Novelion Therapeutics (NVLN) 10-Q 2008 Q2 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 June 30, 2008

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filerþ Non-accelerated filero
(Do not check if a smaller reporting company) Smaller reporting companyo

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 August 5, 2008, the registrant had 74,620,328 outstanding Common Shares.

QLT INC.

QUARTERLY REPORT ON FORM 10-Q
June 30, 2008

TABLE OF CONTENTS

ITEM	PAGE
PART I — FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS		1
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007		1
Unaudited Condensed Consolidated Statements of Income for the three and six months ended June 30, 2008 and June 30, 2007		2
Unaudited Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2008 and June 30, 2007		3
Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Income for the three and six months ended June 30, 2008		4
Notes to Unaudited Condensed Consolidated Financial Statements		5
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		19
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		27
4. CONTROLS AND PROCEDURES		28
PART II — OTHER INFORMATION
1. LEGAL PROCEEDINGS		29
1A. RISK FACTORS		29
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		40
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		41
6. EXHIBITS		41

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

QLT Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands of U.S. dollars)	June 30, 2008			December 31, 2007
ASSETS
Current assets
Cash and cash equivalents	$	120,890		$	126,731
Restricted cash		123,280			123,495
Accounts receivable		30,399			25,257
Income taxes receivable		54,497			48,421
Inventories (Note 2)		11,454			18,511
Current portion of deferred income tax assets		11,512			19,392
Other (Note 3)		12,988			11,930
		365,020			373,737
Property, plant and equipment		8,245			11,643
Assets held for sale		39,676			41,107
Deferred income tax assets		9,695			7,041
Goodwill		93,755			94,903
Long-term inventories and other assets (Note 4)		21,683			20,556
	$	538,074		$	548,987
LIABILITIES
Current liabilities
Accounts payable	$	9,105		$	8,486
Accrued restructuring charge (Note 8)		1,479			153
Accrued liabilities (Note 5)		130,007			123,294
Convertible debt (Note 6)		172,500			172,500
Current portion of deferred revenue		9,001			8,431
Current portion of deferred income tax liabilities		9,421			11,291
		331,513			324,155
Uncertain tax position liabilities		2,209			2,070
Deferred revenue		2,204			2,939
		335,926			329,164
CONTINGENCIES (Note 13)
SHAREHOLDERS’ EQUITY
Share capital (Note 9)
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			702,221
June 30, 2008 — 74,620,328 shares
December 31, 2007 — 74,620,328 shares
Additional paid in-capital		121,889			119,779
Accumulated deficit		(732,364	)		(714,455	)
Accumulated other comprehensive income		110,402			112,278
		202,148			219,823
	$	538,074		$	548,987

See the accompanying “Notes to the Consolidated Financial Statements”.

1

QLT Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
(In thousands of U.S. dollars except share and per share information)	2008			2007			2008			2007
Revenues
Net product revenue (Note 10)	$	13,685		$	18,999		$	25,593		$	39,564
Costs and expenses
Cost of sales		3,232			3,151			5,362			6,627
Accrued cost of sales re: MEEI (Note 13)		1,219			—			2,312			—
Research and development		8,114			8,727			16,162			17,155
Selling, general and administrative		4,556			4,676			11,097			9,991
Depreciation		1,080			1,283			2,101			2,576
Litigation		864			109,897			864			109,897
Restructuring (Note 8)		1,656			121			9,090			494
		20,721			127,855			46,988			146,740
Operating loss		(7,036	)		(108,856	)		(21,395	)		(107,176	)
Investment and other income (expense)
Net foreign exchange (losses) gains		(17	)		(448	)		237			(423	)
Interest income		1,619			3,442			3,936			7,345
Interest expense		(3,040	)		(1,648	)		(6,068	)		(3,230	)
Other gains		109			111			263			1,264
		(1,329	)		1,457			(1,632	)		4,956
Loss from continuing operations before income taxes		(8,365	)		(107,399	)		(23,027	)		(102,220	)
Recovery of income taxes		1,494			36,605			3,605			34,918
Loss from continuing operations		(6,871	)		(70,794	)		(19,422	)		(67,302	)
(Loss) income from discontinued operations, net of income taxes (Note 11)		(567	)		2,127			1,513			3,500
Net loss	$	(7,438	)	$	(68,667	)	$	(17,909	)	$	(63,802	)
Basic net loss per common share
Continuing operations	$	(0.09	)	$	(0.94	)	$	(0.26	)	$	(0.90	)
Discontinued operations		(0.01	)		0.03			0.02			0.05
Net loss income	$	(0.10	)	$	(0.92	)	$	(0.24	)	$	(0.85	)
Diluted net loss per common share
Continuing operations	$	(0.09	)	$	(0.94	)	$	(0.26	)	$	(0.90	)
Discontinued operations		(0.01	)		0.03			0.02			0.05
Net loss income	$	(0.10	)	$	(0.92	)	$	(0.24	)	$	(0.85	)
Weighted average number of common shares outstanding (thousands)
Basic		74,620			74,982			74,620			75,195
Diluted		74,620			74,982			74,620			75,195

2

QLT Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
(In thousands of U.S. dollars)	2008			2007			2008			2007
Cash provided by (used in) operating activities
Net loss	$	(7,438	)	$	(68,667	)	$	(17,909	)	$	(63,802	)
Adjustments to reconcile net loss to net cash from operating activities
Depreciation		1,080			1,646			2,101			3,230
Write down of inventory		7,066			—			7,066			—
Share based compensation		678			732			2,041			1,621
Amortization of deferred financing expenses		342			314			685			608
Unrealized foreign exchange loss		(63	)		(8,467	)		3,922			(7,371	)
Tax loss utilization		—			1,136			1,204			2,552
Interest earned on restricted cash		(860	)		(26	)		(2,088	)		(26	)
Deferred income taxes		5,789			(35,300	)		3,549			(35,207	)
Trading securities		—			(5,924	)		—			52,433
Impairment of property, plant and equipment		92			355			1,691			355
Litigation		—			109,897			—			109,897
Accrued cost of sales and interest re: MEEI		2,630			—			5,108			—
Changes in non-cash operating assets and liabilities
Accounts receivable		(5,595	)		2,412			(5,635	)		10,563
Inventories		(2,962	)		1,059			(1,639	)		(1,278	)
Other current assets		1,752			(354	)		(2,015	)		(2,855	)
Accounts payable		1,357			(2,207	)		488			(2,598	)
Income taxes receivable / payable		(7,247	)		(952	)		(7,062	)		71
Accrued restructuring charge		171			(534	)		1,346			(1,595	)
Other accrued liabilities		3,599			1,407			1,826			(117,683	)
Deferred revenue		480			3,633			(1	)		1,320
		871			160			(5,322	)		(49,765	)
Cash provided by (used in) investing activities
Short-term investment securities		—			—			—			16,435
Restricted cash		—			—			2,307			1,689
Proceeds on disposal of property, plant and equipment		86			—			86			—
Purchase of property, plant and equipment		(37	)		(708	)		(219	)		(1,579	)
Other acquisition related costs		(11	)		(15	)		(41	)		(15	)
		38			(723	)		2,133			16,530
Cash used in financing activities
Common shares repurchased		—			(5,864	)		—			(5,864	)
Issuance of common shares		—			320			—			1,239
		—			(5,544	)		—			(4,625	)
Effect of exchange rate changes on cash and cash equivalents		14			15,284			(2,652	)		15,570
Net increase (decrease) in cash and cash equivalents		923			9,177			(5,841	)		(22,290	)
Cash and cash equivalents, beginning of period		119,967			267,586			126,731			299,053
Cash and cash equivalents, end of period	$	120,890		$	276,763		$	120,890		$	276,763
Supplementary cash flow information:
Interest paid	$	32		$	135		$	2,620		$	2,888
Income taxes paid		1			—			24			—

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, 2006		75,188,980		$	708,206		$	114,724		$	83,535		$	(603,251	)		—		$	303,214
Adjustment for the adoption of FASB Interpretation No. 48														(1,207	)					(1,207	)
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		181,348			2,597			(1,344	)		—			—			—			1,253
Stock-based compensation		—			—			3,696			—			—			—			3,696
Common share repurchase		(750,000	)		(8,582	)		2,703			—			—			—			(5,879	)
Other comprehensive loss:
Cumulative translation adjustment from application of U.S. dollar reporting		—			—			—			28,728			—		$	28,728			28,728
Unrealized gain on available for sale securities		—			—			—			15			—			15			15
Net loss		—			—			—			—			(109,997	)		(109,997	)		(109,997	)
Comprehensive loss		—			—			—			—			—			(81,254	)		—
Balance at December 31, 2007		74,620,328		$	702,221		$	119,779		$	112,278		$	(714,455	)		—		$	219,823
Stock-based compensation		—			—			1,355			—			—			—			1,355
Other comprehensive loss:
Cumulative translation adjustment from application of U.S. dollar reporting		—			—			—			(2,268	)		—		$	(2,268	)		(2,268	)
Net loss		—			—			—			—			(10,471	)		(10,471	)		(10,471	)
Comprehensive loss		—			—			—			—			—			(12,739	)		—
Balance at March 31, 2008		74,620,328		$	702,221		$	121,134		$	110,010		$	(724,926	)		—		$	208,439
Stock-based compensation		—			—			755			—			—			—			755
Other comprehensive loss:
Cumulative translation adjustment from application of U.S. dollar reporting		—			—			—			392			—		$	392			392
Net loss		—			—			—			—			(7,438	)		(7,438	)		(7,438	)
Comprehensive loss		—			—			—			—			—			(7,046	)		—
Balance at June 30, 2008		74,620,328		$	702,221		$	121,889		$	110,402	(1)	$	(732,364	)		—		$	202,148

(1) At June 30, 2008 our accumulated other comprehensive income is entirely related to cumulative translation adjustments from the application of U.S. dollar reporting.

See the accompanying “Notes to the Consolidated Financial Statements”.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

We are a biopharmaceutical company with two commercial products, Visudyne^® and Eligard^®, which were derived from our two unique technology platforms, photodynamic therapy and Atrigel^®. Our clinical development programs are primarily focused on our proprietary punctal plug delivery technology. (See Assets Held for Sale and Discontinued Operations and Note 14 — Subsequent Events below.)

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, 2007. All amounts are expressed in United States dollars unless otherwise noted.

In January 2008, we initiated an active plan to divest: (i) the building and land associated with and surrounding our corporate headquarters in Vancouver; and (ii) QLT USA, Inc. (“QLT USA”), whose primary assets currently include the Eligard product line for prostate cancer and the Atrigel drug delivery system. Assets relating to Aczone^®, a dermatology product for the treatment of acne vulgaris, previously owned by QLT USA, were sold to Allergan Sales, LLC, a wholly-owned subsidiary of Allergan, Inc. on July 11, 2008. As a result, the consolidated financial statements for 2007 have been restated for comparative purposes to present the results of Eligard, Aczone and Atrigel as discontinued operations, and the assets included as part of this divestiture plan have been reclassified as held for sale. (See Note 11 — 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 June 30, 2008, 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 consolidated financial statements are QLT USA, Inc., QLT Plug Delivery, Inc. and QLT Therapeutics, Inc., all of whom 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 and assets held for sale, 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 net assets acquisition or purchase business combinations, stock-based compensation, provision for sales rebate, provisions for taxes, accruals for current income taxes receivable, 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

5

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. Our segment information does not include the results of businesses classified as discontinued operations.

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. Inventory quantities are regularly reviewed and provisions for excess or obsolete inventory are recorded primarily based on our forecast of future demand and market conditions. 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 Statement of Financial Accounting 144 (“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 142 (“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 made 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 third quarter of 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 amount. 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.

Revenue Recognition

     Net Product Revenues

Our net product revenues included in continuing operations are derived from sales of Visudyne.

With respect to Visudyne, under the terms of the PDT Product Development, Manufacturing and Distribution Agreement with Novartis we are responsible for Visudyne manufacturing and product supply, and Novartis is responsible for marketing and distributing Visudyne. Our agreement with Novartis 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, (2) an amount equal to 50% of Novartis’ 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 has occurred, the end selling price of Visudyne is fixed or determinable, and collectibility is

6

reasonably assured. Under the calculation of revenue noted above, this occurs when Novartis has sold Visudyne to its end customers. Our revenue from Visudyne will fluctuate dependent upon Novartis’ ability to market and distribute Visudyne to end-customers.

Beginning in 2008, net product revenues from Eligard have been excluded from continuing operations and reported as discontinued operations for the current and prior periods.

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, which 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.

     Net Royalties

Beginning in 2008, net royalties from Eligard have been excluded from continuing operations and reported as discontinued operations for the current and prior periods.

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, rebates and other items) and calculated based on information supplied to us by our commercial licensees.

