##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 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.
  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)
   Common Shares, without par value
Common Share Purchase Rights
 
 o þ
 o þ
 þ o
 o
  þ o o
 o þ




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##### 



Note regarding references to QLT
  Note regarding Currency and Accounting Standards
   Note regarding Exchange Rates
  2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002High
    
    $
    1.1726
    
    
    $
    1.2703
    
    
    $
    1.3970
    
    
    $
    1.5750
    
    
    $
    1.6128Low
    
    
    1.0989
    
    
    
    1.1507
    
    
    
    1.1775
    
    
    
    1.2923
    
    
    
    1.5108Average
    
    
    1.1340
    
    
    
    1.2115
    
    
    
    1.3017
    
    
    
    1.4008
    
    
    
    1.5704Period End
    
    
    1.1652
    
    
    
    1.1656
    
    
    
    1.2034
    
    
    
    1.2923
    
    
    
    1.5800
 NOTICE REGARDING WEBSITE ACCESS TO COMPANY REPORTS
  2




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##### 



QLT INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2006
  Item 1. BUSINESS
    
    
    4Overview
    
    
    4Our Approved Products
    
    
    8Our Products under Regulatory Review
    
    
    10Our Products in Development
    
    
    10Our Proprietary Technologies
    
    
    12Significant Collaborative Arrangements
    
    
    13Product Manufacturing
    
    
    15Financial Information about Segments and Geographic Areas
    
    
    15Supply of Medical Lasers Required for Visudyne Therapy
    
    
    15Patents, Trademarks and Proprietary Rights
    
    
    16Competition
    
    
    18Government Regulation
    
    
    19Third-Party Reimbursement
    
    
    21Liability and Product Recall
    
    
    21Research and Development
    
    
    22Human Resources
    
    
    22Item 1A. RISK FACTORS
    
    
    24Item 1B. UNRESOLVED STAFF COMMENTS
    
    
    34Item 2. PROPERTIES
    
    
    34Item 3. LEGAL PROCEEDINGS
    
    
    35Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    37Item 5. MARKET FOR THE REGISTRANTS COMMON SHARES AND RELATED SHAREHOLDER
MATTERS
    
    
    38Item 6. SELECTED FINANCIAL DATA
    
    
    42Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
    
    
    44Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    68Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    68Item 9A. CONTROLS AND PROCEDURES
    
    
    113Item 9B. OTHER INFORMATION
    
    
    113Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    114Item 11. EXECUTIVE COMPENSATION
    
    
    114Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    
    
    114Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    115Item 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
    
    
    115Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    116
  3




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##### 



PART I
 
 Item 1. BUSINESS
 
 Overview
 ® ® ®
    ®
    4




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##### 



OUR APPROVED PRODUCTS
 Product/Indication
    
    Location(s)
    
    LicenseeVisudyne®Predominantly classic subfoveal choroidal
neovascularization, or CNV, in wet
age-related macular degeneration, or AMD
    
    Over 75 countries
including the U.S.,
Canada, Japan,
Australia, New
Zealand and those
of the European
Union
    
    Novartis OphthalmicsOccult with no classic subfoveal CNV in AMD
    
    Over 50 countries
including Japan,
Australia, New
Zealand,
Switzerland and
those of the
European Union
    
    Novartis OphthalmicsMinimally Classic CNV in AMD
    
    Japan
    
    Novartis OphthalmicsSubfoveal CNV due to pathologic myopia
    
    Over 60 countries
including the U.S.,
Canada, and those
of the European
Union
    
    Novartis OphthalmicsPredominantly classic subfoveal CNV due to
presumed ocular histoplasmosis syndrome
    
    U.S.
    
    Novartis OphthalmicsEligardâ 7.5-mg one-monthProstate cancer
    
    Over 30 countries,
including the U.S.,
Canada, Australia,
New Zealand, 25
European countries,
India and a number
of Latin American
countries
    
    Sanofi-Synthelabo,
Mayne Pharma,
MediGene/Astellas,
Tecnofarma, RanbaxyEligardâ 22.5-mg three-monthProstate cancer
    
    Over 30 countries,
including the U.S.,
Canada, Australia,
New Zealand, 25
European countries,
India and a number
of Latin America
countries
    
    Sanofi-Synthelabo,
Mayne Pharma,
MediGene/Astellas,
Tecnofarma, RanbaxyEligardâ 30.0-mg four-monthProstate cancer
    
    U.S., Canada,
Australia, New
Zealand and India
    
    Sanofi-Synthelabo,
Mayne Pharma,
RanbaxyEligardâ 45.0-mg six-month formulationProstate cancer
    
    U.S., Canada,
Australia, New
Zealand, India and
Germany
    
    Sanofi-Synthelabo,
Mayne Pharma;
MediGene/Astellas,
RanbaxyAczoneAcne vulgaris
    
    U.S., Canada
A decision with
respect to the
commercialization
of Aczone is
pending the outcome
of a submission to
and decision by the
FDA whether to
remove the
restriction
currently on the
approved label.
    
    Not partnered
 5




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##### 



OUR PRODUCTS UNDER REGULATORY REVIEW
 Product/Indication
    
    Location(s)
    

StatusEligard® 7.5-mg one-monthProstate Cancer
    
    Six countries
outside of North
America
    
    Marketing
authorization
application filedEligard® 22.5-mg three-monthProstate Cancer
    
    Five countries
outside of North
America
    
    Marketing
authorization
application filedEligard® 30.0-mg four-monthProstate Cancer
    
    Two countries
outside of North
America
    
    Marketing
authorization
application filedEligard® 45.0-mg six-monthProstate Cancer
    
    Two countries
outside of North
America. The mutual
recognition
procedure to obtain marketing approval in other
European countries
will start in 2007.
    
    Marketing
authorization
application filed
 6




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##### 



OUR PRODUCTS IN DEVELOPMENT
 Product/Indication
    
    Location(s)
    

StatusOctreotide-Atrigel®  three-monthCarcinoid Syndrome
    
    U.S. and Canada
    
    Phase IIa PK study
planned to begin
enrolment in 2007Acromegaly
    
    U.S.
    
    On clinical hold pending submission
to the FDA of toxicology results in
second quarter of 2007 and a
decision by the FDA whether to
permit the study to proceedGHRP -1- Atrigel®  one-monthMalnutrition in
end-stage-renal-disease patients
undergoing hemodialysis
    
    U.S.
    
    Plan to complete
Phase IIa study in
2007Risperidone- Atrigel®  one-monthSchizophrenia
    
    U.S.
    
    Plan to complete
the IND-enabling
program by end of
2007Eligardâ 7.5-mg one-monthProstate Cancer
    
    Japan
    
    Application for
marketing approval
withdrawn.
Currently assessing
future development
for this product in
Japan.
 7




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##### 



Our Approved Products
 Visudyne®
  About Wet AMD
   Visudyne ® Approvals
 Predominantly Classic CNV in AMD
  Occult with no Classic CNV in AMD
  CNV due to Pathologic Myopia (PM)
  CNV due to Presumed Ocular Histoplasmosis Syndrome (OHS)
  8




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##### 



Eligard®
    Eligard® 7.5-mg One-Month and 22.5-mg Three-Month Products
 ®
 Eligard ® 30.0-mg Four-Month Product
 ®
 Eligard ® 45.0-mg Six-Month Product
 ®
 Aczone
    9




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##### 



Our Products under Regulatory Review
 Eligard® 7.5-mg one-month product
  Eligard® 22.5-mg three-month product
  Eligard® 30.0-mg four-month product
  Eligard® 45.0-mg six-month product
  
 Our Products in Development
 Expansion of Visudyne® Therapy
  Combination Trials
    10




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##### 



Eligard® 3.75-mg one-month Product
  Aczone 
  Octreotide Atrigel®- three-month Product
 Acromegaly
  Carcinoid Syndrome
  GHRP-1-Atrigel® one-month Product
  11




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##### 



Risperidone Atrigel®- three-month Product
  
 Our Proprietary Technologies
 Photodynamic Therapy
    Atrigel® System for injectable sustained release drug delivery
    
    
    Broad applicabilityThe Atrigel system is compatible with a broad range of
pharmaceutical compounds, including water soluble and insoluble compounds and high and low
molecular weight compounds, including peptides and proteins.
    
    Systemic drug deliveryThe Atrigel system can also be used to provide sustained drug
release into the systemic circulation.
    
    Customized continuous release and degradation ratesThe Atrigel system can be designed
to provide continuous release of incorporated pharmaceuticals over a targeted time period
thereby reducing the frequency of drug administration.
    
    BiodegradabilityThe Atrigel system will biodegrade and does not require removal when
the drug is depleted.
    
    Ease of applicationThe Atrigel system can be injected or inserted as flowable
compositions, such as solutions, gels, pastes, and putties, by means of ordinary needles
and syringes, or can be sprayed or painted onto tissues.
 12




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##### 




    
    SafetyAll current components of the Atrigel system are biocompatible and have
independently established safety and toxicity profiles.
 Solvent Microparticle System for topical drug delivery
  
 Significant Collaborative Arrangements
 Novartis
Ophthalmics  PDT
Product Development, Manufacturing and Distribution Agreement for
Visudyne Worldwide
   Sanofi-Synthelabo, Inc.  Marketing of Eligard® in the U.S. and Canada
    13




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##### 



Medigene AG and Astellas   Marketing of Eligard® in Europe
    Other Eligard® marketing collaborations
  ELIGARD ® MARKETING COLLABORATIONS
 Company
    
    TerritoryHan All Pharmaceutical Co.
    
    KoreaKey Oncologics
    
    South AfricaLuxembourg Pharmaceuticals, Ltd.
    
    IsraelMayne Pharma Pty, Ltd.
    
    Australia, New ZealandMediGene AG through its sublicensee, 
Astellas
    
    Albania, Andorra, Armenia,
Austria, Azerbaijan, Belarus,
Belgium, Bosnia and Herzegovina,
Bulgaria, Croatia, Cyprus, Czech
Republic, Denmark, Estonia,
Finland, France, Georgia,
Germany, Greece, Hungary,
Iceland, Ireland, Italy, Latvia,
Liechtenstein, Lithuania,
Luxembourg, Malta, Monaco,
Netherlands, Norway, Poland,
Portugal, Republic of Moldova,
Romania, Russian Federation, San
Marino, Slovakia, Slovenia,
Spain, Sweden, Switzerland, The
former Yugoslav Republic of
Macedonia, Turkey, Ukraine, and
United Kingdom, the Vatican City
and Yugoslavia.Ranbaxy Laboratories Ltd.
    
