Novelion Therapeutics (NVLN) 10-Q 2007 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-17082

QLT INC.

(Exact name of registrant as specified in its charter)

British Columbia, Canada	N/A
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
887 Great Northern Way, Vancouver, B.C., Canada	V5T 4T5
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code:(604) 707-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filerþ      Accelerated filero      Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

As of November 6, 2007, the registrant had 74,620,328 outstanding Common Shares and 5,783,785 outstanding Stock Options.

QLT INC.

QUARTERLY REPORT ON FORM 10-Q
September 30, 2007

TABLE OF CONTENTS

ITEM	PAGE
PART I — FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS	1
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006	1
Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2007 and September 30, 2006	2
Unaudited Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2007 and September 30, 2006	3
Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Income for the three and nine months ended September 30, 2007	4
Notes to Unaudited Condensed Consolidated Financial Statements	6
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	30
4. CONTROLS AND PROCEDURES	30
PART II — OTHER INFORMATION
1. LEGAL PROCEEDINGS	31
1A. RISK FACTORS	31
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	31
6. EXHIBITS	31

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

QLT Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands of U.S. dollars)	September 30, 2007			December 31, 2006
ASSETS
Current assets
Cash and cash equivalents	$	172,175		$	299,053
Short-term investment securities		—			75,163
Restricted cash (Note 14)		122,037			3,916
Accounts receivable		24,954			38,872
Income taxes receivable		7,291			4,049
Inventories (Note 3)		15,601			34,268
Current portion of deferred income tax assets		57,686			8,657
Other (Note 4)		17,100			14,031
		416,844			478,009
Property, plant and equipment		54,610			50,497
Deferred income tax assets		7,391			9,838
Goodwill		93,923			98,641
Long-term inventories and other assets (Note 5)		24,299			2,121
	$	597,067		$	639,106
LIABILITIES
Current liabilities
Accounts payable	$	9,543		$	15,255
Income taxes payable		9			29
Accrued restructuring charge (Note 9)		300			2,383
Accrued liabilities (Note 6)		118,932			125,805
Current portion of long-term debt (Note 7)		172,500			—
Deferred revenue		13,508			11,508
Deferred income tax liabilities		11,496			—
		326,288			154,980
Deferred income tax liabilities		66			5,483
Uncertain tax position liabilities (Note 2)		2,008			—
Deferred revenue		3,306			2,929
Long-term debt (Note 7)		—			172,500
		331,668			335,892
CONTINGENCIES (Note 14)
SHAREHOLDERS’ EQUITY
Share capital (Note 10)
Authorized
500,000,000 common shares without par value
5,000,000 first preference shares without par value, issuable in series
Issued and outstanding
Common shares		702,221			708,206
September 30, 2007 — 74,620,328 shares
December 31, 2006 — 75,188,980 shares
Additional paid in-capital		118,811			114,724
Accumulated deficit		(667,907	)		(603,251	)
Accumulated other comprehensive income		112,274			83,535
		265,399			303,214
	$	597,067		$	639,106

1

QLT Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
(In thousands of U.S. dollars except share and per share information)	2007			2006			2007			2006
Revenues
Net product revenue (Note 11)	$	20,774		$	31,609		$	73,770		$	119,828
Net royalties		7,517			6,118			21,931			14,948
Contract research and development		—			275			299			946
Licensing and milestones		367			244			1,020			732
		28,658			38,246			97,020			136,454
Costs and expenses
Cost of sales		9,912			10,466			30,873			32,198
Accrued cost of sales re: MEEI (Note 14)		1,461			—			1,461			—
Research and development		10,718			13,564			32,876			43,704
Selling, general and administrative		7,087			10,040			19,488			27,614
Depreciation		1,632			1,622			4,795			4,727
Litigation (Note 14)		265			—			110,162			—
Restructuring charge (recovery) (Note 9)		177			4			1,035			(190	)
		31,252			35,696			200,690			108,053
Operating (loss) income		(2,594	)		2,550			(103,670	)		28,401
Investment and other income (expense)
Net foreign exchange gains (losses)		(863	)		581			(1,285	)		(2,886	)
Interest income		3,818			5,492			11,163			15,327
Interest expense		(2,735	)		(1,636	)		(5,965	)		(4,854	)
Other		3,161			979			4,429			2,771
		3,381			5,416			8,342			10,358
Income (loss) from continuing operations before income taxes		787			7,966			(95,328	)		38,759
(Provision) recovery for income taxes		(176	)		(1,771	)		32,313			(11,669	)
Income (loss) from continuing operations		611			6,195			(63,015	)		27,090
Loss from discontinued operations, net of income taxes (Note 12)		(265	)		(9,941	)		(436	)		(11,219	)
Net income (loss)	$	346		$	(3,746	)	$	(63,451	)	$	15,871
Basic net income (loss) per common share
Continuing operations	$	0.01		$	0.07		$	(0.84	)	$	0.31
Discontinued operations		(0.00	)		(0.12	)		(0.01	)		(0.13	)
Net income (loss)	$	0.00		$	(0.04	)	$	(0.85	)	$	0.18
Diluted net income (loss) per common share
Continuing operations	$	0.01		$	0.07		$	(0.84	)	$	0.31
Discontinued operations		(0.00	)		(0.12	)		(0.01	)		(0.13	)
Net income (loss)	$	0.00		$	(0.04	)	$	(0.85	)	$	0.18
Weighted average number of common shares outstanding (thousands)
Basic		74,618			83,831			75,003			87,734
Diluted		74,624			83,831			75,003			87,785

2

QLT Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
(In thousands of U.S. dollars)	2007			2006			2007			2006
Cash flows (used in) provided by operating activities
Net income	$	346		$	(3,746	)	$	(63,451	)	$	15,871
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization of intangibles		1,697			1,768			4,927			5,516
Write down of investments		—			—			—			432
Write down of inventory		—			1,761			—			1,761
Write down of fixed assets		—			6,664			355			6,664
Share based compensation		939			1,033			2,560			3,141
Impairment of goodwill and other intangibles		—			1,928			—			1,928
Amortization of deferred financing expenses		330			308			938			915
Unrealized foreign exchange (gain) loss		(7,162	)		867			(14,539	)		(8,767	)
Tax loss utilization		2,166			—			4,718			—
Deferred income taxes (recovery)		356			(890	)		(34,851	)		(5,303	)
(Gain) loss on sale of asset		(2,990	)		4			(3,990	)		23
Trading securities		—			—			52,433			—
Litigation		265			—			110,162			—
Accrued cost of sales re: MEEI		1,461			—			1,461			—
Interest earned on restricted cash		(1,010	)		(20	)		(1,036	)		(20	)
Changes in non-cash operating assets and liabilities
Appeal bond collateral		(118,781	)		—			(118,781	)		—
Accounts receivable		5,382			8,793			15,945			13,048
Inventories		1,225			2,517			(53	)		10,167
Other current assets		3,613			1,149			758			3,663
Accounts payable		(2,175	)		1,202			(4,773	)		(4,282	)
Income taxes payable		(2,583	)		(6,486	)		(2,512	)		(24,450	)
Accrued restructuring charge		(562	)		(343	)		(2,157	)		(4,014	)
Other accrued liabilities		(1,546	)		(5,301	)		(119,229	)		(9,750	)
Deferred revenue		(627	)		466			693			1,011
		(119,656	)		11,674			(170,422	)		7,554
Cash provided by (used in) investing activities
Short-term investment securities		6,068			54,574			22,503			(18,940	)
Restricted cash		—			—			1,689			(1,675	)
Proceeds on sale of asset		3,000			—			4,000			13
Purchase of property, plant and equipment		(322	)		(1,254	)		(1,901	)		(4,848	)
Other acquisition related costs		(509	)		—			(524	)		(14	)
		8,237			55,320			25,767			(25,464	)
Cash provided by (used in) financing activities
Common shares repurchased, net of fees		(16	)		(104,250	)		(5,878	)		(127,812	)
Issuance of common shares		19			92			1,258			691
		3			(104,158	)		(4,620	)		(127,121	)
Effect of exchange rate changes on cash and cash equivalents		6,828			(419	)		22,397			9,505
Net decrease in cash and cash equivalents		(104,588	)		(37,583	)		(126,878	)		(135,526	)
Cash and cash equivalents, beginning of period		276,763			247,858			299,053			345,801
Cash and cash equivalents, end of period	$	172,175		$	210,275		$	172,175		$	210,275
Supplementary cash flow information:
Interest paid	$	2,775		$	2,729		$	5,663		$	5,603
Income taxes paid		148			8,095			148			40,306

3

QLT Inc.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

										Accumulated
							Additional			Other									Total
	Common Shares						Paid-in			Comprehensive			Accumulated			Comprehensive			Shareholders’
	Shares			Amount			Capital			Income (Loss)			Deficit			Income (Loss)			Equity
(All amounts except share and per share information are expressed in thousands of U.S. dollars)
Balance at December 31, 2005		91,184,681		$	861,676		$	66,565		$	99,515		$	(501,645	)		—		$	526,111
Exercise of stock options at prices ranging from CAD $7.79 to CAD $9.22 per share and U.S. $2.89 - U.S. $8.64 per share		127,299			2,387			(1,574	)		—			—			—			813
Stock-based compensation		—			—			4,586			—			—			—			4,586
Common share repurchase		(16,123,000	)		(155,857	)		45,147			—			—			—			(110,710	)
Other comprehensive income (loss):
Cumulative translation adjustment from application of U.S. dollar reporting		—			—			—			(16,187	)		—		$	(16,187	)		(16,187	)
Unrealized gain on available for sale securities		—			—			—			207			—			207			207
Net Income (loss)		—			—			—			—			(101,605	)		(101,605	)		(101,605	)
Comprehensive loss		—			—			—			—			—			(117,585	)		—
Balance at December 31, 2006		75,188,980		$	708,206		$	114,724		$	83,535	(1)	$	(603,251	)		—		$	303,214
Adjustment for the adoption of FASB Interpretation No. 48														(1,199	)					(1,199	)
Exercise of stock options at prices ranging from CAD $7.79 to CAD $9.84 per share and U.S. $2.89 - U.S. $9.29 per share		125,417			1,840			(921	)		—			—			—			919
Stock-based compensation		—			—			979			—			—			—			979
Other comprehensive income (loss):
Cumulative translation adjustment from application of U.S. dollar reporting		—			—			—			2,013			—		$	2,013			2,013
Unrealized gain on available for sale securities		—			—			—			22			—			22			22
Net Income		—			—			—			—			4,863			4,863			4,863
Comprehensive income		—			—			—			—			—			6,898			—
Balance at March 31, 2007		75,314,397		$	710,046		$	114,782		$	85,570		$	(599,587	)		—		$	310,811
Exercise of stock options at CAD $7.79 and prices ranging from U.S. $5.13 - U.S. $7.27 per share		52,296			684			(364	)		—			—			—			320
Stock-based compensation		—			—			806			—			—			—			806
Common share repurchase		(750,000	)		(8,582	)		2,718			—			—			—			(5,864	)
Other comprehensive income (loss):
Cumulative translation adjustment from application of U.S. dollar reporting		—			—			—			16,745			—		$	16,745			16,745
Unrealized gain on available for sale securities		—			—			—			(14	)		—			(14	)		(14	)

4

								Accumulated
					Additional			Other								Total
	Common Shares				Paid-in			Comprehensive		Accumulated			Comprehensive			Shareholders’
	Shares		Amount		Capital			Income (Loss)		Deficit			Income (Loss)			Equity
(All amounts except share and per share information are expressed in thousands of U.S. dollars)
Net Income (loss)		—		—		—			—		(68,667	)		(68,667	)		(68,667	)
Comprehensive income		—		—		—			—		—			(51,936	)		—
Balance at June 30, 2007		74,616,693		702,148		117,942			102,301		(668,253	)		—			254,138
Exercise of stock options at prices ranging from U.S. $5.29 - - U.S. $5.39 per share		3,635		73		(54	)		—		—			—			19
Stock-based compensation		—		—		939			—		—			—			939
Common share repurchase costs		—		—		(16	)		—		—			—			(16	)
Other comprehensive income (loss):
Cumulative translation adjustment from application of U.S. dollar reporting		—		—		—			9,966		—		$	9,966			9,966
Unrealized gain on available for sale securities		—		—		—			7		—			7			7
Net Income		—		—		—			—		346			346			346
Comprehensive income		—		—		—			—		—			10,319			—
Balance at September 30, 2007		74,620,328		702,221		118,811			112,274		(667,907	)		—			265,399

5

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

We are a global biopharmaceutical company dedicated to the discovery, development and commercialization of innovative therapies. Our research and development efforts are focused on the discovery and development of pharmaceutical products in the fields of ophthalmology and dermatology. In addition, we utilize our two unique technology platforms, photodynamic therapy and Atrigel^®, to create products such as Visudyne^® and Eligard^®. All references to “QLT”, the “Company”, “we” or “us” include QLT Inc., QLT USA, Inc. (“QLT USA”) and our other subsidiaries.

