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.
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.
On August 25, 2008 QLT USA entered into an exclusive license agreement with Reckitt Benckiser Pharmaceuticals Inc. for its Atrigel® sustained-release drug delivery technology, except for certain rights being retained by us and our prior licensees, including rights retained for use with our Eligard products. Under the terms of the license agreement and related asset purchase agreement, we received an aggregate upfront payment of $25.0 million and may receive potential milestone payments of up to $5.0 million based on the successful development of two Atrigel-formulated

products. As part of the transaction, Reckitt acquired 18 employees from QLT USA and took over its corporate facility located in Fort Collins, Colorado. On August 29, 2008 we closed the sale of our land and building comprising our corporate headquarters and the adjacent undeveloped parcel of land in Vancouver to Discovery Parks Holdings Ltd., in its capacity as trustee of Discovery Parks Trust and Discovery Parks Trust 2 ("Discovery Parks") for CAD$65.5 million. Discovery Parks is 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, Canada. In conjunction with the sale, we entered into a five-year lease with Discovery Parks for approximately 30% of the facility and provided a two-year, 6.5% interest-only, second mortgage vendor financing in the amount of CAD$12 million.
We are continuing to pursue the sale of QLT USA, or its remaining assets, namely the Eligard product line and related assets. 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
On October 9, 2008 we announced that we initiated a Phase I safety study in healthy adults of QLT091001, an orally administered synthetic retinoid replacement therapy for 11-cis-retinal, which is a key biochemical component of the visual retinoid cycle. The drug is being developed under a Co-Development Agreement with Retinagenix LLC for the potential treatment of Leber's Congenital Amaurosis (LCA), an inherited progressive retinal degenerative disease that leads to retinal dysfunction and visual impairment beginning at birth. Phase I data is expected to be reported in the first half of 2009.
On October 20, 2008 our worldwide Visudyne licensee, Novartis, announced a restructuring of its U.S. commercial organization. As part of the restructuring, Novartis will no longer have a dedicated Opthalmic sales force in the U.S. by the end of 2008. However, Novartis will continue to support Visudyne in the U.S. through indirect sales methods. In the near term, we expect profitability to increase as a result of reduced selling and administrative expenses. On October 28, 2008 we released data on safety and efficacy results from the Phase II CORE trial which is a study using our Latanoprost Punctal Plug Delivery System (L-PPDS) for the treatment of open angle glaucoma and ocular hypertension. Sixty-one patients were enrolled in the study and 23 patients discontinued before the Week-12 visit due to either loss of efficacy/inadequate intraocular pressure (IOP) control (19 patients) or loss of L-PPDS in both eyes (four patients). The mean change in IOP from baseline at 12 weeks among patients who completed the study was -5.4 mmHg, -4.8 mmHg and -4.9 mmHg for the low, medium, and high concentrations of latanoprost respectively. This represents a clinically meaningful reduction of 20% from baseline at the 12-week time point in those patients. There was no dose response relationship observed within the dose range tasted in the trial. The L-PPDS were well tolerated during the course of treatment. We currently plan to initiate a second Phase II trial in patients with open angle glaucoma or ocular hypertension over a twelve week period to investigate the efficacy of a proprietory punctal plug prototype in conjunction with a dose of Latanoprost that is at least 10-fold higher than the dose used in the CORE study.
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 2008, we recorded net income of $146.9 million and $129.0 million, or $1.97 and $1.73 net income per common share, respectively. These results compare with net income of $0.4 million and a net loss of $63.5 million, or $0.00 net income per common share and $0.85 net loss per common share for the three and nine months ended September 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 nine months
                                                  ended September 30,                 ended September 30,
(In thousands of U.S. dollars)                   2008              2007              2008             2007


Visudyne® sales by Novartis                   $    34,081        $  48,735        $  111,237        $ 169,315
Less: Marketing and distribution
costs(1)                                          (15,606 )        (26,419 )         (51,538 )        (79,701 )
Less: Inventory costs(2)                           (2,322 )         (2,909 )          (7,384 )         (8,863 )
Less: Royalties to third parties(3)                  (733 )         (1,037 )          (2,381 )         (3,576 )