    IndiaSanofi-Synthelabo, Inc.
    
    U.S., CanadaTecnofarma International Ltd.
    
    Argentina, Belize, Bolivia,
Brazil, Chile, Colombia, Costa
Rica, Dominican Republic,
Ecuador, El Salvador, French
Guiana, Guatemala, Guyana,
Honduras, Mexico, Nicaragua,
Panama, Paraguay, Peru,
Suriname, Uruguay, Venezuela
 14




---



##### 



Pfizer, Inc.  Out-license of products utilizing our drug delivery technology
   
 Product Manufacturing
    
 Financial Information about Segments and Geographic Areas
  
 Supply of Medical Lasers Required for Visudyne Therapy
  15




---



##### 



Patents, Trademarks and Proprietary Rights
   Visudyne®
       16




---



##### 



Atrigel®
   Eligard®
  Aczone
  Lemuteporfin
  Other Patents, Trademarks and Proprietary Rights
    17




---



##### 



Competition
  Visudyne®
 ®
 ®
 ®
 18




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##### 



Eligard®
 ® ® ® ® ®
 Aczone
  
 Government Regulation
  FDA Regulati o n  Approval of New Drug Products
  
    
    preclinical testing;
    
    the submission of an investigational new drug application, or IND, to the FDA, which
must become effective before human clinical trials may commence;
    
    adequate and well-controlled human clinical trials to establish the safety and efficacy
of the drug;
    
    the submission of a new drug application, or NDA, or abbreviated new drug application,
or ANDA, to the FDA; and
    
    FDA approval of the application, including approval of all labeling.
   19




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##### 




    
    assess the efficacy of the drug in specific, targeted indications;
    
    assess dosage tolerance and optimal dosage; and
    
    identify possible adverse effects and safety risks.
    FDA Regulations  Approval of Medical Devices
   FDA Regulation  Post-approval requirements
  20




---



##### 



EU Regulation  Approval of medicinal product
  Additional Regulatory Issues
   
 Third-Party Reimbursement
   
 Liability and Product Recall
  21




---



##### 



Research and Development
  
 Human Resources
  22




---



##### 



OUR EXECUTIVE OFFICERS
  Name
    
    Age
    
    PositionRobert L. Butchofsky
    
    
    45
    
    
    President and Chief Executive OfficerCameron R. Nelson
    
    
    41
    
    
    Vice President, Finance and Chief Financial OfficerAlain H. Curaudeau
    
    
    50
    
    
    Senior Vice President, Portfolio
and Project ManagementLinda M. Lupini
    
    
    47
    
    
    Senior Vice President, Human
Resources and Organizational DevelopmentAlexander R. Lussow
    
    
    44
    
    
    Vice President, Business DevelopmentPeter J. OCallaghan
    
    
    47
    
    
    Senior Vice President, Corporate
Development and General Counsel
 . â
   23




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##### 



,
  
 Item 1A. RISK FACTORS
  Risks Relating to Our Business
 We may not be successful in addressing competition for Visudyne, Eligard or our other products.
 24




---



##### 



If there is an adverse outcome in the ongoing litigation in which we are or may become involved,
our business may be harmed.
   We are dependent on third parties to market Visudyne and Eligard.
   25




---



##### 



The success of Visudyne, Eligard and our other products may be limited by governmental and other
third-party payers.
    We may not successfully develop and launch replacements for our products that lose patent
protection.
  26




---



##### 



We may not be able to obtain and enforce effective patents to protect our proprietary rights from
use by competitors, and patents of other companies could require us to stop using or pay to use
required technology.
      Resources devoted to research and development may not yield new products that achieve commercial
success.
  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.
  27




---



##### 



We may be unable to manufacture or continue to efficiently manufacture Visudyne, Eligard or our
other products in compliance with FDA and other regulatory requirements or our product
specifications.
        28




---



##### 



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.
   If our supply of finished products is interrupted, our ability to maintain our inventory levels
could suffer and future revenues may be delayed.
   We may face future product liability claims that may result from the sale of Visudyne, Eligard and
our other products.
  29




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##### 



Our business could suffer if we are unsuccessful in identifying, negotiating or integrating future
acquisitions, business combinations or strategic alliances.
  We are undergoing significant strategic and organizational change. Failure to manage disruption to
the business or the loss of key personnel could have an adverse effect on our business.
  Research, Development and Regulatory Risks
 We
may not be successful in our efforts to develop, license or acquire
new products in targeted therapeutic
segments.
    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.
  30




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##### 



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 harmed.
  Patient enrollment may not be adequate for our current trials or future clinical trials.
  Visudyne, Eligard or our other products may exhibit adverse side effects that prevent their
widespread adoption or that necessitate withdrawal from the market.
  We may be unable to comply with ongoing regulatory requirements.
    31




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##### 



We are subject to environmental compliance risks.
  Risks Relating to Our Financial Results and Condition
 Our future operating results are uncertain and likely to fluctuate.
   32




---



##### 



1.
    
    lower than expected revenues from sales of Visudyne or Eligard;2.
    
    changes in pricing strategies or reimbursement levels for Visudyne or Eligard;3.
    
    seasonal fluctuations, particularly in the third quarter due to decreased demand for
Visudyne in the summer months;4.
    
    high levels of marketing expenses for Visudyne or the launch of additional competitors
to Visudyne or Eligard;5.
    
    fluctuations in currency exchange rates;6.
    
    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;7.
    
    unfavorable outcome in the litigation commenced by Massachusetts Eye and Ear Infirmary
against QLT;8.
    
    higher than expected operating expenses as a result of increased costs associated with
the development or commercialization of Visudyne, Eligard, Aczone and our other products
and candidates; and9.
    
    increased operating expenses as a result of product, technology or other acquisitions
or business combinations.
 Future sales of Visudyne, Eligard and our other products may be less than expected.
   Our
provision for income taxes and effective income tax rate may vary significantly and may adversely affect our results of
operations and cash resources.
  We may need additional capital in the future, and our prospects for obtaining it are uncertain
  We have convertible debt outstanding, which, if not converted into equity, will require a
significant amount of cash and may adversely affect our financial position and cash resources.
 33




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##### 



The market price of our common shares is extremely volatile.
  Various provisions of our charter and our shareholder rights plan may have the effect of impeding a
change in control that are beneficial to our shareholders.
   
 Item 1B. UNRESOLVED STAFF COMMENTS
  
 Item 2. PROPERTIES
  34




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##### 



Item 3. LEGAL PROCEEDINGS
  (a) Eligard Patent Litigation
 United States Patent Litigation
 ®
  ®
   35




---



##### 



Germany Patent Litigation
      (b) Patent Litigation with MEEI
 The First MEEI Lawsuit
 ®
    36




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##### 



The Second MEEI Lawsuit
 ®
    (c) Effect of the German Eligard Patent Litigation and MEEI Litigation
 .
 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  37




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##### 



PART II
 
 Item 5. MARKET FOR THE REGISTRANTS COMMON SHARES, RELATED SHAREHOLDER MATTERS AND ISSUER

            PURCHASES OF EQUITY SECURITIES
 Common Share Information
  The Toronto Stock Exchange
    
    The NASDAQ Stock MarketHigh
    
    Low
    
    Volume
    
    High
    
    Low
    
    Volume(CAD$)
    
    (CAD$)
    
    
    
    
    
    (U.S.$)
    
    (U.S.$)2006Fourth Quarter
    
    $
    10.35
    
    
    $
    8.62
    
    
    
    12,196,874
    
    
    $
    8.98
    
    
    $
    7.69
    
    
    
    55,168,839Third Quarter
    
    
    8.86
    
    
    
    7.10
    
    
    
    7,124,433
    
    
    
    7.92
    
    
    
    6.28
    
    
    
    45,308,444Second Quarter
    
    
    9.37
    
    
    
    7.53
    
    
    
    8,951,607
    
    
    
    8.31
    
    
    
    6.77
    
    
    
    51,772,917First Quarter
    
    
    8.99
    
    
    
    6.84
    
    
    
    11,896,512
    
    
    
    7.82
    
    
    
    5.95
    
    
    
    98,016,0672005Fourth Quarter
    
    $
    9.20
    
    
    $
    7.03
    
    
    
    28,212,418
    
    
    $
    7.92
    
    
    $
    6.05
    
    
    
    74,122,811Third Quarter
    
    
    13.55
    
    
    
    8.15
    
    
    
    19,319,201
    
    
    
    11.12
    
    
    
    6.96
    
    
    
    83,556,511Second Quarter
    
    
    15.55
    
    
    
    11.87
    
    
    
    26,225,580
    
    
    
    12.67
    
    
    
    9.47
    
    
    
    71,776,758First Quarter
    
    
    21.04
    
    
    
    15.02
    
    
    
    23,604,803
    
    
    
    17.19
    
    
    
    12.37
    
    
    
    71,802,369
   38




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##### 



Share Price Performance Graph
  
 Dec. 31, 2001
    
    
    Dec. 31, 2002
    
    
    Dec. 31, 2003
    
    
    Dec. 31, 2004
    
    
    Dec. 30, 2005
    
    
    Dec. 29, 2006QLT Total Return
    
    
    100.00
    
    
    
    33.09
    
    
    
    60.49
    
    
    
    47.48
    
    
    
    18.44
    
    
    
    24.37S&P/TSX Composite Index
    
    
    100.00
    
    
    
    86.03
    
    
    
    106.93
    
    
    
    120.27
    
    
    
    146.61
    
    
    
    167.89NASDAQ Biotechnology Index
    
    
    100.00
    
    
    
    54.15
    
    
    
    64.86
    
    
    
    63.82
    
    
    
    63.50
    
    
    
    64.28
   Dividend Policy
  Exchange Controls and Other Limitations Affecting Holders of Common Shares
   39




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##### 



(a)
    
    acquisition of common shares by a person in the ordinary course of that persons
business as a trader or dealer in securities;(b)
    
    acquisition of control of the Company in connection with the realization of security
granted for a loan or other financial assistance and not for any purpose related to the
provisions of the Investment Act; and(c)
    
    acquisition of control of the Company by reason of an amalgamation, merger,
consolidation or corporate reorganization following which the ultimate direct or indirect
control in fact of the Company, through the ownership of voting interests, remains
unchanged.
  Certain Canadian and U.S. Federal Income Tax Information for U.S. Residents
  40