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and pursuant to the rules and regulations of the United States Securities and Exchange Commission for the presentation of interim financial information. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed, or omitted, pursuant to such rules and regulations. These financial statements do not include all disclosures required for annual financial statements and should be read in conjunction with our audited consolidated financial statements and notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2006. All amounts are expressed in United States dollars unless otherwise noted.

In December 2006, we completed the sale of certain non-core assets, principally the generic dermatology business, dental business and the related manufacturing facility owned by QLT USA in Fort Collins, Colorado. In accordance with SFAS No. 144Accounting for the Impairment or Disposal of Long-lived Assets, the results of operations of the generic dermatology and dental businesses for the prior period have been reported as discontinued operations. (See Note 12 — “Discontinued Operations”.)

In the opinion of management, the condensed consolidated financial statements reflect all adjustments (including reclassifications and normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2007, and for all periods presented. The interim results presented are not necessarily indicative of results that can be expected for a full year.

Principles of Consolidation

These condensed consolidated financial statements include the accounts of QLT Inc. and its subsidiaries, all of which are wholly owned. The principal subsidiaries included in our condensed consolidated financial statements are QLT USA and QLT Therapeutics, Inc., both of which are incorporated in the state of Delaware in the United States of America. All intercompany transactions have been eliminated.

Use of Estimates

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, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods presented. Significant estimates are used for, but not limited to, litigation contingencies, provisions for non-completion of inventory, provision for obsolete inventory, classification of inventory between current and non-current, allowance for doubtful accounts, assessment of the recoverability of long-lived assets, assessment of impairment of goodwill, accruals for contract manufacturing and research and development agreements, accruals for compensation expenses, allocation of costs to manufacturing under a standard costing system, allocation of overhead expenses to research and development, determination of fair value of assets and liabilities acquired in purchase business combinations, stock-based compensation, provisions for taxes, determination of uncertain tax positions and contingencies. Actual results may differ from estimates made by management.

Reporting Currency and Foreign Currency Translation

We use the U.S. dollar as our reporting currency, while the Canadian dollar is the functional currency for QLT Inc. and the U.S. dollar is the functional currency for our U.S. subsidiaries. Our condensed consolidated financial statements are translated into U.S. dollars using the current rate method. Assets and liabilities are translated at the rate of exchange prevailing at the balance sheet date. Shareholders’ equity is translated at the applicable historical rates. Revenues and expenses are translated at a weighted average rate of exchange for the respective years. Translation gains and losses from the application of the U.S. dollar as the reporting currency are included as part of the cumulative

6

foreign currency translation adjustment, which is reported as a component of shareholders’ equity under accumulated other comprehensive income (loss).

Segmented Information

We operate in one industry segment, which is the business of developing, manufacturing, and commercializing therapeutics for human health care. Our chief operating decision makers review our operating results on an aggregate basis and manage our operations as a single operating segment.

Inventories

Raw materials and supplies inventories are carried at the lower of actual cost and net realizable value. Finished goods and work-in-process inventories are carried at the lower of weighted average cost and net realizable value. We record a provision for non-completion of product inventory to provide for potential failure of inventory batches in production to pass quality inspection. The provision is calculated at each stage of the manufacturing process. We estimate our non-completion rate based on past production and adjust our provision quarterly based on actual production volume and actual non-completion experience. Inventory that is obsolete or expired is written down to its market value if lower than cost. We classify inventories that we do not expect to convert or consume in the next year as non-current based upon an analysis of market conditions such as sales trends, sales forecasts, sales price, and other factors.

Long-lived Assets

We incur costs to purchase and occasionally construct property, plant and equipment. The treatment of costs to purchase or construct these assets depends on the nature of the costs and the stage of construction. Costs incurred in the initial design and evaluation phase, such as the cost of performing feasibility studies and evaluating alternatives, are charged to expense. Costs incurred in the committed project planning and design phase, and in the construction and installation phase, are capitalized as part of the cost of the asset. We stop capitalizing costs when an asset is substantially completed and ready for its intended use. We depreciate plant and equipment using the straight-line method over their estimated economic lives, which range from 3-40 years. Determining the economic lives of plant and equipment requires us to make significant judgments that can materially impact our operating results.

We periodically evaluate our long-lived assets for potential impairment under SFAS 144,Accounting for the Impairment or Disposal of Long-lived Assets.We perform these evaluations whenever events or changes in circumstances suggest that the carrying amount of an asset or group of assets is not recoverable. If impairment recognition criteria in SFAS 144 have been met, we charge impairments of the long-lived assets to operations.

Goodwill Impairment

In accordance with Statement of Financial Accounting Standard, or SFAS 142,Goodwill and Other Intangibles, we are required to perform impairment tests annually or whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. We make assumptions and estimates regarding product development, market conditions and cash flows in determining the valuation of goodwill and intangibles, all of which related to our acquisition of Atrix Laboratories, Inc. (now QLT USA). During the quarter ended September 30, 2007, we performed our annual impairment test, and did not identify any potential impairment as the fair value of our reporting unit exceeded its carrying value. Impairment tests may be required in future periods before our next annual test as a result of changes in forecasts and estimates, and may result in impairment charges which could materially impact our future reported results.

Contingencies

We are involved in a number of legal proceedings, the outcomes of which are not within our complete control and may not be known for prolonged periods of time. In these legal proceedings, the claimants seek damages, as well as other relief, which, if granted, could require significant expenditures. We record a liability in the consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the loss is not probable or cannot reasonably be estimated, no liability is recorded in the consolidated financial statements.

On July 10, 2007, the United States District Court (the “Court”) for the District of Massachusetts rendered its decision in the lawsuit brought against QLT by Massachusetts Eye and Ear Infirmary and entered a final judgment on July 18, 2007. The Court found that QLT was liable under Massachusetts state law for unfair trade practices, but that such violation was not knowing or willful. As a result, we recorded a charge of $110.2 million and accrued a litigation reserve in the same amount. In the third quarter of 2007 we accrued an additional $1.5 million based on 3.01% (the amount imposed by the Court in its final judgment which is the subject of our appeal) of worldwide Visudyne net sales since June 30, 2007 pursuant to and pending outcome of the appeal of the judgment (recorded as “Accrued Cost of Sales re: MEEI”). Also in the third quarter we accrued $1.1 million of interest expense related to interest accruing on the judgment amount subsequent to the July 18, 2007 judgment. The Court dismissed MEEI’s claim for misappropriation of trade secrets and, having found that the claim of unjust enrichment was not triable to a jury, also dismissed MEEI’s claim of unjust enrichment.

7

On August 1, 2007, we filed a Notice of Appeal of the Court’s final judgment with the United States Court of Appeals for the First Circuit. In order to stay the execution and enforcement of the judgment pending appeal, we have posted an appeal bond in the amount of approximately $118.8 million (which is the amount of the judgment plus 10%), as required by the Court. To obtain the appeal bond, QLT was required to deposit cash, as security, to the bonding company in the full amount of the appeal bond and was included in restricted cash at September 30, 2007. Accrued interest of $1.0 million on the cash deposit of $118.8 million has also been included in restricted cash. (See Note 14 — Contingencies — in the “Notes to the Consolidated Financial Statements.”)

Discontinued Operations

In December 2006, we completed the sale of certain non-core assets, principally the generic dermatology business, dental business and related manufacturing facility of QLT USA in Fort Collins, Colorado. The results of operations for businesses that are classified as held for sale are excluded from continuing operations and reported as discontinued operations for the prior period. Additionally, segment information does not include the results of businesses classified as discontinued operations.

Revenue Recognition

     Net Product Revenues

Our net product revenues are primarily derived from sales of Visudyne and Eligard.

With respect to Visudyne, under the terms of the PDT Product Development, Manufacturing and Distribution Agreement with Novartis Ophthalmics, a division of Novartis Pharma AG, we are responsible for Visudyne manufacturing and product supply, and Novartis Ophthalmics is responsible for marketing and distribution of Visudyne. Our agreement with Novartis Ophthalmics provides that the calculation of total revenue for the sale of Visudyne be composed of three components: (1) an advance on the cost of inventory sold to Novartis Ophthalmics, (2) an amount equal to 50% of Novartis Ophthalmics’ net proceeds from Visudyne sales to end-customers (determined according to a contractually agreed definition), and (3) the reimbursement of other specified costs incurred and paid for by us. We recognize revenue from the sale of Visudyne when persuasive evidence of an arrangement exists, delivery to Novartis Ophthalmics has occurred, the end selling price of Visudyne is fixed or determinable, and collectibility is reasonably assured. Under the calculation of revenue noted above, this occurs when Novartis Ophthalmics has sold Visudyne to its end customers. Our revenue from Visudyne will fluctuate dependent upon Novartis Ophthalmics’ ability to market and distribute Visudyne to end customers.

With respect to Eligard, under the terms of the license agreements with QLT USA’s commercial licensees, we are responsible for Eligard manufacturing and supply and receive from our commercial licensees an agreed upon sales price upon shipment to them. (We also earn royalties from certain commercial licensees based upon their sales of Eligard products to end customers. These royalties are included in net royalty revenue.) We recognize net revenue from product sales when persuasive evidence of an arrangement exists, product is shipped and title is transferred to our commercial licensees, collectibility is reasonably assured and the price is fixed or determinable. Our net product revenue from Eligard will fluctuate dependent upon our ability to deliver Eligard products to our commercial licensees. Our Eligard commercial licensees are responsible for all products after shipment from our facility. Under this calculation of revenue, we recognize net product revenue from Eligard at the time of shipment to our commercial licensees.

We do not offer rebates or discounts in the normal course of business and have not experienced any material product returns; accordingly, we have not provided an allowance for rebates, discounts, and returns.

     Net Royalties

We recognize net royalties when product is shipped by certain of our commercial licensees to end customers based on royalty rates specified in our agreements with them. Generally, royalties are based on net product sales (gross sales less discounts, allowances and other items) and calculated based on information supplied to us by our commercial licensees.

     Contract Research and Development

Contract research and development revenues consist of non-refundable research and development funding under agreements with third parties with whom we have research or development relationships or licenses. Contract research and development funding generally compensates us for discovery, preclinical and clinical expenses related to the collaborative development programs for certain products and product candidates, and is recognized as revenue at the time research and development activities are performed under the terms of those agreements. For fixed price

8

contracts, we recognize contract research and development revenue over the term of the agreement consistent with the pattern of work performed. Amounts received under those agreements for work actually performed are non-refundable even if the research and development efforts performed by us do not eventually result in a commercial product. Contract research and development revenues earned in excess of payments received are classified as contract research and development receivables and payments received in advance of revenue recognition are recorded as deferred revenue.

