiscal year end and are not fully inclusive of all matters required to be disclosed in our annual audited financial statements. Accordingly, these unaudited interim consolidated financial statements should be read in conjunction with our most recent annual audited financial statements. The information as at and for the year ended December 31, 2007 has been derived from our annual audited financial statements. The accounting policies used in the preparation of these unaudited interim consolidated financial statements conform to those used in our most recent annual financial statements except for the following: Principles of Consolidation The consolidated financial statements include our accounts and the accounts of our subsidiary, Oncolytics Biotech (Barbados) Inc. All intercompany transactions and balances have been eliminated. Adoption of New Accounting Policies Intangible Assets Prior to the adoption of Section 3064, we accounted for our intellectual property expenditures under CICA Handbook section 3450 "Research and Development Costs". Section 3450 permitted the capitalization and amortization of intangible assets in order to match the benefit of the intangible asset to the life of the research project. On April 1, 2008, we early adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook section 3064 "Goodwill and Intangible Assets". Pursuant to the transitional provisions set out in Section 3064, we retroactively adopted this standard with restatement. Section 3064 does not permit the capitalization of certain previously capitalized intellectual property costs. Consequently, these intellectual property expenditures, previously capitalized as intellectual property, are required to be expensed and any previously recorded related amortization charges are to be reversed. The intellectual property costs which remain capitalized and subject to amortization relate to the initial acquisition of our business by SYNSORB Biotech Inc. There has been no change to the treatment of our research and development costs. The impact of the early adoption of Section 3064 on our previously reported consolidated balance sheets is as follows: March 31, December 31, December 31, 2008 2007 2006 Consolidated Balance Sheet $ $ $ ------------------------------------------------------------------------- Intellectual Property Intellectual property, previously reported 5,006,297 5,026,540 5,079,805 Adjustment, adoption of Section 3064 (4,554,422) (4,484,290) (4,176,055) ------------------------------------------------------------------------- Intellectual property, restated 451,875 542,250 903,750 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Deficit Deficit, previously reported (83,846,498) (80,522,257) (65,030,066) Adjustment, adoption of Section 3064 (4,554,422) (4,484,290) (4,176,055) ------------------------------------------------------------------------- Deficit, restated (88,400,920) (85,006,547) (69,206,121) ------------------------------------------------------------------------- ------------------------------------------------------------------------- The impact of the early adoption of Section 3064 on our previously reported consolidated statements of loss, comprehensive loss and cash flows is as follows: Cumulative from Three Month inception Period on April 2, Consolidated Ending Year Ended Year Ended 1998 to Statements March 31, December 31, December 31, December of Loss and 2008 2007 2006 31, 2007 Comprehensive Loss $ $ $ $ ------------------------------------------------------------------------- Net loss and compre- hensive loss, previously reported 3,324,241 15,642,191 14,297,524 80,522,257 Adjustment, adoption of Section 3064 70,132 308,235 330,767 4,484,290 ------------------------------------------------------------------------- Net loss and compre- hensive loss, restated 3,394,373 15,950,426 14,628,291 85,006,547 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted loss per share, previously reported (0.08) (0.39) (0.39) - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted loss per share, restated (0.08) (0.39) (0.40) - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cumulative from Three Month inception Period on April 2, Ending Year Ended Year Ended 1998 to Consolidated March 31, December 31, December 31, December Statements 2008 2007 2006 31, 2007 of Cash Flows $ $ $ $ ------------------------------------------------------------------------- Operating activities, previously reported (2,991,234) (13,569,594) (12,155,372) (66,551,036) Adjustment, adoption of Section 3064 (257,304) (852,498) (842,610) (6,365,180) ------------------------------------------------------------------------- Operating activities, restated (3,248,538) (14,422,092) (12,997,982) (72,902,814) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Investing activities, previously reported 3,602,844 4,678,785 11,894,126 (22,987,619) Adjustment, adoption of Section 3064 257,304 852,498 842,610 6,365,180 ------------------------------------------------------------------------- Investing activities, restated 3,860,148 5,531,283 12,736,736 (16,622,439) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital Disclosures On January 1, 2008, we adopted the new recommendations of the CICA for disclosure of our objectives, policies and processes for managing capital (CICA Handbook Section 1535), as discussed further in Note 6. Financial Instruments - Disclosures On January 1, 2008, we adopted the new recommendations of the CICA for disclosures about financial instruments, including disclosures about fair value and the credit, liquidity and market risks associated with financial instruments (CICA Handbook Section 3862), as discussed further in Notes 7 and 8. Financial Instruments - Presentation On January 1, 2008, we adopted the new recommendations of the CICA for presentation of financial instruments (CICA Handbook Section 3863). Adoption of this standard had no impact on our financial instrument related presentation disclosures. 