EXHIBIT 2

Financial Statements

Oncolytics Biotech Inc.
December 31, 2005 and 2004

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# STATEMENT OF
MANAGEMENTS RESPONSIBILITY

Management is responsible for the
preparation and presentation of the financial statements, Managements Discussion and
Analysis (MD&A) and all other information in the Annual Report.

In managements opinion, the
accompanying financial statements have been properly prepared with reasonable limits of
materiality and within the appropriately selected Canadian generally accepted accounting
principles and policies consistently applied and summarized in the financial statements.

The MD&A has been prepared in
accordance with the requirements of securities regulators as applicable to Oncolytics
Biotech Inc.

The financial statements and
information in the MD&A generally include estimates that are necessary when
transactions affecting the current accounting period cannot be finalized with certainty
until future periods. Based on careful judgments by management, such estimates have been
properly reflected in the accompanying financial statements and MD&A. The MD&A
also includes information regarding the impact of current transactions and events, sources
of liquidity and capital resources and risks and uncertainty. Actual results in the future
may differ materially from our present assessment of this information because future
events and circumstances may not occur as expected.

Systems of internal controls,
including organizational and procedural controls and internal controls over financial
reporting, assessed as reasonable and appropriate in the circumstances, are designed and
maintained by management to provide reasonable assurance that assets are safeguarded from
loss or unauthorized use and to produce reliable records for financial purposes.

We, as the Chief Executive Officer
and Chief Financial Officer will certify to the our annual filings with the CSA and the
SEC as required in Canada by Multilateral Instrument 52-109 (certification of Disclosure
in Issuers Annual Interim Filings) and in the United States by the Sarbanes-Oxley
Act.

The external auditors conducted an
independent examination of corporate and accounting records in accordance with generally
accepted auditing standards to express their opinion on the financial statements. Their
examination included such tests and procedures as they considered necessary to provide
reasonable assurance that the financial statements are presented fairly. The external
auditors have full and free access to our Board of Directors and its Committees to discuss
audit, financial reporting and related matters.

The Board of Directors is responsible
for ensuring that management fulfills its responsibilities for financial reporting and
internal control. The Board exercises this responsibility through the Audit Committee of
the Board. This Committee meets with management and the external auditors to satisfy
itself that managements responsibilities are properly discharged and to review the
financial statements and MD&A before they are presented to the Board of Directors for
approval.

|/s/ Brad Thompson
Brad Thompson, PhD 
Chairman, President and CEO | /s/ Doug Ball
Doug Ball, CA 
Chief Financial Officer
|----------------------------------------------------------------- | ----------------------------------------------------

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# AUDITORS REPORT

To the Shareholders ofOncolytics Biotech Inc.

We have audited the balance sheets of
Oncolytics Biotech Inc. as at December 31, 2005 and 2004 and the statements of loss and
deficit and cash flows for each of the years in the three year period ended December 31,
2005 and for the cumulative period from inception on April 2, 1998. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with Canadian generally accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we
plan and perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. We were not engaged to perform an audit of the
Companys internal control over financial reporting. An audit includes consideration
of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, these financial
statements present fairly, in all material respects, the financial position of the Company
at December 31, 2005 and 2004 and the results of its operations and its cash flows for
each of the years in the three year period ended December 31, 2005 and the cumulative
period from inception on April 2, 1998 in accordance with Canadian generally accepted
accounting principles.

|Calgary, Canada
February 8, 2006 | /s/ Ernst & Young LLP
Chartered Accountants
|-------------------------------- | -------------------------------------------

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# Oncolytics Biotech Inc.

# BALANCE SHEETS

As at December 31

|                                             | 2005
$ | 2004
$     
|-------------------------------------------- | ------ | -----------
|                                             |       
|ASSETS                                       |        |            
|Current                                      |       
|Cash and cash equivalents                    |        | 3,511,357  
|Short-term investments                       |        | 36,894,810 
|Accounts receivable                          |        | 47,390     
|Prepaid expenses                             |        | 540,368    
|                                             |       
|                                             |        | 40,993,925 
|                                             |       
|Capital assets [note 4]                      |        | 189,863    
|                                             |       
|Intellectual property [note 5]               |        | 5,110,538  
|                                             |       
|Investments [notes 7 and 8]                  |        |           
|                                             |       
|                                             |        | 46,294,326 
|                                             |       
|LIABILITIES AND SHAREHOLDERS EQUITY         |       
|Current                                      |       
|Accounts payable and accrued liabilities     |        | 1,692,481  
|                                             |       
|Alberta Heritage Foundation loan [note 6]    |        | 150,000    
|                                             |       
|Commitments and contingency [notes 9 and 10] |       
|                                             |       
|Shareholders equity                         |       
|Share capital [note 11]                      |       
|Authorized: unlimited                        |       
|Issued: 36,236,748 (2004 - 31,915,496)       |        | 84,341,212 
|Warrants [note 11]                           |        | 4,429,932  
|Contributed surplus [notes 2,7, 12 and 13]   |        | 6,413,243  
|Deficit                                      |        | (50,732,542
|                                             |       
|                                             |        | 44,451,845 
|                                             |       
|                                             |        | 46,294,326 
|                                             |       

See accompanying notes

|On behalf of the Board: | /s/ Brad Thompson

Director | /s/ Doug Ball

Director
|----------------------- | --------------------------- | -----------------------

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# Oncolytics Biotech Inc.

# STATEMENTS OF LOSS AND
DEFICIT

For the periods ended
December 31

|                                                      | 2005
$ | 2004
$     | 2003
$ | Cumulative
from inception
on April 2,
1998 to
December 31,
2005
$
|----------------------------------------------------- | ------ | ---------- | ------ | -----------------------------------------------------------------
|                                                     
|Revenue                                               |        |            |        |                                                                  
|Rights revenue                                        |        |           |        |                                                                 
|Interest income                                       |        | 783,456    |        | 699,757                                                          
|                                                     
|                                                      |        | 783,456    |        | 699,757                                                          
|                                                     
|Expenses                                              |       
|Research and development [note 10]                    |        | 9,308,977  |        | 7,107,998                                                        
|Operating                                             |        | 3,084,897  |        | 2,803,669                                                        
|Stock based compensation [note 12]                    |        | 64,104     |        | 2,668,570                                                        
|Foreign exchange loss                                 |        | 253,608    |        | 358,068                                                          
|Amortization - intellectual property                  |        | 786,459    |        | 686,717                                                          
|Amortization - capital assets                         |        | 69,532     |        | 65,039                                                           
|                                                     
|                                                      |        | 13,567,577 |        | 13,690,061                                                       
|                                                     
|                                                     
|Loss before the following:                            |        | 12,784,121 |        | 12,990,304                                                       
|                                                     
|Gain on sale of BCY LifeSciences Inc. [note 8]        |        | (765       | )      | (34,185                                                          
|                                                     
|Loss on sale of Transition Therapeutics Inc. [note 8] |        |           |        |                                                                 
|                                                     
|Loss before taxes                                     |        | 12,783,356 |        | 12,956,119                                                       
|                                                     
|Capital tax (recovery)                                |        | (1,525     | )      |                                                                 
|                                                     
|Future income tax recovery [note 15]                  |        |           |        |                                                                 
|                                                     
|Net loss for the year                                 |        | 12,781,831 |        | 12,956,119                                                       
|                                                     
|Deficit, beginning of year                            |        | 37,950,711 |        | 24,994,592                                                       
|                                                     
|Deficit, end of year                                  |        | 50,732,542 |        | 37,950,711                                                       
|                                                     
|Basic and diluted loss per share [note 14]            |        | (0.39)     |        | (0.45)                                                           
|                                                     

See accompanying notes

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# Oncolytics Biotech Inc.