     Licensing and Milestones

We have licensing agreements that generally provide for non-refundable license fees and/or milestone payments. The licensing agreements typically require a non-refundable license fee and allow licensees to sell our proprietary products in a defined territory for a defined period. A milestone payment is a payment made by a licensee to us upon achievement of a pre-determined event, as defined in the applicable license agreement. Non-refundable license fees and milestone payments are initially reported as deferred revenue. They are recognized as revenue over the remaining contractual term of the license agreement or as covered by patent protection, whichever is earlier, using the straight-line method or until the license agreement terminates. No milestone revenue is recognized until we have completed the required milestone-related services as set forth in the license agreement.

Research and Development

Research and development costs are expensed as incurred and consist of direct and indirect expenditures, including a reasonable allocation of overhead expenses, associated with our various research and development programs. Overhead expenses comprise general and administrative support provided to the research and development programs and involve costs associated with support activities such as facility maintenance, utilities, office services, information technology, legal, accounting and human resources. Patent application, filing and defense costs are expensed as incurred. Research and development costs also include funding provided to third parties for joint research and development programs.

Stock-Based Compensation

On January 1, 2006, we adopted SFAS 123 Revised,Share-Based Payment,(“SFAS 123R”) using the modified prospective method. This statement eliminated the alternative to account for stock-based compensation using the intrinsic value method in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees.SFAS 123R requires such transactions be recognized as compensation expense in the statement of earnings based on their fair values on the date of the grant, with the compensation expense recognized over the period in which a grantee is required to provide service in exchange for the stock award. Compensation expense recognition provisions are applicable to new awards and to any awards modified, repurchased or cancelled after the adoption date. Additionally, for any unvested awards outstanding at the adoption date, we recognize compensation expense over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under Statement of Financial Accounting Standard 123,Accounting for Stock-Based Payment, or SFAS 123. As stock-based compensation expense recognized in the statement of income for the three and nine month periods ended September 30, 2007 and September 30, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

During the three and nine month periods ended September 30, 2007 and September 30, 2006, we recorded stock-based compensation expense for awards granted prior to, but not yet vested, as of January 1, 2006, as if the fair value method required for pro forma disclosure under SFAS 123 was in effect for expense recognition purposes, adjusted for estimated forfeitures. For stock-based awards granted after January 1, 2006, we have recognized compensation expense based on the estimated grant date fair value method using the Black-Scholes valuation model, adjusted for estimated forfeitures. When estimating forfeitures, we consider voluntary termination behaviors as well as trends of actual option forfeitures.

Income Taxes

Income taxes are reported using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to: (i) differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and (ii) operating loss and tax credit carry forwards using applicable enacted tax rates. An increase or decrease in these tax rates will increase or decrease the carrying value of future net tax assets resulting in an increase or decrease to net income. Income tax credits, such as investment tax credits, are included as part of the provision for income taxes. The realization of our deferred tax assets is primarily dependent on generating sufficient taxable income prior to expiration of any loss carry forward balance. A valuation allowance is provided when it is more likely than not that a deferred tax asset may not be realized. (See Note 2 — Income Taxes for a discussion of the adoption of Financial Accounting Standard Board Interpretation No. 48Accounting for Uncertainty in Income Taxes.)

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Net Income Per Common Share

Basic net income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed in accordance with the treasury stock method and “if converted” method, as applicable, which uses the weighted average number of common shares outstanding during the period and also includes the dilutive effect of potentially issuable common stock from outstanding stock options, warrants and convertible debt. In addition, the related interest and amortization of deferred financing fees on convertible debt, when dilutive, (net of tax) are added back to income, since these would not be paid or incurred if the convertible senior notes were converted into common shares.

The following table sets out the computation of basic and diluted net income per common share:

	Three months ended						Nine months ended
(In thousands of U.S. dollars, except	September 30,			September 30,			September 30,			September 30,
share and per share data)	2007			2006			2007			2006
Numerator:
Income (loss) from continuing operations	$	611		$	6,195		$	(63,015	)	$	27,090
Loss from discontinued operations, net of income taxes		(265	)		(9,941	)		(436	)		(11,219	)
Net income (loss)	$	346		$	(3,746	)	$	(63,451	)	$	15,871
Effect of dilutive securities:
Convertible senior notes — interest expense		—			—			—			—
Adjusted income (loss)	$	346		$	(3,746	)	$	(63,451	)	$	15,871
Denominator:(thousands)
Weighted average common shares outstanding		74,618			83,831			75,003			87,734
Effect of dilutive securities:
Stock options		6			—			—			51
Convertible senior notes		—			—			—			—
Diluted potential common shares					—			—			51
Diluted weighted average common shares outstanding		74,624			83,831			75,003			87,785
Basic net income (loss) per common share
Continuing operations	$	0.01		$	0.07		$	(0.84	)	$	0.31
Discontinued operations		(0.00	)		(0.12	)		(0.01	)		(0.13	)
Net income (loss)	$	0.00		$	(0.04	)	$	(0.85	)	$	0.18
Diluted net income (loss) per common share
Continuing operations	$	0.01		$	0.07		$	(0.84	)	$	0.31
Discontinued operations		(0.00	)		(0.12	)		(0.01	)		(0.13	)
Net income (loss)	$	0.00		$	(0.04	)	$	(0.85	)	$	0.18

Excluded from the calculation of diluted net income per common share for the three and nine months ended September 30, 2007 was 5,797,647 and 5,832,772 shares related to stock options because their effect was anti-dilutive. Excluded from the calculation of diluted net income per common share for the three and nine months ended September 30, 2006 were 6,986,094 and 6,856,071 shares, respectively, related to stock options because their effect was anti-dilutive. For all periods presented, 9,692,637 shares related to the conversion of the $172.5 million 3% convertible senior notes were also excluded because their effect was anti-dilutive.

Recently Issued Accounting Standards

We adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109, (“FIN 48”), on January 1, 2007. This interpretation provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. See Note 2 — Income Taxes in “Notes to the Condensed Consolidated Financial Statements” for additional information, including the effects of adoption on our Condensed Consolidated Statement of Financial Position.

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In February 2006, the FASB issued SFAS No. 155,Accounting for Certain Hybrid Financial Instruments - - an amendment of FASB statement 133 and 140(“SFAS 155”). This Statement simplifies accounting for certain hybrid financial statements by permitting fair value remeasurements for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation, and eliminates the restriction on the passive derivative instruments that a qualifying special - purpose entity (SPE) may hold. SFAS 155 is effective for all financial instruments acquired or issued in the first fiscal year beginning after September 15, 2006. The adoption of SFAS 155 did not have a material impact on our results of operations.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements and is effective for fiscal periods beginning after November 15, 2007. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115(“SFAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective for fiscal periods beginning after November 15, 2007. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.

In June 2007, the Emerging Issues Task Force, or EITF, reached a consensus on Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities.Issue No. 07-3 requires that nonrefundable advance payments for future research and development activities be deferred and capitalized. The provisions of Issue No. 07-3 is effective for fiscal years beginning after December 15, 2007, including interim periods within those fiscal years. Entities are required to report the effects of applying this Issue prospectively for new contracts entered into on or after December 15, 2007. We are currently evaluating the impact of this consensus on our Consolidated Financial Statements.

2. INCOME TAXES

On January 1, 2007, we adopted the provisions of Financial Accounting Standard Board Interpretation No. 48 or FIN 48,Accounting for Uncertainty in Income Taxes. As a result of our adoption of FIN 48, we recorded uncertain tax position liabilities of $1.8 million, of which $1.2 million was recorded as an adjustment to the opening balance of accumulated deficit, $0.5 million as an adjustment to income tax receivable and $0.1 million as an adjustment to deferred income tax assets. The total amount of unrecognized tax benefits as of January 1, 2007 ($1.8 million), if recognized, will favorably impact the effective tax rate in a future period.

We recognize potential accrued interest and penalties related to unrecognized tax benefits within our income tax provision. Only an inconsequential amount of interest and penalties has been accrued and is included as a component of the uncertain tax position liabilities.

We do not currently expect any significant increases or decreases to our unrecognized tax benefits within 12 months of the reporting date.

The Company and its subsidiaries file income tax returns and pay income taxes in jurisdictions where we believe we are subject to tax. In jurisdictions in which the Company and its subsidiaries do not believe we are subject to tax and therefore do not file income tax returns, we can provide no certainty that tax authorities in those jurisdictions will not subject one or more tax years (since inception of the Company or its subsidiaries) to examination. Further, while the statute of limitations in each jurisdiction where an income tax return has been filed generally limits the examination period, as a result of loss carryforwards, the limitation period for examination generally does not expire until several years after the loss carryforwards are utilized. We are not aware of any material income tax examination currently in progress by any taxing jurisdiction. Our major jurisdictions are Canada and the U.S. With few exceptions, the Company and its subsidiaries should not be subject to Canadian income tax examinations in respect of taxation years before 1988 and U.S. income tax examinations in respect of taxation years before 1993.

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3. INVENTORIES

(In thousands of U.S. dollars)	September 30, 2007			December 31, 2006
Raw materials and supplies	$	8,691		$	10,723
Work-in-process		8,595			27,981
Finished goods		481			676
Provision for non-completion of product inventory		(2,166	)		(5,112	)
	$	15,601		$	34,268

We record a provision for non-completion of product inventory to provide for the potential failure of inventory batches in production to pass quality inspection. During the three months ended September 30, 2007, we incurred no charges to the provision for non-completion of product inventory. We classify inventories that we do not expect to convert or consume in the next year as non-current based upon an analysis of market conditions such as sales trends, sales forecasts, sales price, and other factors. (See Note 5 — Other Long-Term Assets.)

4. OTHER CURRENT ASSETS

(In thousands of U.S. dollars)	September 30, 2007		December 31, 2006
Visudyne inventory held by Novartis Ophthalmics	$	13,527	$	10,677
Deferred financing expenses		1,216		—
Prepaid expenses and other		2,357		3,354
	$	17,100	$	14,031

Inventory in transit comprises finished goods that have been shipped to and are held by Novartis Ophthalmics. Under the terms of the PDT Product Development, Manufacturing and Distribution Agreement, upon delivery of inventory to Novartis Ophthalmics, we are entitled to an advance equal to our cost of inventory. The inventory is also included in deferred revenue at cost, and will be recognized as revenue in the period of the related product sale and delivery by Novartis Ophthalmics to third parties, where collection is reasonably assured.

Deferred financing expenses represent debt issue costs related to the convertible senior notes, net of amortization and are being amortized over five years commencing August 2003.

5. OTHER LONG-TERM ASSETS

(In thousands of U.S. dollars)	2007		2006
Inventory	$	23,352	$	—
Deferred financing expenses		—		1,922
Other		947		199
	$	24,299	$	2,121

Inventory as of September 30, 2007, has been reduced by provision for non-completion of product inventory of $4.1 million. During the three months ended September 30, 2007, we incurred no charges to the provision for non-completion of product inventory.

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6. ACCRUED LIABILITIES

(In thousands of U.S. dollars)	September 30, 2007		December 31, 2006
Royalties	$	1,084	$	1,723
Compensation		4,231		4,683
Separation costs		—		1,107
Foreign exchange contracts		—		2,011
Interest		741		1,936
Litigation		112,254		112,500
Other		622		1,845
	$	118,932	$	125,805

7. CONVERTIBLE DEBT

In August 2003, we issued $172.5 million aggregate principal amount of convertible senior notes due in 2023. The notes bear interest at 3% per annum, payable semi-annually beginning March 15, 2004. Holders of the convertible senior notes have the right to require us to redeem these notes, for cash, at their issue price plus accrued interest on September 15 in each of 2008, 2013, and 2018. Since the first redemption date is within 12 months of the date of this report and we believe it is likely that most of the convertible senior notes will be redeemed on the first redemption date, we have reclassified our convertible debt as a current liability at September 30, 2007.

