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, 2008. All of the following amounts are expressed in U.S. dollars unless otherwise indicated.
OVERVIEW
We are a pharmaceutical company dedicated to the development and commercialization of innovative therapies for the eye. We are focused on our commercial product Visudyne® for the treatment of wet-AMD, and the development of drugs to be delivered in our proprietary punctal plug devices. On October 1, 2009, our Eligard® product line was divested as part of the sale of all of the shares of our wholly owned U.S. subsidiary, QLT USA, Inc. ("QLT USA"). See Recent Developments.
Marketed Products
Our most significant source of revenue is derived from sales of our Visudyne product and, prior to the sale of QLT USA on October 1, 2009, the Eligard line of products, which are marketed through commercial licensees. See Recent Developments. Visudyne is used to treat subfoveal choroidal neovascularization (CNV) that occurs due to eye diseases known as wet age related macular degeneration, or wet AMD, pathologic myopia (severe near-sightedness that changes the shape of the eye, stretching the retina), presumed ocular histoplasmosis (fungal spore infection of the retina), and other macular diseases. The Eligard line of products is used to treat prostate cancer and includes one, three, four and six month commercial formulations of Atrigel technology combined with leuprolide acetate. Net product revenues from Eligard have been excluded from continuing operations and reported within discontinued operations for the current and prior periods. Research and Development
Funds derived from the sales of Visudyne and Eligard help fund our research and development, or R&D, programs. The majority of our research and development, or R&D, effort is directed towards our proprietary punctal plug technology, which is a minimally invasive drug delivery system that we are developing with the goal of delivering a variety of drugs topically to the eye through controlled sustained release to the tear film. We are initially targeting the treatment of glaucoma and ocular hypertension and are presently conducting Phase II studies in this program.
We are also continuing to study the effectiveness of Visudyne in patients with wet AMD by exploring its use in combination with the class of therapeutics known as anti-VEGF drugs, which prevent the growth of abnormal blood vessels that characterize wet AMD. We and Novartis Pharma AG ("Novartis") have each initiated studies comparing the safety and efficacy of Visudyne in combination with Lucentis, an anti-VEGF drug. The purpose of the studies is to determine if combination therapy reduces re-treatment rates compared with Lucentis monotherapy while maintaining similar vision outcomes and an acceptable safety profile.
We have completed a Phase Ia 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 for the potential treatment of Leber's Congenital Amaurosis, or LCA, an inherited progressive retinal degenerative disease that leads to retinal dysfunction and visual impairment beginning at birth. We are planning to initiate a Phase Ib trial in pediatric patients with LCA in the fourth quarter of 2009.
RECENT DEVELOPMENTS
On October, 1, 2009, the Eligard product line was divested as part of the sale of all of the shares of QLT USA to TOLMAR Holding, Inc. ("TOLMAR") for up to an aggregate $230.0 million. Pursuant to the stock purchase agreement, we received $20.0 million on closing and will receive $10.0 million on or before October 1, 2010 and up to an additional $200.0 million payable on a quarterly basis in amounts equal to 80% of the royalties paid under the license agreements with each of Sanofi Synthelabo Inc. ("Sanofi") and MediGene Aktiengesellschaft for the commercial marketing of Eligard in Canada, the United States and Europe (beginning with the royalties payable for Eligard sales that occurred in the quarter ended September 30, 2009) until the earlier of QLT receiving the additional $200.0 million or the expiry of the stock purchase agreement on October 1, 2024. In addition, under the terms of the stock purchase agreement, TOLMAR paid QLT an amount equal to the cash that QLT USA had on-hand at closing.