# STATEMENTS OF CASH
FLOWS

For the periods ended
December 31

|                                                 | 2005
$ | 2004
$      | 2003
$ | Cumulative
from inception
on April 2,
1998 to
December 31,
2005
$
|------------------------------------------------ | ------ | ----------- | ------ | -----------------------------------------------------------------
|                                                
|OPERATING ACTIVITIES                             |        |             |        |                                                                  
|Net loss for the year                            |        | (12,781,831 | )      | (12,956,119                                                      
|Deduct non-cash items                            |       
|Amortization - intellectual property             |        | 786,459     |        | 686,717                                                          
|Amortization - capital assets                    |        | 69,532      |        | 65,039                                                           
|Stock based compensation [note 12]               |        | 64,104      |        | 2,668,570                                                        
|Loss on sale of Transition Therapeutics Inc.     |        |            |        |                                                                 
|Other non-cash items [note 19]                   |        | 224,508     |        | 379,895                                                          
|Net changes in non-cash working                  |       
|capital [note 19]                                |        | 584,766     |        | (69,065                                                          
|                                                
|Cash used in operating activities                |        | (11,052,462 | )      | (9,224,963                                                       
|                                                
|                                                
|INVESTING ACTIVITIES                             |       
|Intellectual property                            |        | (1,033,035  | )      | (958,809                                                         
|Capital assets                                   |        | (61,309     | )      | (15,230                                                          
|Purchase of short-term investments               |        | (22,195,253 | )      | (6,777,179                                                       
|Redemption of short-term investments             |        | 6,656,746   |        | 3,114,000                                                        
|Investment in BCY LifeSciences Inc.              |        | 7,965       |        | 133,609                                                          
|Investment in Transition Therapeutics Inc.       |        |            |        |                                                                 
|                                                
|Cash used in investing activities                |        | (16,624,886 | )      | (4,503,609                                                       
|                                                
|                                                
|FINANCING ACTIVITIES                             |       
|Alberta Heritage Foundation loan                 |        |            |        |                                                                 
|Proceeds from exercise of stock options and      |       
|warrants                                         |        | 3,384,787   |        | 8,121,296                                                        
|Proceeds from private placements                 |        | 15,395,402  |        | 6,223,763                                                        
|Proceeds from public offerings                   |        |            |        | 9,150,902                                                        
|                                                
|Cash provided by financing activities            |        | 18,780,189  |        | 23,495,961                                                       
|                                                
|Increase (decrease) in cash and cash equivalents |       
|during the period                                |        | (8,897,159  | )      | 9,767,389                                                        
|                                                 |       
|Cash and cash equivalents, beginning of the      |       
|period                                           |        | 12,408,516  |        | 2,641,127                                                        
|                                                
|Cash and cash equivalents, end of the period     |        | 3,511,357   |        | 12,408,516                                                       
|                                                
|Cash interest received                           |        | 993,097     |        | 459,757                                                          
|                                                
|Cash taxes paid (net)                            |        |            |        |                                                                 
|                                                

See accompanying notes

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# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

# 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, the Company
changed its name to Oncolytics Biotech Inc.

The Company is 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. The product being developed by the Company 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.    BASIS OF FINANCIAL
STATEMENT PRESENTATION

On April 21, 1999, SYNSORB Biotech
Inc. (SYNSORB) purchased all of the shares of the Company. In connection with
the acquisition, the basis of accounting for the assets and liabilities of Oncolytics was
changed to reflect SYNSORBs cost of acquiring its interest in such assets and
liabilities (i.e. reflecting SYNSORBs purchase cost in the financial statements of
the Company). The amount by which SYNSORBs purchase price exceeded the underlying
net book value of the Companys assets and liabilities at April 21, 1999 was
$2,500,000. Such amount has been credited to contributed surplus and charged to
intellectual property which will be amortized to income based on the established
amortization policies for such assets. Subsequent to April 21, 1999 SYNSORBs
ownership has been diluted through public offerings of the Companys common shares,
sales of the Companys shares by SYNSORB and a distribution of SYNSORBS
ownership interest in the Company to its shareholders [note 7]. As a result,
SYNSORB no longer has any ownership in the Company.

# 3.    SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

The financial statements of the
Company have been prepared in accordance with Canadian generally accepted accounting
principles. These policies are, in all material respects, in accordance with United States
generally accepted accounting principles except as disclosed in note 20. The financial
statements have, in managements opinion, been properly prepared within reasonable
limits of materiality and within the framework of the accounting policies summarized
below.

# Use of estimates

Because a precise determination of
many assets and liabilities is dependent upon future events, the preparation of financial
statements in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of expenses during the reporting periods.
Actual results could differ from those estimates and such differences could be
significant. Significant estimates made by management affecting the Companys
financial statements include the assessment of the net realizable value of long lived
assets and the amortization period of intellectual property.

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# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

# Cash and cash equivalents

Cash and cash equivalents consists of
cash on hand and balances with the Companys bank including interest bearing deposits
earning an average interest rate of 2.9% (2004  2.26%).

# Short-term investments

Short-term investments consisting
primarily of bankers acceptances, treasury bills and bonds and are liquid
investments that are readily convertible to known amounts of cash and are subject to an
insignificant risk of changes in value and with original maturities less than two years at
the time of purchase, and are carried at the lower of amortized cost and market value.
Gains and losses on disposal of short-term investments are included in income in the
period of realization. Premiums or discounts are amortized over the remaining maturity of
the instrument and reported in interest income.

# Capital assets

Capital assets are recorded at cost.
Amortization is provided on bases and at rates designed to amortize the cost of the assets
over their estimated useful lives. Amortization is recorded using the declining balance
method at the following annual rates:

| | Office equipment and furniture
Medical equipment             
Computer equipment            
Leasehold improvements | 20%                                      
20%                                      
30%                                      
Straight line over the term of the lease
| | ------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Intellectual property

Costs relating to acquiring and
establishing intellectual property (mainly patents) are recorded at cost, net of
recoveries. Amortization of the intellectual property is on a straight-line basis over
seventeen years or estimated useful life (currently estimated to be ten years) and begins
on the earlier of a patent being granted or its utilization. The Company assesses
potential impairment of its intellectual property when any events that might give rise to
impairment are known to the Company by measuring the expected net recovery from products
based on the use of the intellectual property.