8. FOREIGN EXCHANGE FACILITIES

During the quarter, we terminated one foreign exchange credit facility, and currently have two foreign exchange facilities with two separate financial institutions for the sole purpose of entering into foreign exchange contracts.

The two facilities have similar terms and allow us to enter into a combined maximum of $550.0 million in forward foreign exchange contracts for terms up to 15 months, or in the case of spot foreign exchange transactions, a maximum limit of $95.0 million. Interest charges, at the financial institutions’ prime rate plus 2%, are only applicable if we are in default with regards to the foreign exchange contracts. These foreign exchange facilities are secured by money market instruments equivalent to our contingent credit exposure for the period in which any foreign exchange transactions are outstanding. At September 30, 2007, we had no foreign exchange transactions outstanding and therefore no money market instruments were pledged as security for these foreign exchange facilities.

9. RESTRUCTURING CHARGE

In December 2005, we restructured our operations in order to concentrate our resources on key product development programs and business initiatives (“December 2005 Restructuring”). We provided approximately 100 affected employees with severance and support to assist with outplacement and recorded $5.0 million of restructuring charges. We have completed all activities associated with this restructuring and expect to pay out the remaining amounts over the next three months.

On October 26, 2006, as a result of declining Visudyne sales, we announced plans to restructure our operations in order to reduce our overall cost structure going forward (“October 2006 Restructuring”). We provided approximately 80 affected employees with severance and support to assist with outplacement. We recorded $0.2 million of restructuring charge in the third quarter of 2007 for a cumulative total of $4.1 million. We anticipate paying most amounts for the October 2006 Restructuring by the end of 2007.

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The details of our restructurings are as follows:

Severance and termination benefits accrued

	December 2005			October 2006
(In thousands of U. S. dollars)	Restructuring			Restructuring			Total
Balance at December 31, 2006	$	686		$	1,514		$	2,200
Restructuring charge		—			407			407
Adjustments		(68	)		—			(68	)
Cash payments		(246	)		(1,080	)		(1,326	)
Balance at March 31, 2007	$	372		$	841		$	1,213
Restructuring charge		—			253			253
Adjustments		20			10			30
Cash payments		(178	)		(558	)		(736	)
Balance at June 30, 2007		214			546			760
Restructuring charge		—			176			176
Adjustments		2			8			10
Cash payments		(151	)		(549	)		(700	)
Balance at September 30, 2007		65			181			246

Other related expenses accrued

	December 2005			October 2006
(In thousands of U. S. dollars)	Restructuring			Restructuring			Total
Balance at December 31, 2006	$	99		$	84		$	183
Restructuring charge		—			237			237
Cash payments		(23	)		(285	)		(308	)
Balance at March 31, 2007	$	76		$	36		$	112
Restructuring charge		—			6			6
Adjustments		(6	)		—			(6	)
Cash payments		(13	)		(18	)		(31	)
Balance at June 30, 2007		57			24			81
Restructuring charge		—			3			3
Adjustments		—			(12	)		(12	)
Cash payments		(12	)		(6	)		(18	)
Balance at September 30, 2007		45			9			54

Combined Total

	December 2005			October 2006
(In thousands of U. S. dollars)	Restructuring			Restructuring			Total
Balance at December 31, 2006	$	785		$	1,598		$	2,383
Restructuring charge		—			644			644
Adjustments		(68	)		—			(68	)
Cash payments		(269	)		(1,365	)		(1,634	)
Balance at March 31, 2007	$	448		$	877		$	1,325
Restructuring charge		—			259			259
Adjustments		14			10			24
Cash payments		(191	)		(576	)		(767	)
Balance at June 30, 2007		271			570			841
Restructuring charge		—			179			179
Adjustments		2			(4	)		(2	)
Cash payments		(163	)		(555	)		(718	)
Balance at September 30, 2007		110			190			300

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10. SHARE CAPITAL

(a) Share Buy-Back Program

On June 4, 2007, our Board of Directors announced a share buy-back program pursuant to which we have the right to purchase up to $50 million of our outstanding common shares or up to 5.7 million common shares over a 12-month period commencing on June 11, 2007. The share purchases are to be made as a normal course issuer bid. All purchases are to be effected in the open market through the facilities of the Toronto Stock Exchange (“TSX”) or NASDAQ Stock Market (“NASDAQ”), and in accordance with all regulatory requirements. The actual number of common shares which are purchased and the timing of any such purchases are determined by management.

Cumulative purchases under this program since June 11, 2007 were 750,000 shares at an average price of $7.82, for a total cost of $5.9 million.

(b) Stock Options

We used the Black-Scholes option pricing model to estimate the value of the options at each grant date, using the following weighted average assumptions (no dividends are assumed):

	Three months ended						Nine months ended
	September 30,			September 30,			September 30,			September 30,
	2007			2006			2007			2006
Annualized volatility		36.7	%		44.1	%		37.0	%		45.5	%
Risk-free interest rate		4.0	%		3.8	%		4.4	%		4.2	%
Expected life (years)		3.3			3.3			3.3			3.0

The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including the expected stock price volatility. We project expected volatility and expected life of our stock options based upon historical and other economic data trended into future years. The risk-free interest rate assumption is based upon observed interest rates appropriate for the terms of our stock options.

The impact on our results of operations of recording stock-based compensation for the three-month and nine-month periods ended September 30, 2007 and September 30, 2006 was as follows:

	Three months ended					Nine months ended
(In thousands of U.S. dollars,	September 30,			September 30,		September 30,			September 30,
except share information)	2007			2006		2007			2006
Cost of sales	$	17		$	15	$	21		$	38
Research and development		533			598		1,602			1,866
Selling, general and administrative		349			335		897			1,003
Restructuring charge		40			—		40			—
Discontinued operations		—			85		—			233
Share based compensation expense before income taxes		939			1,033		2,560			3,140
Related income tax benefits		(30	)		—		(110	)		—
Share based compensation, net of income taxes	$	909		$	1,033	$	2,450		$	3,140

At September 30, 2007, total unrecognized estimated compensation cost related to non-vested stock options granted prior to that date was $7.6 million, which is expected to be recognized over 36 months with a weighted-average period of 2.2 years. The total share-based compensation cost of stock options capitalized as part of inventory was negligible during the three months ended September 30, 2007 and $0.2 million during the nine month periods ended September 30, 2007. During the three and nine month periods ended September 30, 2006, total share-based compensation cost of stock options capitalized as part of inventory was $0.1 million and $0.3 million respectively. The total intrinsic value of stock options exercised during the three and nine month periods ended September 30, 2007 was $0.1 million and

15

$0.3 million, respectively. For the three and nine month periods ended September 30, 2006 the total intrinsic value of stock options exercised was $0.1 million and $0.2 million, respectively. We recorded cash received from the exercise of stock options of $0.1 million and $1.3 million, respectively, during the three and nine months ended September 30, 2007. We recorded a negligible amount for related tax benefits during the three months ended September 30, 2007 and $0.1 million during the nine months ended September 30, 2007. For the three and nine month periods ended September 30, 2006, we recorded cash received from the exercise of stock options of $0.1 million and $0.7 million, respectively, and there were no related tax benefits recorded during these same periods. Upon option exercise, we issue new shares of stock.

11. NET PRODUCT REVENUE

Net product revenue was determined as follows:

	For the three months ended						For the nine months ended
	September 30,						September 30,
(In thousands of U.S. dollars)	2007			2006			2007			2006
Visudyne® sales by Novartis Ophthalmics	$	48,735		$	75,137		$	169,315		$	277,259
Less: Marketing and distribution costs		(26,419	)		(32,289	)		(79,701	)		(96,796	)
Less: Inventory costs		(2,909	)		(3,963	)		(8,863	)		(14,669	)
Less: Royalties to third parties		(1,037	)		(1,581	)		(3,576	)		(5,942	)
	$	18,370		$	37,304		$	77,175		$	159,852
QLT’s 50% share of Novartis Ophthalmics’ net proceeds from Visudyne sales	$	9,185		$	18,652		$	38,587		$	79,926
Add: Advance on inventory costs from
Novartis Ophthalmics		2,198			3,153			6,372			11,922
Add: Royalties reimbursed to QLT		991			1,552			3,533			5,944
Add: Other costs reimbursed to QLT		2,232			2,406			5,663			4,393
Revenue from Visudyne® sales	$	14,606		$	25,763		$	54,155		$	102,185
Net product revenue from Eligard®		6,168			5,846			19,615			17,643
	$	20,774		$	31,609		$	73,770		$	119,828

For the three months ended September 30, 2007, approximately 42% of total Visudyne sales were in Europe, 19% in the United States, and 39% in other markets worldwide. For the same period in 2006, approximately 56% of total Visudyne sales were in Europe, 15% in the United States, and 29% in other markets worldwide.

For the nine months ended September 30, 2007, approximately 51% of total Visudyne sales were in Europe, 17% in the United States, and 33% in other markets worldwide. For the same period in 2006, approximately 51% of total Visudyne sales were in Europe, 22% in the United States, and 27% in other markets worldwide.

12. DISCONTINUED OPERATIONS

To focus our business on the research and development of proprietary products in our core therapeutic areas, during the first quarter of 2006 we initiated an active plan to sell the generic dermatology business, dental business and related manufacturing facility of QLT USA in Fort Collins, Colorado. In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-lived Assets, the generic dermatology and dental businesses were accounted for as discontinued operations. Accordingly, the results of operations of these businesses have been excluded from continuing operations and reported as discontinued operations for the prior period. In December 2006, QLT USA completed the sale of these non-core assets to Tolmar, Inc., a privately-held pharmaceutical company.

Operating results of our generic dermatology and dental businesses included in discontinued operations are summarized below. Adjustments to the loss on disposal are recorded in 2007 as we complete closing activities related to the sale of our generic dermatology and dental businesses to Tolmar, Inc.

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	For the three months ended						For the nine months ended
	September 30,						September 30,
(In thousands of U.S. dollars)	2007			2006			2007			2006
Net revenue	$	—		$	2,600		$	—		$	10,505
Impairment of assets held for sale	$	—		$	(8,592	)	$	—		$	(8,592	)
Pretax losses	$	—		$	(10,970	)	$	—		$	(12,312	)
Income taxes		—			1,029						1,093
Loss on disposal		(421	)		—			(693	)		—
Income tax on disposal		156			—			257			—
Net loss from discontinued operations	$	(265	)	$	(9,941	)	$	(436	)	$	(11,219	)

13. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

With respect to the concentration of credit risk, our accounts receivable, as at September 30, 2007 and December 31, 2006, comprised primarily amounts owing from Novartis Ophthalmics and Sanofi-Synthelabo, Inc. At September 30, 2007, there are no outstanding forward foreign exchange contracts.

14. CONTINGENCIES

Litigation and Legal Matters

We and certain of our subsidiaries are involved in litigation and may in the future become involved in various other litigations in the ordinary course of our business. We are currently a defendant in a number of lawsuits filed against QLT Inc., QLT USA, and QLT Therapeutics, Inc. which we consider to be potentially material to our business and are described below.

We are also from time to time a defendant in other litigation that are not material in the amounts claimed or that the claim is covered by insurance and that, in our reasonable judgment based on the information available to us at the time, we do not expect the damages if we are found liable to exceed the insured limits. QLT cannot determine the ultimate liability with respect to such legal proceedings and claims at this time.