On October 16, 2009, we entered into an Amended and Restated PDT Product Development, Manufacturing and Distribution Agreement (the "Amended PDT Agreement") with Novartis. Under the Amended PDT Agreement, effective January 1, 2010, we will, among other things, receive exclusive U.S. rights to the Visudyne® patents to sell and market Visudyne in the U.S. Under the Amended PDT Agreement, we will have exclusive U.S. sales and marketing rights to Visudyne, including rights to all end-user revenue derived from Visudyne sales in the U.S. Novartis will have marketing and sales rights in all countries outside of the U.S. ("ex-US") and will pay QLT a royalty of 20% of ex-US net sales until December 31, 2014, and thereafter 16% of ex-US net sales until the expiry of the Amended PDT Agreement on December 31, 2019. We will continue to manufacture Visudyne and will supply the product at a pre-specified price exclusively to Novartis for ex-US distribution. QLT and Novartis will each be responsible for all costs and expenses associated with marketing and sales in their respective territories. Also under the Amended PDT Agreement, QLT and Novartis have released each other from all open claims the parties may have against each other, including any in connection with QLT's litigation with MEEI and QLT's litigation with MGH.
On October 27, 2009, we announced that our Board of Directors authorized the repurchase of up to 2.7 million of our common shares, being 5% of our issued and outstanding common shares, over a 12 month period commencing November 3, 2009 under a normal course issuer bid. A copy of the TSX Form 12 - Notice of Intention to Make a Normal Course Issuer Bid can be obtained, without charge, by contacting QLT. See Note 8 - Share Capital in the "Notes to Unaudited Condensed Consolidated Financial Statements" in this Report.
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 2009, we recorded net income of $8.9 million and $18.9 million, or $0.16 and $0.33 of net income per common share, respectively. These results compare with a net income of $146.9 million and $129.0 million, or $1.97 and $1.73 of net income per common share for the three and nine months ended September 30, 2008, respectively. Detailed discussion and analysis of our results of operations are as follows:
Revenues
Net Product Revenue
Net product revenue was determined as follows:

                                          Three months ended             Nine months ended
                                             September 30,                 September 30,
(In thousands of U.S. dollars)            2009           2008           2009           2008

Visudyne sales by Novartis             $   23,497      $  34,081      $  80,236      $ 111,237
Less: Marketing and distribution
costs(1)                                   (8,019 )      (15,606 )      (25,492 )      (51,538 )
Less: Inventory costs(2)                   (1,379 )       (2,322 )       (4,511 )       (7,384 )
Less: Royalties to third parties(3)          (503 )         (733 )       (1,731 )       (2,381 )

                                       $   13,596      $  15,420      $  48,502      $  49,934


QLT's 50% share of Novartis' net
proceeds from Visudyne sales           $    6,798      $   7,710      $  24,251      $  24,967
Add: Advance on inventory costs
from Novartis(4)                              762          1,266          3,646          5,018
Add: Royalties reimbursed to QLT(5)           494            750          1,730          2,425
Add: Other costs reimbursed to
QLT(6)                                        731          1,142          1,669          4,052

Revenue from Visudyne sales            $    8,785      $  10,868      $  31,296      $  36,462

(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 certain
excess or
obsolete
inventory,
losses on
manufacturing
purchase
commitments,
plus Novartis'
packaging and
labelling
costs, freight
and custom
duties.

(3) "Less:
Royalties to
third parties"

This
represents the
royalty
expenses we
incur and
charge to
Novartis
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 certain
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, certain legal and administrative expenses that we incur in support of Visudyne sales.

For the three months ended September 30, 2009, revenue from Visudyne sales of $8.8 million decreased by $2.1 million, or 19.2%, from the three months ended September 30, 2008. The decrease was primarily due to a 31.1% 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, offset by a 48.6% reduction in marketing and distribution costs. In the third quarter of 2009, approximately 26% of the total Visudyne sales by Novartis were in the U.S., 28% were in Europe, and 46% were in other markets worldwide. For the third quarter of 2008, approximately 27% of the total Visudyne sales by Novartis were in the U.S., 29% were in Europe, and 44% were in other markets worldwide. Overall, the ratio of our 50% share of Novartis' net proceeds from Visudyne sales compared to total worldwide Visudyne sales was 28.9% in the third quarter of 2009, up from 22.6% in the third quarter of 2008.
For the nine months ended September 30, 2009, revenue from Visudyne sales of $31.3 million decreased by $5.2 million, or 14.2%, from the nine months ended September 30, 2008. The decrease was primarily due to a 27.9% 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, offset by a 50.5% reduction in marketing and distribution costs. In the nine months ended September 30, 2009, approximately 29% of the total Visudyne sales by Novartis were in the U.S., 27% were in Europe, and 44% were in other markets worldwide. In the nine months ended September 30, 2008, approximately 26% of the total Visudyne sales by Novartis were in the U.S., 34% were in Europe, and 40% were in other markets worldwide. Overall, the ratio of our 50% share of Novartis' net proceeds from Visudyne sales compared to total worldwide Visudyne sales was 30.2% in the nine months ended September 30, 2009, up from 22.4% in the nine months ended September 30, 2008.
Under the Amended PDT Agreement, effective January 1, 2010, we will have exclusive U.S. sales and marketing rights to Visudyne, including rights to all end-user revenue derived from Visudyne sales in the U.S. Novartis will have ex-US marketing and sales rights and will pay QLT a royalty of 20% of ex-US net sales until December 31, 2014, and thereafter 16% of ex-US net sales until the expiry of the Amended PDT Agreement on December 31, 2019.