# Investments

Investments are accounted for at cost
and written down only when there is evidence that a decline in value that is other than
temporary has occurred.

# Foreign exchange

Transactions originating in foreign
currencies are translated into Canadian dollars at the exchange rate in effect at the date
of the transaction. Monetary assets and liabilities are translated at the year-end rate of
exchange and  non-monetary  items
are  translated at historic  exchange  rates.  Exchange gains and losses are included in
net loss for the year.

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# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

# Research and development

Research costs are expensed as
incurred. Development costs that meet specific criteria related to technical, market and
financial feasibility will be capitalized. To date, all of the development costs have been
expensed.

# Loss per common share

Basic loss per share is determined
using the weighted average number of common shares outstanding during the period.

The Company uses the treasury stock
method to calculate diluted loss per share. Under this method, diluted loss per share is
computed in a manner consistent with basic loss per share except that the weighted average
shares outstanding are increased to include additional shares from the assumed exercise of
options and warrants, if dilutive. The number of additional shares is calculated by
assuming that any outstanding in the money options and warrants were exercised
at the later of the beginning of the period or the date of issue and that the proceeds
from such exercises were used to acquire shares of common stock at the average market
price during the reporting period.

# Stock option plan

The Company has one stock option plan
(the Plan) available to officers, directors, employees, consultants and
suppliers with grants under the Plan approved from time to time by the Board of Directors.
Under the Plan, the exercise price of each option equals the market price of the
Companys stock on the date of grant in accordance with Toronto Stock Exchange
guidelines. Vesting is provided for at the discretion of the Board and the expiration of
options is to be no greater than ten years from the date of grant.

# Stock based compensation

Officers, Directors and Employees
Effective January 1, 2003, the
Company prospectively adopted the fair value based method of accounting for employee
awards granted under its stock option plan (see note 12). The Company calculates the fair
value of each stock option grant using the Black Scholes Option Pricing Model and the fair
value is recorded over the options vesting period on a straight line basis.
Previously, the intrinsic value method was used. The following tables provide pro forma
net loss and pro forma basic and diluted net loss per share had compensation expense, for
awards granted in 2002, been based on the fair value method of accounting for stock based
compensation:

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# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

|                                               | 2005
$ | 2004
$     | 2003
$
|---------------------------------------------- | ------ | ---------- | ------
|                                              
|Reported net loss                              |        | 12,781,831 |       
|Compensation expense                           |        | 983        |       
|                                              
|Pro forma net loss                             |        | 12,782,814 |       
|                                              
|Reported basic and diluted net loss per share  |        | (0.39      | )     
|                                              
|Pro forma basic and diluted net loss per share |        | (0.39      | )     
|                                              

As this policy has been applied
prospectively, comparative information has not been restated.

Non-employees
Stock based compensation to
non-employees is recorded at the fair market value based on the fair value of the
consideration received, or the fair value of the equity instruments granted, or
liabilities incurred, whichever is more reliably measurable, on the earlier of the date at
which a performance commitment is reached, performance is achieved, or the vesting date of
the options.

# Future income taxes

The Company follows the liability
method of accounting for income taxes. Under the liability method, future income taxes are
recognized for the difference between financial statement carrying values and the
respective income tax basis of assets and liabilities (temporary differences). Future
income tax assets and liabilities are measured using substantively enacted income tax
rates expected to apply in the years in which temporary differences are expected to be
recovered or settled. The effect on future income tax assets and liabilities of a change
in tax rates is included in income in the period of the change.

# Newly Adopted Canadian
Accounting Standards

# GAAP Hierarchy and
General Standards of Financial Statement Presentation

In 2005, the Company adopted the new
CICA Handbook Sections 1100, Generally Accepted Accounting Principles, and
1400, General Standards of Financial Statement Presentation. Section 1100
describes what constitutes Canadian GAAP and its sources and provides guidance on sources
to consult when selecting accounting policies and determining appropriate disclosures when
a matter is not dealt with explicitly in the primary sources of generally accepted
accounting principles, thereby re-codifying the Canadian GAAP hierarchy. Section 1400
provides general guidance on financial statement presentation and further clarifies what
constitutes fair presentation in accordance with GAAP. The application of this standard
had no impact on the financial position or results of operations of the Company.

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# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

# Future Changes in
Accounting Policy

# Non-monetary Transactions

In 2006, the Company will
prospectively adopt the new Canadian standard, Non-monetary Transactions, which requires
application of fair value measurement to non-monetary transactions determined by a number
of tests. The new standard is consistent with recently amended US standards. The Company
does not expect this standard to have a significant impact on its financial statements
upon adoption.

# Financial Instruments

On January 1, 2007, the Company will
prospectively adopt the new Canadian accounting standards for financial instruments and
comprehensive income. These new accounting standards will impact our accounting policy for
investment securities. The new rules will require the Company to classify these securities
as held-to-maturity or available-for-sale. Available-for-sale securities will be measured
at fair value with gains and losses recorded in a new section of shareholders equity
called other comprehensive income. There will be no change in accounting for
held-to-maturity securities. The Company does not expect these standards to have a
significant impact on its financial statements upon adoption as the Companys
short-term investments will be classified as held-to-maturity securities.

# 4.    CAPITAL ASSETS

|                       | 2005
|---------------------- | ----
|                      
|
|                      
|Medical equipment      |     
|Office equipment       |     
|Office furniture       |     
|Computer equipment     |     
|Leasehold improvements |     
|                      
|                       |     
|                      

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# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

|                       | 2004
|---------------------- | ----
|                      
|
|                      
|Medical equipment      |     
|Office equipment       |     
|Office furniture       |     
|Computer equipment     |     
|Leasehold improvements |     
|                      
|                       |     
|                      

In 2005, the Company donated the
medical equipment used in its Canadian glioma clinical trial to the clinical trial site.
The amount of the donation was $66,069 and equates to the net book value of the medical
equipment donated. This amount has been recorded as a clinical trial cost within research
and development expenses.

# 5.    INTELLECTUAL PROPERTY

|                      | 2005
|--------------------- | ----
|                     
|
|                     
|Intellectual property |     
|                     

|                      | 2004
|--------------------- | ----
|                     
|
|                     
|Intellectual property |     
|                     

# 6.    ALBERTA HERITAGE
FOUNDATION LOAN

The Company has received a loan of
$150,000 from the Alberta Heritage Foundation for Medical Research. Pursuant to the terms
of the agreement, the Company is required to repay this amount in annual installments from
the date of commencement of sales in an amount equal to the lesser of: (a) 5% of the gross
sales generated by the Company; or (b) $15,000 per annum until the entire loan has been
paid in full.