Assets Held for Sale and Discontinued Operations

We consider assets to be held for sale when management approves and commits to a formal plan to actively market the assets for sale. Upon designation as held for sale, the carrying value of the assets are recorded at the lower of their carrying value or their estimated fair value. We cease to record depreciation or amortization expense at that time. Our assets held for sale include the land and building associated with our corporate headquarters in Vancouver, and assets of QLT USA including the Eligard product line, Aczone, the Atrigel drug delivery system and related equipment. Assets relating to Aczone were sold on July 11, 2008. Details of the sale of Aczone assets are described in Note 11 — Discontinued Operations.

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 current and prior periods. Additionally, segment information does not include the results of businesses classified as discontinued operations. In accordance with SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assets, we do not expect any continuing involvement with these businesses following their sales and they are expected to be sold during the current fiscal year.

Contingencies

We are involved in 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. Details of our potentially material legal proceedings are described in Note 13 — Contingencies.

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:

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(In thousands of U.S. dollars, except share
and per share data)	Three months ended						Six months ended
	June 30,			June 30,			June 30,			June 30,
	2008			2007			2008			2007
Numerator:
Loss from continuing operations	$	(6,871	)	$	(70,794	)	$	(19,422	)	$	(67,302	)
(Loss) Income from discontinued operations, net of income taxes		(567	)		2,127			1,513			3,500
Net loss	$	(7,438	)	$	(68,667	)	$	(17,909	)	$	(63,802	)
Effect of dilutive securities:
Convertible senior notes - interest expense		—			—			—			—
Adjusted loss	$	(7,438	)	$	(68,677	)	$	(17,909	)	$	(63,802	)
Denominator:(In thousands)
Weighted average common shares outstanding		74,620			74,982			74,620			75,195
Effect of dilutive securities:
Stock options		—			—			—			—
Convertible senior notes		—			—			—			—
Diluted potential common shares		—			—			—			—
Diluted weighted average common shares outstanding		74,620			74,982			74,620			75,195
Basic net loss per common share
Continuing operations	$	(0.09	)	$	(0.94	)	$	(0.26	)	$	(0.90	)
Discontinued operations		(0.01	)		0.03			0.02			0.05
Net loss	$	(0.10	)	$	(0.92	)	$	(0.24	)	$	(0.85	)
Diluted net loss per common share
Continuing operations	$	(0.09	)	$	(0.94	)	$	(0.26	)	$	(0.90	)
Discontinued operations		(0.01	)		0.03			0.02			0.05
Net loss	$	(0.10	)	$	(0.92	)	$	(0.24	)	$	(0.85	)

Excluded from the calculation of diluted net income per common share for the three and six months ended June 30, 2008 were 6,512,901 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 six months ended June 30, 2007 were 5,981,917 shares 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.

Fair Value of Financial Assets and Liabilities

The carrying values of cash and cash equivalents, trade receivables and payables approximate fair value. We estimate the fair value of our financial instruments using the market approach. The fair values of our financial instruments reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). For foreign currency spot and forward contracts, which are carried at their fair values, our fair value estimate incorporates quoted market prices at the balance sheet date. Our convertible notes are carried at historical cost and are adjusted for foreign currency fluctuations and principal repayments. The fair value estimates presented in this report are based on information available to us as of June 30, 2008, and December 31, 2007.

Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but instead eliminates inconsistencies in guidance found in various prior accounting pronouncements and is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB FSP 157-2,Effective Date of FASB Statement No. 157,which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial long-lived assets measured at fair value for an impairment assessment. Effective January 1, 2008, we adopted SFAS 157 for financial assets and liabilities recognized at fair value on a recurring basis. The partial adoption of SFAS 157 for

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financial assets and liabilities did not have a material impact on our consolidated financial position, results of operations or cash flows. See Note 12 — Financial Instruments and Concentration of Credit Risk in “Notes to the Consolidated Financial Statements” in this Report for additional information.

In February 2007, the FASB issued SFAS 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. While SFAS 159 became effective for our 2008 fiscal year, we did not elect the fair value measurement option for any of our financial assets or liabilities. Therefore, the adoption of SFAS 159 did not have a material impact on our financial condition, results of operations or cash flows.

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 are 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. The adoption of Issue No. 07-3 did not have a material impact on our financial condition, results of operations or cash flows.

In November 2007, the EITF reached a consensus on Issue No. 07-1,Accounting for Collaborative Arrangement Related to the Development and Commercialization of Intellectual Property.Issue No. 07-1 defines collaborative arrangement and establishes standards for the reporting of costs incurred and revenues generated from collaborative arrangements and disclosure requirements. The provisions of Issue No. 07-1 are effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact of this consensus on our Consolidated Financial Statements.

In December 2007, the FASB issued SFAS 141R,Business Combinations(“SFAS 141R”) which replaced SFAS 141. This statement retains the purchase method of accounting for acquisitions but made a number of changes including the recognition of assets acquired and liabilities assumed arising from contingencies, the capitalization of in-process research and development at fair value, and the expensing of acquisition-related costs as incurred. This statement will apply prospectively to business combinations for which the acquisition date occurs in the fiscal year beginning on or after December 15, 2008. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.

In December 2007, the FASB issued SFAS 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51(“SFAS 160”) which requires an entity to classify noncontrolling interests in subsidiaries as a separate component of equity, to clearly present the consolidated net income attributable to the parent and the noncontrolling interest on the face of the consolidated statement of income, and to account for transactions between an entity and noncontrolling interests as equity transactions. Additionally, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary should be initially measured at fair value. This statement is effective for fiscal periods beginning after December 31, 2008. We believe the adoption of SFAS 160 will not have a material impact on our financial condition, results of operations or cash flows.

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of SFAS 133” (“SFAS 161”). SFAS 161 requires enhanced disclosure related to derivatives and hedging activities and thereby seeks to improve the transparency of financial reporting. Under SFAS 161, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under SFAS 133,Accounting for Derivative Instruments and Hedging Activities(“SFAS 133”), and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 must be applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS 133 for all financial statements issued for fiscal years and interim periods beginning after November 15, 2008, which for us begins with our 2009 fiscal year, with early application encouraged. We are currently evaluating the impact that SFAS 161 will have on our financial statements.

In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We are currently evaluating the impact that SFAS 162 will have on our financial statements.

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2. INVENTORIES

(In thousands of U.S. dollars)	June 30, 2008			December 31, 2007
Raw materials and supplies	$	7,454		$	12,653
Work-in-process		31,675			33,819
Finished goods		1,108			67
Provision for excess inventory		(2,952	)		(3,020	)
Provision for non-completion of product inventory		(4,306	)		(4,613	)
	$	32,979		$	38,906
Less: Long-term inventory, net of provisions		(21,525	)		(20,395	)
	$	11,454		$	18,511

We review our inventory quantities against our forecast of future demand and market conditions and, if necessary, provide a reserve for potential excess or obsolete inventory. Our provision for excess inventory of $3.0 million, all of which was applied against our long-term inventory, reflects our forecast of future Visudyne demand.

During the quarter ended June 30, 2008, we recorded a $7.1 million charge for obsolete raw materials, of which $5.5 million relates to Aczone raw materials, and $1.6 million relates to Visudyne and Eligard raw materials.

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 quarter ended June 30, 2008 we incurred a charge of $0.3 million related to a batch failure. At June 30, 2008 and December 31, 2007, $2.2 million and $2.3 million, respectively, of the provision for non-completion of product inventory related to long-term 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 4 — Long-Term Inventories and Other Assets.

3. OTHER CURRENT ASSETS

(In thousands of U.S. dollars)	June 30, 2008		December 31, 2007
Inventory in transit held by Novartis	$	7,478	$	7,995
Foreign exchange contracts		3,006		1,236
Deferred financing expenses		169		863
Prepaid expenses and other		2,335		1,836
	$	12,988	$	11,930

Inventory in transit comprises finished goods that have been shipped to and are held by Novartis. Under the terms of the PDT Product Development, Manufacturing and Distribution Agreement, upon delivery of inventory to Novartis, 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 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.

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4. LONG-TERM INVENTORIES AND OTHER ASSETS

(In thousands of U.S. dollars)	June 30, 2008		December 31, 2007
Inventory, net of provisions	$	21,525	$	20,395
Other		158		161
	$	21,683	$	20,556

5. ACCRUED LIABILITIES

(In thousands of U.S. dollars)	June 30, 2008		December 31, 2007
Royalties	$	923	$	1,033
Compensation		3,447		5,263
Interest		1,804		1,560
Litigation charge — MEEI judgment and ongoing related accruals (Note 13)		120,141		115,027
Provision for Eligard sales pricing rebate		3,460		—
Other		232		411
	$	130,007	$	123,294

6. 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. Subject to certain conditions, the notes may be converted into shares of common stock at a conversion price of approximately $17.80 per share. On and after September 15, 2008, we have the right to redeem all or a portion of the notes, for cash, at 100% of the principal amount of the notes plus accrued and unpaid interest. In addition, holders of the convertible senior notes have the right to require us to repurchase the notes, for cash, at 100% of the principal amount of the notes plus accrued interest on September 15 in each of 2008, 2013, and 2018. Since the first redemption and repurchase date is September 15, 2008 and we believe it is likely that most or all of the convertible senior notes will be redeemed on the first redemption date, we have classified our convertible debt as a current liability.

7. FOREIGN EXCHANGE FACILITIES

We 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. These foreign exchange facilities are secured by money market instruments based on contingent credit exposure for the period in which any foreign exchange transactions are outstanding. At June 30, 2008, money market instruments totalling $1.6 million were pledged as security for these foreign exchange facilities.

8. RESTRUCTURING CHARGE

In January 2008 we restructured our operations in order to concentrate our resources on our Visudyne product and on our clinical development programs related to our proprietary punctal plug delivery technology and our photodynamic therapy dermatology technology (Lemuteporfin). See Note 14 - - Subsequent Events. We have provided or will be providing approximately 115 employees with severance and support to assist with outplacement and recorded $9.1 million of restructuring charges for the six months ended June 30, 2008. Restructuring charges include impairment charges on property, plant and equipment of $1.5 million related to equipment used for activities which were eliminated pursuant to our restructuring. We expect to record additional restructuring charges of approximately $0.7 to $1.0 million in 2008 related to severance, termination benefits and other costs, as we complete final activities associated with this restructuring. We anticipate paying most amounts by the end of 2008.

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The details of our restructuring are as follows:

	Employee
	Termination			Asset
(In thousands of U. S. dollars)	costs(1)			Write-downs			Total
Balance at December 31, 2007(2)	$	153		$	—		$	153
Restructuring charge		5,948			1,486			7,434
Foreign exchange		(24	)		—			(24	)
Cash payments		(4,240	)		—			(4,240	)
Non-cash portion(3)		(537	)		(1,486	)		(2,023	)
Balance at March 31, 2008	$	1,300		$	—		$	1,300
Restructuring charge		1,603			53			1,656
Restructuring charge in discontinued operations		216			—			216
Foreign exchange		6			—			6
Cash payments		(1,663	)		—			(1,663	)
Non-cash portion(3)		17			(53	)		(36	)
Balance at June 30, 2008	$	1,479		$	—		$	1,479

(1)	Costs include severance, termination benefits, and outplacement support.
(2)	Opening balance represents remaining balance from previous restructurings.
(3)	Non-cash portion of employee termination costs relates to stock-based compensation.

9. SHARE CAPITAL

(a) Share Buy-Back Program

We implemented a share buy-back program in June 2007 pursuant to which we had 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. This program expired in June 2008. 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. There were no shares repurchased in 2008. The share purchases were made under a normal course issuer bid in the open market through the facilities of the Toronto Stock Exchange or NASDAQ Stock Market, and in accordance with all regulatory requirements.

(b) Stock Options

We use 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						Six months ended
	June 30,			June 30,			June 30,			June 30,
	2008			2007			2008			2007
Annualized volatility		42.1	%		37.0	%		42.1	%		37.0	%
Risk-free interest rate		2.9	%		4.4	%		2.9	%		4.4	%
Expected life (years)		3.9			3.3			3.9			3.3

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.

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The impact on our results of operations of recording stock-based compensation for the three and six month periods ended June 30, 2008 and June 30, 2007 was as follows:

(In thousands of U.S. dollar)	Three months ended						Six months ended
	June 30,			June 30,			June 30,			June 30,
	2008			2007			2008			2007
Cost of sales	$	4		$	—		$	11		$	—
Research and development		248			432			576			902
Selling, general and administrative		377			236			808			501
Restructuring charge		(17	)		—			520			—
Discontinued operations		66			64			126			218
Stock-based compensation expense before income taxes		678			732			2,041			1,621
Related income tax benefits		(22	)		(23	)		(48	)		(81	)
Stock-based compensation, net of income taxes	$	656		$	709		$	1,993		$	1,540

At June 30, 2008, total unrecognized estimated compensation cost related to non-vested stock options was $6.2 million, which is expected to be recognized over 36 months with a weighted-average period of 2.4 years. Share-based compensation capitalized as part of inventory was $0.1 million during the three and six months ended June 30, 2008, flat in comparison to the same period in 2007. There were no stock options exercised during the three and six months ended June 30, 2008. The total intrinsic value of stock options exercised during the three and six month periods ended June 30, 2007 was $0.1 million and $0.3 million, respectively. We recorded cash received from the exercise of stock options of $0.3 million and $1.2 million, respectively, during the three and six months ended June 30, 2007. We recorded a negligible amount for related tax benefits during the three and six months ended June 30, 2008. Upon option exercise, we issue new shares of stock.