3. CONTRIBUTED SURPLUS Amount $ ------------------------------------------------------------------------- Balance, December 31, 2006 8,529,326 Stock-based compensation 539,156 Expired warrants 1,308,480 ------------------------------------------------------------------------- Balance, December 31, 2007 10,376,962 Stock-based compensation 37,616 ------------------------------------------------------------------------- Balance, June 30, 2008 10,414,578 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 4. DEFICIT Amount $ ------------------------------------------------------------------------- Restated balance, December 31, 2006 (note 2) 69,206,121 Adjustment - Alberta Heritage Foundation loan(1) (150,000) Restated net loss and comprehensive loss for the year (note 2) 15,950,426 ------------------------------------------------------------------------- Restated balance, December 31, 2007 (note 2) 85,006,547 Net loss and comprehensive loss, June 30, 2008 8,648,903 ------------------------------------------------------------------------- Balance, June 30, 2008 93,655,450 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 1. On January 1, 2007, the Company 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. 5. ADDITIONAL CASH FLOW DISCLOSURE Net Change in Non-Cash Working Capital Cumulative Three Three Six Six from Month Month Month Month inception Period Period Period Period on April 2, Ended Ended Ended Ended 1998 to June 30, June 30, June 30, June 30, June 30, 2008 2007 2008 2007 2008 $ $ $ $ $ ------------------------------------------------------------------------- Changes in: Accounts receivable 37,816 4,231 32,802 37,286 (47,283) Prepaid expenses (274,249) (16,233) (175,427) (159,650) (435,727) Accounts payable and accrued liabilities 1,394,095 (473,370) 1,324,968 (240,430) 4,146,195 ------------------------------------------------------------------------- Net change in non-cash working capital 1,157,662 (485,372) 1,182,343 (362,794) 3,663,185 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other Non-Cash Items Cumulative Three Three Six Six from Month Month Month 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, 2008 2007 2008 2007 2008 $ $ $ $ $ ------------------------------------------------------------------------- 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 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 6. CAPITAL DISCLOSURES Our objective when managing capital is to maintain adequate cash resources to support planned activities which include the clinical trial program, product manufacturing, administrative costs and intellectual property expansion and protection. We include shareholders' equity, cash and short-term investments in the definition of capital. We do not have any debt other than trade accounts payable and we have potential contingent obligations relating to the completion of our research and development of REOLYSIN(R). In managing our capital, we estimate our future cash requirements by preparing a budget and a multiyear plan annually for review and approval by our board of directors (the "Board"). The budget establishes the approved activities for the upcoming year and estimates the costs associated with these activities. The multiyear plan estimates future activity along with the potential cash requirements and is based on our assessment of our current clinical trial progress along with the expected results from the coming year's activity. Budget to actual variances are prepared monthly and reviewed by management and are presented quarterly to the Board. Historically, funding for our plan is primarily managed through the issuance of additional common shares and common share purchase warrants that upon exercise are converted to common shares. Management regularly monitors the capital markets attempting to balance the timing of issuing additional equity with our progress through our clinical trial program, general market conditions, and the availability of capital. There are no assurances that funds will be made available to us when required. On June 16, 2008, we filed a short form base shelf prospectus (the "Base Shelf") that qualifies for distribution up to $150,000,000 of common shares, subscription receipts, warrants, debt securities and/or units (the "Securities"). Under our Base Shelf, we may sell Securities to or through underwriters, dealers, placement agents or other intermediaries and also may sell Securities directly to purchasers or through agents, subject to obtaining any applicable exemption from registration requirements. The distribution of Securities may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at market prices prevailing at the time of sale, or at prices related to such prevailing market prices to be negotiated with purchasers and as set forth in an accompanying Prospectus Supplement. Establishing the Base Shelf provides us with additional flexibility when managing our cash resources as, under certain circumstances, it shortens the time period required to close a financing and is expected to increase the number of potential investors that may be prepared to invest in our company. Funds received from a Prospectus Supplement will be used in line with our Board approved budget and multiyear plan. This Base Shelf expires on July 16, 2010 and as of June 30, 2008 we have not registered or distributed any securities under this shelf. We are not subject to externally imposed capital requirements. 