---



##### 



Canadian Federal Tax Information
    U.S. Federal Tax Information
      Until such time, U.S. Holders that desire to maintain a QEF election
may contact our Investment Relations group for the PFIC Annual Information Statement, which may be
used to complete their annual QEF election filings.
 41




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##### 



Item 6. SELECTED FINANCIAL DATA
 Annual Financial Data
 Year Ended December 31,
    
    2006(5)
    
    2005(4)
    
    2004(2)(3)
    
    2003
    
    2002(In thousands of U.S. dollars except per share information)CONSOLIDATED STATEMENT OF OPERATIONS DATATotal revenues
    
    $
    175,090
    
    
    $
    229,837
    
    
    $
    184,755
    
    
    $
    146,750
    
    
    $
    110,513Research and development expenses
    
    
    56,428
    
    
    
    63,330
    
    
    
    48,698
    
    
    
    44,905
    
    
    
    42,252(Loss) income from continuing operations
    
    
    (83,415
    )
    
    
    (313,484
    )
    
    
    (163,204
    )
    
    
    44,817
    
    
    
    13,595(Loss) income before extraordinary gain
    
    
    (101,605
    )
    
    
    (325,412
    )
    
    
    (178,226
    )
    
    
    44,817
    
    
    
    13,595Net (loss) income
    
    
    (101,605
    )
    
    
    (325,412
    )
    
    
    (165,709
    )
    
    
    44,817
    
    
    
    13,595Basic net (loss) income per common share:Continuing operations
    
    
    (0.99
    )
    
    
    (3.38
    )
    
    
    (2.23
    )
    
    
    0.65
    
    
    
    0.20Discontinued operations
    
    
    (0.22
    )
    
    
    (0.13
    )
    
    
    (0.20
    )
    
    
    
    
    
    
    Extraordinary gain(3)
    
    
    
    
    
    
    
    
    
    
    0.17
    
    
    
    
    
    
    
    Net (loss) income
    
    
    (1.20
    )
    
    
    (3.51
    )
    
    
    (2.26
    )
    
    
    0.65
    
    
    
    0.20Diluted net (loss) income per common
share:Continuing operations
    
    
    (0.99
    )
    
    
    (3.38
    )
    
    
    (2.23
    )
    
    
    0.59
    
    
    
    0.20Discontinued operations
    
    
    (0.22
    )
    
    
    (0.13
    )
    
    
    (0.20
    )
    
    
    
    
    
    
    Extraordinary gain(3)
    
    
    
    
    
    
    
    
    
    
    0.17
    
    
    
    
    
    
    
    Net (loss) income
    
    
    (1.20
    )
    
    
    (3.51
    )
    
    
    (2.26
    )
    
    
    0.59
    
    
    
    0.20CONSOLIDATED BALANCE SHEET DATACash, cash equivalents and short-term
investment securities
    
    $
    374,216
    
    
    $
    465,615
    
    
    $
    379,852
    
    
    $
    495,430
    
    
    $
    207,935Working capital
    
    
    323,511
    
    
    
    514,713
    
    
    
    465,826
    
    
    
    556,733
    
    
    
    260,127Total assets
    
    
    639,106
    
    
    
    776,494
    
    
    
    1,116,249
    
    
    
    634,722
    
    
    
    345,841Long term debt
    
    
    172,500
    
    
    
    172,500
    
    
    
    172,500
    
    
    
    172,500
    
    
    
    Total shareholders equity
    
    
    303,214
    
    
    
    526,111
    
    
    
    856,779
    
    
    
    433,371
    
    
    
    313,545
  Quarterly Financial Data (1)
  Three Months Ended
    
    December 31
    
    
    September 30
    
    
    June 30
    
    
    March 31(In thousands of U.S. dollars except per share information)2006(5)Total revenues
    
    $
    38,636
    
    
    $
    38,246
    
    
    $
    47,796
    
    
    $
    50,412Gross Profit
    
    
    28,643
    
    
    
    27,780
    
    
    
    36,245
    
    
    
    40,231Research and development expenses
    
    
    12,724
    
    
    
    13,564
    
    
    
    15,767
    
    
    
    14,373Net (loss) income from continuing
operations
    
    
    (110,505
    )
    
    
    6,195
    
    
    
    8,240
    
    
    
    12,654Net (loss) income
    
    
    (117,476
    )
    
    
    (3,746
    )
    
    
    7,484
    
    
    
    12,133Basic net (loss) income per common shareContinuing operations
    
    
    (1.47
    )
    
    
    (0.07
    )
    
    
    0.09
    
    
    
    0.14Discontinued operations
    
    
    (0.09
    )
    
    
    (0.12
    )
    
    
    (0.01
    )
    
    
    (0.01
    )Net (loss) income
    
    
    (1.56
    )
    
    
    (0.04
    )
    
    
    0.08
    
    
    
    0.13Diluted net (loss) income per common shareContinuing operations
    
    
    (1.47
    )
    
    
    (0.07
    )
    
    
    0.09
    
    
    
    0.14Discontinued operations
    
    
    (0.09
    )
    
    
    (0.12
    )
    
    
    (0.01
    )
    
    
    (0.01
    )Net (loss) income
    
    
    (1.56
    )
    
    
    (0.04
    )
    
    
    0.08
    
    
    
    0.132005(4)Total revenues
    
    $
    47,386
    
    
    $
    61,130
    
    
    $
    59,627
    
    
    $
    61,695Gross Profit
    
    
    37,561
    
    
    
    48,236
    
    
    
    49,821
    
    
    
    48,165
 42




---



##### 



Three Months Ended
    

    December 31
    
    
    September 30
    
    
    June 30
    
    
    March 31Research and development expenses
    
    
    16,300
    
    
    
    15,701
    
    
    
    17,348
    
    
    
    13,991Net (loss) income from continuing
operations
    
    
    (362,829
    )
    
    
    14,290
    
    
    
    18,160
    
    
    
    16,896Net (loss) income
    
    
    (370,393
    )
    
    
    12,899
    
    
    
    16,826
    
    
    
    15,256Basic net (loss) income per common shareContinuing operations
    
    
    (3.96
    )
    
    
    0.15
    
    
    
    0.20
    
    
    
    0.18Discontinued operations
    
    
    (0.08
    )
    
    
    (0.02
    )
    
    
    (0.01
    )
    
    
    (0.02
    )Net (loss) income
    
    
    (4.04
    )
    
    
    0.14
    
    
    
    0.18
    
    
    
    0.16Diluted net (loss) income per common
shareContinuing operations
    
    
    (3.96
    )
    
    
    0.15
    
    
    
    0.20
    
    
    
    0.18Discontinued operations
    
    
    (0.08
    )
    
    
    (0.02
    )
    
    
    (0.01
    )
    
    
    (0.02
    )Net (loss) income
    
    
    (4.04
    )
    
    
    0.14
    
    
    
    0.18
    
    
    
    0.16
 (1)
    
    The basic and diluted income (loss) per share are determined separately for each quarter.
Consequently, the sum of the quarterly amounts may differ from the annual amounts disclosed in the
consolidated financial statements as a result of using different weighted average numbers of shares
outstanding.(2)
    
    On March 31, 2004, we acquired all the outstanding shares of Kinetek Pharmaceuticals, Inc., or
Kinetek, a privately held biopharmaceutical company based in Vancouver, British Columbia that
focused on discovery and development of new targets and therapies, for $2.4 million. The
extraordinary gain in fiscal 2004 of $12.5 million resulting from this acquisition related to the
estimated fair value of net assets acquired, including the recognition of certain tax assets, in
excess of the total consideration paid by us.(3)
    
    On November 19, 2004, we completed our acquisition of Atrix Laboratories, Inc., or Atrix, for
$870 million. The impact of this acquisition on 2004 operations includes: total revenues of $5.0
million, a $236.0 million charge for purchased in-process research and development, and
amortization of acquired intangibles of $0.9 million.(4)
    
    During the fourth quarter of 2005, events and circumstances indicated impairment of goodwill
and intangible assets acquired in connection with our acquisition of Atrix in November 2004. As a
result, we recorded a non-cash charge of $410.5 million to reduce the carrying value of our
goodwill to $104.0 million and our intangible assets to $6.9 million.(5)
    
    On February 9, 2007, QLT USA and Sanofi-Synthelabo entered into a Settlement, Release and
Patent License to settle the TAP Litigation, and without admitting liability, QLT USA paid $112.5
million and Sanofi-Synthelabo paid $45.0 million, for an aggregate settlement amount of $157.5
million. As a result of this settlement, we recorded a charge of $112.5 million in our results for
2006. (See Item 3  Legal Proceedings and Note 23 to
Notes to the Consolidated Financial Statements). 43




---



##### 



Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  FORWARD-LOOKING STATEMENTS
  
    
    anticipated levels of future sales of our products;
    
    anticipated future operating results;
    
    our expectations as to the outcome of the patent related litigation commenced by
Massachusetts Eye and Ear Infirmary against us;
    
    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;
    
    the anticipated timing and progress of clinical trials;
    
    the anticipated timing of regulatory submissions for our products;
    
    the anticipated timing for, receipt of and our ability to maintain regulatory approvals for our products;
    
    the anticipated timing for, receipt of and our ability to maintain reimbursement
approvals for our products in development; and
    
    our expectation as to our eligibility for certain tax benefits resulting from new tax
legislation in effect in the Province of British Columbia.
  OVERVIEW
 ® ® ®
  44




---



##### 



®
    RECENT DEVELOPMENT
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  45




---



##### 



Reporting Currency and Foreign Currency Translation
  Revenue Recognition
 Net Product Revenue
 ® ®
    46




---



##### 



Net Royalties
  Contract Research and Development
  Licensing and milestones
  Cost of Sales
    47




---



##### 



Stock-Based Compensation
 Accounting for
Stock Issued to Employees
 Share-Based Payment,
  Research and Development
  48




---



##### 



Income Taxes
  Assets Held for Sale and Discontinued Operations
  Legal Proceedings
    Long-Lived and Intangible Assets
  49




---



##### 



Accounting
for the Impairment or Disposal of Long-lived Assets.
   Impairment of Goodwill
 Goodwill and Other
Intangibles
 Recently Issued and Recently Adopted Accounting Standards
   50