(a) Eligard Patent Litigation

On June 1, 2004, QLT USA’s Eligard marketing licensee for Eligard, MediGene AG, filed an action in the Federal Patent Court, Munich, Germany, seeking nullification of European Patent 0 202 065 (the “065 patent”). The ‘065 patent expired on May 6, 2006.

On June 21, 2004, Takeda Chemical Industries Ltd., Wako Pure Chemical Industries, Ltd. and Takeda Pharma GmbH sought a provisional injunction in the Regional Court Hamburg, Germany, alleging that the marketing of Eligard by MediGene and its licensee Astellas Pharma Europe Ltd. (formerly known as Yamanouchi U.K. Ltd.) in Germany violated the ‘065 patent. The Court denied that request.

On June 28, 2004, the Takeda companies and Wako filed a complaint in the Regional Court Düsseldorf, Germany, against MediGene and Astellas, alleging infringement of the ‘065 patent.

In April 2005, in the suit initiated by MediGene, the Federal Patent Court ruled that all of the patent claims asserted by the Takeda companies and Wako in their subsequent infringement suit are null and void in Germany for lack of novelty and lack of inventive step. Takeda and Wako have appealed that decision. The Regional Court Düsseldorf has stayed the infringement action brought by Takeda and Wako in view of the Federal Patent Court’s decision. It is uncertain when a decision of the appeal court in the ‘065 patent will be rendered.

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Under agreements QLT USA entered into with MediGene and Astellas, QLT USA has provided certain indemnities to MediGene and Astellas including indemnities covering certain losses relating to infringement of a third party’s proprietary rights on and subject to the terms of those agreements.

The final outcome of the German Eligard patent litigation is not presently determinable or estimable and accordingly, no amounts have been accrued. There can be no assurance that the matter will finally be resolved in favor of QLT USA’s German licensees of Eligard or in our favor. If the German Eligard patent litigation is not resolved favorably, QLT USA’s German licensees could be found liable for damages and those licensees may attempt to assert a claim against QLT USA for indemnification of all or part of such damages. While we cannot estimate the potential damages in the German Eligard patent litigation, or what level of indemnification by QLT USA, if any, will be required in connection with the German Eligard patent litigation under the agreements with its German licensees, MediGene and Astellas, the amount of damages and indemnification could be substantial, which could have a material adverse impact on our financial condition. Alternatively, the German Eligard patent litigation could be resolved favorably or could be settled. An outcome could materially affect the market price of our shares, either positively or negatively.

(b) Patent Litigation with MEEI

In April 2000, Massachusetts Eye and Ear Infirmary (“MEEI”) filed a civil suit (Civil Action No. 00-10783-JLT) against QLT Inc. in the United States District Court (the “Court”) for the District of Massachusetts seeking to establish exclusive rights for MEEI as the owner of certain inventions relating to the use of verteporfin (the active pharmaceutical ingredient in Visudyne^®) as the photoactive agent in the treatment of certain eye diseases including AMD.

In 2002, we moved for summary judgment against MEEI on all eight counts of MEEI’s complaint. The Court granted our motion, dismissing all of MEEI’s claims.

MEEI appealed the decision of the Court to the United States Court of Appeals for the First Circuit. In a decision dated June 15, 2005, the United States Court of Appeals for the First Circuit upheld the dismissal of five of MEEI’s eight claims and remanded to the Court for further proceedings concerning three of MEEI’s claims (unjust enrichment, unfair trade practices and misappropriation of trade secrets). In 2006, MEEI’s three remaining claims were remanded to the Court for further proceedings.

On November 6, 2006, a federal jury found QLT liable under Massachusetts state law for unjust enrichment and unfair trade practices and determined that we should pay MEEI 3.01% of net sales of Visudyne worldwide. On July 18, 2007, the Court entered a final judgment in which it found that we were liable under Massachusetts state law for unfair trade practices, but that such violation was not knowing or willful, and determined that we should pay to MEEI 3.01% of past, present and future net sales worldwide of Visudyne. The Court also awarded interest at the Massachusetts statutory rate of 12% on the amounts as they would have become payable, from April 24, 2000. The Court also awarded MEEI its legal fees in an amount on $14.1 million, to which will be applied a reduction of $3 million previously agreed to by MEEI. The Court dismissed MEEI’s claim for misappropriation of trade secrets and, having found that the claim of unjust enrichment was not triable to a jury, also dismissed MEEI’s claim to unjust enrichment.

As a result, we recorded a charge of $110.2 million and accrued a litigation reserve in the same amount. In the third quarter of 2007 we accrued an additional $1.5 million based on 3.01% (the amount imposed by the Court in its final judgment which is the subject of our appeal) of worldwide Visudyne net sales since June 30, 2007 pursuant to and pending outcome of the appeal of the judgment (recorded in the Unaudited Condensed Consolidated Statements of Income as “Accrued Cost of Sales re: MEEI”). Also in the third quarter we accrued $1.1 million of interest expense related to interest accruing on the judgment amount subsequent to the July 18, 2007 judgment. On August 1, 2007, we filed a Notice of Appeal of the Court’s final judgment to the United States Court of Appeals for the First Circuit. In order to stay the execution and enforcement of the judgment pending appeal, we have posted an appeal bond in the amount of approximately $118.8 million (which is the amount of the judgment plus 10%), as required by the Court. To obtain the appeal bond, QLT was required to deposit cash, as security, to the bonding company in the full amount of the appeal bond and was included in restricted cash at September 30, 2007. Accrued interest of $1.0 million on the cash deposit of $118.8 million has also been included in restricted cash.

U.S. patent no. 5,789,349 (the “‘349 patent”), which is the subject of this litigation, is co-owned by QLT, Massachusetts General Hospital or “MGH” and MEEI. QLT entered into an exclusive license with MGH for its rights under the ‘349 patent in return for a royalty equal to 0.5% of net sales of Visudyne in the United States and Canada. Under the license agreement with MGH, if QLT concludes a license agreement with MEEI for rights under the ‘349 patent and continuation patents which includes payment of royalties and other compensation to MEEI that are more favorable than are contained in the license agreement with MGH, then as of the effective date of such more favorable royalties or compensation to MEEI, the license agreement with MGH shall be revised to the same rate as paid under the agreement with MEEI.

MGH has recently advised QLT that it believes that as a result of the MEEI judgment, MGH is entitled to be paid the same royalties or other compensation as MEEI or alternatively that we provide security for such payment pending the outcome of our appeal. We have advised MGH that we do not believe the outcome of our litigation with MEEI falls within the scope of our license agreement with MGH, and that the outcome of the litigation gives MGH no basis for seeking security or payment.

We believe that our position on the scope of our obligations to MGH is correct, and hence that, regardless of the outcome of the litigation with MEEI, we will not owe MGH additional payments. Because this matter may be the subject of litigation, and the outcome of any litigation is uncertain, the Company can give no assurances of the result and an adverse outcome could have a material adverse impact on our financial condition.

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(c) Litigation with Biolitec, Inc.

On September 26, 2006, we notified Biolitec, Inc. or “Biolitec,” that Biolitec was in default under a Distribution Supply and Service Agreement, or the “Agreement”, entered into on December 21, 2005, between QLT Therapeutics, Inc. and Biolitec, relating to the development and sale of ocular medical lasers used to activate Visudyne, and that we were therefore terminating the Agreement unless Biolitec remedied its failure to perform. On December 1, 2006, we provided Biolitec notice of termination of the Agreement. On April 6, 2007, Biolitec filed a Complaint and Demand for Jury Trial in the Hampen County Superior Court of the Commonwealth of Massachusetts for breach of contract, promissory estoppel, misrepresentation and unfair trade practices. Biolitec also filed a demand for Arbitration with the American Arbitration Association, requesting that our termination of the Agreement be deemed and ruled invalid. After removing the court action to the United States District Court for the District of Massachusetts (the “Court”), we filed a motion to dismiss the court action or to stay the proceedings pending arbitration. On April 30, 2007, we also filed counterclaims against Biolitec in the arbitration action. We asserted counterclaims for breach of contract and rescission of the Agreement, and requested $739,000 in damages, plus interest, costs and attorney fees. On May 23, 2007, the Court entered an order granting our motion to stay the proceedings pending arbitration, but denied our motion to dismiss the action.

On May 18, 2007, Biolitec filed an amended demand for arbitration with the American Arbitration Association asserting claims for breach of contract, promissory estoppel and misrepresentation relating to the Agreement. In the amended demand for arbitration, Biolitec seeks damages in the amount of $3,276,000 and a determination that our termination of the contract is invalid. Biolitec also seeks an award of attorneys’ fees and reasonable costs in prosecuting the arbitration. The final outcome of the litigation and arbitration with Biolitec is not presently determinable or estimable and accordingly, no amounts have been accrued. The arbitration with Biolitec is currently scheduled for March, 2008. The parties will report back to the Court following resolution of the arbitration or earlier if ordered by the Court.

15. SUBSEQUENT EVENT

On October 18, 2007, we completed the acquisition of privately held ForSight Newco II, Inc. for a cash payment of approximately $42 million on closing (including bonus payments to be paid pursuant to certain change of control bonus agreements and an escrow amount of $4.2 million that has been deposited as security for the indemnification obligations set forth in the Merger Agreement), along with future contingent consideration in the nature of milestone payments and royalties on net sales of products. The milestone payments consist of a one-time $5 million payment upon the initiation of a phase III clinical trial for the first product, $20 million on first commercialization of each of the first two products using the proprietary technology and $15 million on first commercialization of each subsequent product. ForSight Newco II owns certain patent applications with respect to its proprietary ocular punctal plug drug delivery system. On October 18, 2007, ForSight Newco II, Inc.’s name was changed to QLT Plug Delivery, Inc.

On October 25, 2007, we announced that the Company has initiated a research and development (R&D) restructuring which will entail an R&D portfolio reprioritization and pursuant to this, a significant reduction in costs beginning in 2008 and reduced staffing levels in R&D and SG&A with expected overall annualized savings of approximately 20%.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the accompanying unaudited interim condensed consolidated financial statements and notes thereto, which are prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) and our audited consolidated financial statements and notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2006. All of the following amounts are expressed in U.S. dollars unless otherwise indicated.

OVERVIEW

We are a global biopharmaceutical company dedicated to the discovery, development and commercialization of innovative therapies. Our research and development efforts are focused on pharmaceutical products in the fields of ophthalmology and dermatology. In addition, we utilize two unique technology platforms, photodynamic therapy and Atrigel^®, to create products such as Visudyne^® and Eligard^®. Pursuant to our acquisition of ForSight Newco II, Inc. (now QLT Plug Delivery, Inc.) on October 18, 2007, we are also developing an ocular punctal plug delivery system.

QLT was formed in 1981 under the laws of the Province of British Columbia, Canada. In November 2004, we acquired Atrix Laboratories, Inc. (now QLT USA, Inc. or “QLT USA”), a Fort Collins, Colorado based biopharmaceutical company focused on advanced drug delivery.

Our first commercial product was in the field of photodynamic therapy, or PDT, which uses photosensitizers (light activated drugs) in the treatment of disease. Our lead commercial product, Visudyne, utilizes PDT to treat the eye disease known as wet age related macular degeneration, or “wet AMD,” the leading cause of blindness in people over the age of 55 in North America and Europe.

Visudyne is commercially available in more than 75 countries, including the U.S., Canada, Japan and the European Union countries, for the treatment of a form of wet AMD known as predominantly classic subfoveal choroidal neovascularization, or “CNV.”

Visudyne is approved for the treatment of the form of wet AMD known as occult subfoveal CNV (“occult AMD”) in certain countries worldwide, which until recently included countries of the European Union (“EU”). Health authorities in the EU have recently removed occult AMD from the officially approved indications. This change is applicable to all EU member countries and may affect Visudyne reimbursement levels this year. Although we expect Visudyne European sales to decline as a result, the degree of decline should vary by country as the occult indication was not universally reimbursed across Europe previously, despite regulatory approval, and may also depend on potential market adoption of Visudyne following clinical trial results studying the use of Visudyne in combination with other compounds.