10. NET PRODUCT REVENUE

Net product revenue was determined as follows:

	For the three months ended						For the six months ended
	June 30,						June 30,
(In thousands of U.S. dollars)	2008			2007			2008			2007
Visudyne® sales by Novartis	$	40,677		$	59,346		$	77,156		$	120,581
Less: Marketing and distribution costs		(17,900	)		(26,449	)		(35,932	)		(53,282	)
Less: Inventory costs		(3,073	)		(2,870	)		(5,062	)		(5,956	)
Less: Royalties to third parties		(869	)		(1,256	)		(1,647	)		(2,539	)
	$	18,835		$	28,771		$	34,515		$	58,804
QLT’s 50% share of Novartis’ net proceeds from Visudyne® sales	$	9,418		$	14,386		$	17,257		$	29,402
Add: Advance on inventory costs from Novartis		2,398			2,092			3,752			4,174
Add: Royalties reimbursed to QLT		879			1,258			1,676			2,542
Add: Other costs reimbursed to QLT		990			1,263			2,908			3,446
Revenue from Visudyne® sales	$	13,685		$	18,999		$	25,593		$	39,564

For the three months ended June 30, 2008, approximately 35% of total Visudyne sales were in Europe, 25% in the United States, and 40% in other markets worldwide. For the same period in 2007, approximately 50% of total Visudyne sales were in Europe, 17% in the United States, and 33% in other markets worldwide.

For the six months ended June 30, 2008, approximately 35% of total Visudyne sales were in Europe, 25% in the United States, and 40% in other markets worldwide. For the same period in 2007, approximately 54% of total Visudyne sales were in Europe, 16% in the United States, and 30% in other markets worldwide.

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11. DISCONTINUED OPERATIONS

As a result of our comprehensive business and portfolio review, we initiated a strategic restructuring of our operations in January 2008 in order to concentrate our resources on Visudyne and on our clinical development programs related to our proprietary punctal plug delivery technology and our photodynamic therapy dermatology technology (Lemuteporfin). Our restructuring plan provides for the sale of the land and building associated with our corporate headquarters in Vancouver, British Columbia, and the assets of QLT USA, our wholly owned U.S. subsidiary, whose primary assets currently include the Eligard product line for prostate cancer and the Atrigel drug delivery system. Assets related to Aczone were sold by QLT USA to Allergan Sales, LLC, a wholly-owned subsidiary of Allergan, Inc., in July 2008 for cash consideration of $150.0 million, pursuant to the terms of a purchase agreement executed on June 6, 2008. (See Note 14 — Subsequent Events.) In accordance with SFAS No. 144, the results of operations from the Eligard, Aczone, and Atrigel products were accounted for as discontinued operations. Accordingly, the results of operations related to these products were excluded from continuing operations and reported as discontinued operations for the current and prior periods. In addition, the long-lived assets included as part of these divestitures have been reclassified as held for sale in the Condensed Consolidated Balance Sheet.

The carrying values of assets held for sale are summarized below. At June 30, 2008, no impairment has been recognized in relation to these assets.

	June 30,		December 31,
(In thousands of U.S. dollars)	2008		2007
Building	$	29,073	$	29,735
Land		7,026		7,187
Equipment		3,577		4,185
	$	39,676	$	41,107

Operating results of our Eligard, Aczone and Atrigel related operations included in discontinued operations are summarized as follows:

	For the three months ended						For the six months ended
	June 30,						June 30,
(In thousands of U.S. dollars)	2008			2007			2008			2007
Net revenue	$	16,935		$	16,659		$	31,721		$	28,797
Pre-tax (loss) income		(928	)		3,607			2,219			5,827
Income tax recovery (expense)		361			(1,480	)		(706	)		(2,327	)
Net (loss) income from discontinued operations	$	(567	)	$	2,127		$	1,513		$	3,500

As at June 30, 2008, we held accounts receivable and inventory of $17.8 million and $8.1 million, respectively, related to these products (December 31, 2007 — $13.4 million and $11.6 million, respectively).

12. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

We adopted SFAS 157 on January 1, 2008. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FAS No. 157 details the disclosures that are required for items measured at fair value.

We have various financial instruments that must be measured under the new fair value standard including: cash and cash equivalents, forward currency contracts, and convertible senior notes. We currently do not have non-financial assets or non-financial liabilities that are required to be measured at fair value on a recurring basis. Our financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:

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Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.

The following table provides a summary of the fair values of assets and liabilities under SFAS 157:

			Fair Value Measurements at June 30, 2008
	Carrying Value
	June 30, 2008		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	120,890	$	25,473	$	95,417	$	—
Forward currency contracts	��	3,006		—		3,006		—
Total	$	123,896	$	25,473	$	98,423	$	—
Liabilities:
Convertible senior notes	$	172,500	$	—	$	170,344	$	—

We purchase goods and services primarily in Canadian (“CAD”) and U.S. dollars (“USD”), and earn most of our revenues in USD. We enter into foreign exchange contracts to manage exposure to currency rate fluctuations related to our USD denominated liabilities. We are exposed to credit risk in the event of non-performance by counterparties in connection with these foreign exchange contracts. We mitigate this risk by transacting with financially sound counterparties and, accordingly, do not anticipate loss for non-performance. Foreign exchange risk is also managed by satisfying foreign denominated expenditures with cash flows or assets denominated in the same currency. The net unrealized (loss) or gain in respect of such foreign currency contracts for the three and six months ended June 30, 2008, was approximately a $0.2 million loss, and a $1.8 million gain, respectively, which was included in our results of operations.At June 30, 2008, we had outstanding forward foreign currency contracts as noted below.

	Maturity Period	Quantity (millions)	Average Price
Canadian / U.S. dollar forward contracts to buy USD	2008	USD 76.0	0.98155 per USD

Other financial instruments that potentially subject us to concentration of credit risk include our cash, cash equivalents and accounts receivable. In order to limit our credit exposure, our policy in regards to cash and cash equivalents is to deposit our cash with high quality financial institutions or invest in investment grade money market instruments. Furthermore, we limit our investment in any particular issuer to a maximum of 5% of our total portfolio unless it is a government issuer.

Our accounts receivable, as at June 30, 2008 and December 31, 2007, respectively, comprised primarily amounts owing from Novartis, MediGene AG, and Sanofi-Synthelabo, Inc.

13. CONTINGENCIES

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 is not material in the amounts claimed or as to which the claim is covered by insurance and that, in our reasonable judgment based on the information available to us at the

15

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.

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; MGH Matters

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

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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, at June 30, 2007, we recorded a charge of $109.9 million and accrued a litigation reserve in the same amount. We have also accrued, since July 2007, an additional $5.1 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 Consolidated Statements of Operations as “Accrued Cost of Sales re: MEEI”). Furthermore, we have accrued $5.3 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. The appeal is scheduled for hearing before the United States Court of Appeals for the First Circuit in September, 2008. In order to stay the execution and enforcement of the judgment pending appeal, we 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 on our Consolidated Balance Sheets as at June 30, 2008. Accrued interest of $4.5 million on the cash deposit of $118.8 million has also been included in restricted cash.

We may provide additional cash security in the amount of the damages accrued and accruing under the judgment. These amounts will be included as restricted cash on our Consolidated Balance Sheets if and when we deposit the additional security.

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 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, we can give no assurances of the result and an adverse outcome could have a material adverse impact on our financial condition.

(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 $0.7 million 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.

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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 sought damages in the amount of $3.3 million and a determination that our termination of the Agreement is invalid. Biolitec also sought an award of attorneys’ fees and reasonable costs in prosecuting the arbitration. On May 15, 2008, the arbitrator determined that QLT had an adequate basis to terminate the Agreement after the first year of the term of the Agreement, but awarded Biolitec $864,000 in damages for QLT’s failure to perform for the balance of the first year of the term of the Agreement, and required Biolitec to deliver at our request certain lasers Biolitec would otherwise have been obligated to provide to QLT during the first year of the Agreement. As permitted under the arbitrator’s award, we have requested delivery of those certain lasers from Biolitec. Neither party was awarded attorney’s fees or costs in connection with the arbitration. The parties reported back to the Court with the arbitrator’s determination.

14. SUBSEQUENT EVENTS

On July 14, 2008 we announced the completion of the sale of our Aczone-related assets to Allergan Sales, LLC, a wholly-owned subsidiary of Allergan, Inc., for cash consideration of $150.0 million.

On July 29, 2008, we announced that based on interim clinical trial results from our lemuteporfin (QLT 0074) injectable formulation Phase I/II study in patients with acne, we have decided to halt continuation of our current clinical development plans for photodynamic therapy with lemuteporfin (QLT 0074) for acne. See Recent Developments in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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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, 2007. All of the following amounts are expressed in U.S. dollars unless otherwise indicated.

OVERVIEW

QLT was formed in 1981 under the laws of the Province of British Columbia, Canada. We are a biopharmaceutical company with two commercial products, Visudyne^® and Eligard^®, which were derived from our two unique technology platforms, photodynamic therapy and Atrigel^®. Our clinical development programs are primarily focused on our proprietary punctal plug delivery technology. See Recent Developments and Income from Discontinued Operations below.

Our commercial product, Visudyne, utilizes photodynamic therapy 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, or “EU,” countries, for the treatment of a form of wet AMD known as predominantly classic subfoveal choroidal neovascularization, or “CNV.” Visudyne is also 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. Furthermore, Visudyne is approved in more than 60 countries, including the U.S., Canada and the EU 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”) and is manufactured by QLT and sold by Novartis under the terms of a co-development, manufacturing and commercialization agreement with Novartis.

In addition to 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).

In January 2008, we initiated a strategic corporate restructuring designed to enhance shareholder value. These initiatives include:

• the sale of QLT USA, Inc. (“QLT USA”), our wholly-owned U.S. subsidiary, or its assets, which at the time included: the Eligard product line for prostate cancer, the Atrigel drug delivery system and Aczone^® (a dermatology product for the treatment of acne vulgaris);

• the sale of the land and building associated with and surrounding our corporate head-office in Vancouver; and

• the reduction in headcount of approximately 115 employees with planned reductions in the future as assets are divested.

The plan to pursue a sale of the assets described above was part of a significant strategic change pursuant to which we are focusing our ongoing business primarily on Visudyne and clinical development programs related to our punctal plug delivery technology and until recently, our photodynamic therapy dermatology technology (Lemuteporfin — see Recent Developments below).

On May 15, 2008, we announced that we entered into a sale and purchase agreement to sell the land and building comprising our corporate headquarters and an adjacent undeveloped parcel of land in Vancouver. The sale and purchase agreement provides for the sale of the real estate to Discovery Parks Holdings Ltd. (“Discovery Parks”), an affiliate of Discovery Parks Trust, a private Canadian trust that designs and builds research facilities for the benefit of the people of British Columbia, for Cdn$65.5 million. In conjunction with the sale, QLT will enter into a five-year lease with Discovery Parks for approximately thirty percent of the facility and will provide two-year 6.5% interest-only second mortgage vendor financing in the amount of Cdn$12 million. The conditions to the closing of this transaction have been removed and the closing is expected to take place by the end of August, 2008.

On July 11, 2008 we completed the sale of the assets related to Aczone to Allergan Sales, LLC, a wholly-owned subsidiary of Allergan, Inc., for cash consideration of $150.0 million. We have also completed most of our reduction in headcount.

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We are continuing to pursue the sale of QLT USA, or its remaining assets, namely: the Eligard product line and the Atrigel drug delivery system. There can be no assurance that we will be able to negotiate the sale of the remaining assets on terms acceptable to us or at all or that we will pursue any particular transaction structure. Goldman Sachs & Co., our financial advisor, is assisting us as we review and evaluate transaction proposals. The goal of maximizing shareholder value will be the key driver in any decision we make regarding specific deal structures or transactions into which we may enter.

RECENT DEVELOPMENTS

Lemuteporfin is a proprietary photosensitizer (a light-activated drug) to which we own or exclusively license all rights. We have been developing both a topical and an injectable formulation of lemuteporfin for the treatment of acne wherein Lemuteporfin is applied directly (topically) or through systemic administration (injectable) to the affected area and light is then shone on the area to activate the drug. Phase I (topical) and Phase I/II (injectable) studies are ongoing in Canada. On July 29, 2008, we announced that based on interim clinical trial results from our lemuteporfin (QLT 0074) injectable formulation Phase I/II study in patients with acne, we have decided to halt continuation of our current clinical development plans for photodynamic therapy with lemuteporfin (QLT 0074) for acne.