---



##### 



COMPARISON OF YEARS ENDED DECEMBER 31, 2006 AND 2005
  Revenues
 Net Product Revenue
  For the year endedDecember 31,(In thousands of U.S. dollars)
    
    2006
    
    2005Visudyne® sales by Novartis Ophthalmics
    
    $
    353,759
    
    
    $
    483,762Less: Marketing and distribution costs(1)
    
    
    (132,669
    )
    
    
    (142,244
    )Less: Inventory costs(2)
    
    
    (18,275
    )
    
    
    (24,060
    )Less: Royalties to third parties(3)
    
    
    (7,545
    )
    
    
    (10,699
    )$
    195,270
    
    
    $
    306,759QLTs 50% share of Novartis Ophthalmics net proceeds from Visudyne sales
    
    $
    97,635
    
    
    $
    153,379Add: Advance on inventory costs from Novartis
Ophthalmics(4)
    
    
    15,063
    
    
    
    18,932Add: Royalties reimbursed to QLT(5)
    
    
    7,622
    
    
    
    10,431Add: Other costs reimbursed to QLT(6)
    
    
    9,046
    
    
    
    4,496Revenue from Visudyne® sales
    
    $
    129,366
    
    
    $
    187,238Net product revenue from Eligard®
    
    
    22,494
    
    
    
    16,808$
    151,860
    
    
    $
    204,046
 (1)
    
    Less: Marketing and distribution costsThis represents Novartis Ophthalmics cost of marketing, promoting, and distributing Visudyne,
as well as certain specified costs incurred and paid for by QLT, determined in accordance with
the PDT Product Development, Manufacturing, and Distribution Agreement between QLT and
Novartis Ophthalmics. The
costs incurred by Novartis Ophthalmics are related to its sales force, advertising expenses,
marketing, and certain administrative overhead costs. The costs incurred by us include
marketing support, legal and administrative expenses that we incur in support of Visudyne
sales.
 51




---



##### 



(2)
    
    Less: Inventory costsThis represents Novartis Ophthalmics cost of goods sold related to Visudyne. It includes the
cost of bulk Visudyne we ship to Novartis Ophthalmics, plus Novartis Ophthalmics packaging
and labeling costs, freight and custom duties.(3)
    
    Less: Royalties to third partiesThis represents the royalty expenses we incur and charge to Novartis Ophthalmics pursuant to
the PDT Product Development, Manufacturing and Distribution Agreement between QLT and Novartis
Ophthalmics. The amounts are calculated by us based on specified royalty rates from existing
license agreements with our licensors of certain Visudyne patent rights.(4)
    
    Add: Advance on inventory costs from Novartis OphthalmicsThis represents the amount that Novartis Ophthalmics advances to us for shipments of bulk
Visudyne. The price of the Visudyne shipments is determined based on the existing agreement
between QLT and Novartis Ophthalmics and represents our actual costs of producing Visudyne.(5)
    
    Add: Royalties reimbursed to QLTThis is related to item (3) above and represents the amounts we receive from Novartis
Ophthalmics in reimbursement for the actual royalty expenses we owe to third party licensors.(6)
    
    Add: Other costs reimbursed to QLTThis represents reimbursement by Novartis Ophthalmics to us of our portion of the Marketing
and distribution costs described in (1) above. This expense includes marketing support, legal
and administrative expenses that we incur in support of Visudyne sales.
   Net Royalties
  Contract Research and Development Revenue
  52




---



##### 



Costs and Expenses
 Cost of Sales
  Research and Development
   
    
    changes in the regulatory environment
 
    
    introduction of competing treatments
 
    
    unexpected safety issues
 
    
    patent maintenance and enforcement issues
 
    
    changes in the commercial marketplace
 
    
    difficulties in enrolling patients
 
    
    delays in study progression
 
    
    inability to develop cost effective manufacturing methods that comply with regulatory standards
 
    
    uncertainties related to collaborative partners
 
    
    environmental risks
 
    
    other factors that we described in the Risk Factors section
  (In thousands of U.S. dollars)
    
    2006
    
    
    2005
    
    
    2004Ocular
    
    $
    18,539
    
    
    $
    18,215
    
    
    $
    20,659Dermatology
    
    
    15,769
    
    
    
    11,410
    
    
    
    7,926Urology and
Oncology
    
    
    7,500
    
    
    
    23,436
    
    
    
    17,905Others
(including Atrigel programs not in the above therapeutic areas)
    
    
    14,620
    
    
    
    9,769
    
    
    
    2,208$
    56,428
    
    
    $
    63,330
    
    
    $
    48,698
  Product/Indication
    
    Location(s)
    
    StatusOctreotide-Atrigel®  three-monthCarcinoid Syndrome
    
    U.S. and Canada
    
    Phase IIa PK study
planned to begin
enrolment in 2007
 53




---



##### 



Product/Indication
    
    Location(s)
    
    StatusGHRP -1- Atrigel®  one-monthMalnutrition in
end-stage-renal-disease patients undergoing hemodialysis
    
    U.S.
    
    Plan to complete Phase
IIa study in 2007Risperidone- Atrigel®  one-monthSchizophrenia
    
    U.S.
    
    Plan to complete the
IND-enabling program by
end of 2007Eligardâ 7.5-mg one-monthProstate Cancer
    
    Japan
    
    Application for marketing
approval withdrawn.
Currently assessing
future development for
this product in Japan.
  ®
       54




---



##### 



®
    ®
 Acromegaly
  Carcinoid Syndrome
   ®
  55




---



##### 



®
   Selling, General and Administrative Expenses
  Amortization of Intangibles
  Litigation Settlement
  Impairment of Goodwill and other Intangible Assets
 Goodwill and Other Intangibles
 Discontinued
Operations
  Impairment of plant and equipment
 Accounting for the Impairment or Disposal of Long-lived Assets, .
 56




---



##### 



Restructuring
    Investment and Other Income
 Net Foreign Exchange Gains (Losses)
   For the year ended
    
    For the year ended(In thousands of U.S. dollars)
    
    December 31, 2006
    
    December 31, 2005Cash and cash equivalents and short-term investments
    
    $
    733
    
    
    $
    (5,636
    )U.S. dollar long-term debt
    
    
    (562
    )
    
    
    5,857Foreign exchange contracts
    
    
    (4,606
    )
    
    
    7,401Foreign currency receivables and payables
    
    
    729
    
    
    
    (3,470
    )Net foreign exchange (losses) gains
    
    $
    (3,706
    )
    
    $
    4,152
 Interest Income
  Interest Expense
  57




---



##### 



Other Gains
  Discontinued Operations
 Goodwill and Other
Intangibles
  Income taxes
    COMPARISON OF YEARS ENDED DECEMBER 31, 2005 AND 2004
  58




---



##### 



Revenues
 Net Product Revenue
  For the year
    
    
    For the yearended
    
    
    endedDecember 31,
    
    
    December 31,(In thousands of U.S. dollars)
    
    2005
    
    
    2004Visudyne® sales by Novartis Ophthalmics
    
    $
    483,762
    
    
    $
    448,277Less: Marketing and distribution
costs(1)
    
    
    (142,244
    )
    
    
    (133,730
    )Less: Inventory costs(2)
    
    
    (24,060
    )
    
    
    (25,789
    )Less: Royalties to third parties(3)
    
    
    (10,699
    )
    
    
    (10,074
    )$
    306,759
    
    
    $
    278,684QLTs 50% share of Novartis Ophthalmics net proceeds
from Visudyne sales
    
    $
    153,379
    
    
    $
    139,342Add: Advance on inventory costs from Novartis
Ophthalmics(4)
    
    
    18,932
    
    
    
    21,791Add: Royalties reimbursed to QLT(5)
    
    
    10,431
    
    
    
    10,074Add: Other costs reimbursed to QLT(6)
    
    
    4,496
    
    
    
    6,250Revenue from Visudyne® sales
    
    $
    187,238
    
    
    $
    177,457Net product revenue from Eligard® and other products
(effective November 20, 2004)
    
    
    16,808
    
    
    
    931$
    204,046
    
    
    $
    178,388
 (1)
    
    Less: Marketing and distribution costsThis represents Novartis Ophthalmics cost of marketing, promoting, and distributing Visudyne,
as well as certain specified costs incurred and paid for by QLT, determined in accordance with
the PDT Product Development, Manufacturing, and Distribution Agreement between QLT and
Novartis Ophthalmics. The costs incurred by Novartis Ophthalmics are related to its sales
force, advertising expenses, marketing, and certain administrative overhead costs. The costs
incurred by us include marketing support, legal and administrative expenses that we incur in
support of Visudyne sales.(2)
    
    Less: Inventory costsThis represents Novartis Ophthalmics cost of goods sold related to Visudyne. It includes the
cost of bulk Visudyne we ship to Novartis Ophthalmics, plus Novartis Ophthalmics packaging
and labelling costs, freight and custom duties.(3)
    
    Less: Royalties to third partiesThis represents the royalty expenses we incur and charge to Novartis Ophthalmics pursuant to
the PDT Product Development, Manufacturing and Distribution Agreement between QLT and Novartis
Ophthalmics.
The amounts are calculated by us based on specified royalty rates from existing license
agreements with our licensors of certain Visudyne patent rights.
 59




---



##### 



(4)
    
    Add: Advance on inventory costs from Novartis OphthalmicsThis represents the amount that Novartis Ophthalmics advances to us for shipments of bulk
Visudyne. The price of the Visudyne shipments is determined based on the existing agreement
between QLT and Novartis Ophthalmics and represents our actual costs of producing Visudyne.(5)
    
    Add: Royalties reimbursed to QLTThis is related to item (3) above and represents the amounts we receive from Novartis
Ophthalmics in reimbursement for the actual royalty expenses we owe to third party licensors.(6)
    
    Add: Other costs reimbursed to QLTThis represents reimbursement by Novartis Ophthalmics to us of our portion of the Marketing
and distribution costs described in (1) above. This expense includes marketing support, legal
and administrative expenses that we incur in support of Visudyne sales.
 ®
 Net Royalties
  Contract Research and Development Revenue
  Costs and Expenses
 Cost of Sales
  Research and Development
  60