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

# 7.    RELATED PARTY
TRANSACTIONS

On May 7, 2002, the shareholders of
SYNSORB and the Company approved an arrangement whereby the Company would release from
escrow 4,000,000 common shares held by SYNSORB. As consideration, SYNSORB provided the
Company with 1,500,000 common shares of BCY Life Sciences Inc. (BCY) along
with the rights to receive an additional 400,000 common shares of BCY upon the attainment
of certain milestones by BCY at no cash cost to the Company. The Company received 200,000
of these 400,000 common shares on November 27, 2002. These 1,700,000 common shares in BCY
were recorded as an investment at $170,000 based on the quoted market price of the BCY
common shares at that time with an offsetting credit recorded to contributed surplus.

# 8.    INVESTMENTS

On April 23, 2002, the Company
acquired 694,445 common shares of BCY, a public company, for $0.18 per share, and warrants
exercisable until April 23, 2004 to purchase up to 694,445 common shares in BCY at an
exercise price of $0.27 per share for total consideration of $127,123 (including costs of
$2,123). After this transaction and the transaction described in note 7, the Company held
a total of 2,394,445 BCY shares. During 2005, the Company sold 120,000 (2004 
697,945; 2003  1,496,500) of its BCY shares for net cash proceeds of $7,965 (2004
 $133,609; 2003  $450,151) recording a gain on sale of investment of $765
(2004  $34,185; 2003  $264,453). As at December 31, 2005, the Companys
remaining ownership in BCY was 80,000 common shares with a book value $4,800. These common
shares will be released from escrow in February 2006; consequently the remaining
investment in BCY has been reclassified as a short term investment. The warrants expired
out of the money.

On June 14, 2002, the Company
acquired 6,890,000 common shares of Transition Therapeutics Inc. (TTH), a
public company, through the issuance of 1,913,889 common shares of the Company from
treasury. The investment was recorded at $4,709,380 (including acquisition costs of
$20,352) based on the trading price of the Companys shares at the time of
acquisition. On June 6, 2003, the Company sold all of its 6,890,000 common shares of TTH
for net cash proceeds of $2,552,695 recording a loss on sale of investment of $2,156,685.

# 9.    COMMITMENTS

The Company is committed to payments
totaling $1,138,000 during 2006 for activities related to its clinical trial program and
collaborations.

The Company is committed to monthly
rental payments (excluding the Companys portion of operating costs) of $7,453 under
the terms of a lease for office premises, which expires on May 31, 2011.

Under a clinical trial agreement
entered into with the Alberta Cancer Board (ACB), the Company has agreed to
repay the amount funded under the agreement together with a royalty, to a combined maximum
amount of $400,000 plus an overhead repayment of $100,000, upon sales of a specified
product. The Company agreed to repay the ACB in annual installments in an amount equal to
the lesser of: (a) 5% of gross sales of a specified product; or (b) $100,000 per annum.

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

# 10.    CONTINGENCY

During 1999, the Company entered into
an agreement that assumed certain obligations (the Assumption Agreement) in
connection with a Share Purchase Agreement (the Agreement) between SYNSORB and
the former shareholders of the Company to make milestone payments and royalty payments.

As of December 31, 2005, a milestone
payment was still outstanding for $1.0 million, due within 90 days of the first receipt
from an Appropriate Regulatory Authority, for marketing approval to sell REOLYSIN® to
the public or the approval of a new drug application for REOLYSIN®.

This milestone payment, when payable,
will be accounted for as research and development expense and will not be deductible for
tax purposes.

In addition to the milestone payment,
payments may become due and payable in accordance with the Agreement upon realization of
sales of REOLYSIN®. In 2003, the Company completed amendments and revisions to the
contingent obligations to its five founding shareholders with respect to these other
contingent payments. The amendments and revisions reduced the amount and clarified the
determination of potential obligations of the Company to these shareholders arising from
the Agreement and Assumption Agreement entered into in 1999. Also, on September 23, 2004,
the Company reached an agreement that further reduced its contingent payments to its
founding shareholders through the cancellation of a portion of these contingent payments
from one of its non-management founding shareholders. The consideration paid by the
Company consisted of $250,000 cash and 21,459 common shares valued at $150,000 and has
been recorded as research and development expense. The value of the common shares was
based on the closing market price on September 23, 2004.

As a result of the amendments and the
cancellation agreement, if the Company receives royalty payments or other payments as a
result of entering into partnerships or other arrangements for the development of the
reovirus technology, the Company is obligated to pay to the founding shareholders 11.75%
(formerly in 2003  14.25% and 2002  20%) of the royalty payments and other
payments received. Alternatively, if the Company develops the reovirus treatment to the
point where it may be marketed at a commercial level, the payments referred to in the
foregoing sentence will be amended to a royalty payment of 2.35% (formerly in 2003 
2.85% and 2002  4%) of Net Sales received by the Company for such products.

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

# 11.    SHARE CAPITAL

# Authorized:

Unlimited number of common shares

|Issued:                                                | Shares | Warrants  
|------------------------------------------------------ | ------ | ----------
|                                                      
|
|                                                      
|Balance, December 31, 1998                             |        | 2,145,300 
|                                                      
|Issued on exercise of stock options                    |        | 76,922    
|                                                      
|                                                       |        | 2,222,222 
|                                                      
|July 29, 1999 share split (a)                          |        | 6,750,000 
|Issued for cash pursuant to July 30, 1999 private      |       
|placement (net of share issue costs of $45,000) (b)    |        | 1,500,000 
|Issued for cash pursuant to August 24, 1999 private    |       
|placement                                              |        | 1,399,997 
|Issued on initial public offering (net of share issue  |       
|costs of $317,897) (c)                                 |        | 4,000,000 
|Issued for cash pursuant to exercise of share purchase |       
|warrants                                               |        | 20,000    
|                                                      
|Balance, December 31, 1999                             |        | 13,669,997
|                                                      
|Issued on exercise of stock options and warrants       |       
|                                                       |        | 573,910   
|Issued for cash pursuant to July 17, 2000 private      |       
|placement (d)                                          |        | 244,898   
|Issued on public offering (net of share issue costs of |       
|$998,900) (e)                                          |        | 3,000,000 
|                                                      
|Balance, December 31, 2000                             |        | 17,488,805
|                                                      
|Issued on exercise of stock options and warrants       |        | 1,702,590 
|                                                      
|Balance, December 31, 2001                             |        | 19,191,395
|                                                      
|Issued on exercise of stock options                    |        | 40,000    
|                                                      
|Issued on acquisition of the interest in Transition    |       
|Therapeutics Inc. [note 8]                             |        | 1,913,889 
|                                                      
|Issued for cash pursuant to December 11, 2002 private  |       
|placement (f)                                          |        | 1,000,000 
|                                                      
|Share issue costs                                      |        |          
|                                                      