                                              $    15,420        $  18,370        $   49,934        $  77,175


QLT's 50% share of Novartis' net
proceeds from Visudyne® sales                 $     7,710        $   9,185        $   24,967        $  38,587
Add: Advance on inventory costs from
Novartis(4)                                         1,266            2,198             5,018            6,372
Add: Royalties reimbursed to QLT(5)                   750              991             2,425            3,533
Add: Other costs reimbursed to QLT(6)               1,142            2,232             4,052            5,678

Revenue from Visudyne® sales                  $    10,868        $  14,606        $   36,462        $  54,170

(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 September 30, 2008, revenue from Visudyne of $10.9 million decreased by $3.7 million, or 26%, from the three months ended September 30, 2007. The decrease was primarily due to a 30% 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 third quarter of 2008, approximately 27% of the total Visudyne sales by Novartis were in the U.S., compared to approximately 19% in third quarter of 2007. Overall the ratio of our share of net proceeds from Visudyne sales compared to Visudyne sales was 22.6% in the third quarter of 2008, up from 18.8% in the third quarter of 2007. For the nine months ended September 30, 2008, revenue from Visudyne sales of $36.5 million decreased by $17.7 million, or 33%, from the nine months ended September 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 nine months ended September 30, 2008, approximately 26% of the total Visudyne sales by Novartis were in the U.S., compared to approximately 17% 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 nine months ended September 30, 2008, down from 22.8% in the nine months ended September 30, 2007. Costs and Expenses
Cost of Sales
For the three months ended September 30, 2008, cost of sales decreased 30% to $2.0 million compared to $2.8 million for the same period in 2007. For the nine months ended September 30, 2008, cost of sales decreased 22% to $7.3 million compared to $9.4 million for the same period in 2007. The decrease in cost of sales is related to the drop in Visudyne sales for the three and nine months ended September 30, 2008. For the nine months ended September 30, 2008, the decrease was partially 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 15 - Contingencies in the "Notes to Condensed Consolidated Financial Statements". Research and Development
Research and development ("R&D") expenditures decreased 24% to $6.9 million for the three months ended September 30, 2008 compared to $9.1 million in the same period in 2007. For the nine months ended September 30, 2008, R&D decreased 12% to $23.0 million compared to $26.2 million for the same period in 2007. Significant reductions in spending on early stage research projects and reduced overhead expenses were partially 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:

• inability to design punctal plugs to function as expected,

• delays or inability to formulate active ingredient in right concentration to deliver effective doses of drug,

• 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,

• inability to attract personnel with expertise required by our development program,

• inability to manufacture sterile supplies necessary for composition of products,

• 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 nine months
                                       ended September 30,          ended September 30,
   (In thousands of U.S. dollars)          2008          2007            2008         2007

   Ocular                           $     6,255       $ 6,608     $    20,057     $ 18,344
   Dermatology                              581         2,440           2,821        7,189
   Other                                     51            33             171          703

                                    $     6,887       $ 9,081     $    23,049     $ 26,236

Selling, General and Administrative Expenses For the three months ended September 30, 2008, selling, general and administrative ("SG&A") expenses decreased by 26% to $4.4 million compared to $6.0 million for same period in 2007. For the nine months ended September 30, 2008, SG&A decreased 3% to $15.5 million compared to $16.0 million for the same period in 2007. For the three and nine months ended September 30, 2008, the decrease in SG&A relates to cost savings from restructuring and decreased spending on Visudyne support. For the nine months ended September 30, 2008 the decrease was partially offset by lower inventory overhead absorption and a 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 15 - Contingencies in the "Notes to Unaudited Condensed Consolidated Financial Statements". Gain on Sale of Long-Lived Asset
On August 29, 2008 we closed the sale of our land and building comprising our corporate headquarters and the adjacent undeveloped parcel of land in Vancouver to Discovery Parks for CAD$65.5 million. We recognized a gain of $21.3 million related to this transaction. The assets sold included $27.7 million of building, $6.8 million of land, and $2.9 million of equipment. In connection with the sale of the land and building we recorded a write down of other equipment in the amount of $2.0 million.
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). We have provided most of the approximately 115 affected employees with severance and support to assist with outplacement and recorded $9.4 million of restructuring charges in the nine months ended September 30, 2008, which include contract termination costs and property, plant and equipment impairment charges of $1.8 million. We expect to record additional restructuring charges of up to $0.5 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 nine months ended September 30, 2007, restructuring charges of $0.2 million and $0.7 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
Net foreign exchange losses comprise losses 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. We completed the redemption our U.S. dollar denominated convertible debt on September 15, 2008. See "Liquidity and Capital Resources - Interest and Foreign Exchange Rates." Details of our net foreign exchange losses were as follows:

                                                  For the three months                For the nine months
                                                  ended September 30,                 ended September 30,
                                                     2008             2007              2008             2007

(In thousands of U.S. dollars)
Cash and cash equivalents and short-term
investments                                   $     8,159        $ (18,622 )      $   12,936        $ (33,385 )
U.S. dollar long-term debt                         (7,623 )         12,072           (11,559 )         27,757
Foreign exchange contracts                          3,446              (76 )           5,275            1,913
Foreign currency receivables and
payables                                           (4,278 )          5,763            (6,710 )          2,430

Net foreign exchange losses                   $      (296 )      $    (863 )      $      (58 )      $  (1,285 )

Interest Income
For the three months ended September 30, 2008, interest income decreased 52% to $1.9 million compared to $3.8 million for the same period in 2007. For the nine months ended September 30, 2008, interest income decreased from $11.2 million to $5.8 million when compared to the same period in 2007. The decrease for the quarter ended September 30, 2008, in comparison to the same period in 2007 was a result of a substantial decline in interest rates, partially offset by a higher average cash balance due to proceeds received from asset sales. For the nine months ended September 30, 2008, the decrease was a result of lower interest rates combined with a lower average 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 month periods ended September 30, 2008 and 2007, $2.7 million of interest expense comprised interest accrued on the convertible senior notes, amortization of deferred financing expenses related to the placement of these notes and interest expense on the post judgment accrued liability associated with the MEEI patent litigation damage award currently pending appeal. On September 15, 2008, we completed the redemption of all of our convertible senior notes for 100% of the principal amount, plus accrued and unpaid interest. For the three month periods ended September 30, 2008 and 2007, there was $1.0 million and $1.5 million, respectively, related to the interest expense on the post judgment accrued liability associated with the MEEI patent litigation included within interest expense.
For the nine month periods ended September 30, 2008 and 2007, $8.8 million and $6.0 million of interest expense, respectively, related to the convertible senior notes, amortization of deferred financing expenses related to the placement of these notes, and, beginning in the third quarter of 2007, the interest expense on the post judgment accrued liability associated with the MEEI patent litigation. For the nine month periods ended September 30, 2008 and 2007 there was $4.3 million and $2.5 million, respectively, related to the interest expense on the post judgment accrued liability associated with the MEEI patent litigation included within interest expense. Income from Discontinued Operations

Income from discontinued operations for the three months ended September 30, 2008 was $134.8 million compared to $2.2 million in the same period in 2007. For the nine months ended September 30, 2008, income from discontinued operations was $136.3 million compared to $5.7 million for the same period in 2007. The increase was primarily due to pre-tax gains of $134.3 million on sale of discontinued operations, or $70.9 million net of applicable income tax expense (but before application of loss carryforwards), and tax benefit recognition of $58.5 million related to tax assets (which include operating loss carryforwards and research and development credit carryforwards) for which we previously applied a valuation allowance. Included in income from discontinued operations for the three and nine months ended September 30, 2008 is $1.1 million ($0.7 million, net of income tax) and $4.6 million ($2.8 million, net of income tax), related to a provision for a potential retroactive pricing rebate on certain sales of Eligard from 2004 to the third quarter of 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 recognized a pre-tax gain of $117.5 million related to this transaction, or $62.3 million net of applicable income tax expense (but before application of loss carryforwards). The assets sold include worldwide rights to Aczone®, related inventory of $1.4 million, $27.8 million of goodwill allocated in accordance with SFAS 142. Aczone® has a nil book value as it was recorded as in-process R&D upon the acquisition of Atrix Laboratories, Inc. in 2004.
On August 25, 2008 we entered into an exclusive license agreement with Reckitt Benckiser Pharmaceuticals Inc. for our Atrigel® sustained-release drug delivery technology, except for certain rights being retained by QLT USA and its prior licensees, including rights retained for use with our Eligard products. Under . . .