RESULTS OF OPERATIONS

For the three and six months ended June 30, 2008, we recorded a net loss of $7.5 million and $17.9 million, or $0.10 and $0.24 net loss per common share, respectively. These results compare with a net loss of $68.7 million and $63.8 million, or $0.92 and $0.85 net loss per common share for the three and six months ended June 30, 2007, respectively. Detailed discussion and analysis of our results of operations are as follows:

Revenues

Net Product Revenue

     Net product revenue was determined as follows:

	For the three months						For the six months ended
	ended June 30,						June 30,
(In thousands of U.S. dollars)	2008			2007			2008			2007
Visudyne® sales by Novartis	$	40,677		$	59,346		$	77,156		$	120,581
Less: Marketing and distribution costs(1)		(17,900	)		(26,449	)		(35,932	)		(53,282	)
Less: Inventory costs(2)		(3,073	)		(2,870	)		(5,062	)		(5,956	)
Less: Royalties to third parties(3)		(869	)		(1,256	)		(1,647	)		(2,539	)
	$	18,835		$	28,771		$	34,515		$	58,804
QLT’s 50% share of Novartis’ net proceeds from Visudyne® sales	$	9,418		$	14,386		$	17,257		$	29,402
Add: Advance on inventory costs from Novartis(4)		2,398			2,092			3,752			4,174
Add: Royalties reimbursed to QLT(5)		879			1,258			1,676			2,542
Add: Other costs reimbursed to QLT(6)		990			1,263			2,908			3,446
Revenue from Visudyne® sales	$	13,685		$	18,999		$	25,593		$	39,564

(1)

“Less: Marketing and distribution costs”

This represents Novartis’ 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. The costs incurred by Novartis 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.

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(2)	“Less: Inventory costs”
	This represents Novartis’ cost of goods sold related to Visudyne. It includes the cost of bulk Visudyne we ship to Novartis and our provisions for excess or obsolete inventory, plus Novartis’ packaging and labelling costs, freight, custom duties and inventory obsolescence.
(3)	“Less: Royalties to third parties”
	This represents the royalty expenses we incur and charge to Novartis pursuant to the PDT Product Development, Manufacturing and Distribution Agreement between QLT and Novartis. 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”
	This represents the amount that Novartis advances to us for shipments of bulk Visudyne and reimbursement for inventory obsolescence. The price of the Visudyne shipments is determined based on the existing agreement between QLT and Novartis and represents our actual costs of producing Visudyne.
(5)	“Add: Royalties reimbursed to QLT”
	This is related to item (3) above and represents the amounts we receive from Novartis 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 to us of our portion of the marketing and distribution costs described in (1) above. Our marketing and distribution costs include marketing support, legal and administrative expenses that we incur in support of Visudyne sales.

For the three months ended June 30, 2008, revenue from Visudyne sales of $13.7 million decreased by $5.3 million, or 28%, from the three months ended June 30, 2007. The decrease was primarily due to a 32% decline in Visudyne sales by Novartis over the same quarter in the prior year as a result of decreased end user demand due to competing therapies. In the second quarter of 2008, approximately 25% of the total Visudyne sales by Novartis were in the U.S., compared to approximately 17% in second quarter of 2007. Overall the ratio of our share of net proceeds from Visudyne sales compared to Visudyne sales was 23.2% in the second quarter of 2008, down from 24.2% in the second quarter of 2007.

For the six months ended June 30, 2008, revenue from Visudyne sales of $25.6 million decreased by $14.0 million, or 35%, from the six months ended June 30, 2007. The decrease was primarily due to a 36% decline in Visudyne sales by Novartis over the same period in the prior year as a result of decreased end-user demand due to competing therapies. In the six months ended June 30, 2008, approximately 25% of the total Visudyne sales by Novartis were in the U.S., compared to approximately 16% in same period in 2007. Overall the ratio of our share of net proceeds from Visudyne sales compared to Visudyne sales was 22.4% in the six months ended June 30, 2008, down from 24.4% in the six months ended June 30, 2007.

Costs and Expenses

Cost of Sales

For the three months ended June 30, 2008, cost of sales was $3.2 million, flat in comparison to the same period in 2007. For the six months ended June 30, 2008, cost of sales decreased 19% to $5.4 million compared to $6.6 million for the same period in 2007. A decrease in cost of sales related to the drop in Visudyne sales for the three and six months ended June 30, 2008 was offset by a $0.9 million inventory write-down.

Accrued Cost of Sales re: MEEI

As a result of the damage award imposed by the Court in relation to the patent litigation with MEEI, we are accruing an amount equal to 3.01% of net worldwide sales of Visudyne as a charge to our cost of sales, pursuant to and pending

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outcome of our appeal of the judgment. See Note 13 — Contingencies in the “Notes to Condensed Consolidated Financial Statements”.

Research and Development

Research and development (“R&D”) expenditures decreased 7% to $8.1 million for the three months ended June 30, 2008 compared to $8.7 million in the same period in 2007. For the six months ended June 30, 2008, R&D decreased 6% to $16.2 compared to $17.2 million for the same period in 2007. Significant reductions in spending on early stage research projects and reduced overhead expenses were mostly offset by higher spending on punctal plug development and Visudyne combination studies.

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 technologies and treatments,

• unexpected safety issues,

• patent application, maintenance and enforcement issues,

• changes in the commercial marketplace,

• difficulties in enrolling patients,

• delays in study progression, including regulatory delays,

• 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”.

R&D expenditures by therapeutic area were as follows:

	For the three months				For the six months
	ended June 30,				ended June 30,
(In thousands of U.S. dollars)	2008		2007		2008		2007
Ocular	$	7,093	$	6,067	$	13,802	$	11,736
Dermatology		966		2,222		2,240		4,749
Other		55		438		120		670
	$	8,114	$	8,727	$	16,162	$	17,155

Selling, General and Administrative Expenses

For the three months ended June 30, 2008, selling, general and administrative (“SG&A”) expenses of $4.6 million were flat in comparison to the same period in 2007. For the six months ended June 30, 2008, SG&A increased 11% to $11.1 million compared to $10.0 million for the same period in 2007. The increase was primarily due to negative foreign exchange impact of a weaker U.S. dollar on our Canadian dollar denominated expenses.

Litigation

In May 2008, we received the arbitrator’s decision in relation to our dispute with Biolitec over the Distribution, Supply and Service Agreement between QLT Therapeutics, Inc. and Biolitec. As a result, in June 2008, we paid $0.9 million to Biolitec and recorded a charge of the same amount. The litigation charge in the second quarter of 2007 resulted from the damage award imposed by the Court in relation to the patent litigation with MEEI. See Note 13 — Contingencies in the “Notes to Unaudited Condensed Consolidated Financial Statements”.

Restructuring Charge

In January 2008, we restructured our operations in order to concentrate our resources on Visudyne, and on our clinical development programs related to our proprietary punctal plug delivery technology and our photodynamic therapy dermatology technology (Lemuteporfin). (See Recent Developments above.) We have provided or will be providing approximately 115 employees with severance and support to assist with outplacement and recorded $9.1 million of restructuring charges in the six months ended June 30, 2008, which included a property, plant and equipment impairment charge of $1.5 million. We expect to record additional restructuring charges of approximately $0.7 to $1.0

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million in 2008 related to severance, termination benefits and other costs as we complete final activities associated with this restructuring. We anticipate paying most amounts by the end of 2008. Annual operating savings as a result of this restructuring are expected to be approximately $11.0 million.

For the three and six months ended June 30, 2007, restructuring charges of $0.1 million and $0.5 million, respectively, represent the remaining effects of the restructurings that occurred in the fourth quarters of 2005 and 2006.

Investment and Other Income (Expense)

Net Foreign Exchange (Losses) Gains

Net foreign exchange gains comprise gains from the impact of foreign exchange fluctuation on our cash and cash equivalents, restricted cash, derivative financial instruments, foreign currency receivables, foreign currency payables or accruals, and U.S. dollar denominated convertible debt. 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 six months ended
	June 30,						June 30,
(In thousands of U.S. dollars)	2008			2007			2008			2007
Cash and cash equivalents and short-term investments	$	(370	)	$	(13,212	)	$	4,777		$	(14,764	)
U.S. dollar long-term debt		649			13,933			(3,936	)		15,685
Foreign exchange contracts		(231	)		1,575			1,829			1,989
Foreign currency receivables and payables		(65	)		(2,744	)		(2,433	)		(3,333	)
Net foreign exchange (losses) gains	$	(17	)	$	(448	)	$	237		$	(423	)

Interest Income

For the three months ended June 30, 2008, interest income decreased 53% to $1.6 million compared to $3.4 million for the same period in 2007. For the six months ended June 30, 2007, interest income decreased from $7.3 million to $3.9 million when compared to the same period in 2007. The decrease was primarily due to a decline in interest rates and a lower cash balance in 2008 as a result of the cash expended in our acquisition of ForSight Newco II (now QLT Plug Delivery, Inc.) in October 2007 and the Eligard patent litigation settlement payment in February 2007 in connection with the TAP litigation.

Interest Expense

For the three and six month periods ended June 30, 2008, $3.0 million and $6.1 million of interest expense, respectively, 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 on the post judgment accrued liability associated with the MEEI patent litigation damage award currently pending appeal. For the three and six month periods ended June 30, 2008 there was $1.4 million and $2.8 million of interest, respectively, related to the MEEI patent litigation included within interest expense.

(Loss) income from Discontinued Operations

As a result of our comprehensive business and portfolio review, we initiated a strategic restructuring of our operations in January 2008 in order to concentrate our resources on Visudyne and on our clinical development programs related to our punctal plug delivery technology and our photodynamic therapy dermatology technology (Lemuteporfin). See Recent Developments above. Our restructuring plan provides for the sale of the land and building associated with our corporate headquarters in Vancouver, British Columbia, and the assets of QLT USA, our wholly-owned U.S. subsidiary, whose primary assets include the Eligard product line for prostate cancer and the Atrigel drug delivery system. Assets related to Aczone were sold by QLT USA to Allergan Sales, LLC, a wholly-owned subsidiary of Allergan, Inc., in July 2008. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”, the Eligard, Aczone, and Atrigel products were accounted for as discontinued operations. Accordingly, the results of operations related to these products were excluded from continuing operations and reported as discontinued operations for the current and prior periods. In addition, the long-term assets included as part of this divestiture have been reclassified as held for sale in the Condensed Consolidated Balance Sheet.

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Loss from discontinued operations for the three months ended June 30, 2008 was $0.6 million compared to income of $2.1 million in the same period in 2007. For the six months ended June 30, 2008, income from discontinued operations decreased by 57% to $1.5 million compared to $3.5 million for the same period in 2007. The decrease was primarily due to a $5.5 million ($3.5 million, net of tax) inventory write-down of Aczone raw material not included in the sale of the Aczone assets to Allergan Sales, LLC and a $3.5 million ($2.2 million, net of income tax) provision for a potential retroactive pricing rebate on certain sales of Eligard from 2004 to the second quarter of 2008, offset by higher Eligard sales and reduced R&D spending on Atrigel projects.

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, sale of non-core assets and interest income.

The primary drivers of our operating cash flows during the three and six months ended June 30, 2008 were cash payments related to the following: restructuring expenses, R&D activities, SG&A expenses, raw material purchases, manufacturing costs related to the production of Eligard and interest expense related to our convertible notes, offset by cash receipts from product revenues, royalties, interest income and release of a holdback from escrow related to the sale of our generic dermatology and dental businesses in December 2006.

For the three months ended June 30, 2008, we generated $0.9 million of cash from operations as compared to $0.2 million for the same period in 2007. The $0.7 million positive cash flow variance is primarily attributable to:

• A positive cash flow variance from lower operating and inventory related expenditures of $13.6 million;

• A positive cash flow variance from lower purchase of trading securities of $5.9 million;

• A negative cash flow variance from lower interest income and higher foreign exchange losses of $3.9 million; and

• A negative cash flow variance from lower cash receipts from product sales, royalties and milestones of $14.9 million.

During the three months ended June 30, 2008, the disposal of property, plant and equipment of $0.1 million accounted for the most significant cash flows provided by investing activities offset by capital expenditures.

For the three months ended June 30, 2008, there were no cash flows provided by financing activities.

For the six months ended June 30, 2008, we used $5.3 million of cash in operations as compared to $49.8 million for the same period in 2007. The $44.5 million positive cash flow variance is primarily attributable to:

• A positive cash flow variance from lower litigation payment as 2007 included the TAP litigation payment of $112.5 million;

• A positive cash flow variance from lower operating and inventory related expenditures of $16.0 million;

• A negative cash flow variance from higher restructuring costs of $3.6 million;

• A negative cash flow variance from lower investment and other income of $3.7 million;

• A negative cash flow variance from lower cash receipts from product sales, royalties and milestones of $25.7 million; and

• A negative cash flow variance from lower cash receipts from the sale of trading securities of $52.4 million.

During the six months ended June 30, 2008, a decrease in restricted cash of $2.3 million and the disposal of property, plant and equipment of $0.1 million accounted for the most significant cash flows provided by investing activities offset by capital expenditures. We used $0.2 million for the purchase of property, plant and equipment and other acquisition related costs.