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

|Issued:                                                   | Shares | Warrants  
|--------------------------------------------------------- | ------ | ----------
|                                                         
|
|                                                         
|Balance, December 31, 2002                                |        | 22,145,284
|                                                         
|Issued for cash pursuant to February 10, 2003 private     |       
|placement (g)                                             |        | 140,000   
|                                                         
|Issued for cash pursuant to June 19, 2003 private         |       
|placement (h)                                             |        | 2,120,000 
|                                                         
|Issued for cash pursuant to August 21, 2003 private       |       
|placement (i)                                             |        | 1,363,900 
|                                                         
|Issued for cash pursuant to October 14, 2003 public       |       
|offering (j)                                              |        | 1,200,000 
|                                                         
|Exercise of options                                       |        | 64,700    
|                                                         
|Exercise of warrants                                      |        | 174,378   
|                                                         
|Share issue costs                                         |        |          
|                                                         
|Balance, December 31, 2003                                |        | 27,208,262
|                                                         
|Issued for cash pursuant to April 7, 2004 private         |       
|placement(k)                                              |        | 1,077,100 
|                                                         
|Issued for cash pursuant to pursuant to November 23, 2004 |       
|public offering(l)                                        |        | 1,504,000 
|                                                         
|Issued pursuant to cancellation of contingent             |       
|payment [note 10]                                         |        | 21,459    
|                                                         
|Exercise of warrants                                      |        | 1,907,175 
|                                                         
|Expired warrants                                          |        |          
|                                                         
|Exercise of options                                       |        | 197,500   
|                                                         
|Share issue costs                                         |        |          
|                                                         
|Balance, December 31, 2004                                |        | 31,915,496
|                                                         
|Issued for cash pursuant to December 29, 2005 private     |       
|placement(m)                                              |        | 3,200,000 
|                                                         
|Exercise of warrants                                      |        | 771,252   
|                                                         
|Expired warrants                                          |        |          
|                                                         
|Exercise of options                                       |        | 350,000   
|                                                         
|Share issue costs                                         |        |          
|                                                         
|Balance, December 31, 2005                                |        | 36,236,748
|                                                         

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

|(a) |  | Pursuant
to subsection 167(1)(f) of the Business Corporations Act (Alberta), the
          Articles of the Company were amended by subdividing the 2,222,222 issued and
          outstanding common shares of the Company into 6,750,000 common shares.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Pursuant
to a private placement, 1,500,000 common share purchase warrants were           issued
entitling the holders thereof to acquire one additional share at $0.75           per
share until November 8, 2001. At December 31, 2001, all of the warrants
          had been exercised.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | Pursuant
to the initial public offering, the agent was issued common share           purchase
warrants entitling it to acquire 400,000 common shares at $0.85 per           share until
May 8, 2001. At December 31, 2001, all of the warrants had been           exercised.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) |  | Pursuant
to the private placement, 244,898 common shares were issued at an issue           price
of $12.25 per share net of issue costs of $1,355.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|(e) |  | Pursuant
to a special warrant offering, the Company sold 3,000,000 special           warrants for
$4.70 per warrant for net proceeds of $13,101,100. Each warrant           entitled the
holder to one common share upon exercise. At December 31, 2001, all           of the
warrants had been exercised.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) |  | Pursuant
to a private placement, 1,000,000 units were issued at an issue price           of $2.00
per unit net of issue costs of $241,123. Each unit included one common           share
(ascribed value of $1.897) and one-half of one common share purchase           warrant
(ascribed value of $0.103) for a total of 500,000 warrants. Each whole           common
share purchase warrant entitles the holder to acquire one common share in           the
capital of the Company upon payment of $3.00 per share until June 11, 2004.           In
addition, the Company issued 50,000 common share purchase warrants on the           same
terms to the brokerage firm assisting with the transaction. The ascribed           value
of these broker warrants was $11,000 ($0.22 per broker warrant) and has           been
included in the issue costs. The ascribed values of the warrants were based           on
the Black Scholes Option Pricing Model.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) |  | Pursuant
to a private placement, 140,000 units were issued at an issue price of           $2.00
per unit net of issue costs of $37,369. Each unit included one common           share
(ascribed value of $1.897) and one-half of one common share purchase           warrant
(ascribed value of $0.103) for a total of 70,000 warrants. Each whole           common
share purchase warrant entitles the holder to acquire one common share in           the
capital of the Company upon payment of $3.00 per share until August 10,           2004.
In addition, the Company issued 7,000 common share purchase warrants on           the
same terms to the brokerage firm assisting with the transaction. The           ascribed
value of these broker warrants was $1,540 ($0.22 per broker warrant)           and has
been included in the issue costs. The ascribed values of the warrants           were
based on the Black Scholes Option Pricing Model.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(h) |  | Pursuant
to a private placement, 2,120,000 units were issued at an issue price           of $3.00
per unit net of issue costs of $637,986. Each unit included one common           share
(ascribed value of $2.789) and one-half of one common share purchase           warrant
(ascribed value of $0.211) for a total of 1,060,000 warrants. Each whole           common
share purchase warrant entitles the holder to acquire one common share in           the
capital of the Company upon payment of $4.00 per share until December 19,           2004.
In addition, the Company issued 212,000 common share purchase warrants on           the
same terms to the brokerage firms assisting with the transaction. The           ascribed
value of these broker warrants was
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

| | $95,400
($0.45 per broker warrant) and has been included in the issue costs. The ascribed values
of the warrants were based on the Black Scholes Option Pricing Model.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(i) |  | Pursuant
to a private placement, 1,363,900 common shares and 681,943 common           share
purchase warrants were issued for gross proceeds of $4,091,738. Each           common
share and whole common share purchase warrant have ascribed values of           $2.787
and $0.425 respectively. Each common share purchase warrant entitles the           holder
to acquire one common share in the capital of the Company upon payment of           $4.00
per share until February 21, 2005. Share issue costs related to this           private
placement were $367,839. In addition, the Company issued 131,590 common           share
purchase warrants on the same terms to the advisors assisting with the
          transaction. The ascribed value of these additional warrants was $59,216 ($0.45
          per additional warrant) and has been included in the issue costs. The ascribed
          values of the warrants were based on the Black Scholes Option Pricing Model.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(j) |  | Pursuant
to a public offering, 1,200,000 units were issued at an issue price of           $5.00
per unit net of issue costs of $687,001. Each unit included one common           share
(ascribed value of $4.607) and one-half of one common share purchase           warrant
(ascribed value of $0.393) for a total of 600,000 warrants. Each whole           common
share purchase warrant entitles the holder to acquire one common share in           the
capital of the Company upon payment of $6.25 per share until April 14, 2005.           In
addition, the Company issued 120,000 common share purchase warrants with an
          exercise price of $5.00 that expires on April 14, 2005 to the brokerage firms
          assisting with the transaction. The ascribed value of these broker warrants was
          $146,400 ($1.19 per broker warrant) and has been included in the issue costs.
          The ascribed values of the warrants were based on the Black Scholes Option
          Pricing Model.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(k) |  | Pursuant
to a private placement, the Company sold 1,077,100 units at an average           price of
$6.25 per unit for gross cash proceeds of $6,731,875. The units were           comprised
of 1,077,100 common shares and 538,550 common share purchase warrants           and have
ascribed values of $5.50 and $1.50 respectively. Each common share           purchase
warrant entitles the holder to acquire one common share in the capital           of the
Company upon payment of $7.75 per share until October 7, 2005. Share           issue
costs related to the private placement were $728,918. In addition, the           Company
issued 107,710 common share purchase warrants to its advisor entitling           the
holder to acquire one common share of the capital of the Company upon           payment
of $7.00 per share until October 7, 2005. The ascribed value of these
          additional warrants was $220,806 ($2.05 per additional warrant) and has been
          included in the share issue costs above. The ascribed values of the warrants
          were based on the Black Scholes Option Pricing Model.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(l) |  | Pursuant
to a public offering, the Company sold 1,504,000 units at an issue           price of
$6.65 per unit for gross cash proceeds of $10,001,600. Each unit           included one
common share (ascribed value of $5.78) and one-half of one common           share
purchase warrant (ascribed value of $0.87) for a total of 752,000           warrants.
Each whole common share purchase warrant entitles the holder to           acquire one
common share in the capital of the Company upon payment of $8.00 per           share
until November 23, 2007. Share issue costs related to this public offering           were
$ 1,063,890. In addition, the Company issued 112,800 common share purchase
          warrants with an exercise price of $7.06 that expires on May 23, 2006 to the
          brokerage firm assisting with the transaction. The ascribed value of these
          broker warrants was $213,192 ($1.89 per broker warrant) and has been included
in           the share issue costs above. The ascribed values of the warrants were based
on           the Black Scholes Option Pricing Model.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