Visudyne is reimbursed in the U.S. by the Centers for Medicare & Medicaid Services for certain patients with the occult and minimally classic forms of wet AMD. Visudyne is also approved in more than 60 countries, including the U.S., Canada and the European Union countries, for the treatment of subfoveal CNV due to pathologic myopia (severe near-sightedness). In some countries, including the U.S. and Canada, Visudyne is also approved for presumed ocular histoplasmosis or other macular diseases. Visudyne was co-developed by QLT and Novartis Pharma AG of Switzerland (“Novartis Ophthalmics”) and is manufactured by QLT and sold by Novartis Ophthalmics under the terms of a co-development, manufacturing and commercialization agreement with Novartis Ophthalmics.

In addition to our lead commercial product Visudyne, we market (through commercial licensees) the Eligard line of products for the treatment of prostate cancer. The Eligard product line includes four different commercial formulations of our Atrigel technology combined with leuprolide acetate for the treatment of prostate cancer. The FDA has approved all four products: Eligard 7.5-mg (one-month), Eligard 22.5-mg (three-month), Eligard 30.0-mg (four-month) and Eligard 45.0-mg (six-month). The Eligard 7.5-mg (one-month) and Eligard 22.5-mg (three-month) products are also approved in a number of other countries, including 25 European countries, Canada, Australia, New Zealand, India, Korea and a number of Latin American countries. In addition to the U.S., Eligard 30-mg (four-month) is approved in Canada, Australia, New Zealand, Korea and India while Eligard 45.0-mg (six-month) is approved in 24 European countries, Canada, Australia and India.

Our most advanced proprietary dermatology product, Aczone™, was approved by the FDA in July 2005 and by Health Canada in June 2006. Although Aczone is approved in the U.S. and Canada, it is not yet marketed. Based on a post-approval commitment requested by the FDA,

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we conducted a Phase IV clinical trial of Aczone™ in more than 50 patients with glucose-6-phosphate dehydrogenase, or “G6PD,” deficiency and communicated the positive outcome of this study in November 2006. A label revision supplement was submitted to the FDA during the second quarter of 2007 and in July it was accepted by the FDA for filing and review. A decision by the FDA on the label revision is expected by the end of March 2008. Commercialization of Aczone is pending the outcome of this submission to the FDA to remove the restriction currently on the approved label for the product.

Our efforts to increase our portfolio of products are ongoing. We carry out research and pre-clinical projects in our core therapeutic areas of ophthalmology and dermatology.  To focus our business on the research and development of proprietary products in our core therapeutic areas, in December 2006, we divested our generic dermatology business, dental business and the manufacturing facility of QLT USA, in Fort Collins, Colorado.  We have also begun the process to out-license our Atrigel drug delivery system in therapeutic areas that are no longer of core interest to us.  As a result, we have stopped enrollment in the Growth Hormone Releasing Peptide (“GHRP”) study for end-stage renal disease and are spending very limited amounts on the Risperidone program. In July 2007, we received communication from the FDA indicating that they will retain the clinical hold on our Octreotide Acromegaly IND. As a result, we have discontinued our Octreotide programs and withdrawn our IND.

RECENT DEVELOPMENTS

In order to expand our pipeline of ocular products, on October 18, 2007, we completed the acquisition of privately held ForSight Newco II, Inc. (“ForSight Newco II”). The acquisition includes ForSight Newco II’s proprietary ocular punctal plug drug delivery system. The first clinical candidate utilizing this leading edge platform technology will target glaucoma.

Under the terms of the agreement, we acquired all of the outstanding shares of ForSight Newco II for $42 million along with future contingent consideration in the nature of milestone payments and royalties on net sales of products. The milestone payments consist of a one-time $5 million payment upon the initiation of a phase III clinical trial for the first product, $20 million on first commercialization of each of the first two products using the proprietary technology and $15 million on first commercialization of each subsequent product. ForSight Newco II owns certain patent applications with respect to its proprietary ocular punctal plug drug delivery system. On October 18, 2007 ForSight Newco II, Inc.’s name was changed to QLT Plug Delivery, Inc.

In order to facilitate our focus on innovative ocular drug delivery, we plan to continue our divestment of non-core assets, including selling the vacant property adjacent to our headquarters in Vancouver, British Columbia. In addition, we plan to monetize the value built up in our headquarters by obtaining a mortgage or other financial structures.

On October 25, 2007, we announced the initiation of a research and development (“R&D”) restructuring which will entail a R&D portfolio reprioritization and pursuant to this, a significant reduction in costs beginning in 2008 and reduced staffing levels in R&D and selling, general and administration (“SG&A”) with expected overall annualized savings of approximately 20%.

Evonik Degussa Canada Inc. (“Degussa”) (formerly Degussa Canada, Inc. and formerly Raylo Chemicals Inc.) manufactures a material used in the production of Visudyne^®. As a result of the acquisition of Degussa by a third party, Degussa gave notice of its intention to terminate that manufacturing agreement, which termination we believe would be effective January 1, 2010 under the terms of the agreement. As we believe we currently have sufficient quantities of that material to meet our anticipated demand for Visudyne, on November 8, 2007 we entered into a termination agreement with Degussa permitting the termination of the manufacturing agreement effective December 15, 2007. We are in the process of identifying an alternative manufacturer for this material. In the event that we are unable to locate and qualify an alternate manufacturer to Degussa, our future supply of Visudyne could be materially affected.

RESULTS OF OPERATIONS

For the three and nine months ended September 30, 2007, we recorded net income of $0.3 million and a net loss of $63.5 million, or $0.00 diluted net income per common share and $0.85 diluted net loss per common share. These results compare with a net loss of $3.7 million and net income of $15.9 million, or $0.04 diluted net loss per common share and $0.18 diluted net income per common share, for the three and nine months ended September 30, 2006. Detailed discussion and analysis of our results of operations are as follows:

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Revenues

Net Product Revenue

     Net product revenue was determined as follows:

	For the three months ended						For the nine months ended
	September 30,						September 30,
(In thousands of U.S. dollars)	2007			2006			2007			2006
Visudyne® sales by Novartis Ophthalmics	$	48,735		$	75,137		$	169,315		$	277,259
Less:      Marketing and distribution costs(1)		(26,419	)		(32,289	)		(79,701	)		(96,796	)
Less:      Inventory costs(2)		(2,909	)		(3,963	)		(8,863	)		(14,669	)
Less:      Royalties to third parties(3)		(1,037	)		(1,581	)		(3,576	)		(5,942	)
	$	18,370		$	37,304		$	77,175		$	159,852
QLT’s 50% share of Novartis Ophthalmics’ net proceeds from Visudyne® sales	$	9,185		$	18,652		$	38,587		$	79,926
Add:      Advance on inventory costs from Novartis Ophthalmics(4)		2,198			3,153			6,372			11,922
Add:      Royalties reimbursed to QLT(5)		991			1,552			3,533			5,944
Add:      Other costs reimbursed to QLT(6)		2,232			2,406			5,663			4,393
Revenue from Visudyne® sales	$	14,606		$	25,763		$	54,155		$	102,185
Net product revenue from Eligard®		6,168			5,846			19,615			17,643
	$	20,774		$	31,609		$	73,770		$	119,828

(1)	“Less: Marketing and distribution costs”
	This represents Novartis Ophthalmics’ cost of marketing, promoting, and distributing Visudyne, as well as certain specified costs incurred and paid for by QLT, determined in accordance with the PDT Product Development, Manufacturing, and Distribution Agreement between QLT and Novartis Ophthalmics (a division of Novartis Pharma AG). The costs incurred by Novartis Ophthalmics are related to its sales force, advertising expenses, marketing, and certain administrative overhead costs. The costs incurred by us include marketing support, legal and administrative expenses that we incur in support of Visudyne sales.
(2)	“Less: Inventory costs”
	This represents Novartis Ophthalmics’ cost of goods sold related to Visudyne. It includes the cost of bulk Visudyne we ship to Novartis Ophthalmics, plus Novartis Ophthalmics’ packaging and labelling costs, freight and custom duties.
(3)	“Less: Royalties to third parties”
	This represents the royalty expenses we incur and charge to Novartis Ophthalmics pursuant to the PDT Product Development, Manufacturing and Distribution Agreement between QLT and Novartis Ophthalmics. The amounts are calculated by us based on specified royalty rates from existing license agreements with our licensors of certain Visudyne patent rights.
(4)	“Add: Advance on inventory costs from Novartis Ophthalmics”
	This represents the amount that Novartis Ophthalmics advances to us for shipments of bulk Visudyne. The price of the Visudyne shipments is determined based on the existing agreement between QLT and Novartis Ophthalmics and represents our actual costs of producing Visudyne.
(5)	“Add: Royalties reimbursed to QLT”

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	This is related to item (3) above and represents the amounts we receive from Novartis Ophthalmics in reimbursement for the actual royalty expenses we owe to third party licensors.
(6)	“Add: Other costs reimbursed to QLT”
	This represents reimbursement by Novartis Ophthalmics to us of our portion of the marketing and distribution costs described in (1) above. This expense includes marketing support, legal and administrative expenses that we incur in support of Visudyne sales.

For the three months ended September 30, 2007, revenue from Visudyne sales of $14.6 million decreased by $11.2 million, or 43%, over the three months ended September 30, 2006. The decrease was primarily due to a 35% decline in Visudyne sales by Novartis Ophthalmics over the same quarter in the prior year as a result of decreased end user demand due to competing therapies. In the third quarter of 2007, approximately 19% of the total Visudyne sales by Novartis Ophthalmics were in the U.S., compared to approximately 15% in third quarter of 2006. Overall the ratio of our share of net proceeds from Visudyne sales compared to Visudyne sales was 18.8% in the third quarter of 2007, down from 24.8% in the third quarter of 2006.

For the nine months ended September 30, 2007, revenue from Visudyne sales of $54.2 million decreased by $48.0 million, or 47%, over the nine months ended September 30, 2006. The decrease was primarily due to a 39% decline in Visudyne sales by Novartis Ophthalmics over the same period in the prior year as a result of decreased end user demand due to competing therapies. In the nine months ended September 30, 2007, approximately 17% of the total Visudyne sales by Novartis Ophthalmics were in the U.S., compared to approximately 22% in the nine months ended September 30, 2006. Overall the ratio of our share of net proceeds from Visudyne sales compared to Visudyne sales was 22.8% in the nine months ended September 30, 2007, down from 28.8% in the nine months ended September 30, 2006.

For the three and nine months ended September 30, 2007, net product revenue from Eligard of $6.2 million and $19.6 million increased by $0.3 million, or 6%, and $2.0 million, or 11%, respectively, over the same period in the prior year due to increased shipments of Eligard to commercial licensees, which was driven by Eligard’s continued growth in Europe and the U.S.

Net Royalties

For the three months ended September 30, 2007, royalty revenue of $7.5 million was $1.4 million, or 23%, higher compared to the same period in 2006. For the nine months ended September 30, 2007, royalty revenue of $21.9 million was $7.0 million, or 47%, higher compared to the same period in 2006. The increase was due to Eligard’s continued growth in Europe and higher sales in the U.S. compared to the prior year when there was a temporary suspension of Eligard sales in the U.S. by our commercial licensee.