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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 June 30, 2008, we had an investment portfolio consisting of fixed interest rate securities with an average remaining maturity of approximately 21 days. If market interest rates were to increase immediately and uniformly by a hundred basis points from levels at June 30, 2008, the fair value of the portfolio would decline by an immaterial amount due to the short remaining maturity period.

At June 30, 2008, we had $120.9 million in cash and cash equivalents and $172.5 million of debt. To offset the foreign exchange impact of our $172.5 million U.S. dollar-denominated debt and other U.S. dollar-denominated liabilities, we held approximately the equivalent amount in U.S. dollar-denominated cash, cash equivalents, accounts receivables and foreign currency contracts such that if the U.S. dollar were to increase in value by 10% against the Canadian dollar, the increase in the fair value of our U.S. dollar denominated liabilities would be mostly offset by the increase in fair value of our U.S. dollar-denominated cash, cash equivalents, accounts receivables and foreign currency contracts, 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 or losses in operations.

We enter into foreign exchange contracts to manage exposures to currency rate fluctuations related to our U.S. dollar-denominated liabilities. The net unrealized loss in respect of such foreign currency contracts for the three months ended June 30, 2008 was $0.2 million, and was included as part of the net foreign exchange (losses) gains in our results of operations.

At June 30, 2008, we had outstanding forward foreign currency contracts as noted below.

	Maturity Period		Quantity (millions)	Average Price
Canadian / U.S. dollar forward contracts to buy USD		2008	USD 76.0	0.98155 per USD

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 June 30, 2008 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, 2007.

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.

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, and expected amounts under the restructuring programs. In accordance with the strategic initiatives announced by our Board of Directors in January 2008, involving the sale of assets to generate additional capital, on July 14, 2008 we announced the completion of the sale of the Aczone^® assets to Allergan Sales, LLC, a wholly-owned subsidiary of Allergan, Inc., for cash consideration of USD$150.0 million. Furthermore, on May 15, 2008 we announced the signing of a sale and purchase agreement to sell the land and building comprising our corporate headquarters and an adjacent undeveloped parcel of land in Vancouver, British Columbia. The sale and purchase agreement provides for the sale of the real estate to Discovery Parks Holdings Ltd. (“Discovery Parks”), an affiliate of Discovery Parks Trust, a private Canadian trust that designs and builds research facilities for the benefit of the people of British Columbia, for Cdn$65.5 million. In conjunction with the sale, QLT will enter into a five-year lease with Discovery Parks for approximately thirty percent of the facility and will provide two-year 6.5% interest-only second mortgage vendor financing in the amount of Cdn$12 million. The conditions to the closing of this transaction have been removed and the closing is expected to take place by the end of August, 2008. We can provide no assurance that we will complete this transaction

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nor can we provide any assurance that we will be able to negotiate the sale of the remaining assets included in the strategic initiatives on terms acceptable to us or at all. 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 and their intellectual property rights; the outcome of legal proceedings and damage awards; the progress 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, and other 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 posted an appeal bond in the amount of approximately $118.8 million (which was the amount of the judgment plus 10%), as required by the Court. To obtain the appeal bond, QLT was required to provide cash, as security, to the bonding company in the full amount of the appeal bond. This amount is included in restricted cash on our Condensed Consolidated Balance Sheet at June 30, 2008. We may provide additional cash security in the amount of the damages accrued and accruing under the judgment. These amounts will be included as restricted cash on our Condensed Consolidated Balance Sheets if and when we deposit the additional security.

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 repurchase 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. On and after September 15, 2008, we also have the right to redeem all or a portion of the notes for 100% of the principal amount of the notes, plus accrued and unpaid interest. At June 30, 2008 we had $120.9 million of cash and cash equivalents. In July 2008, we received $150.0 million from the divestment of Aczone. We plan to redeem our convertible debt and will use our existing cash resources for the redemption.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our 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 net assets acquisition or purchase business combinations, provisions for sales rebates, provisions for taxes, accruals for current income taxes receivable and determination of uncertain tax positions. 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, 2007.

Recently Issued and Recently Adopted Accounting Standards

Refer to Note 1 — Summary of Significant Accounting Policies in the “Notes to Unaudited Condensed Consolidated Financial Statements” for a discussion of recently issued and adopted accounting standards.

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.

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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 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 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 timing and ability to sell certain core and non-core assets at prices acceptable to us or at all;

• our expectations regarding the amount of annual operating savings we could derive as a result of our corporate restructure;

• the anticipated timing, cost and progress of the development of our technology (including our punctal plug delivery system and our photodynamic therapy dermatology technology) and 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.

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 applicable 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, 2007.

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ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

The Company maintains 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. The Company’s principal executive and financial officers have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report and concluded that the Company’s disclosure controls and procedures were effective in timely alerting them to material information required to be included in our periodic SEC reports.

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.

No change was made to our internal controls over financial reporting during the fiscal quarter ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, such internal controls 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 13 Contingencies”, and is incorporated by reference herein.

ITEM 1A. RISK FACTORS

There are many factors that affect our business and our results of operations, some of which are beyond our control. The following is a description of important factors that may cause our actual results of operations in future periods to differ materially from those currently expected or discussed in forward-looking statements set forth in this Report relating to our financial results, operations and business prospects. Except as required by law, we undertake no obligation to update any such forward-looking statements to reflect events or circumstances after the date on which it is made.

We may not be able to negotiate the sale of defined assets, including QLT USA or its assets, on terms acceptable to us or at all, and our Board of Directors may determine during and as a result of the process that we should not continue with the present strategy.

We are in the process of seeking the sale of certain of our core and non-core assets under a strategic restructure. The goal of maximizing shareholder value will drive any decisions we make regarding specific deal structures or transactions into which we may enter. We can provide no assurances that we will be able to negotiate the sale of assets, on terms acceptable to us or at all or on terms which meet our or our shareholders’ expectations regarding the value of these assets or that we will pursue any particular transaction structure. In addition, we may incur tax obligations related to the divestitures and there is no assurance that any gains from the sale of assets can be shielded by the existing pool of net operating losses in QLT USA. Further, we may determine during and as a result of the process that, based on the terms that may be offered for the sale of the Company or our assets, or upon conditions that may be imposed or may not be satisfied, as well as upon our Board of Directors’ ongoing assessment of various strategic alternatives available to the Company, we should implement different strategic restructuring initiatives including a sale of the Company.

Even if we are able to negotiate and enter into definitive agreements for the sale of defined assets, including QLT USA or its assets, we may not be able to consummate the transactions contemplated by the definitive agreements.

Even if we are able to negotiate and enter into definitive agreements for the sale of defined assets on terms acceptable to us, the consummation of the transactions contemplated by the definitive agreements would likely be subject to the satisfaction of various conditions and contingencies, which may not be met and could result in our not being able to consummate the transactions contemplated by the definitive agreements. These conditions and contingencies customarily include the receipt of consents from third parties, especially in asset sales transactions in which third parties may have the right to not consent to the transfer of contractual rights.

The process of pursuing multiple strategic transactions and initiatives simultaneously diverts the attention of our management and employees, increases our professional services expenses and may disrupt our operations.

The process of pursuing a strategic transaction is generally a time-consuming process for the seller and demands the time and efforts of management and employees during the due diligence process with potential buyers, including management presentations and meetings with potential buyers, and the evaluation of bids from potential buyers. The demands of this process tend to be compounded in an auction process in which a seller is interacting with multiple bidders simultaneously. The process we have undertaken may entail our pursuing multiple strategic transactions simultaneously, including the sale of QLT USA or its assets in one or more sales transactions or the sale of the entire Company, in auction processes. The diversion of our management’s and employees’ attention to these processes may disrupt our operations, including by adversely impacting the progress of our development efforts, our product sales and our relationships with partners or suppliers.

We have increased our expenditures for professional services in connection with our evaluation of strategic alternatives. We also have engaged the investment banking firm, Goldman, Sachs & Co., to advise us in our evaluation

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of strategic alternatives and as we review and evaluate specific transaction proposals, which will receive additional fees upon the completion of certain transactions we may execute.

We are undertaking significant strategic and organizational changes. Failure to manage disruption to our business or the loss of key personnel could have a material adverse effect on our business.

In the last three years we have made significant changes to both management and organizational structure. In January 2008, in connection with an evaluation of strategic alternatives that our Board of Directors is conducting, we announced a significant strategic change to divest certain core and non-core assets and to focus the Company on our Visudyne franchise and our clinical development programs related to our punctal plug delivery technology and our photodynamic therapy dermatology technology. In connection with the strategic restructure we eliminated approximately 115 employment positions. Further reductions in force are expected in 2008 as the Company’s assets are divested under the restructuring.

As a result of these changes and the uncertainty regarding the timing and effect of any of the strategic transactions we are pursuing, employee morale may be lower and we may lose or be unable to attract and retain key employees. The loss of key employees or our inability to attract employees could adversely impact our ongoing operations, including failure to achieve targets and advance our clinical development projects, or impact our ability to effectively implement strategic transactions.

We face intense competition, which may limit our commercial opportunities and our ability to generate revenues.

The biopharmaceutical industry is highly competitive and is characterized by rapidly evolving technology. Competition in our industry occurs on many fronts, including developing and bringing new products to market before others, developing new technologies to improve existing products, developing new products to provide the same benefits as existing products at less cost, developing new products to provide benefits superior to those of existing products, and acquiring or licensing complementary or novel technologies from other pharmaceutical companies or individuals.

We face intense competition against our current products as well as our technology under clinical development. We may be unable to contend successfully with current or future competitors. Our competitors include major pharmaceutical and biopharmaceutical companies, many of which are large, well-established companies with access to financial, technical and marketing resources significantly greater than ours and substantially greater experience in developing and manufacturing products, conducting preclinical and clinical testing and obtaining regulatory approvals. Some of our competitors are also our collaborators. For example, Novartis, which has the marketing rights to our Visudyne product, also has rights to market Lucentis outside of the United States, a product that is competitive with Visudyne. Our competitors may develop or acquire new or improved products to treat the same conditions as our products treat, or may make technological advances that reduce their cost of production so that they may engage in price competition through aggressive pricing policies to secure a greater market share to our detriment. Our commercial opportunities will be reduced or eliminated if our competitors develop or acquire and market products that are more effective, have fewer or less severe adverse side effects, or are less expensive than our products. Competitors also may develop or acquire products that make our current or future products obsolete. In connection with our technology under clinical development, including our punctal plug drug delivery technology, our competitors may develop or obtain patent protection for products earlier than us, design around patented technology developed by us, obtain regulatory approval for such products before us, or develop more effective or less expensive products than us.

Any of these events could have a significant negative impact on our business and financial results, including reductions in our market share and gross margins.

If we do not sustain profitability, shareholders may lose their investment.

We have incurred operating losses for the years ended December 31, 2005, 2006 and 2007 and the six months ended June 30, 2008. Our 2005 fiscal year was impacted by a $410.5 million non-cash charge for impairment of goodwill and other intangible assets that resulted from the Atrix acquisition, and our 2006 fiscal year was impacted by a litigation settlement charge of $112.5 million related to ongoing patent litigation. Our 2007 fiscal year was impacted by a litigation charge of $110.2 million related to the judgment in the litigation brought against us by Massachusetts Eye and Ear Infirmary (“MEEI”). Our accumulated deficit at June 30, 2008 was approximately $732.3 million. We may incur additional losses in the future. If we are unable to achieve profitability in the future, our stock price may decline.

If there is an adverse outcome in our litigation or other legal actions, our business may be harmed.

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We and certain of our subsidiaries are involved in litigation, and in the future we may become involved in various other legal actions in the ordinary course of our business. We are currently a defendant in a number of lawsuits filed against us or our subsidiaries, which, if not ultimately resolved in our favor, could have a material adverse impact on our financial condition and the market price of our shares. For example, in July 2007 the United States District Court (the “Court”) for the District of Massachusetts entered judgment against us in the litigation brought by MEEI. The Court found us 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 damages equal to 3.01% on past, present and future net sales worldwide of Visudyne. The Court also awarded interest at the Massachusetts statutory rate of 12% on the royalties as they would have become payable from April 24, 2000, and legal fees in the amount of $14.1 million, to which will be applied a reduction of $3 million previously agreed to by MEEI. The judgment led to a charge being recorded in the second quarter of 2007 of $110 million. While we are appealing the judgment, the outcome of our appeal is uncertain and may be unfavorable. See Note 13 — Contingencies and Part II Item 1. Legal Proceedings.

U.S. patent no. 5,789,349 (the “’349 patent”), which is the subject of the MEEI 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 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, we can give no assurances of the result and an adverse outcome could have a material adverse impact on our financial condition.

As has occurred in the MEEI litigation, litigation may result in excessive verdicts, which may include a judgment with significant monetary award, including the possibility of punitive damages, a judgment that certain of our patent or other intellectual property rights are invalid or unenforceable and, as occurred in 2006 in the U.S. litigation with TAP Pharmaceuticals, the risk that an injunction could be issued preventing the manufacture, marketing and sale of our products that are the subject of the litigation. Furthermore, we will have to incur substantial expense in defending these lawsuits and the time demands of these lawsuits could divert management’s attention from ongoing business concerns and interfere with our normal operations.