|(m) |  | Pursuant
to a private placement, 3,200,000 units were issued at an issue price           of $5.15
per unit net of issue costs of $1,689,398. Each unit included one           common share
(ascribed value of $4.43) and one-half of one common share purchase           warrant
(ascribed value of $0.72) for a total of 1,600,000 warrants. Each whole           common
share purchase warrant entitles the holder to acquire one common share in           the
capital of the Company upon payment of $6.15 per share until December 29,           2008.
In addition, the Company issued 320,000 common share purchase warrants           with an
exercise price of $5.65 expiring on December 29, 2008. The ascribed           value of
these broker warrants was $604,800 ($1.89 per broker warrant) and has           been
included in the issue costs. The ascribed values of the warrants were based           on
the Black Scholes Option Pricing Model.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table summarizes the
Companys outstanding warrants as at December 31, 2005:

|Exercise
Price | Outstanding,
Beginning of
the Year | Granted
During the
Year | Exercised
During the
Year | Expired
During the
Year | Outstanding,
End of Year | Weighted
Average
Remaining
Contractual
Life (years)
|-------------- | ---------------------------------- | ----------------------- | ------------------------- | ----------------------- | ------------------------ | ---------------------------------------------------
|              
|$     4        | .00                                | 768,972                 |                           |                        |                          | 768,972                                            
|$     5        | .00                                | 45,558                  |                           |                        |                          | 2,280                                              
|$     5        | .65                                |                        |                           | 320,000                 |                          |                                                   
|$     6        | .15                                |                        |                           | 1,600,000               |                          |                                                   
|$     6        | .25                                | 529,750                 |                           |                        |                          |                                                   
|$     7        | .00                                | 107,710                 |                           |                        |                          |                                                   
|$     7        | .06                                | 112,800                 |                           |                        |                          |                                                   
|$     7        | .75                                | 538,550                 |                           |                        |                          |                                                   
|$     8        | .00                                | 752,000                 |                           |                        |                          |                                                   
|              
|               |                                    | 2,855,340               |                           | 1,920,000               |                          | 771,252                                            
|              

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

# 12.    STOCK BASED
COMPENSATION

# Stock Option Plan

The Company has issued stock options
to acquire common stock through its stock option plan of which the following are
outstanding at December 31:

|                                   | 2005 | 2004     
|---------------------------------- | ---- | ---------
|                                  
|
|                                  
|Outstanding at beginning of year   |      | 3,805,550
|Granted during year                |      | 200,000  
|Cancelled during year              |      | (21,000  
|Exercised during year              |      | (350,000 
|                                   |      |          
|Outstanding at end of year         |      | 3,634,550
|                                   |      |          
|Options exercisable at end of year |      | 3,387,050
|                                   |      |          

The following table summarizes
information about the stock options outstanding and exercisable at December 31, 2005:

|Range of
Exercise Price | Number
Outstanding | Weighted
Average
Remaining
Contractual
Life (years) | Weighted
Average
Exercise
Price
$ | Number
Exercisable | Weighted
Average
Exercise
Price
$
|----------------------- | ------------------ | --------------------------------------------------- | --------------------------------- | ------------------ | ---------------------------------
|                       
|$0.75 - $1.00           |                    | 632,550                                             |                                   | 3.8                |                                  
|$1.65 - $2.37           |                    | 281,000                                             |                                   | 6.9                |                                  
|$2.70 - $3.33           |                    | 678,750                                             |                                   | 7.9                |                                  
|$4.00 - $5.00           |                    | 1,190,750                                           |                                   | 8.7                |                                  
|$6.77 - $9.76           |                    | 708,500                                             |                                   | 6.2                |                                  
|$12.15 - $13.50         |                    | 143,000                                             |                                   | 4.8                |                                  
|                       
|                        |                    | 3,634,550                                           |                                   | 6.4                |                                  
|                       

The outstanding options vest annually
or after the completion of certain milestones. The Company has reserved 3,662,461 common
shares for issuance relating to outstanding stock options.

As the Company is following the fair
value based method of accounting for stock option awards, compensation expense related to
options granted to employees and consultants was $43,886 (2004  $2,537,088; 2003
 $812,711) and $20,218 (2004  $131,482; 2003  $102,466) respectively
with an offsetting credit to contributed surplus.

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

The estimated fair value of stock
options issued during the year was determined using the Black-Scholes model using the
following weighted average assumptions and fair value of options:

|                                                | 2005 | 2004      | 2003
|----------------------------------------------- | ---- | --------- | ----
|                                               
|Risk-free interest rate                         |      | 3.27%     |     
|Expected hold period to exercise                |      | 3.5 years |     
|Volatility in the price of the Company's shares |      | 64%       |     
|Dividend yield                                  |      | Zero      |     
|Weighted average fair value of options          |      | $  1.51   |     
|                                               

In 2002, the Company granted 48,000
share incentive rights to a non-employee which, when exercised by the holder, would
require payment in cash or shares, at the sole option of the Company for amounts in excess
of $2.31 based on the weighted average trading price for the ten trading days prior to the
exercise. The Company accounted for this transaction with a non-employee at fair value
determined using the Black-Scholes model. The related compensation expense recorded in
2003 was $81,530, with an offsetting credit to contributed surplus. During 2005, these
share incentive rights were surrendered. In accordance with generally accepted accounting
principles, no credit to expense was recorded as a result of the surrender.