Costs and Expenses
Cost of Sales
For the three months ended September 30, 2009, cost of sales of $2.2 million decreased $0.8 million, or 26.3%, compared to $3.0 million for the same period in 2008. The decrease in cost of sales was related to the drop in Visudyne sales for the three month period. For the nine months ended September 30, 2009, cost of sales of $12.7 million increased $2.0 million, or 19.0%, compared to $10.7 million for the same period in the prior year. The increase was mainly due to a $4.6 million inventory write-down related to Visudyne recorded in the second quarter of 2009, offset by lower cost of sales related to the drop in Visudyne sales. 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. During the nine months ended September 30, 2009, we concluded that based on our forecast of future Visudyne demand, certain early stage materials used in the manufacture of Visudyne were potential excess inventory. As a result, we provided a reserve against the excess inventory and in the second quarter of 2009, recorded a charge of $4.6 million in cost of sales.
Cost of sales related to Visudyne included 3.01% of worldwide Visudyne net sales, pursuant to damages awarded in the judgment against us in the MEEI litigation. See Note 12 - Contingencies in the "Notes to Unaudited Condensed Consolidated Financial Statements" in this report. We are required to continue to pay MEEI 3.01% of worldwide Visudyne net sales, and this amount is reported in cost of sales. On October 16, 2009, we entered into an Amended and Restated PDT Product Development, Manufacturing and Distribution Agreement with Novartis. Under the Amended PDT Agreement, QLT and Novartis have released each other from all open claims the parties may have against each other, including any in connection with QLT's litigation with MEEI and QLT's litigation with MGH. No reimbursement has been or will be received for the damages paid to MEEI in the amount of 3.01% of worldwide Visudyne net sales. Research and Development
For the three months ended September 30, 2009, research and development, or R&D, expenditures increased 7.1% to $7.4 million compared to $6.9 million in the same period in 2008. The increase was a result of higher spending on the punctal plug program which more than offset a decline in Visudyne R&D. For the nine months ended September 30, 2009, R&D decreased 11.1% to $20.5 million compared to $23.0 million for the same period in 2008. The decrease was a result of lower overhead expenses due to cost savings from restructuring, lower spending on Visudyne combination studies and Lemuteporfin, partially offset by higher spending on punctal plug development.
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,

• inability to operate without infringing the proprietary rights of others,

• changes in the commercial marketplace,

• difficulties in enrolling patients into or keeping them in our clinical studies,

• delays in study progression, including study site, Institutional Review Board and regulatory delays,

• failure to meet favorable study endpoints,

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

• inability to attract personnel or retain 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 referenced under Item 1A, Risk Factors.

R&D expenditures by therapeutic area were as follows:

                                        Three months ended          Nine months ended
                                           September 30,              September 30,
     (In thousands of U.S. dollars)      2009          2008         2009          2008

     Ocular                           $    7,276      $ 6,255     $  20,057     $ 20,057
     Dermatology                               -          581            10        2,821
     Other                                    99           51           419          171

                                      $    7,375      $ 6,887     $  20,486     $ 23,049

Selling, General and Administrative Expenses For the three months ended September 30, 2009, selling, general and administrative, or SG&A, expenses increased 1.8% to $4.5 million compared to $4.4 million in the same period in 2008. The three months ended September 30, 2009 included a $0.6 million charge for capital tax. For the nine months ended September 30, 2009, SG&A decreased 19.6% to $12.5 million compared to $15.5 million for the same period in 2008. The decrease was primarily due to cost savings from our restructuring partially offset by the charge for capital tax.
Litigation
Litigation expense of $0.3 million for the three month period ended September 30, 2009 related to reimbursement of certain MEEI legal costs, as awarded by the Court of Appeals for the First Circuit in September. During the nine months ended September 30, 2009, we also incurred a charge of approximately $0.3 million in connection with the reimbursement of legal fees, accounting fees and other amounts to resolve issues not material to QLT or its business. Restructuring Charge
In January 2008, we restructured our operations and during the nine months ended September 30, 2008, we provided most of the approximately 115 affected employees with severance and support to assist with outplacement and recorded $9.4 million of restructuring charges which included a property, plant, and equipment impairment charge of $1.8 million. During the nine months ended September 30, 2009 we recorded a $0.1 million adjustment to our restructuring accrual related to severance, termination benefits and other costs as we complete final activities associated with this restructuring. Annualized operating savings as a result of the 2008 restructuring, which was substantially completed by June 30, 2008, are approximately $11.0 million.
Investment and Other Income (Expense)
Net Foreign Exchange Gains (Losses)
Net foreign exchange gains (losses) comprise the impact of foreign exchange fluctuation on our cash and cash equivalents, restricted cash, derivative financial instruments, foreign currency receivables, foreign currency payables, foreign currency intercompany debt and, prior to its redemption in September 2008, U.S. dollar denominated convertible debt. Differing functional currencies between QLT Inc. and QLT USA, Inc. result in gains and losses on our intercompany debt. On October 1, 2009, the Eligard product line was divested as part of the sale of the shares of QLT USA and our intercompany debt was settled. As a result, for the three months ended September 30, 2009, the foreign currency receivables, payables and other include a foreign currency gain of approximately $8.0 million related to our intercompany debt. See "Liquidity and Capital Resources - Interest and Foreign Exchange Rates."