---



##### 



Selling, General and Administrative Expenses
  Depreciation Expense
  Amortization of Intangibles
  Impairment of Goodwill and other Intangible Assets
 Goodwill and Other Intangibles
    Impairment of plant and equipment
 Accounting for the Impairment or Disposal of Long-lived Assets, .
 In-process Research and Development
  61




---



##### 



Restructuring
   Investment and Other Income
 Net Foreign Exchange Gains (Losses)
   For the year ended
    
    For the year ended(In thousands of U.S. dollars)
    
    December 31, 2005
    
    December 31, 2004Cash and cash equivalents and short-term investments
    
    $
    (5,636
    )
    
    $
    (11,751
    )U.S. dollar long-term debt
    
    
    5,857
    
    
    
    13,258Foreign exchange contracts
    
    
    7,401
    
    
    
    905Foreign currency receivables and payables
    
    
    (3,470
    )
    
    
    (1,575
    )Net foreign exchange gains (losses)
    
    $
    4,152
    
    
    $
    837
 Interest Income
  Interest Expense
  Other Gains
 ®
 Extraordinary Gain
  62




---



##### 



Income taxes
    OUTLOOK FOR 2007
   LIQUIDITY AND CAPITAL RESOURCES
     63




---



##### 



Interest and Foreign Exchange Rates
     Maturity Period
    
    Quantity (millions)
    
    Average PriceU.S. / Canadian dollar option-dated
forward contracts to sell USD
    
    
    2007
    
    
    USD 1.0
    
    1.34014 per USDSwiss franc / Canadian dollar option-dated forward contract to sell CHF
    
    
    2007
    
    
    CHF 29.7
    
    0.90587 per CHF
 64




---



##### 



Contractual Obligations
    (In thousands of U.S. dollars)
    
    
    
    
    
    Payments due by periodContractual Obligations
    
    Total
    
    Less than 1 year
    
    1-3 years
    
    3-5 years
    
    More than 5 yearsLong-Term Debt:1Principal
    
    $
    172,500
    
    
    $
    
    
    
    $
    172,500
    
    
    $
    
    
    
    $
    Interest
    
    
    8,819
    
    
    
    5,175
    
    
    
    3,644
    
    
    
    
    
    
    
    Operating Leases 2
    
    
    1,563
    
    
    
    576
    
    
    
    648
    
    
    
    339
    
    
    
    Purchase Obligations 3
    
    
    43,648
    
    
    
    29,413
    
    
    
    14,235
    
    
    
    
    
    
    
    Total
    
    $
    226,530
    
    
    $
    35,164
    
    
    $
    191,027
    
    
    $
    339
    
    
    $
    
 1.
    
    Long-term debt relates to the $172.5 million aggregate principal amount of 3% convertible
senior notes described above. The amounts in the table above include interest and principal
payable to 2008 assuming holders of the notes redeem on the earliest permitted redemption date
of September 15, 2008. If redemption does not occur until the due date in 2023, total interest
payable will be $86.4 million.2.
    
    Operating leases comprise our long-term leases of photocopiers, office space and postage
meters.3.
    
    Purchase obligations comprise minimum purchase requirements of our product supply agreements
with contract manufacturers ($41.2 million) and other outstanding purchase commitments related
to the normal course of business ($2.4 million).
 65




---



##### 



Off-Balance Sheet Arrangements
   General
    FACTORS
AFFECTING OUR BUSINESS AND PROSPECTS
  
    
    the failure of acquisitions to achieve anticipated results,
    
    competitive factors that may limit our ability to market our products,
    
    insufficient cash flow that could affect our debt financing and create refinancing risk,
    
    failure to generate sufficient revenue, which could impair our debt service payments,
    
    the failure to succeed with new products,
    
    our inability to obtain and enforce patents to protect our property rights,
    
    our dependence on contract manufacturers,
    
    potential liability for environmental contamination, which could result in substantial costs,
    
    our failure to successfully address competition for our products,
    
    adverse outcome in ongoing litigation,
    
    our dependence on third parties to market our products,
    
    efforts of governmental authorities and third party payors to limit or reduce
reimbursement for our products,
    
    the inability to successfully develop and launch replacements for products that lose patent protection,
    
    impact of product liability claims,
    
    impact of regulatory approvals on the marketing of products, and
    
    failure to achieve projected development goals within anticipated timeframes. MATERIAL DIFFERENCES IN OUR CONSOLIDATED FINANCIAL STATEMENTS BETWEEN U.S. GAAP AND CANADIAN GAAP
     66




---



##### 






67



---



##### 



Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Managements Report on Internal Control over Financial Reporting
    68




---



##### 



REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
 To the Board of Directors and Shareholders of
 QLT Inc.
 ,
      /s/ DELOITTE & TOUCHE LLP
 Independent Registered Chartered Accountants
 
 69




---



##### 



REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
 To the Board of Directors and Shareholders of
 QLT INC.
     Internal ControlIntegrated
Framework
 /s/ DELOITTE & TOUCHE LLP
 Independent Registered Chartered Accountants
 
 70




---



##### 



CONSOLIDATED BALANCE SHEETS
 As at December 31,
    
    2006
    
    
    2005(In thousands of U.S. dollars)ASSETSCurrent assetsCash and cash equivalents
    
    $
    299,053
    
    
    $
    345,799Short-term investment securities
    
    
    75,163
    
    
    
    119,816Restricted cash
    
    
    3,916
    
    
    
    Accounts receivable (Note 4)
    
    
    38,872
    
    
    
    43,986Income taxes receivable
    
    
    4,049
    
    
    
    Inventories (Note 5)
    
    
    34,268
    
    
    
    46,239Current portion of deferred income tax assets (Note 18)
    
    
    8,657
    
    
    
    2,480Other (Note 6)
    
    
    14,031
    
    
    
    20,728478,009
    
    
    
    579,048Property, plant and equipment (Note 7)
    
    
    50,497
    
    
    
    52,797Assets held for sale
    
    
    
    
    
    
    29,626Deferred income tax assets (Note 18)
    
    
    9,838
    
    
    
    7,593Goodwill (Note 9)
    
    
    98,641
    
    
    
    103,958Other long-term assets (Note 10)
    
    
    2,121
    
    
    
    3,472$
    639,106
    
    
    $
    776,494LIABILITIESCurrent liabilitiesAccounts payable
    
    $
    15,255
    
    
    $
    14,519Income taxes payable
    
    
    29
    
    
    
    17,253Accrued restructuring charge (Note 17)
    
    
    2,383
    
    
    
    5,205Accrued liabilities (Note 11)
    
    
    125,805
    
    
    
    17,901Deferred revenue
    
    
    11,508
    
    
    
    9,457154,980
    
    
    
    64,335Deferred income tax liabilities (Note 18)
    
    
    5,483
    
    
    
    9,800Deferred revenue
    
    
    2,929
    
    
    
    3,748Long-term debt (Note 13)
    
    
    172,500
    
    
    
    172,500335,892
    
    
    
    250,383COMMITMENTS AND GUARANTEES (NOTE 21)CONTINGENCIES (NOTE 23)SHAREHOLDERS EQUITYShare capital (Note 14)Authorized500,000,000 common shares without par value5,000,000 first preference shares without par
value, issuable in seriesIssued and outstandingCommon shares
    
    
    708,206
    
    
    
    861,676December 31, 2006 75,188,980 sharesDecember 31, 2005 91,184,681 sharesAdditional paid in capital
    
    
    114,724
    
    
    
    66,565Accumulated deficit
    
    
    (603,251
    )
    
    
    (501,645
    )Accumulated other comprehensive income
    
    
    83,535
    
    
    
    99,515303,214
    
    
    
    526,111$
    639,106
    
    
    $
    776,494
  71




---



##### 



CONSOLIDATED STATEMENTS OF OPERATIONS
 Year ended December 31,
    

2006
    
    

2005
    
    

2004(In thousands of U.S. dollars except per share information)
    
    
    
    
    
    (note 19)
    
    
    (note 19)RevenuesNet product revenue (Note 15)
    
    $
    151,860
    
    
    $
    204,046
    
    
    $
    178,388Net royalties
    
    
    21,099
    
    
    
    15,816
    
    
    
    2,338Contract research and development (Note 16)
    
    
    1,155
    
    
    
    9,251
    
    
    
    4,029Licensing and milestones
    
    
    976
    
    
    
    724
    
    
    
    175,090
    
    
    
    229,837
    
    
    
    184,755Costs and expensesCost of sales
    
    
    42,191
    
    
    
    46,056
    
    
    
    33,157Research and development
    
    
    56,428
    
    
    
    63,330
    
    
    
    48,698Selling, general and administrative
    
    
    42,228
    
    
    
    22,975
    
    
    
    16,921Depreciation
    
    
    6,255
    
    
    
    6,768
    
    
    
    3,552Amortization of intangibles
    
    
    
    
    
    
    6,334
    
    
    
    695Litigation settlement (Note 23)
    
    
    112,500
    
    
    
    
    
    
    
    Impairment of goodwill and other intangible assets
    
    
    
    
    
    
    401,085
    
    
    
    Impairment of plant and equipment
    
    
    
    
    
    
    6,955
    
    
    
    Purchase of in-process research and development
    
    
    
    
    
    
    
    
    
    
    222,000Restructuring charge (Note 17)
    
    
    2,828
    
    
    
    8,042
    
    
    
    262,430
    
    
    
    561,545
    
    
    
    325,024Operating loss
    
    
    (87,340
    )
    
    
    (331,708
    )
    
    
    (140,269
    )Investment and other income (loss)Net foreign
exchange (loss) gains
    
    
    (3,706
    )
    
    
    4,152
    
    
    
    837Interest income
    
    
    20,488
    
    
    
    13,203
    
    
    
    10,136Interest expense
    
    
    (6,595
    )
    
    
    (6,357
    )
    
    
    (6,261
    )Other gains
    
    
    2,773
    
    
    
    49
    
    
    
    1,905Loss before income taxes
    
    
    (74,380
    )
    
    
    (320,661
    )
    
    
    (133,652
    )(Provision for)
recovery of income taxes (Note 18)
    
    
    (9,035
    )
    
    
    7,177
    
    
    
    (29,552
    )Loss from continuing operations
    
    $
    (83,415
    )
    
    $
    (313,484
    )
    
    $
    (163,204
    )Loss from discontinued operations, net of income tax (Note 19)
    
    
    (18,190
    )
    
    
    (11,928
    )
    
    
    (15,022
    )Loss before extraordinary gain
    
    
    (101,605
    )
    