# 13.    CONTRIBUTED SURPLUS

The following table summarizes the
change in contributed surplus for the period ending December 31:

|                           | 2005 | 2004     
|-------------------------- | ---- | ---------
|                          
|Balance, beginning of year |      | 6,349,139
|                          
|Stock based compensation   |      | 64,104   
|                          
|Exercise of stock options  |      |         
|                          
|Balance end of year        |      | 6,413,243
|                          

# 14.    LOSS PER COMMON SHARE

Loss per common share is calculated
using the weighted average number of common shares outstanding for the year ended December
31, 2005 of 32,804,540 (2004  29,028,391; 2003  24,242,845). The effect of any
potential exercise of the Companys stock options and warrants outstanding during the
year has been excluded from the calculation of diluted earnings per share, as it would be
anti-dilutive.

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

# 15.    INCOME TAXES

The provision for income taxes
recorded in the financial statements differs from the amount which would be obtained by
applying the statutory income tax rate to the loss before tax as follows:

|                                                      | 2005
$ | 2004
$      | 2003
$
|----------------------------------------------------- | ------ | ----------- | ------
|                                                     
|Loss before taxes                                     |        | (12,783,356 | )     
|Statutory Canadian corporate tax rate                 |        | 33.60       | %     
|Anticipated tax recovery                              |        | (4,295,208  | )     
|Non-taxable portion of net capital loss (gain)        |        | (129        | )     
|Employee stock based compensation                     |        | 21,539      |       
|Cancellation of contingent payment obligation settled |       
|in common shares                                      |        |            |       
|Change in tax rate                                    |        | 102,309     |       
|Tax return adjustment                                 |        | 78,995      |       
|Non-deductible expenses                               |        | 8,113       |       
|Change in valuation allowance (a)                     |        | 4,084,381   |       
|                                                     
|Future income tax recovery                            |        |            |       
|                                                     

|(a) |  | As
of December 31, 2005, the Company has non-capital losses for income tax
          purposes of approximately $34,176,000, which are available for application
          against future taxable income and expire in 2006 ($663,000) 2007 ($1,033,000),
          2008 ($2,898,000), 2009 ($4,483,000), 2010 ($4,483,000), 2014 ($9,075,000) and
          2015 ($11,541,000) . In addition to the loss carry forward amounts above, the
          Company has scientific research and development claims and related investment
          tax credits of approximately $8,170,000 and $1,997,000 respectively as at
          December 31, 2005 which are available for application against future taxable
          income. The potential benefits resulting from these tax pools have been
          recognized in the financial statements only to the extent they are more likely
          than not of being realized.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The components of the Companys
future income tax asset are as follows:

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

|                                                                          | 2005
$ | 2004
$     
|------------------------------------------------------------------------- | ------ | -----------
|                                                                         
|Non-capital loss carryforwards                                            |        | 11,483,387 
|Scientific research and development                                       |        | 2,745,133  
|Investment tax credits                                                    |        | 1,997,300  
|Net capital loss carryforwards                                            |        | 283,822    
|Undepreciated capital costs in excess of book value of capital assets and |       
|intellectual property                                                     |        | 325,377    
|Share issue costs                                                         |        | 772,133    
|Valuation allowance                                                       |        | (17,607,152
|                                                                         
|Future tax asset                                                          |        |           
|                                                                         

# 16.    INDEMNIFICATION OF
OFFICERS AND DIRECTORS

The Companys corporate by-laws
require that, except to the extent expressly prohibited by law, the Company will indemnify
its officers and directors against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment reasonably incurred in respect of any
civil, criminal or administrative action or proceeding as it relates to their services to
the Company. The by-laws provide no limit to the amount of the indemnification. The
Company has purchased directors and officers insurance coverage to cover
claims made against the directors and officers during the applicable policy periods. The
amounts and types of coverage have varied from period to period as dictated by market
conditions. The Company believes that it has adequate insurance coverage; however there is
no guarantee that all indemnification payments will be covered under the Companys
existing insurance policies.

There is no pending litigation or
proceeding involving any officer or director of the Company as to which indemnification is
being sought, nor is the Company aware of any threatened litigation that may result in
claims for indemnification.

# 17.    FINANCIAL INSTRUMENTS

Financial instruments of the Company
consist of cash and cash equivalents, short term investments, accounts receivable,
investments, accounts payable, and the Alberta Heritage Foundation loan. As at December
31, 2005, there are no significant differences between the carrying values of these
amounts and their estimated market values.

Credit risk
The Company is exposed to credit risk
on its short-term investments in the event of non-performance by counterparties, but does
not anticipate such non-performance. The Company mitigates its exposure to credit risk by
restricting its portfolio to investment grade securities with short term maturities and by
monitoring the credit risk and credit standing of counterparties.

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

Interest rate risk
The Company has exposure to interest
income risk through its short-term investments in fixed-income securities that are
sensitive to interest rate fluctuations.

Foreign exchange risk
The Company purchases goods and
services denominated primarily in Canadian, U.S. and UK currencies. To manage its foreign
exchange risk, the Company, from time to time, acquires short-term investments denominated
in these securities.

# 18.    ECONOMIC DEPENDENCE

The Company contracts the production
and currently receives its supplies of REOLYSIN® from one toll manufacturer based in
the United Kingdom. There are a limited number of potential producers and suppliers of
REOLYSIN®. As a result, any significant disruption of the services provided by this
toll manufacturer has the potential to delay the progress of the Companys clinical
trial program. Management is aware of and is taking actions to minimize this exposure.

# 19.    ADDITIONAL CASH FLOW
DISCLOSURE

# Net Change In Non-Cash
Working Capital

|                                                | 2005
$ | 2004
$   | 2003
$ | Cumulative from     
 inception on       
   April 2,         
   1998 to          
  December 31, 2005
|----------------------------------------------- | ------ | -------- | ------ | -------------------------------------------------------------------------------------------------------
|                                               
|Change in:                                      |        |          |        |                                                                                                        
|Accounts receivable                             |        | 377      |        | 16,457                                                                                                 
|Prepaid expenses                                |        | (290,003 | )      | (93,528                                                                                                
|Accounts payable and accrued liabilities        |        | 743,223  |        | 64,330                                                                                                 
|                                               
|Change in non-cash working capital              |        | 453,597  |        | (12,741                                                                                                
|Net change associated with investing activities |        | 131,169  |        | (56,324                                                                                                
|                                               
|Net change associated with operating activities |        | 584,766  |        | (69,065                                                                                                
|                                               