Details of our net foreign exchange gains were as follows:

                                           Three months ended             Nine months ended
                                             September 30,                  September 30,
(In thousands of U.S. dollars)            2009            2008           2009           2008

Cash and cash equivalents              $     (337 )     $   3,055      $     291      $   5,032
Restricted cash                                 -           5,104              3          7,904
U.S. dollar convertible debt                    -          (7,623 )            -        (11,559 )
Foreign exchange contracts                  1,111           3,446          2,886          5,275
Foreign currency receivables,
payables and other                          6,743          (4,278 )       11,112         (6,710 )

Net foreign exchange gains (losses)    $    7,517       $    (296 )    $  14,292      $     (58 )

Interest Income
For the three months ended September 30, 2009, interest income of $1.9 million was consistent with the same period in the prior year, although in the current period, $1.6 million of the interest income related to interest earned on tax refunds. For the nine months ended September 30, 2009, interest income decreased 34% to $3.8 million compared to $5.8 million for the same period in 2008. The decrease was primarily due to a substantial decline in interest rates and a lower average cash and restricted cash balance compared to the same period in the prior year, partially offset by interest earned on tax refunds, and interest earned on our second mortgage financing. For the nine months ended September 30, 2009, interest income included $2.7 million of interest earned on tax refunds and $0.5 million of interest earned on our second mortgage receivable. Interest Expense
For the nine month period ended September 30, 2009, interest expense of $1.8 million was entirely related to interest expense on the post judgment accrued liability associated with the MEEI litigation damage award. For the three and nine months ended September 30, 2008, interest expense of $2.7 million and $8.8 million respectively, comprised interest accrued on the 3% convertible senior notes due in 2023 (which were redeemed on September 15, 2008), 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 litigation damage award. For the three and nine month periods ended September 30, 2008 there was $1.0 million and $4.3 million of interest, respectively, related to the interest on the MEEI litigation included within interest expense.
Income from Discontinued Operations
On October, 1, 2009, the Eligard product line was divested as part of the sale of all of the shares of QLT USA. Previously, during the third quarter of 2008 through QLT USA, we completed the sale of Aczone, a topical treatment for acne vulgaris, to Allergan Sales, LLC pursuant to an asset purchase agreement, and we out-licensed certain Atrigel rights to Reckitt Benckiser Pharmaceuticals Inc. pursuant to a license agreement and related asset sale agreement. In accordance with the accounting standard for discontinued operations, the results of operations related to QLT USA were excluded from continuing operations and reported as discontinued operations for the current and prior periods. Income Taxes
The effective income tax rate for the nine month period ended September 30, 2009 was approximately 137.5% compared to approximately (2.0)% for the same period in the prior year. The change in the effective tax rate was primarily due to a lower effective tax rate applicable to certain of our foreign exchange gains, and changes in our overall levels and mix of income (loss) in the jurisdictions in which we operate, including the associated impact on our valuation allowance (i.e. we have a valuation allowance against the tax benefit of losses associated with our punctal plug development expenditures).

LIQUIDITY AND CAPITAL RESOURCES
General
Our cash resources and working capital, cash flow from operations, cash from sale of assets, and other available financing resources will be utilized to fund current product development programs, operating requirements, liability requirements, potential acquisition and licensing activities, milestone payments, and repurchases of our common shares. On October, 1, 2009, the Eligard product line was divested as part of the sale of all of the shares of our wholly owned U.S. subsidiary, QLT USA. See Recent Developments.
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; levels of future sales of Eligard and our receipt of up to an additional $200.0 million in contingent consideration under the stock purchase agreement; the progress of our R&D programs, including preclinical and clinical testing; future share . . .