In addition, the testing, manufacture, marketing and sale of human pharmaceutical products entail significant inherent risks of allegations of product liability. Our use of such products in clinical trials and our sale of Visudyne, Eligard, our other product candidates and related medical devices exposes us to liability claims allegedly resulting from the use of these products or devices. These risks exist even with respect to those products or devices that are approved for commercial sale by the FDA or applicable foreign regulatory authorities and manufactured in facilities licensed and regulated by those regulatory authorities.

Our current insurance may not provide coverage or adequate coverage against potential claims, losses or damages resulting from such litigation. We also cannot be certain that our current coverage will continue to be available in the future on reasonable terms, if at all. If we were found liable for any claims in excess of our coverage or outside of our coverage, the cost and expense of such liability could materially harm our business and financial condition.

We derive a significant portion of our revenue from sales of Visudyne and Eligard. If our planned sale of QLT USA and/or the Eligard product line is completed, Visudyne will be our primary source of revenue. Accordingly, any decrease in sales of Visudyne would harm our business.

Our revenues to date have consisted largely of revenue from product sales of Visudyne and Eligard. If our planned sale of QLT USA and/or its Eligard product line is completed, Visudyne sales will constitute our primary source of revenue for the foreseeable future. Accordingly, any decrease in Visudyne product sales would harm our business and cause our financial results to be below expectations. Our products could be rendered obsolete or uneconomical by competitive changes, including generic competition. Product sales could also be adversely affected by other factors, including:

• failure of ongoing clinical trials,

• product manufacturing or supply interruptions,

• the development of competitive products by other companies,

• marketing or pricing actions by our competitors or regulatory authorities,

• changes in the reimbursement or substitution policies of third-party payors,

• changes in or withdrawal of regulatory approval for or the labeling of our products,

• the outcome of disputes relating to patents, 

• disputes with our licensees, and

• changes in laws that adversely affect our ability to market our products.

Our commercial success depends in part on the success of third parties to market our products.

Our strategy for the development and commercialization of our products includes entering into various marketing arrangements with third parties, and our growth is dependent on the success of these third parties in performing their responsibilities under such arrangements. Our collaborative marketing arrangements with third parties are intended to provide such third parties with an economic incentive to succeed in performing their contractual responsibilities, but the amount and timing of resources to be devoted to these activities generally are not under our control.

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For example, a significant portion of our revenue depends on the efforts of Novartis to market and sell Visudyne. The terms of our agreement with Novartis, however, do not restrict Novartis from commercializing non-PDT products that could be competitive with Visudyne. Novartis entered into a license arrangement with Genentech, Inc. in which Novartis has been granted a license to the rights outside of the United States to Lucentis, a product that has been approved for the treatment of wet AMD, and is a competing product to Visudyne. In addition, Novartis is responsible for the marketing of Visudyne but our ability to control the amount of, and allocations to, marketing related expenditures by Novartis for Visudyne is limited. Third parties such as Novartis may not perform their obligations as expected and significant revenue may not be derived or sustained from such arrangements. To the extent such third parties do not perform adequately under our various agreements with them, the development and commercialization of our products may be delayed, may become more costly to us or may be terminated, and may require us to expend significant amounts of time and money to find new collaborators and structure alternative arrangements. In addition, disputes with a collaborator could delay a program on which we are working with the collaborator and could result in expensive arbitration or litigation, which may not be resolved in our favor.

Our revenues depend on payment and reimbursement from third party payers and pricing, and if third party payers reduce or refuse payment, or reimbursement or if prices are reduced, the use and sales of our products will suffer, we may not increase our market share, and our revenues and profitability will suffer.

The continuing efforts of governmental and third-party payers to contain or reduce the costs of health care may negatively affect the sale of Visudyne, Eligard and our other products. Our ability to commercialize Visudyne, Eligard and our other products successfully will depend in part on the timeliness of and the extent to which adequate reimbursement for the cost of such products and related treatments is obtained from government health administration authorities, private health insurers and other organizations in the U.S. and foreign markets. Product sales, attempts to gain market share or introductory pricing programs of our competitors could require us to lower our prices, which could adversely affect our results of operations. We may be unable to set or maintain price levels sufficient to realize an appropriate return on our investment in product development. We may also be subject to price reductions, including retroactive price reductions in the form of price rebates, as a result of government pricing rules and regulations which may impact both our financial condition and future revenues. Significant uncertainty exists as to the reimbursement status of newly approved therapeutic products or newly approved product indications.

In both the United States and some non-U.S. jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. In the United States, new legislation may be proposed at the federal and state levels that would result in significant changes to the healthcare system, either nationally or at the state level. Effective January 2004, the Medicare Prescription Drug, Improvement and Modernization Act,, changed the methodology used to calculate reimbursement for drugs such as Visudyne and Eligard that are administered in physicians’ offices in a manner intended to reduce the amount that is subject to reimbursement. In addition, beginning in January 2006, the legislation directs the Secretary of the Department of Health and Human Services, or “HHS,” to contract with procurement organizations to purchase physician-administered drugs from the manufacturers and provides physicians with the option to obtain drugs through these organizations as an alternative to purchasing from the manufacturers, which some physicians may find advantageous. These changes may also cause private insurers to reduce the amounts that they will pay for physician-administered drugs. In addition, the Center for Medicare and Medicaid Services, or “CMS”, the agency within HHS that administers Medicare and is responsible for reimbursement of the cost of Visudyne and Eligard, has asserted the authority of Medicare not to cover particular drugs if it determines that they are not “reasonable and necessary” for Medicare beneficiaries or to cover them at a lesser rate, comparable to that for drugs already reimbursed that CMS considers to be therapeutically comparable. Further federal and state proposals and healthcare reforms are likely. Our results of operations could be materially adversely affected by the Medicare prescription drug coverage legislation, by the possible effect of this legislation on amounts that private insurers will pay and by other healthcare reforms that may be enacted or adopted in the future.

Our applications or re-applications for reimbursement for any of our products may not result in approvals and our current reimbursement approvals for Visudyne, Eligard and our other products may be reduced or reversed in whole or in part. If we were to have reimbursement reduced or reversed, the market for the affected product may be materially impaired and could materially harm our business and future revenues from that product. For example, while we believe that the results seen in the Visudyne in occult, or “VIO,” study did not contradict results seen in prior studies, because the VIO study failed to meet its primary endpoint, there is a risk that reimbursement for Visudyne in the occult form of wet AMD could be re-evaluated in the U.S. and elsewhere by the applicable governmental authorities. In April 2007, after reviewing the results in the VIO study, the CHMP recommended to the European Commission that the indication of the use of Visudyne^® in the treatment of occult subfoveal CNV, secondary to AMD be deleted in Europe. In June 2007, the EMEA endorsed the recommendation by CHMP to delete the indication of Visudyne in the

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treatment of occult subfoveal CNV from the label for Visudyne in the EU. Reimbursement for Visudyne in the occult form of wet AMD has ceased in most European countries.

If we do not successfully develop and launch replacements for our products that lose patent protection, our revenues may decline and we may not be able to compete effectively.

Most of our products are covered by patents. Upon the expiration of the patents, our competitors may introduce products or, in the case of Atrigel, drug delivery technology, using the same technology. As a result of this possible increase in competition, we may need to lower our prices in order to maintain sales of our products or we may lose a competitive advantage and marketability of our products and technologies. If we fail to develop and successfully launch new products prior to the expiration of patents for our existing products, our revenue from those products could decline significantly. We may not be able to develop and successfully launch more advanced replacement products and/or drug delivery technologies before these and other patents expire. Competition in the pharmaceutical and biotechnology industry for new products is increasing and the amount required to be paid to acquire or in-license new products may be prohibitive and negatively affect our ability to successfully acquire or in-license new products.

Our products in clinical trials may not achieve favorable results, may fail to achieve or maintain regulatory approvals or market acceptance, or may encounter difficulties with proprietary rights or manufacturing, any of which could adversely affect our prospects for future revenue growth.

Our success depends on our ability to successfully develop and obtain regulatory approval to market new pharmaceutical products, including our punctal plug drug delivery technology. Development of a product requires substantial technical, financial and human resources even if such product development is not successfully completed. The research and development process is expensive, prolonged and entails considerable uncertainty. Notwithstanding the outcome of clinical trials for new products, regulatory approval may not be achieved. Development of a new product, from discovery through testing and registration to initial product launch, typically takes between eight and fifteen years or more for a pharmaceutical product. Each of these periods varies considerably from product to product and country to country. Because of the complexities and uncertainties associated with research and development and in some cases the complexity of the technology itself, products we are currently developing may not complete the development process or we may not obtain the regulatory approvals required for us to market such products successfully, or at all.

In addition, we might fail to obtain the additional regulatory approvals we are seeking to expand our product line or, in the case of Visudyne, the use of our product in combination with other therapies and the indications for which our products are approved. Those approvals may be delayed, may not be obtained or may be more limited than anticipated. Delays and uncertainties in the clinical development and regulatory approval process could adversely affect our prospects and future revenue growth.

If we do not achieve our projected development goals in the time frames we announce and expect, the commercialization of our products may be delayed and, as a result, our business could be materially harmed.

From time to time, we estimate the timing of the accomplishment of various scientific, clinical, regulatory and other product development goals, which we sometimes refer to as milestones. These milestones may include the commencement or completion of scientific studies and clinical trials and the submission of regulatory filings. From time to time, we publicly announce the expected timing of some of these milestones. All of these milestones are based on a variety of assumptions. The actual timing of these milestones can vary dramatically compared to our estimates, or they might not be achieved, in some cases for reasons beyond our control. For instance, our current and planned clinical trials may not begin on time or at all, or may not be completed on schedule or at all. The commencement or completion of our clinical trials may be delayed or halted for numerous reasons. If we do not meet or achieve these milestones, the commercialization of our products may be delayed or never achieved and, as a result, our business could be materially harmed.

Our commercial success depends in part on our ability and the ability of our licensors to obtain and maintain patent protection on technologies, to preserve trade secrets, and to operate without infringing the proprietary rights of others.

We have applied for and will continue to apply for patents for certain aspects of Visudyne, Eligard and our other products and technology, including our punctal plug drug delivery technology. Such applications may not result in the issuance of any patents, and any patents now held or that may be issued may not provide us with a preferred position with respect to any product or technology. In addition, patents issued or licensed to us may be challenged successfully. In that event, to the extent a preferred position is conferred by such patents, any preferred position held by us would be lost. If we are unable to secure or to continue to maintain a preferred position, Visudyne, Eligard and

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our other products could become subject to competition from the sale of generic versions of our products in addition to the other competitive products discussed above.

Patents issued or licensed to us may be infringed by the products or processes of other parties. The cost of enforcing our patent rights against infringers, if such enforcement is required, could be significant, and the time demands could interfere with our normal operations.

It is also possible that a court may find us to be infringing validly issued patents of third parties. In that event, in addition to the cost of defending the underlying suit for infringement, we may have to pay license fees and/or damages and may be enjoined from conducting certain activities. Obtaining licenses under third-party patents can be costly, and such licenses may not be available at all. Under such circumstances, we may need to materially alter our products or processes or may lose the right to continue to manufacture and sell a product entirely for a period of time.

Unpatented trade secrets, improvements, confidential know-how and continuing technological innovation are important to our scientific and commercial success. Although we attempt to and will continue to attempt to protect our proprietary information through reliance on trade secret laws and the use of confidentiality agreements with our collaborators, licensees, employees and consultants and other appropriate means, these measures may not effectively prevent disclosure of our proprietary information, and, in any event, others may develop independently, or obtain access to, the same or similar information.

The incidence of wet AMD might be reduced if therapies currently in development or currently available prevent or reduce the risk of development of wet AMD which could adversely impact the sales of Visudyne.

There are a number of biotechnology and pharmaceutical companies conducting pre-clinical and clinical research towards other treatments for dry AMD. We are also aware of published reports of studies showing that supplemental vitamin therapies reduce the risk of development of wet AMD. If these studies show that new therapies are effective to treat dry AMD or if supplemental vitamin usage becomes common place in patients with dry AMD, the incidence of wet AMD, which often develops in patients initially diagnosed with dry AMD, might be reduced, and Visudyne sales and our revenues could be materially reduced.

We rely on third-party manufacturers, and difficulties with such third parties could delay future revenues from our products sales.

We rely on several third parties in the U.S., Canada, Europe and Japan to manufacture Visudyne and Eligard. If such third parties fail to meet their respective contractual commitments, we may not be able to supply or continue to supply commercial quantities of the product or conduct certain future clinical testing.