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

Other Non-Cash Items

|                                              | 2005
$ | 2004
$  | 2003
$ | Cumulative from     
 inception on       
   April 2,         
   1998 to          
  December 31, 2005
|--------------------------------------------- | ------ | ------- | ------ | -------------------------------------------------------------------------------------------------------
|                                             
|Foreign exchange loss                         |        | 159,204 |        | 264,080                                                                                                
|Donation of medical equipment [note 4]        |        | 66,069  |        |                                                                                                       
|Gain on sale of BCY LifeSciences Inc.         |        | (765    | )      | (34,185                                                                                                
|Cancellation of contingent payment obligation |       
|settled in common shares [note 10]            |        |        |        | 150,000                                                                                                
|Future income tax recovery                    |        |        |        |                                                                                                       
|                                             
|                                              |        | 224,508 |        | 379,895                                                                                                
|                                             

# 20.    RECONCILIATION OF
CANADIAN GAAP TO US GAAP

The financial statements of the
Company are prepared in accordance with Canadian GAAP which, in most respects, conforms to
US GAAP. Significant differences between Canadian and US GAAP are as follows:

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

|                                  |  | Year Ended December 31 | Cumulative from   
 inception on April 2,
 1998 to December 
31,  2005
|--------------------------------- |  | ---------------------- | ----------------------------------------------------------------------
|
|                                 
|Net loss - Canadian GAAP          |  |                        |                                                                       
|Amortization of intellectual      | 
|property                          |  | (1                     | )                                                                     
|Future income tax recovery        |  | (1                     | )                                                                     
|                                 
|Net loss - US GAAP                |  |                        |                                                                       
|                                 
|Unrealized loss (gain) on         | 
|available-for-sale securities     |  | (2                     | )                                                                     
|                                 
|Reclassification of unrealized    | 
|gain (loss) on available-for-sale | 
|securities                        |  | (2                     | )                                                                     
|                                 
|Comprehensive loss - US GAAP      |  |                        |                                                                       
|                                 
|Basic and diluted loss per common | 
|share - US GAAP                   |  |                        |                                                                       
|                                 

There are no differences between
Canadian GAAP and US GAAP in amounts reported as cash flows from (used in) operating,
financing and investing activities.

Balance sheet items in accordance
with US GAAP are as follows:

|                                  |  | December 31, 2005 | December 31, 2004
|--------------------------------- |  | ----------------- | -----------------
|                                 
|
|                                 
|Intellectual property             |  | (1                | )                
|Investments                       |  | (2                | )                
|Future income taxes               |  | (1                | )                
|Contributed surplus               |  | (1                | )                
|Deficit                           |  | (1                | )                
|Other comprehensive loss (income) |  | (2                | )                
|                                 

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

|1. |  | Push-DownAccounting
and In Process Research and Development
|-- |  | -------------------------------------------------------------

| | Intellectual
property of $2,500,000 recorded as a consequence of SYNSORBs acquisition of the
Companys shares comprises intangible assets related to research and development
activities. Under US GAAP, this would not be capitalized on acquisition.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of removing the $2,500,000 from intellectual property in 1999 for US GAAP
purposes, the amortization of the intellectual property, the future income tax recovery,
future income tax liability and contributed surplus amounts recorded for Canadian GAAP
purposes have been reversed.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | Unrealized
Gains and Losses on Investments
|-- |  | ------------------------------------------

| | Under
U.S. GAAP, equity securities, having a readily determinable fair value and not classified
as trading securities, are classified as available-for-sale securities and
reported at fair value, with unrealized gains and losses included in comprehensive income
or loss and reported as a separate component of shareholders equity net of related
deferred income taxes. Declines in the fair value of individual available-for-sale
securities below their cost that are other than temporary result in write-downs of the
individual securities to their fair value. The related write-downs are included in
earnings as realized losses. Under Canadian GAAP, these securities are carried at cost and
written down only when there is evidence that a decline in value that is other than
temporary has occurred.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Stock Based Employee
Compensation

On January 1, 2003, the Company
prospectively adopted the fair value based method for its employee options (see note 3).
Consequently there were no differences between Canadian GAAP and U.S. GAAP with respect to
options granted subsequent to this date.

In 2002, the Company applied the
intrinsic value method for employee stock options and the fair value method for
non-employee options granted after January 1, 2002. Prior to January 1, 2002, for US GAAP,
the Company applied the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees and related
interpretations in accounting for its employee stock option plans. As well, the Company
provided pro forma disclosure as required by FAS 123 for those options granted prior to
January 1, 2002.

The following additional pro-forma
disclosure would be provided under US GAAP with respect to the fair value of employee
options granted prior to January 1, 2002. The fair value for these options granted was
estimated at the date of grant using a Black-Scholes Option Pricing Model with the
following weighted-average assumptions:

|                                              | 2001
|--------------------------------------------- | ----
|                                             
|Risk free interest rate                       |     
|Dividend yield                                |     
|Volatility factors of expected market price   |     
|Weighted average expected life of the options |     
|                                             

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

Pro forma disclosures of loss and
loss per common share are presented below as if the Company had adopted the cost
recognition requirements under FAS 123 from inception.

|                           |  | 2005
$                | 2004
$ | 2003
$    
|-------------------------- |  | --------------------- | ------ | ----------
|                          
|                           |  | Pro forma - Canadian  |        |           
|Net Loss                   |  | GAAP                  |        | 12,782,814
|                          
|                           |  | As reported - US GAAP |        | 12,420,331
|                           |  | Pro forma - US GAAP   |        | 12,421,314
|                          
|                          
|Basic and diluted net loss |  | Pro forma - Canadian  |       
|per common share           |  | GAAP ($/share)        |        | (0.39     
|                          
|                           |  | As reported - US GAAP |        | (0.38     
|                           |  | Pro forma - US GAAP   |       
|                           |  | ($/share)             |        | (0.38     
|                          

# Additional Stock Based
Payment Disclosure

As at December 31, 2005, the
aggregate intrinsic value of the stock options outstanding and the stock options
exercisable were $5,595,845 and $5,058,570, respectively. The total intrinsic value of the
options exercised in 2005 was $1,223,400 (2004  1,253,014; and 2003  195,715).

A summary of the Companys
non-vested shares as of December 31, 2005 and changes during the year ended December 31,
2005 is as follows:

|                                | 2005
|------------------------------- | ----
|                               
|
|                               
|Non-vested at beginning of year |     
|Granted during year             |     
|Vested during year              |     
|Forfeited during year           |     
|                                |     
|Non-vested at end of year       |     
|                                |     

As of December 31, 2005, there was
$335,750 of total unrecognized compensation costs related to non-vested stock options
granted under the Companys stock option plan. This cost is expected to be recognized
over a weighted average period of 2.12 years. The total fair value of shares vested during
the years ended December 31, 2005, 2004 and 2003 was $59,630, $8,250 and $nil,
respectively.

The Company issues shares from
treasury to satisfy any exercises of stock options.

---

# Oncolytics Biotech Inc.

# NOTES TO FINANCIAL
STATEMENTS

December 31, 2005 and 2004

# 21.    COMPARATIVE FIGURES

Certain comparative figures have been
reclassified to conform with the current years presentation.

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