7. SHORT-TERM INVESTMENTS Short-term investments, consisting of bankers' acceptances, 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 our excess cash resources in investment vehicles that provide a better rate of return compared to our interest bearing bank account with limited risk to the principal invested. We intend to match the maturities of these short-term investments with the cash requirements of our activities and treat these as held-to-maturity short-term investments. We do not hold any asset backed commercial paper. Original Accrued Carrying Fair Effective Cost Interest Value Value Interest $ $ $ $ Rate ------------------------------------------------------------------------- June 30, 2008 Short-term investments 9,601,966 148,963 9,750,929 9,757,805 3.77% ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- December 31, 2007 Short-term investments 18,230,340 268,393 18,498,733 18,499,173 4.26% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Fair value is determined by using published market prices provided by the Company's investment advisor. 8. FINANCIAL INSTRUMENTS Our financial instruments consist of cash and cash equivalents, short- term investments, accounts receivable, and accounts payable. As at June 30, 2008, there are no significant differences between the carrying values of these amounts and their estimated market values. Credit risk Credit risk is the risk of financial loss if a counterparty to a financial instrument fails to meet its contractual obligations. We are exposed to credit risk on our cash and cash equivalents and short-term investments in the event of non-performance by counterparties, but we do not anticipate such non-performance. Our maximum exposure to credit risk at the end of the period is the carrying value of our cash and cash equivalents and short-term investments. We mitigate our exposure to credit risk by maintaining our primary operating and investment bank accounts with Schedule I banks in Canada. For our foreign domiciled bank accounts, we use referrals or recommendations from our Canadian banks to open foreign bank accounts and these accounts are used solely for the purpose of settling accounts payable or payroll. We also mitigate our exposure to credit risk by restricting our portfolio to investment grade securities with short-term maturities and by monitoring the credit risk and credit standing of counterparties. Interest rate risk Interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. We are exposed to interest rate risk through our cash and cash equivalents and our portfolio of short-term investments. We mitigate this risk through our investment policy that only allows investment of excess cash resources in investment grade vehicles while matching maturities with our operational requirements. Fluctuations in market rates of interest do not have a significant impact on our results of operations due to the short term to maturity of the investments held. Currency risk Currency risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. We are exposed to currency risk from the purchase of goods and services primarily in the U.S. and the U.K. We mitigate our foreign exchange risk through the purchase of foreign currencies in sufficient amounts to settle our foreign accounts payable. Balances in foreign currencies at June 30, 2008 are as follows: U.S. British dollars pounds $ (pnds stlg) ------------------------------------------------------------------------- Cash and cash equivalents 636,260 505,812 Accounts payable (600,369) (113,318) ------------------------------------------------------------------------- 35,891 392,494 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liquidity risk Liquidity risk is the risk that we will encounter difficulty in meeting obligations associated with financial liabilities. We manage liquidity risk through the management of our capital structure as outlined in note 6 to the unaudited financial statements. Accounts payable are all due within the current operating period. 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/II 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. %SEDAR: 00013081E

For further information:

For further information: PLEASE CONTACT: For Canada: Oncolytics Biotech
Inc., Cathy Ward, 210, 1167 Kensington Cr NW, Calgary, Alberta, T2N 1X7, Tel:
(403) 670-7377, Fax: (403) 283-0858, cathy.ward@oncolytics.ca; The Equicom
Group, Nick Hurst, 325, 300 5th Ave. SW, Calgary, Alberta, T2P 3C4, Tel: (403)
538-4845, Fax: (403) 237-6916, nhurst@equicomgroup.com; For United States: The
Investor Relations Group, Erika Moran, 11 Stone St, 3rd Floor, New York, NY
10004, Tel: (212) 825-3210, Fax: (212) 825-3229,
emoran@investorrelationsgroup.com


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