Currently, Nippon Fine Chemicals, JHP Pharmaceuticals, LLC (previously Parkedale Pharmaceuticals Inc.), Orgapharm S.A.S. and Hollister-Stier Laboratories LLC manufacture Visudyne or components thereof. Evonik Degussa Canada Inc., or “Degussa” (formerly Degussa Canada, Inc. and formerly Raylo Chemicals Inc.), manufactured 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. If we are unable to locate and qualify an alternate manufacturer to Degussa, our future supply of Visudyne could be materially affected.

Our agreement with Nippon Fine Chemicals is in effect for a term ending on December 31, 2008. Our agreement with JHP Pharmaceuticals, LLC. is in effect for a term expiring December 31, 2009. The agreement with Orgapharm is effective for a period of five years from the date of commercial approval of the Visudyne component by either the EU regulatory authorities, or the U.S. and the Canadian regulatory authorities, whichever is earlier. The agreement with Hollister-Stier is in effect for five years from the date of applicable regulatory approval for the component product, after which it will renew for additional two-year periods unless one party provides the other with 36 months advance notice of its intention not to renew.

For the manufacture of Eligard we rely on a number of manufacturers and suppliers, including Tolmar, Inc. and Chesapeake Biological Laboratories, Inc. We currently contract with Tolmar for the full manufacturing of the Eligard product, including the sterile filling and lyophilization process for the drug syringe, the manufacture of the delivery system syringe and final packaging of Eligard. We continue to maintain Chesapeake Biological Laboratories (another approved contract manufacturer) as an alternate to manufacture the filling and lyophilization of the drug syringe. Our contract with Tolmar is for a period of seven years commencing December 22, 2006, and automatically extends for

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successive terms of four years each, unless either party notifies the other party that it does not intend to renew this agreement at least three years prior to the last day of the then current term. Our contract with Chesapeake Biological Laboratories is for a period of two years commencing January 23, 2004, and automatically renews for additional one-year terms unless either party provides notice on non-renewal more than 90 days prior to termination, which has not occurred at this time.

If we are unable to maintain agreements on favorable terms with any of our contract manufacturers for Visudyne or Eligard, or if we experience any disruption in the supply of materials required for the manufacture of our products, or if we fail to timely locate and obtain regulatory approval for additional or replacement manufacturers as needed, it could impair or prevent our ability to deliver our commercial products on a timely basis, or at all, or cause delays in our clinical trials and applications for regulatory approvals which in turn would materially and adversely harm our business and financial results and may result in claims against us from our licensees of the affected product. In addition, any loss of a manufacturer or any difficulties that could arise in the manufacturing process could significantly affect our inventories and supply of products available for sale. If we are unable to supply sufficient amounts of our products on a timely basis, our market share could decrease which could materially harm our business.

If our contract manufacturers fail to comply with FDA and other foreign regulatory requirements or with our product specifications, we may be unable to meet demand for our products and may lose potential revenue and be subject to claims from our licensees.

Our ability to commercialize Visudyne, Eligard and our other products, or to conduct clinical trials with our products, either directly or in conjunction with others, depends, in large part, on our ability to have such products manufactured at a competitive cost and in accordance with FDA and other foreign regulatory requirements, including FDA Good Manufacturing Practices, as well as our product specifications which could significantly adversely affect our product inventories and our ability to have product available for commercial sale. Our contract manufacturers’ manufacturing and quality procedures may not achieve or maintain compliance with applicable FDA and other foreign regulatory standards or product specifications, and, even if they do, we may be unable to produce or continue to produce commercial quantities of Visudyne, Eligard and our other products at an acceptable cost or margin.

If current manufacturing processes are modified, or the source or location of our product supply is changed (voluntarily or involuntarily), regulatory authorities will require us to demonstrate that the material produced from the modified or new process or facility is equivalent to the material used in the clinical trials or products previously approved. Any such modifications to the manufacturing process or supply may not achieve or maintain compliance with the applicable regulatory requirements or our product specifications. In many cases, prior approval by regulatory authorities may be required before any changes can be instituted.

If our contract manufacturers produce one or more product batches that do not conform to FDA or other regulatory requirements, or our product specifications, or if they introduce changes to their manufacturing processes, our manufacturing expenses may increase materially, our product inventories may be reduced to unacceptable levels or entirely, we may lose market share, and/or our ability to meet demand for Visudyne, Eligard and our other products may be materially and adversely impacted, which may cause us to lose potential revenue and become subject to claims from our licensees.

In the field of Photodynamic Therapy, or PDT, we are dependent on the success and continued supply of third-party medical device companies with complementary light source and light delivery devices by third party suppliers.

We currently depend on third-party suppliers, Carl Zeiss-Meditec, Lumenis and Quantel to provide the laser light delivery devices for Visudyne therapy and to service such devices. Because PDT requires a light source, and in some instances a light delivery system, to be used in conjunction with our photosensitizers, we are dependent on the success of these medical device companies in placing and maintaining light sources with the appropriate medical facilities, in distributing the light delivery systems and servicing such systems as required. Carl Zeiss-Meditic, Lumenis and Quantel supply such lasers to treating physicians directly, and neither QLT nor Novartis has a supply or distribution agreement with either Carl Zeiss-Meditic, Lumenis or Quantel for the supply of such devices. The relationship between our Company or Novartis and such suppliers, under which we or Novartis provides support and assistance to such suppliers, is an informal collaboration only. If one or more of the medical device companies with whom we or Novartis have such collaborations cease to carry on business, or if they no longer supply complementary light sources or light delivery systems or if they or we are unable to achieve the appropriate placements of light sources and ensure an uninterrupted supply and ongoing maintenance of light delivery systems to treating physicians, sales of Visudyne and our revenues from the sale of Visudyne may be materially adversely affected.

The expected lifecycle of the laser light delivery devices for Visudyne therapy is approximately five to ten years. Therefore, in the coming years, we expect that many of these lasers will need significant upgrades or will need to be

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replaced. Customers may decide not to invest in purchasing a new laser in light of emerging competitive therapies which do not require a medical device and this could negatively impact our future sales of Visudyne, possibly materially.

If our supply of Visudyne or Eligard is interrupted, our ability to maintain our inventory levels could suffer and our future revenues may be reduced.

Any interruption in the supply of finished products could hinder our ability to timely distribute Visudyne and Eligard. If we are unable to obtain adequate product supplies to satisfy our customers’ or licensees’ orders, we may lose those orders and our customers or licensees may cancel other orders and seek monetary compensation or exercise their other remedies permitted under the agreement. In addition, customers or licensees may decide to stock and sell competing products, which in turn could cause a loss of our market share and materially adversely affect our revenues. Numerous factors could cause interruptions in the supply of our finished products, including shortages in raw material required by our manufacturers, changes in our sources for manufacturing, the failure of our manufacturers to comply with FDA and foreign regulatory authorities requirements for the manufacture of our product or our product specifications, our failure to timely locate and obtain regulatory approval for additional or replacement manufacturers as needed, disputes with our contract manufacturers and conditions affecting the cost and availability of raw materials and manufacturing processes.

Inherent uncertainties associated with forecasting product demand and future product launch and other factors could result in our inventory becoming obsolete or reduced, possibly materially, in market value.

We maintain levels of inventory of raw materials, intermediates and finished product based upon various factors including our forecasted demand for products, anticipated commercial launch of new products, minimum contractual requirements with third party suppliers and as we consider appropriate for supply chain management and security. Some of our inventory has a limited “shelf life” for use or optimal use or sale. If our inventory exceeds forecasted demand, or if we are unable to use our inventory or use it during its shelf life due to delay in or failure to launch a product, withdrawal of a product from the market or delays in, or termination of agreements for, the marketing and sale of our products by third parties, our inventory may become obsolete or decline, possibly materially, in market value. As a result, we may not be able to resell our inventory at a price equal to its full value or recovery of our costs, or at all.

If the facilities storing our inventory are damaged or destroyed, our ability to meet market demand for our products could be significantly affected.

We rely on our contract manufacturers and commercial licensees to store our product inventory and related raw materials and intermediates. Any one of these facilities may store a significant amount of our inventory at one time and or may be the only available source of an item of inventory. Damage or destruction to these storage facilities, such as from fire, flood, earthquake or other natural disaster or otherwise, could result in significant write-down to our inventory and may impair our ability to deliver our commercial products on a timely basis or at all. If the supply of our products is interrupted, our sales and market share could decrease which could materially harm our business.

The future growth of our business may depend in part on our ability to successfully identify, acquire on favorable terms, and assimilate technologies, products or businesses.

From time to time, we may engage in negotiations to expand our operations and market presence by future product, technology or other acquisitions and business combinations, joint ventures or other strategic alliances with other companies, such as our acquisition of ForSight Newco II, Inc. (now QLT Plug Delivery, Inc.) in October 2007. We may not be successful in identifying, initiating or completing such negotiations. Competition for attractive product acquisition or alliance targets can be intense, and we may not succeed in completing such transactions on terms that are acceptable to us. Even if we are successful in these negotiations, these transactions create risks, including:

• difficulties in and costs associated with assimilating the operations, technologies, personnel and products of an acquired business,

• assumption of known or unknown liabilities or other unanticipated events or circumstances,

• the potential disruption to our ongoing business, and

• the potential negative impact on our earnings.

Any of these risks could harm our ability to achieve anticipated levels of profitability for acquired businesses or to realize other anticipated benefits of the transaction.

We rely on our employees and consultants to keep our trade secrets confidential.

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We rely on trade secrets and unpatented proprietary know-how and continuing technological innovation in developing and manufacturing our products. We require each of our employees, contract manufacturers, and certain consultants and advisors to enter into confidentiality agreements prohibiting them from taking our proprietary information and technology or from using or disclosing proprietary information to third parties except in specified circumstances. These agreements may not provide meaningful protection of our trade secrets and proprietary know-how that is used or disclosed. Despite all of the precautions we may take, people who are not parties to confidentiality agreements may obtain access to our trade secrets or know-how. In addition, others may independently develop similar or equivalent trade secrets or know-how.

Visudyne, Eligard or our other products may exhibit adverse side effects that prevent their widespread use or that necessitate withdrawal from the market.

Even after approval by the FDA and other regulatory authorities, Visudyne, Eligard or our other products may later exhibit adverse side effects that prevent widespread use or necessitate withdrawal from the market. Undesirable side effects not previously observed during clinical trials could emerge in the future. The manifestation of such side effects could materially harm our business. In some cases, regulatory authorities may require labeling changes that could add warnings or restrict usage based on adverse side effects seen after marketing a drug.

If we fail to comply with ongoing regulatory requirements it will materially harm our business.

Our commercial products and our products under development are subject to extensive and rigorous regulation for safety, efficacy and quality by the U.S. federal government, principally the FDA, and by state and local governments and by foreign regulatory authorities in jurisdictions in which Visudyne, Eligard and our other products are sold or used in clinical development. The regulatory clearance process is lengthy, expensive and uncertain. We may not be able to obtain, or continue to obtain, necessary regulatory clearances or approvals on a timely basis, or at all, for any of our commercial products or any of our products under development, and delays in receipt or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or failure to comply with existing or future regulatory requirements could have a material adverse effect on our business and our financial condition.

Drugs manufactured or distributed pursuant to the FDA’s approval are subject to pervasive and continuing regulation by the FDA, certain state agencies and various foreign governmental regulatory agencies such as the EMEA, among others. Manufacturers are subject to inspection by the FDA and regulatory agencies from other jurisdictions. We must comply with a host of regulatory requirements that usually apply to drugs marketed in the U.S. and elsewhere, to our clinical development programs and to investigator sponsored studies that we may from time-to-time support, including but not limited to labeling regulations, Good Manufacturing Practice requirements, adverse event reporting, pricing rules and restrictions and general prohibitions against promoting products for unapproved or “off-label” uses imposed by the FDA and regulatory agencies in other jurisdictions. Our or our licensees’ failure to comply with applicable requirements could result in sanctions being imposed on us and/or our licensees. These sanctions could include warning letters, fines, product recalls or seizures, penalties, price rebates, injunctions, refusals to permit products to be imported into or exported out of the U.S. or elsewhere, FDA or other regulatory agency refusal to grant approval of drugs or to allow us to enter into governmental supply contracts, withdrawals of previously approved marketing applications and criminal prosecutions.

We, our contract manufacturers, all of our subsuppliers, as well as the suppliers of the medical lasers required for Visudyne and other PDT therapy, are subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. In addition, advertising and promotional materials relating to medical devices and drugs are, in certain instances, subject to regulation by the Federal Trade Commission, the FDA and other regulatory agencies in other jurisdictions. We, our contract manufacturers, subsuppliers and laser suppliers may be required to incur significant costs to comply with such laws and regulations in the future, and such laws or regulations may materially harm our business. Unanticipated changes in existing regulatory requirements, the failure of us, or any of these manufacturers, subsuppliers or suppliers to comply with such requirements or the adoption of new requirements could materially harm our business.