    
    (325,412
    )
    
    
    (178,226
    )Extraordinary gain (Note 8)
    
    
    
    
    
    
    
    
    
    
    12,517Net loss
    
    $
    (101,605
    )
    
    $
    (325,412
    )
    
    $
    (165,709
    )Basic net loss per common shareContinuing operations
    
    $
    (0.99
    )
    
    $
    (3.38
    )
    
    $
    (2.23
    )Discontinued operations
    
    
    (0.22
    )
    
    
    (0.13
    )
    
    
    (0.20
    )Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    0.17Net loss
    
    $
    (1.20
    )
    
    $
    (3.51
    )
    
    $
    (2.26
    )Diluted net (loss) income per common shareContinuing operations
    
    $
    (0.99
    )
    
    $
    (3.38
    )
    
    $
    (2.23
    )Discontinued operations
    
    
    (0.22
    )
    
    
    (0.13
    )
    
    
    (0.20
    )Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    0.17Net loss
    
    $
    (1.20
    )
    
    $
    (3.51
    )
    
    $
    (2.26
    )Weighted average number of common shares outstanding (thousands)Basic
    
    
    84,596
    
    
    
    92,637
    
    
    
    73,240Diluted
    
    
    84,596
    
    
    
    92,637
    
    
    
    73,240
  72




---



##### 



CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year ended December 31,
    

2006
    
    

2005
    
    

2004(In thousands of U.S. dollars)Cash flows (used in) provided by operating activitiesNet (loss) income
    
    $
    (101,605
    )
    
    $
    (325,412
    )
    
    $
    (165,709
    )Adjustments to reconcile net income to net cash from
operating activitiesImpairment of goodwill and other intangible assets
    
    
    
    
    
    
    410,534
    
    
    
    Impairment of plant and equipment
    
    
    
    
    
    
    6,955
    
    
    
    Write-down of assets held for sale
    
    
    8,592
    
    
    
    
    
    
    
    In-process research and development
    
    
    
    
    
    
    
    
    
    
    236,000Amortization of intangibles
    
    
    78
    
    
    
    6,915
    
    
    
    852Depreciation
    
    
    7,087
    
    
    
    8,088
    
    
    
    3,715Write-down of fixed assets, investments and deposit
    
    
    1,013
    
    
    
    
    
    
    
    Write-down of inventory
    
    
    2,584
    
    
    
    
    
    
    
    Amortization of deferred financing expenses
    
    
    1,218
    
    
    
    1,139
    
    
    
    1,053Share-based compensation
    
    
    4,284
    
    
    
    
    
    
    
    Unrealized foreign exchange gains
    
    
    (9,503
    )
    
    
    (6,919
    )
    
    
    (12,396
    )Interest earned on restricted cash
    
    
    (41
    )
    
    
    
    
    
    
    Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    (12,517
    )Deferred income taxes
    
    
    (10,471
    )
    
    
    (36,189
    )
    
    
    19,612Loss on disposal of assets held for sale
    
    
    8,001
    
    
    
    
    
    
    
    Changes in non-cash operating assets and liabilitiesPurchase of trading securities
    
    
    (58,357
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    7,137
    
    
    
    12,963
    
    
    
    (9,382
    )Inventories
    
    
    6,573
    
    
    
    275
    
    
    
    749Other current assets
    
    
    6,351
    
    
    
    (5,761
    )
    
    
    7,219Accounts payable
    
    
    (476
    )
    
    
    2,661
    
    
    
    749Income tax (receivable) payable
    
    
    (21,694
    )
    
    
    16,190
    
    
    
    (67
    )Accrued restructuring charge
    
    
    (2,836
    )
    
    
    5,134
    
    
    
    Other accrued liabilities
    
    
    107,837
    
    
    
    (11,697
    )
    
    
    162Deferred revenue
    
    
    1,396
    
    
    
    10,582
    
    
    
    (4,845
    )(42,832
    )
    
    
    95,458
    
    
    
    65,195Cash (used in) provided by investing activitiesShort-term investment securities
    
    
    112,834
    
    
    
    (5,970
    )
    
    
    211,093Restricted cash
    
    
    (3,875
    )
    
    
    
    
    
    
    Purchase of property, plant and equipment
    
    
    (6,546
    )
    
    
    (7,726
    )
    
    
    (11,657
    )Proceeds on disposal of property and equipment
    
    
    20,728
    
    
    
    
    
    
    
    Purchase of Atrix Laboratories, Inc., net of cash acquired
    
    
    
    
    
    
    (1,012
    )
    
    
    (301,145
    )Purchase of Kinetek Pharmaceuticals, Inc., net of cash
acquired
    
    
    
    
    
    
    
    
    
    
    (2,316
    )123,141
    
    
    
    (14,708
    )
    
    
    (104,025
    )Cash (used in) provided by financing activitiesCommon shares repurchased
    
    
    (129,433
    )
    
    
    (27,754
    )
    
    
    Deferred financing expenses
    
    
    
    
    
    
    
    
    
    
    (123
    )Issuance of common shares
    
    
    817
    
    
    
    12,879
    
    
    
    15,205(128,616
    )
    
    
    (14,875
    )
    
    
    15,082Effect of exchange rate changes on cash and cash equivalents
    
    
    1,561
    
    
    
    2,837
    
    
    
    38,427Net (decrease) increase in cash and cash equivalents
    
    
    (46,746
    )
    
    
    68,712
    
    
    
    14,679Cash and cash equivalents, beginning of year
    
    
    345,799
    
    
    
    277,087
    
    
    
    262,408Cash and cash equivalents, end of year
    
    $
    299,053
    
    
    $
    345,799
    
    
    $
    277,087Supplementary cash flow information:Interest paid
    
    $
    5,792
    
    
    $
    5,830
    
    
    $
    6,035Income taxes paid
    
    
    40,235
    
    
    
    7,119
    
    
    
    11,342
 Non-cash investing and financing activities:
 1.
    
    On November 19, 2004, in connection with the acquisition of Atrix Laboratories, Inc. (now QLT
USA Inc.) we issued 22,283,826 common shares valued at $436.1 million, assumed 6,106,961
options valued at $77.7 million, and a warrant to purchase 1,000,000 common shares of QLT
valued at $16.2 million.
  73




---



##### 



CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
 AccumulatedAdditional
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    TotalCommon 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, 2003
    
    
    68,892,027
    
    
    $
    395,627
    
    
    $
    
    
    
    $
    45,828
    
    
    $
    (8,084
    )
    
    
    
    
    
    $
    433,371Shares issued for the acquisition of Atrix
Laboratories, Inc.
    
    
    22,283,826
    
    
    
    436,094
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    436,094Assumption of stock options and warrant on
the acquisition of Atrix Laboratories, Inc.
    
    
    
    
    
    
    
    
    
    
    93,896
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,896Exercise of stock options at prices ranging
from CAD $12.10 to CAD $34.75 per share and
U.S.$5.29 to U.S.$14.23 per share
    
    
    845,719
    
    
    
    16,777
    
    
    
    (1,703
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,074Other comprehensive loss:Cumulative translation adjustment from
application of U.S. dollar reporting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,168
    
    
    
    
    
    
    $
    44,168
    
    
    
    44,168Unrealized (loss) on available for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114
    )
    
    
    
    
    
    
    (114
    )
    
    
    (114
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (165,709
    )
    
    
    (165,709
    )
    
    
    (165,709
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (121,655
    )
    
    
    Balance at December 31, 2004
    
    
    92,021,572
    
    
    $
    848,498
    
    
    $
    92,193
    
    
    $
    89,882
    
    
    $
    (173,794
    )
    
    
    
    
    
    $
    856,779Exercise of stock
options at prices
ranging from CAD$12.10
to CAD $13.35 per share
and U.S. $2.63 - U.S.
$16.22 per share
    
    
    1,304,509
    
    
    
    25,068
    
    
    
    (15,593
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,475Exercise of warrant at
U.S. $3.39 per share
    
    
    1,000,000
    
    
    
    19,594
    
    
    
    (16,204
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,390Common share repurchase
    
    
    (3,141,400
    )
    
    
    (31,484
    )
    
    
    6,169
    
    
    
    
    
    
    
    (2,439
    )
    
    
    
    
    
    
    (27,754
    )Other comprehensive loss:Cumulative translation
adjustment from
application of U.S.
dollar reporting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,792
    
    
    
    
    
    
    $
    9,792
    
    
    
    9,792Unrealized (loss) on
available for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (159
    )
    
    
    
    
    
    
    (159
    )
    
    
    (159
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (325,412
    )
    
    
    (325,412
    )
    
    
    (325,412
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (315,779
    )
    
    
    Balance at December 31,
2005
    
    
    91,184,681
    
    
    $
    861,676
    
    
    $
    66,565
    
    
    $
    99,515
    (1)
    
    $
    (501,645
    )
    
    
    
    
    
    $
    526,111Exercise of stock
options at prices
ranging from CAD $7.79
to CAD $9.22 per share
and U.S. $2.89 - U.S.
$8.64 per share
    
    
    127,299
    
    
    
    2,387
    
    
    
    (1,574
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    813Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    4,586
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,586Common share repurchase
    
    
    (16,123,000
    )
    
    
    (155,857
    )
    
    
    45,147
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (110,710
    )Other comprehensive loss:Cumulative translation
adjustment from
application of U.S.
dollar reporting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,187
    )
    
    
    
    
    
    $
    (16,187
    )
    
    
    (16,187
    )Unrealized gain on
available for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207
    
    
    
    
    
    
    
    207
    
    
    
    207Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (101,605
    )
    
    
    (101,605
    )
    
    
    (101,605
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (117,585
    )


    

    
    

    Balance at December 31,
2006
    
    
    75,188,980
    
    
    $
    708,206
    
    
    $
    114,724
    
    
    $
    83,535
    (1)
    
    $
    (603,251
    )
    
    
    
    
    
    $
    303,214
 (1)
    
    At December 31, 2006, our accumulated other comprehensive income are related almost
entirely to cumulative translation adjustments from the application of U.S. dollar reporting with
an insignificant amount due to unrealized loss on available for sale securities.
 74




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  1. BASIS OF PRESENTATION
  Accounting for the Impairment or Disposal
of Long-lived Assets,
 2. PRINCIPLES OF CONSOLIDATION
  3. SIGNIFICANT ACCOUNTING POLICIES
 Use of Estimates
  Reporting Currency and Foreign Currency Translation
  Segmented Information
 75