Costs and Expenses

Cost of Sales

For the three months ended September 30, 2007, cost of sales decreased 5% to $9.9 million compared to $10.5 million for the same period in 2006. The decrease was due to a drop in Visudyne cost of sales related to decreased Visudyne sales, partially offset by higher costs related to increased Eligard shipments to commercial licensees. For the nine months ended September 30, 2007, cost of sales decreased 4% to $30.9 million compared to $32.2 million for the same period in 2006. The decrease was due to lower sales of Visudyne, partially offset by higher manufacturing costs related to Eligard shipments to commercial licensees.

Cost of sales related to revenue from Visudyne decreased from $5.1 million to $2.8 million in the three months ended September 30, 2007 compared to the same period in 2006 and decreased from $17.3 million to $9.4 million in the nine months ended September 30, 2007.

Cost of sales related to revenue from Eligard increased from $5.3 million to $7.1 million in the three months ended September 30, 2007 compared to the same period in 2006 and increased from $14.9 million to $21.4 in the nine months ended September 30, 2007.

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Accrued Cost of Sales re: MEEI

On July 18, 2007, the Court entered judgment in relation to the patent litigation with MEEI in which it found that we were liable under Massachusetts state law for unfair trade practices, but that such violation was not knowing or willful, and determined that we should pay to MEEI 3.01% of past, present and future net sales worldwide of Visudyne. As a result, in the third quarter of 2007, we began accruing an amount equal to 3.01% of net worldwide sales of Visudyne, pursuant to and pending outcome of appeal of the judgment, as a charge to our cost of sales. (See Note 14 — Contingencies in the “Notes to Condensed Consolidated Financial Statements”.)

Research and Development

Research and development, or R&D, expenditures decreased 21% to $10.7 million for the three months ended September 30, 2007 compared to $13.6 million in the same period in 2006. For the nine months ended September 30, 2007, R&D decreased 25% to $32.9 compared to $43.7 million for the same period in 2006. The decrease was due to reduced spending on Atrigel, Aczone, Lemuteporfin and Visudyne projects. Furthermore, the prior year included a $1.9 million in-licensing fee, whereas there were no in-licensing fees in 2007. The decreases were partly offset by higher spending on ocular research.

The magnitude of future R&D expenses is highly variable and depends on many factors over which we have limited visibility and control. Numerous events can happen to an R&D project prior to it reaching any particular milestone which can significantly affect future spending and activities related to the project. These events include:

• changes in the regulatory environment,

• introduction of competing treatments,

• unexpected safety issues,

• patent maintenance and enforcement issues,

• changes in the commercial marketplace,

• difficulties in enrolling patients,

• delays in study progression,

• inability to develop cost effective manufacturing methods that comply with regulatory standards,

• uncertainties related to collaborative arrangements,

• environmental risks, and

• other factors discussed under “Item 1A, Risk Factors” and Recent Developments in this Report.

R&D expenditures by therapeutic area were as follows:

	For the three months				For the nine months
	ended September 30,				ended September 30,
(In thousands of U.S. dollars)	2007		2006		2007		2006
Ocular	$	6,608	$	5,553	$	18,364	$	14,219
Dermatology		2,826		3,550		8,327		12,233
Urology and Oncology		398		1,663		1,642		5,298
Other (including Atrigel programs not in the above therapeutic areas)		886		2,798		4,543		11,954
	$	10,718	$	13,564	$	32,876	$	43,704

Selling, General and Administrative Expenses

For the three months ended September 30, 2007, selling, general and administrative, or SG&A, expenses decreased 29% to $7.1 million compared to $10.0 million for the three months ended September 30, 2006. For the nine months ended September 30, 2007, SG&A decreased 29% to $19.5 million compared to $27.6 million for the same period in 2006. The decrease was primarily due to lower legal fees as a result of the TAP litigation settlement, partly offset by increased Visudyne support costs and the fees associated with the posting of the appeal bond related to the MEEI patent litigation.

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Litigation

In July 2007, the United States District Court (the “Court”) for the District of Massachusetts entered judgment in the lawsuit brought against us by MEEI in connection with U.S. patent no. 5,789,349. The Court found that we were liable under Massachusetts state law for unfair trade practices, but that such violation was not knowing or willful, and determined that we should pay MEEI 3.01% of past, present and future net sales worldwide of Visudyne. The Court also awarded interest at the Massachusetts statutory rate of 12% on the amounts as they would have become payable, from April 24, 2000. The Court further awarded MEEI its legal fees in an amount of $14.1 million, to which will be applied a reduction of $3 million previously agreed to by MEEI. As a result, we recorded a charge of $110.2 million and accrued a litigation reserve in the same amount.

In the third quarter of 2007 we accrued an amount of $1.5 million based on 3.01% (the amount imposed by the Court in its final judgment which is the subject of our appeal) of worldwide Visudyne net sales since June 30, 2007 pursuant to and pending outcome of the appeal of the judgment (included in “Accrued Cost of Sales re: MEEI”). Also in the third quarter we accrued $1.1 million of interest expense within Investment and Other Income (Expense) related to interest accruing on the judgment amount subsequent to the July 18, 2007 judgment. (See Note 14 - Contingencies — in the “Notes to the Condensed Consolidated Financial Statements.”)

Restructuring Charge (Recovery)

For the three months ended September 30, 2007, restructuring expenses increased by $0.2 million compared to the three months ended September 30, 2006. For the nine months ended September 30, 2007, restructuring expenses increased to $1.0 million compared to a restructuring recovery of $0.2 million for the same period in 2006. Restructuring charge (recovery) represents the remaining effects of the restructurings we did in the fourth quarters of 2005 and 2006.

Investment and Other Income (Expense)

Net Foreign Exchange (Losses) Gains

Net foreign exchange (losses) gains arise from the impact of foreign exchange fluctuation on our cash and cash equivalents, short-term investments, derivative financial instruments, foreign currency receivables, foreign currency liabilities and U.S. dollar denominated convertible debt. For the three months ended September 30, 2007, we recorded net foreign exchange losses of $0.9 million versus net foreign exchange gains of $0.6 million in the same period in 2006. For the nine months ended September 30, 2007, we recorded net foreign exchange losses of $1.3 million versus net foreign exchange losses of $2.9 million in the same period in 2006. (See “Liquidity and Capital Resources – Interest and Foreign Exchange Rates”.)

Details of our net foreign exchange (losses) gains were as follows:

	For the three months ended						For the nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
(In thousands of U.S. dollars)
Cash and cash equivalents and short-term investments	$	(18,622	)	$	328		$	(33,385	)	$	(6,711	)
U.S. dollar long-term debt		12,072			(246	)		27,757			6,723
Foreign exchange contracts		(76	)		702			1,913			(2,738	)
Foreign currency receivables and payables		5,763			(203	)		2,430			(160	)
Net foreign exchange gains (losses)	$	(863	)	$	581		$	(1,285	)	$	(2,886	)

Interest Income

For the three months ended September 30, 2007, interest income decreased by $1.7 million to $3.8 million from the same period in 2006. For the nine months ended September 30, 2007, interest income decreased by $4.2 million to $11.2 million from the same period in 2006. The decrease was due to a reduction in cash resulting from our share buyback programs and the Eligard patent litigation settlement payment in February 2007, partially offset by higher interest rates compared to the same periods in the prior year.

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Interest Expense

Interest expense of $2.7 million and $6.0 million for the three and nine months periods ended September 30, 2007 comprised interest accrued on the 3% convertible senior notes issued on August 15, 2003, amortization of deferred financing expenses related to the placement of these notes and beginning in the third quarter of 2007, interest expense of $1.1 million on the post judgment accrued liability associated with the MEEI patent litigation damage award.

Other

For the three months ended September 30, 2007, other income of $3.2 million comprised primarily the $3.0 million proceeds from the sale of the U.S. rights to our BEMA technology. For the nine months ended September 30, 2007, other income of $4.4 million included the $3.0 million proceeds described above and an additional $1.0 million related to the final payment from the sale of the non-U.S. rights of our BEMA technology in March 2007.

For the three months ended September 30, 2006, other income of $1.0 million represents the initial payment related to the sale of the non-U.S. rights of our BEMA technology in August 2006. For the nine months ended September 30, 2006, other income of $2.8 million included the $1.0 million proceed described above plus the final milestone payment from Axcan Pharma, Inc. related to the sale of our Photofrin business in 2000.

Discontinued Operations

In December 2006, QLT USA completed the sale of its generic dermatology and dental businesses and related manufacturing facility located in Fort Collins, Colorado to Tolmar, Inc., a privately held pharmaceutical company. In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-lived Assets, the results of operations related to the generic dermatology and dental business has been excluded from continuing operations and reported as discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

We have financed operations, product development and capital expenditures primarily through proceeds from our commercial operations, public and private sales of equity securities, private placement of convertible senior notes, licensing and collaborative funding arrangements, and interest income.

The primary drivers of our operating cash flows during the three and nine months ended September 30, 2007 were cash payments related to the following: TAP litigation settlement, R&D activities, SG&A expenses, legal expenses related to various legal proceedings, raw material purchases, manufacturing costs related to the production of Visudyne and Eligard, and interest expense related to our convertible notes, offset by cash receipts from product revenues, royalties, interest income and proceeds from the sale of U.S. rights to QLT USA’s BEMA technology.

For the three months ended September 30, 2007, we used $119.7 million of cash in operations as compared to generating $11.7 million for the same period in 2006. During the current period, we deposited cash of $118.8 million as security for the appeal bond. Furthermore, lower cash receipts from Visudyne sales of $15.3 million, lower interest income of $2.7 million, higher realized foreign exchange losses, operating and inventory related expenditures of $2.0 million, and the prior period including $2.6 million from the generic dermatology business divested in December 2006, were offset by lower income tax instalments of $7.9 million (income tax instalments of $0.1 million were made for the three months ended September 30, 2007), higher cash receipts from Eligard product sales, royalties and milestones of $1.1 million and higher foreign exchange contracts receipts of $1.0 million.

During the three months ended September 30, 2007, a decrease in short-term investments of $6.1 million and proceeds of $3.0 million from the sale of our BEMA technology accounted for the most significant cash flows provided by investing activities offset by capital expenditures. We used $0.3 million for the purchase of property, plant and equipment and $0.5 million for other acquisition related costs.

For the three months ended September 30, 2007, our cash flows provided by financing activities consisted primarily of cash receipts from stock option exercises offset by fees related to common shares repurchased in the second quarter of 2007.

For the nine months ended September 30, 2007, we used $170.4 million of cash in operations as compared to generating $7.6 million of cash from operations for the same period in 2006. During the current period, we deposited cash of $118.8 million as security for the appeal bond. Furthermore, lower cash receipts of $68.5 million from Visudyne sales, higher payments in relation to foreign exchange contracts of $1.3 million, lower interest income of

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$5.3 million, and higher realized foreign exchange losses, operating and inventory related expenditures of $30.1 million, and the prior period including $10.5 million from the generic dermatology business divested in December 2006, were offset by higher cash receipts from Eligard product sales, royalties and milestones of $16.4 million and lower income tax instalments of $40.1 million (income tax instalments of $0.1 million were made for the nine months ended September 30, 2007).

During the nine months ended September 30, 2007, a decrease in short-term investments of $22.5 million and proceeds of $4.0 million from the sale of our BEMA technology accounted for the most significant cash flows provided by investing activities offset by capital expenditures. We used $1.9 million for the purchase of property, plant and equipment and $0.5 million for other acquisition related costs.

For the nine months ended September 30, 2007, our cash flows provided by financing activities consisted primarily of cash receipts from stock option exercises offset by common shares repurchased in the second quarter of 2007.

Interest and Foreign Exchange Rates

We are exposed to market risk related to changes in interest and foreign currency exchange rates, each of which could adversely affect the value of our current assets and liabilities. At September 30, 2007, we had an investment portfolio consisting of fixed interest rate securities with an average remaining maturity of approximately 17 days. If market interest rates were to increase immediately and uniformly by a hundred basis points from levels at September 30, 2007, the fair value of the portfolio would decline by an immaterial amount due to the short remaining maturity period.