As noted above, all of our contract manufacturers must comply with the applicable FDA cGMP regulations and requirements of foreign regulatory authorities in jurisdictions in which our products are sold or used in clinical development, which include quality control and quality assurance requirements as well as the corresponding maintenance of records and documentation. If our contract manufacturers do not comply with the applicable cGMP regulations and other applicable regulatory requirements, the availability of Visudyne and Eligard for sale could be reduced or we may be unable to supply product at all for an uncertain amount of time, which could be significant, and we could suffer delays in the progress of clinical trials for products under development. We do not have full control over our third-party manufacturers’ compliance with these regulations and standards. The loss of a contract

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manufacturer could have a negative effect on our sales, margins and market share, as well as our overall business and financial results.

In the future, if we are involved directly in the marketing or promotion of our products, our activities relating to the sale and marketing of our products are subject to regulation under the U.S. Federal Food, Drug and Cosmetic Act and other federal statutes. Violations of these laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal health care programs (including Medicare and Medicaid). We are also subject to various U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback and false claims laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. Due to the breadth of the statutory provisions and the absence of guidance in the form of regulations or court decisions, it is possible that our practices might be challenged under anti-kickback or similar laws. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third-party payers (including Medicare and Medicaid) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal health care programs (including Medicare and Medicaid). If a court were to find us liable for violating these laws, or if the government were to allege against or convict us of violating these laws, there could be a material adverse effect on our business and our financial condition.

Our use of hazardous materials exposes us to the risk of environmental liabilities, and we may incur substantial additional costs to comply with environmental laws.

Our research, development and manufacturing activities involve the controlled use of hazardous chemicals, primarily flammable solvents, corrosives, and toxins. The biologic materials include microbiological cultures, animal tissue and serum samples. Some experimental and clinical materials include human source tissue or fluid samples. We are subject to federal, state/provincial and local government regulation in the use, storage, handling and disposal of hazardous and radioactive materials. If any of these materials resulted in contamination or injury, or if we fail to comply with these regulations, we could be subject to fines and other liabilities, and any such liabilities could exceed our resources. Our insurance may not provide adequate coverage against potential claims or losses related to our use of any such materials, and we cannot be certain that our current insurance coverage will continue to be available on reasonable terms, if at all. In addition, any new regulation or change to an existing regulation could require us to implement costly capital or operating improvements for which we have not budgeted.

Our provision for income taxes and effective income tax rate may vary significantly and may adversely affect our results of operations and cash resources.

Significant judgment is required in determining our provision for income taxes. Various internal and external factors may have favorable or unfavorable effects on our future provision for income taxes, income taxes receivable, and or effective income tax rate. These factors include but are not limited to changes in tax laws, regulations and/or rates, results of audits by tax authorities, changing interpretations of existing tax laws or regulations, changes in estimates of prior years’ items, future levels of R&D spending, changes in the overall mix of income among the different jurisdictions in which we operate, and changes in overall levels of income before taxes. For example, we have recognized the full tax benefit associated with the MEEI litigation damages award in our Financial Statements. To the extent that the taxation authorities do not agree with our tax position, we may not be able to realize all or a portion of the tax benefit recognized. Furthermore, new accounting pronouncements or new interpretations of existing accounting pronouncements (such as those described in Note 1 to the Consolidated Financial Statements of this Report) can have a material impact on our effective income tax rate.

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. Tax examinations are often complex as tax authorities may disagree with the treatment of items reported by the Company, the result of which could have a material adverse effect on our financial condition and results of operations.

We may need additional capital in the future, and our prospects for obtaining it are uncertain.

Our business may not generate the cash necessary to fund our operations and anticipated growth. The amount required to fund additional operating expenses will also depend on other factors, including the status of competitive products, the success of our research and development programs, the extent and success of any collaborative research

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arrangements, any amounts we may be required to pay in connection with any ongoing litigation as a result of an adverse court decision or any settlement agreement that we may enter into, and the results of product, technology or other acquisitions or business combinations. We could seek additional funds in the future from a combination of sources, including product licensing, joint development, sale of assets and other financing arrangements. In addition, we may issue debt or equity securities if we determine that additional cash resources could be obtained under favorable conditions or if future development funding requirements cannot be satisfied with available cash resources. Additional capital may not be available on terms favorable to us, or at all.

We plan to redeem our $172.5 million of convertible debt on September 15, 2008, which will reduce our liquidity.

As of June 30, 2008, we had $172.5 million of convertible debt outstanding, bearing interest at the rate of 3% per annum, payable semi-annually, and due in 2023. On and after September 15, 2008, we have the right, at our option, to redeem all or a portion of the notes for cash at a price of 100% of the principal amount of the notes, plus accrued and unpaid interest to, but excluding, the redemption date. In addition, on each of September 15, 2008, 2013 and 2018, holders of the notes may 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 to, but excluding, that date. We plan to redeem the notes on September 15, 2008, which will result in a usage of cash of $172.5 million reducing our liquidity.

Our operating results may fluctuate, which may cause our financial results to be below expectations and the market price of our securities to decline.

Our operating results may fluctuate from period to period for a number of reasons some of which are beyond our control. A revenue shortfall or increase in operating expenses could arise from any number of factors, such as:

• lower than expected revenues from sales of Visudyne or Eligard,

• changes in pricing, pricing strategies or reimbursement levels for Visudyne or Eligard,

• seasonal fluctuations, particularly in the third quarter due to decreased demand for Visudyne in the summer months,

• high levels of marketing expenses for Visudyne or the launch of additional competitors to Visudyne or Eligard,

• fluctuations in currency exchange rates,

• unfavorable outcome of the German Eligard patent litigation commenced against QLT USA, Inc.’s German licensees by Takeda Chemical Industries Ltd. and Takeda Pharma Gmbh,

• unfavorable outcome in the appeal of the judgment of the District Court in the litigation commenced by MEEI against us,

• higher than expected operating expenses as a result of increased costs associated with the development or commercialization of Visudyne, Eligard, and our other products and candidates,

• increased operating expenses as a result of product, technology or other acquisitions or business combinations, and

• divestment of Eligard and other revenue producing assets.

Even a relatively small revenue shortfall may cause a period’s results to be below our expectations or projections, which in turn may cause the market price of our securities to drop significantly and the value of your investment to decline.

The market price of our common shares is extremely volatile and the value of your investment could decline.

The market prices for securities of biopharmaceutical companies, including QLT, have been and are likely to continue to be extremely volatile. As a result, investors in companies such as ours often buy at high prices only to see the price drop substantially a short time later, resulting in an extreme drop in value in the holdings of these investors. Factors such as announcements of fluctuations in our or our competitors’ operating results, changes in our prospects and general market conditions for biopharmaceutical stocks could have a significant impact on the future trading prices of our common shares. In particular, trading prices of the securities of many biopharmaceutical companies, including us, have experienced extreme price and volume fluctuations which have at times been unrelated to the operating performance of the companies whose securities were affected. Our announcements that we are engaged in an ongoing evaluation of strategic alternatives and the initiatives planned to be implemented in connection with our strategic restructure, and any future announcements that we may make regarding potential initiatives and transactions undertaken pursuant to the restructuring process, may increase the volatility of the market price of our common shares. Some of the other factors that may cause volatility in the price of our securities include:

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• announcements of technological innovations or new products by us or our competitors,

• developments or outcome of litigation, including litigation regarding proprietary and patent rights,

• regulatory developments or delays concerning our products,

• quarterly variations in our financial results,

• business and product market cycles,

• fluctuations in customer requirements,

• the availability and utilization of manufacturing capacity and our ability to continue to supply Visudyne, Eligard and our other products,

• the timing and amounts of royalties paid to us by third parties, and

• issues with the safety or effectiveness of our products.

The price of our common shares may also be adversely affected by the estimates and projections of the investment community, general economic and market conditions, and the cost of operations in our product markets. These factors, either individually or in the aggregate, could result in significant variations in the trading prices of our common shares. Volatility in the trading prices of our common shares could result in securities class action litigation. Any litigation would likely result in substantial costs, and divert our management’s attention and resources.

Various provisions of our charter may impede a change in control that is beneficial to our shareholders.

Our authorized preference share capital is available for issuance from time to time at the discretion of our board of directors, without shareholder approval. Our charter grants the board of directors the authority, subject to the corporate laws of British Columbia, to determine or alter the rights, preferences, privileges and restrictions granted to or imposed on any wholly unissued series of preference shares, including any dividend rate, voting rights, conversion privileges or redemption or liquidation rights. The rights of any future series of preference shares could have an adverse effect on the holders of our common shares by delaying or preventing a change of control, making removal of the present management more difficult or resulting in restrictions on the payment of dividends and other distributions to the holders of common shares.

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

We implemented a share buy-back program in June 2007 pursuant to which we had 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. This program expired in June 2008. 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. There were no shares repurchased in 2008. The share purchases were made under a normal course issuer bid in the open market through the facilities of the Toronto Stock Exchange or NASDAQ Stock Market, and in accordance with all regulatory requirements.

The following table sets forth information regarding our purchases of common shares on a monthly basis during the three months ended June 30, 2008:

Issuer Purchases of Equity Securities
					Total Number of		Maximum Number
	Total				Shares Purchased as		of Shares that May
	Number of		Average		Part of Publicly		Yet Be Purchased
	Shares		Price Paid		Announced Plans or		Under the Plans or
Period	Purchased		per Share		Programs		Programs
April 1, 2008 through
April 30, 2008		—		—		—	4,961,993 shares
May 1, 2008 through
May 31, 2008		—		—		—	4,961,993 shares
June 1, 2008 through
June 30, 2008		—		—		—		—
Total		—		—		—		—

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 14, 2008, we held our annual meeting of shareholders. At the Meeting, our shareholders voted on the election of directors and a proposal to approve the appointment of Deloitte and Touche LLP as our independent auditors for the ensuing year and to authorize the directors to fix the remuneration to be paid to the auditors.

Each of the six nominees to the Board of Directors identified and described in our proxy circular and proxy statement dated April 14, 2008 were elected at the meeting, to hold office until our next annual meeting of shareholders or until his successor is duly elected, unless he resigns earlier. The proxies received by us for the Meeting and votes cast at the Meeting were voted as follows on the resolution to elect six directors, and each of the directors was declared elected:

Directors	Shares For		Shares Withheld		Abstentions and Broker Non-Votes
Robert L. Butchofsky		38,444,074		330,160		2
Bruce L.A. Carter		38,132,657		641,577		2
C. Boyd Clarke		38,469,075		305,159		2
Peter A. Crossgrove		38,227,574		546,660		2
Ian J. Massey		38,479,668		294,566		2
L. Jack Wood		38,480,930		147,852		2

At the Meeting, the shareholders approved the proposal to appoint Deloitte & Touche as our independent auditors for the ensuing year and to authorize the directors to fix the remuneration to be paid to the auditors. The proxies received by us for the Meeting were voted as follows on the resolution, and the resolution was declared passed:

Shares For	Shares Withheld	Abstentions and Broker Non-Votes
38,626,383	147,852	1

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: August 8, 2008	By:	/s/ Robert L. Butchofsky
		Robert L. Butchofsky
		President and Chief Executive Officer (Principal Executive Officer)
Date: August 8, 2008	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	Description	Location
10.45	Sale and Purchase Agreement dated May 15, 2008 by and among QLT Inc., 560677 B.C. Ltd., 630321 B.C. Ltd. and Discovery Parks Holdings Inc. as amended by each of: an Amending Agreement dated July 4, 2008 by and among QLT Inc., 560677 B.C. Ltd., 630321 B.C. Ltd. and Discovery Parks Holdings Inc., an Amended and Restated Sale and Purchase Agreement dated July 11, 2008 by and among QLT Inc., 560677 B.C. Ltd., 630321 B.C. Ltd. and Discovery Parks Holdings Inc., a Third Amending Agreement dated July 16, 2008 by and among QLT Inc., 560677 B.C. Ltd., 630321 B.C. Ltd. and Discovery Parks Holdings Inc., a Fourth Amending Agreement dated July 18, 2008 by and among QLT Inc., 560677 B.C. Ltd., 630321 B.C. Ltd. and Discovery Parks Holdings Inc., a Fifth Amending Agreement dated July 23, 2008 by and among QLT Inc., 560677 B.C. Ltd., 630321 B.C. Ltd. and Discovery Parks Holdings Inc., a Sixth Amending Agreement dated July 25, 2008 by and among QLT Inc., 560677 B.C. Ltd., 630321 B.C. Ltd. and Discovery Parks Holdings Inc., a Second Amended and Restated Sale and Purchase Agreement dated July 30, 2008 by and among QLT Inc., 560677 B.C. Ltd., 630321 B.C. Ltd. and Discovery Parks Holdings Inc. and an Eighth Amending Agreement dated August 7, 2008 by and among QLT Inc., 560677 B.C. Ltd., 630321 B.C. Ltd. and Discovery Parks Holdings Ltd.	Filed herewith.
31.1	Rule 13a-14 (a) Certification of the Chief Executive Officer.	Filed herewith.
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer.	Filed herewith.
32.1	Section 1350 Certification of the Chief Executive Officer.	Filed herewith.
32.2	Section 1350 Certification of the Chief Financial Officer.	Filed herewith.

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