---



##### 



Cash, Cash Equivalents and Short-term Investment Securities
  Inventories
  Investments
  Long-lived and Intangible Assets
  Accounting
for the Impairment or Disposal of Long-lived Assets.
   76




---



##### 



Goodwill Impairment
 Goodwill and Other
Intangibles
    Property, Plant and Equipment
   Method
    
    Rates
    
    
    
    Method
    
    YearsBuildings
    
    Declining balance
    
    4%
    
    or
    
    Straight-line
    
    25 or 40Office furnishings, fixtures and other
    
    Declining balance
    
    20%
    
    or
    
    Straight-line
    
    5Research and commercial manufacturing
equipment and computer operating
system
    
    Declining balance
    
    20%
    
    or
    
    Straight-line
    
    3-5Computer hardware
    
    Declining balance
    
    30%
    
    or
    
    Straight-line
    
    3-5
 Revenue Recognition
 Net Product Revenues
 ® ®
   77




---



##### 



Net Royalties
  Contract Research and Development
  Licensing and Milestones
  Cost of Sales
  78




---



##### 



Stock-Based Compensation
 Share-Based Payment, Accounting for Stock Issued to Employees. Accounting for Stock-Based Payment
 Impact of the Adoption of SFAS 123R
    2006
    
    
    2005
    
    
    2004Annualized volatility
    
    
    44.5
    %
    
    
    47.1
    %
    
    
    55.9
    %Risk-free interest rate
    
    
    4.1
    %
    
    
    3.5
    %
    
    
    2.9
    %Expected life (years)
    
    
    3.0
    
    
    
    2.5
    
    
    
    2.5Dividends
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
 79




---



##### 



(In thousands of U.S. dollars, except share information)
    
    Twelve months ended(Unaudited)
    
    December 31, 2006Cost of sales
    
    $
    55Research and development
    
    
    2,447Selling, general and administrative
    
    
    1,315Restructuring
    
    
    112Discontinued operations
    
    
    354Share based compensation expense before income taxes
    
    
    4,283Related income tax benefits
    
    
    Share based compensation, net of income taxes
    
    $
    4,283Net share based compensation, per common share:Basic
    
    $
    0.05Diluted
    
    $
    0.05
  Pro forma Information for Periods Prior to the Adoption of SFAS 123R
 Accounting for Stock Issued to Employees
  80




---



##### 



(In thousands of U.S. dollars except
per share information)
    
    2005
    
    2004Net (loss) income as reported
    
    $
    (325,412
    )
    
    $
    (165,709
    )Less: Additional stock-based compensation
expense under the fair value method
    
    
    (7,171
    )
    
    
    (11,229
    )Pro forma
    
    $
    (332,583
    )
    
    $
    (176,938
    )Basic net (loss) income per common shareAs reported
    
    $
    (3.51
    )
    
    $
    (2.26
    )Pro forma
    
    
    (3.59
    )
    
    
    (2.42
    )Diluted net (loss) income per shareAs reported
    
    $
    (3.51
    )
    
    $
    (2.26
    )Pro forma
    
    
    (3.59
    )
    
    
    (2.42
    )
 Research and Development
  Income Taxes
  Derivative Financial Instruments
  Assets Held for Sale and Discontinued Operations
  Legal Proceedings
  81




---



##### 



Net (Loss) Income Per Common Share
   (In thousands of U.S. dollars, except per share data)
    

2006
    

2005
    

2004Numerator:Loss from continuing operations
    
    $
    (83,415
    )
    
    $
    (313,484
    )
    
    $
    (163,204
    )Loss from discontinued operations, net of tax
    
    
    (18,190
    )
    
    
    (11,928
    )
    
    
    (15,022
    )Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    12,517Net loss
    
    $
    (101,605
    )
    
    $
    (325,412
    )
    
    $
    (165,709
    )Effect of dilutive securities:Convertible senior notes  interest expense
    
    
    
    
    
    
    
    
    
    
    Adjusted loss
    
    $
    (101,605
    )
    
    $
    (325,412
    )
    
    $
    (165,709
    )Denominator: (thousands)Weighted average common shares outstanding
    
    
    84,596
    
    
    
    92,637
    
    
    
    73,240Effect of dilutive securities:Stock options
    
    
    
    
    
    
    
    
    
    
    Convertible senior notes
    
    
    
    
    
    
    
    
    
    
    Diluted potential common shares
    
    
    
    
    
    
    
    
    
    
    Diluted weighted average common shares outstanding
    
    
    84,596
    
    
    
    92,637
    
    
    
    73,240Basic net loss per common share:Continuing operations
    
    $
    (0.99
    )
    
    $
    (3.38
    )
    
    $
    (2.23
    )Discontinued operations
    
    
    (0.22
    )
    
    
    (0.13
    )
    
    
    (0.20
    )Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    0.17Net loss
    
    $
    (1.20
    )
    
    $
    (3.51
    )
    
    $
    (2.26
    )Diluted net loss per common share:Continuing operations
    
    $
    (0.99
    )
    
    $
    (3.38
    )
    
    $
    (2.23
    )Discontinued operations
    
    
    (0.22
    )
    
    
    (0.13
    )
    
    
    (0.20
    )Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    0.17Net loss
    
    $
    (1.20
    )
    
    $
    (3.51
    )
    
    $
    (2.26
    )
  82




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##### 



Recently Issued Accounting Standards
     4. ACCOUNTS RECEIVABLE
 (In thousands of U.S. dollars)
    
    2006
    
    
    2005Visudyne®
    
    $
    24,542
    
    
    $
    34,188Royalties
    
    
    8,769
    
    
    
    5,358Contract research and development
    
    
    641
    
    
    
    1,176Eligard®
product shipments
    
    
    2,611
    
    
    
    1,859Trade and other
    
    
    2,434
    
    
    
    2,078Allowance for doubtful accounts
    
    
    (125
    )
    
    
    (673
    )$
    38,872
    
    
    $
    43,986
  83




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##### 



5. INVENTORIES
 (In thousands of U.S. dollars)
    
    2006
    
    
    2005Raw materials and supplies
    
    $
    10,723
    
    
    $
    22,046Work-in-process
    
    
    27,981
    
    
    
    29,083Finished goods
    
    
    676
    
    
    
    390Reserve for obsolete inventory
    
    
    
    
    
    
    (1,452
    )Provision for non-completion of product inventory
    
    
    (5,112
    )
    
    
    (3,828
    )$
    34,268
    
    
    $
    46,239
  6. OTHER CURRENT ASSETS
 (In thousands of U.S. dollars)
    
    2006
    
    
    2005Inventory in transit held by Novartis Ophthalmics
    
    $
    10,677
    
    
    $
    10,725Foreign exchange contracts
    
    
    
    
    
    
    5,015Prepaid expenses and other
    
    
    3,354
    
    
    
    4,988$
    14,031
    
    
    $
    20,728
   7. PROPERTY, PLANT AND EQUIPMENT
 2006Accumulated
    
    
    Net(In thousands of U.S. dollars)
    
    Cost
    
    
    Depreciation
    
    
    Book ValueBuildings
    
    $
    30,663
    
    
    $
    7,036
    
    
    $
    23,627Office furnishings, fixtures, and other
    
    
    7,959
    
    
    
    5,102
    
    
    
    2,857Research equipment
    
    
    13,902
    
    
    
    8,704
    
    
    
    5,198Commercial manufacturing equipment
    
    
    11,658
    
    
    
    4,506
    
    
    
    7,152Computer hardware and operating system
    
    
    19,119
    
    
    
    13,611
    
    
    
    5,508Land
    
    
    6,155
    
    
    
    
    
    
    
    6,155$
    89,456
    
    
    $
    38,959
    
    
    $
    50,497
 84




---



##### 



2005Accumulated
    
    
    Net(In
thousands of U.S. dollars)
    
    Cost
    
    
    Depreciation
    
    
    Book ValueBuildings
    
    $
    35,287
    
    
    $
    6,667
    
    
    $
    28,620Office furnishings, fixtures, and other
    
    
    5,027
    
    
    
    3,758
    
    
    
    1,269Research equipment
    
    
    11,458
    
    
    
    7,741
    
    
    
    3,717Commercial manufacturing equipment
    
    
    8,475
    
    
    
    3,222
    
    
    
    5,253Computer hardware and operating system
    
    
    19,227
    
    
    
    11,468
    
    
    
    7,759Land
    
    
    6,179
    
    
    
    
    
    
    
    6,179$
    85,653
    
    
    $
    32,856
    
    
    $
    52,797
 Accounting for the Impairment or Disposal of Long-lived Assets, .
 8. BUSINESS COMBINATIONS
 Acquisition of Atrix Laboratories, Inc.
   85




---



##### 



(In thousands of U.S. dollars)Purchase PriceCash paid for shares tendered
    
    $
    325,567Issuance of 22,283,826 QLT Inc. common shares
    
    
    436,094Assumption of options to purchase 6,106,961 QLT Inc. common shares
    
    
    77,655Assumption of a warrant to purchase 1,000,000 QLT Inc. common shares
    
    
    16,204Acquisition costs
    
    
    14,957Total purchase price
    
    $
    870,477Fair Value of Tangible and Intangible Assets Acquired
and Liabilities AssumedCash and cash equivalents
    
    $
    30,121Short-term investments
    
    
    80,519Other current assets
    
    
    31,175Property, plant and equipment
    
    
    26,372Goodwill
    
    
    409,586In-process research and development
    
    
    236,000Intangibles
    
    
    109,129Current liabilities
    
    
    (8,920
    )Deferred income tax liability
    
    
    (43,505
    )Net assets
    
    $
    870,477
   Volatility
    
    Risk-free Interest Rate
    
    Expected Life (years)Options
    
    
    60
    %
    
    
    3.38
    %
    
    
    4.0Warrants
    
    
    40
    %
    
    
    2.36
    %
    
    
    0.4
   86




---



##### 



Acquisition of Kinetek Pharmaceuticals, Inc.
  9. GOODWILL AND INTANGIBLE ASSETS
     87




---



##### 



Developed(In thousands of U.S. dollars)
    
    Goodwill
    
    Technology
    
    Trademark
    
    TotalCost
    
    $
    409,586
    
    
    $
    111,600
    
    
    $
    8,000
    
    
    $
    529,186Accumulated amortization
    
    
    