At September 30, 2007, we had $172.2 million in cash, cash equivalents and $122.0 million of restricted cash, and $172.5 million of debt. To offset the foreign exchange impact of our $172.5 million U.S. dollar-denominated debt and other liabilities, we held approximately the equivalent amount in U.S. dollar denominated cash, cash equivalents and accounts receivables such that if the U.S. dollar were to decrease in value by 10% against the Canadian dollar, the decline in fair value of our U.S. dollar-denominated cash and cash equivalents and receivables would be mostly offset by the decline in the fair value of our $172.5 million U.S. dollar denominated convertible debt and other liabilities, resulting in an immaterial amount of unrealized foreign currency translation loss. As the functional currency of our U.S. subsidiaries is the U.S. dollar, the U.S. dollar-denominated cash and cash equivalents holdings of our U.S. subsidiaries do not result in foreign currency gains and losses in operations.

We enter into foreign exchange contracts to manage exposures to currency rate fluctuations related to our expected future foreign currency cash flows. The net unrealized loss in respect of such foreign currency contracts for the three months ended September 30, 2007 was $0.2 million.

At September 30, 2007, there are no outstanding forward foreign currency contracts.

Contractual Obligations

During the third quarter of 2007, we entered into an agreement with a bonding company (“the Security Agreement”) to provide an appeal bond in the amount of $118.8 million in order to stay the execution and enforcement of the judgment related to the patent litigation with MEEI pending appeal. To obtain the bond, we provided cash as security to the bonding company in the full amount of the bond.

In addition to the Security Agreement with the bonding company described above, our material contractual obligations as of September 30, 2007 comprised our convertible debt, supply agreements with contract manufacturers, and clinical and development agreements. We also had operating lease commitments for office space and office equipment. Details of these contractual obligations are described in our Annual Report on Form 10-K for the year ended December 31, 2006.

Off-Balance Sheet Arrangements

In the course of our business, we regularly provide indemnities with respect to certain matters, including product liability, patent infringement, contractual breaches and misrepresentations, and other indemnities to third parties under the clinical trial, license, service, manufacturing, supply, distribution and other agreements that we enter into in the normal course of our business.

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Except as described above and the contractual arrangements described in the Contractual Obligations section, we do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company.

General

Our cash resources and working capital, cash flow from operations, and other available financing resources will be utilized to fund current product development programs, operating requirements, debt requirements, acquisitions (including the $42.0 million acquisition of ForSight Newco II, Inc. in October 2007) and expected amounts under the restructuring programs. We will seek additional funding in the near future from various sources to fund activities which may include repayment of long-term debt, product launch, in-licensing or acquisition of technology, and stock buy-back. Potential sources of funding include product out-licensing, sale of assets, additional debt or equity financing, or new collaborative arrangements. No assurance can be given that additional funding will be available or, if available, on terms acceptable to us. If adequate capital is not available, our business could be materially and adversely affected. Other factors that may affect our future capital requirements include: the status of competitors; the outcome of legal proceedings and damage awards (see our Condensed Consolidated Financial Statements — Note 14 - - Contingencies); the progress and reprioritization of our R&D programs including preclinical and clinical testing; fluctuating or increasing manufacturing requirements; the timing and cost of obtaining regulatory approvals; the levels of resources that we devote to the development of manufacturing, marketing and support capabilities; technological advances; the cost of filing, prosecuting and enforcing our patent claims and other intellectual property rights; and our ability to establish collaborative arrangements with other organizations.

On August 1, 2007, in order to stay the execution and enforcement of the judgment in the MEEI litigation pending appeal, we have posted an appeal bond in the amount of approximately $118.8 million (which is the amount of the judgment plus 10%), as required by the Court. To obtain the appeal bond, QLT was required to provide its cash, as security, to the bonding company in the full amount of the appeal bond.

In regards to our $172.5 million of convertible debt outstanding, on September 15, 2008, holders of the notes will have the right to require us to purchase all or a portion of their notes for cash at a purchase price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest. We will utilize a significant amount of our cash resources if the holders of the notes elect to require repayment of the debt in 2008.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our condensed consolidated financial statements, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Significant estimates are used for, but not limited to, provision for litigation related contingencies, stock-based compensation, provisions for non-completion of inventory, determination of requirement for reserve for obsolete or excess inventory, classification of inventory between current and non-current assets, assessment of the recoverability of long-lived assets, assessment of impairment of goodwill, accruals for contract manufacturing and research and development agreements, allocation of costs to manufacturing under a standard costing system, allocation of overhead expenses to research and development, determination of fair value of assets and liabilities acquired in the purchase business combinations, determination of fair value of assets held for sale, and provisions for taxes. Please refer to our Critical Accounting Policies and Estimates included as part of our Annual Report on Form 10-K for the year ended December 31, 2006.

Recently Issued and Recently Adopted Accounting Standards

We adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109(“FIN 48”), on January 1, 2007. This interpretation provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. See Note 2 — Income Taxes in “Notes to Condensed Consolidated Financial Statements” for additional information, including the effects of adoption on our Condensed Consolidated Statement of Financial Position.

In February 2006, the FASB issued SFAS No. 155,Accounting for Certain Hybrid Financial Instruments - - an amendment of FASB statement 133 and 140(“SFAS 155”). This Statement simplifies accounting for certain hybrid financial statements by permitting fair value remeasurements for any hybrid financial instrument that contains an

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embedded derivative that would otherwise require bifurcation, and eliminates the restriction on the passive derivative instruments that a qualifying special — purpose entity may hold. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of SFAS 155 did not have a material impact on our results of operations.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements and is effective for fiscal periods beginning after November 15, 2007. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115(“SFAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective for fiscal periods beginning after November 15, 2007. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.

In June 2007, the Emerging Issues Task Force, or EITF, reached a consensus on Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities.Issue No. 07-3 requires that nonrefundable advance payments for future research and development activities be deferred and capitalized. The provisions of Issue No. 07-3 is effective for fiscal years beginning after December 15, 2007, including interim periods within those fiscal years. Entities are required to report the effects of applying this Issue prospectively for new contracts entered into on or after December 15, 2007. We are currently evaluating the impact of this consensus on our Consolidated Financial Statements.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Report contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and “forward looking information” within the meaning of the Canadian securities legislation which are based on our current expectations and projections. Words such as “anticipate”, “project”, “believe”, “expect”, “forecast”, “outlook”, “plan”, “intend”, “estimate”, “should”, “may”, “assume”, “continue”, and variations of such words or similar expressions are intended to identify our forward-looking statements and forward-looking information. Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of QLT to be materially different from the results of operations or plans expressed or implied by such forward-looking statements and forward-looking information. Many such risks, uncertainties and other factors are taken into account as part of our assumptions underlying the forward-looking statements and forward-looking information.

The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements and forward-looking information:

• anticipated levels of future sales of our products;

• our expectations regarding European Visudyne label changes, reimbursement and sales;

• anticipated future operating results;

• our expectations as to the outcome of the appeal of the judgment in the Massachusetts Eye and Ear Infirmary, or “MEEI,” litigation against us and the effect of an adverse judgment on the MGH license agreement;

• our expectations as to the outcome of the German Eligard patent litigation commenced against QLT USA, Inc.’s German licensees by Takeda Chemical industries Ltd. and Takeda Pharma Gmbh;

• our dependency on contract manufacturers and suppliers to manufacture our products at competitive prices and in accordance with U.S. Food and Drug Administration, or “FDA,” and other local and foreign regulatory requirements as well as our product specifications;

• our expectations regarding future tax liability as a result of changes in estimates of prior years’ tax items and results of tax audits by tax authorities;

• our expectations regarding our annualized savings as a result of our R&D portfolio reprioritization and reduction in costs and staffing levels;

• the anticipated timing and progress of clinical trials;

• the anticipated timing of regulatory submissions for our products;

• the anticipated timing for receipt of, and our ability to maintain, regulatory approvals for our products; and

• the anticipated timing for receipt of, and our ability to maintain, reimbursement approvals for our products in development.

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Although we believe that the assumptions underlying the forward-looking statements and forward-looking information contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements and information included in this Report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements and forward-looking information included herein, the inclusion of such statements and information should not be regarded as a representation by us or any other person that the results or conditions described in such statements and information or our objectives and plans will be achieved. Any forward-looking statement and forward-looking information speaks only as of the date on which it is made. Except to fulfill our obligations under the federal securities laws, we undertake no obligation to update any such statement or information to reflect events or circumstances after the date on which it is made.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and Note 13 to the unaudited condensed consolidated financial statements as well as our Annual Report on Form 10-K for the year ended December 31, 2006.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in filings made pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified and in accordance with the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer. Our principal executive and financial officers have evaluated our disclosure controls and procedures as of the end of the period covered by this report and concluded that our disclosure controls and procedures were effective.

It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective under circumstances where our disclosure controls and procedures should reasonably be expected to operate effectively.

(b) Changes in Internal Control over Financial Reporting

Our internal control over financial reporting is designed with the objective of providing reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

In February 2007, following the divestiture of our subsidiary QLT USA’s manufacturing facility and other non-core assets, we migrated the financial information system of our QLT USA subsidiary to SAP. This completed an internal objective for the Company of consolidating financial reporting onto one ERP platform. Further to this, various transitional controls designed to supplement existing internal controls were implemented to mitigate risks potentially associated with a system migration at a subsidiary following a downsizing of operations. Management believes the result of these changes, once completed, will be an enhancement of its operational efficiency and effectiveness and further improvement of internal controls that were previously considered effective.

Except for the changes described in the preceding paragraph, our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, concluded that during the quarter ended September 30, 2007, there was no change to our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information pertaining to legal proceedings can be found in “Part I, Item 1 Financial Statements - Notes to Condensed Consolidated Financial Statements — Note 14 Contingencies”, and is incorporated by reference herein.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Part II, Item 1A Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, which could materially affect our business, financial condition or future results. The risks described in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem not to be material also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On June 4, 2007, our Board of Directors announced a share buy-back program pursuant to which we have the right to purchase up to $50 million of our common shares or up to 5.7 million common shares over a twelve month period commencing June 11, 2007. The share purchases are made as a normal course issuer bid. All purchases are to be effected in the open market through the facilities of TSX and NASDAQ, and in accordance with all regulatory requirements. The actual number of common shares which are purchased and the timing of any such purchases are determined by management.

The following table sets forth information regarding our purchases of common shares on a monthly basis during the three months ended September 30, 2007:

Issuer Purchases of Equity Securities
							Maximum Number
							of Shares (or
					Total Number of		Approximate Dollar
	Total				Shares Purchased as		Value) that May Yet
	Number of		Average		Part of Publicly		Be Purchased Under
	Shares		Price Paid		Announced Plans or		the Plans or
Period	Purchased		per Share		Programs		Programs
July 1, 2007 through July 31, 2007		—		—		—		—
August 1, 2007 through August 31, 2007		—		—		—		—
September 1, 2007 through September 30, 2007		—		—		—		—
Total		—		—		—		—

ITEM 6. EXHIBITS

The exhibits filed or furnished with this Report are set forth in the Exhibit Index.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			QLT Inc. (Registrant)
Date: November 8, 2007	By:	/s/ Robert L. Butchofsky
		Robert L. Butchofsky
		President and Chief Executive Officer (Principal Executive Officer)
Date: November 8, 2007	By:	/s/ Cameron R. Nelson
		Cameron R. Nelson
		Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit
Number	Description
31.1	Rule 13a-14 (a) Certification of the Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer.
32.1	Section 1350 Certification of the Chief Executive Officer.
32.2	Section 1350 Certification of the Chief Financial Officer.

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