• 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.

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.

(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

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

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.

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.

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 . . .