    
    
    
    (562
    )
    
    
    (53
    )
    
    
    (615
    )January 1, 2005
    
    
    409,586
    
    
    
    111,038
    
    
    
    7,947
    
    
    
    528,571Amortization
    
    
    
    
    
    
    (6,682
    )
    
    
    (471
    )
    
    
    (7,153
    )Impairment losses
    
    
    (305,628
    )
    
    
    (97,430
    )
    
    
    (7,476
    )
    
    
    (410,534
    )Balance as of December 31,
2005
    
    
    103,958
    
    
    
    6,926
    
    
    
    
    
    
    
    110,884Amortization
    
    
    
    
    
    
    (78
    )
    
    
    
    
    
    
    (78
    )Allocation to loss from
discontinued operations
    
    
    (5,317
    )
    
    
    (6,848
    )
    
    
    
    
    
    
    (12,165
    )Balance as of December 31,
2006
    
    $
    98,641
    
    
    $
    
    
    
    $
    
    
    
    $
    98,641
  10. OTHER LONG-TERM ASSETS
 (In thousands of U.S. dollars)
    
    2006
    
    
    2005Deferred financing expenses
    
    $
    1,922
    
    
    $
    3,117Other
    
    
    199
    
    
    
    355$
    2,121
    
    
    $
    3,472
  11. ACCRUED LIABILITIES
 (In thousands of U.S. dollars)
    
    2006
    
    
    2005Royalties
    
    $
    1,723
    
    
    $
    2,654Compensation
    
    
    4,683
    
    
    
    5,432Separation costs
    
    
    1,107
    
    
    
    2,540Foreign exchange contracts
    
    
    2,011
    
    
    
    2,172Atrix acquisition costs
    
    
    147
    
    
    
    154Interest
    
    
    1,936
    
    
    
    1,740Litigation settlement (Note 23)
    
    
    112,500
    
    
    
    Other
    
    
    1,698
    
    
    
    3,209$
    125,805
    
    
    $
    17,901
 88




---



##### 



12. CREDIT AND FOREIGN EXCHANGE FACILITIES
    13. LONG TERM DEBT
     14. SHARE CAPITAL
 (a)
    
    Authorized SharesThere were no changes to the authorized share capital of QLT during the three-year period
ended December 31, 2006.(b)
    
    Share Buy-Back Program
 89




---



##### 



On April 28, 2005, we announced a share buy-back program pursuant to which we could purchase
up to $50.0 million of our common shares over a two-year period. In December 2005 we
increased the amount that could be purchased to $100.0 million of our common shares over a
two-year period ending May 2007. The share purchases were made as a normal course issuer bid
and were effected in the open market through the facilities of The Toronto Stock Exchange
and the NASDAQ Stock Market, and in accordance with all regulatory requirements. Cumulative
purchases under this program since May 2005 were 6,264,400 common shares at an average price
of $8.20, for a total cost of $51.3 million. On July 27, 2006, we terminated this normal
course issuer bid as a result of our decision to proceed with an offer to purchase up to 13
million common shares in a modified Dutch Auction tender offer. Under this Dutch
Auction tender offer, shareholders were invited to tender all or a portion of their shares
at a price per share that was not less than US$7.00 and not greater than US$8.00. Based on
the number of shares tendered and the prices specified by the tendering shareholders, we
determined the lowest price per share within the range that allowed
us to buy 13 million shares properly tendered. The tender offer commenced on August 3, 2006 and expired on
September 8, 2006. As a result of this tender offer, we accepted for purchase and
cancellation 13 million common shares at a price of $8.00 per share, totalling $104 million.
These shares represented approximately 14.7% of the shares outstanding as of September 8,
2006. Our total outstanding common shares on December 31, 2006 were 75,188,980 shares.In repurchasing our common shares under the normal course issuer bid described above, the
prices we paid for the shares we repurchased were different than our carrying value for
these shares. We had previously recorded this difference between purchase price and
carrying value in the accumulated deficit section of our shareholders equity. We have made
adjustments to prior periods to record the amounts representing the excess of carrying value
over the purchase price of the shares as additional paid-in capital. As a result, our
December 31, 2005 additional paid-in capital increased by $6.2 million and correspondingly,
our accumulated deficit increased by $6.2 million. This adjustment had no impact on
previously reported results of operations or cash flows and was not material to the balance
sheet.(c)
    
    Shareholder Protection Rights PlanEffective March 17, 2002 we adopted a Shareholder Rights Plan, which was then amended and
restated effective April 8, 2005 (the Rights Plan), and approved, as amended, by the
shareholders of QLT at the 2005 Annual General Meeting of QLT. The Rights Plan will remain
in effect until the 2008 annual meeting of shareholders. Under the Rights Plan, holders of
common shares are entitled to one share purchase right for each common share held.
Generally, if any person or group makes a take-over bid, other than a bid permitted under
the Rights Plan (a Permitted Bid) or acquires beneficial ownership of 20% or more of our
outstanding common shares without complying with the Rights Plan, the Rights Plan will
entitle the holders of share purchase rights to purchase, in effect, common shares of QLT at
50% of the prevailing market price. A take-over bid for QLT can avoid the dilutive effects
of the share purchase rights, and therefore become a Permitted Bid, if it complies with
provisions of the Rights Plan.(d)
    
    WarrantAs part of our acquisition of Atrix, on November 19, 2004 we assumed an outstanding warrant
entitling the holder to purchase up to 1,000,000 of our common shares at a net exercise
price of $3.39 per share. The warrant was exercised in full into
1,000,000 of our common shares in January 2005.(e)
    
    Stock OptionsWe currently maintain four equity compensation plans which provide for the issuance of
common shares to employees, officers and directors, all of which have been approved by the
shareholders, namely the 1998 Incentive Stock Option Plan, the 2000 Incentive Stock Option
Plan, the 1987 Atrix Performance Stock Option Plan and the 2000 Atrix Performance Stock
Option Plan. We also maintain one equity compensation plan, the Non-Qualified Atrix Stock
Option Plan which provides for the issuance of common shares to certain outside consultants.
The Non-Qualified Atrix Stock Option Plan was not approved by shareholders of Atrix
Laboratories, Inc. (Atrix), but the details of this Plan was included in the Joint Proxy
Statement prospectus mailed to shareholders of QLT and Atrix on or about October 18, 2004
and was the subject of the approval granted by our shareholders in connection with our
acquisition of Atrix.
 90




---



##### 



As of February 28, 2007, no QLT securities remain available for issuance under the 1998
Stock Option Plan or the 1987 Atrix Performance Stock Option Plan, however, both of these
plans remain in effect for so long as options previously granted under these plans remain
outstanding.Details of the manner in which those options formerly granted by Atrix were assumed by QLT
were included in the Joint Proxy Statement prospectus mailed to shareholder of QLT and Atrix
on or about October 18, 2004 and were the subject of the approval granted by our
shareholders in connection with our acquisition of Atrix.None of these plans have been amended in the last fiscal year and there are no entitlements
previously granted under any of these plans that remain subject to ratification by security
holders. No financial assistance is provided by us to the participants under these plans to
facilitate the exercise of options.Exercise PricePursuant to the terms of each of our plans, the exercise price of options granted will be
determined by the Compensation Committee, but will in no event be less than the fair market
value of our common shares immediately preceding the grant. As such, the exercise price for
options granted under all our plans is the closing price on the TSX (for Canadian employees)
or NASDAQ (for U.S. employees) immediately preceding the grant.Exercise PeriodAlthough the plans provide discretion to the Compensation Committee or QLTs board to have
an exercise period of up to 10 years, all options granted under the 1998 Incentive Stock
Option Plan and the 2000 Incentive Stock Option Plan have an exercise period of 5 years.
Under 1987 Atrix Performance Stock Option Plan, the 2000 Atrix Performance Stock Option Plan
and the Non-Qualified Atrix Stock Option Plan, Atrix previously provided a 10 year exercise
period to optionees. However, since our acquisition of Atrix on November 19, 2004, all
options granted under the 2000 Atrix Performance Stock Option Plan have been given a 5 year
exercise period. No options have been granted under the 1987 Atrix Performance Stock Option
Plan or the Non-Qualified Atrix Stock Option Plan since the acquisition.VestingUnder the 1998 Incentive Stock Option Plan and the 2000 Incentive Stock Option Plan vesting
of options granted under such plans occurs monthly over 36 months, subject to such altered
vesting schedules as the Compensation Committee or QLTs board may determine. For senior
managers, executive officers and Directors, 50% of any unvested options vest on the
termination of employment without cause, and 100% of unvested options vest on the occurrence
of a change of control.All options granted under the 1987 Atrix Performance Stock Option Plan, the 2000 Atrix
Performance Stock Option Plan and the Non-Qualified Atrix Stock Option Plan prior to our
acquisition of Atrix became 100% vested as a condition of the transaction. In addition, any
non-qualified options that were issued prior to the acquisition were amended immediately
following the closing so that such options are exercisable until the earlier of: (i) one
year following the date of termination of the option holders position, if the option holder
is terminated other than for cause within 12 months of the acquisition; and (ii) the
expiration of the option term. Since the acquisition of Atrix, options granted under the
2000 Atrix Performance Stock Option Plan have vested monthly over 36 months.Below is a summary of certain of the key terms of each of the equity compensation plans that
we currently maintain:
 (i)
    
    1998 Incentive Stock Option Plan, or 1998 PlanShare Reserve. The number of Common Shares which may be reserved for issuance pursuant
to options granted under the 1998 Incentive Stock Option Plan shall not exceed, in the
aggregate, 5,000,000. The number of common shares reserved for issuance to any one
person under this plan shall not, in the aggregate, exceed five percent of QLTs issued
and outstanding common shares (on a
 91




---



##### 



non-diluted basis). At December 31, 2006, options to purchase an aggregate total of
79,750 common shares were outstanding under the 1998 Plan and exercisable in the future
at CAD $12.10 per common share.Administration. The Compensation Committee administers the 1998 Incentive Stock Option
Plan.Eligibility. The Directors, officers, and employees of QLT or our affiliated companies,
who in the opinion of the Compensation Committee, are important for our growth and
success and whose participation in this plan will, in the opinion of the executive
compensation committee, accomplish the purposes of this plan, are eligible to
participate under the 1998 Incentive Stock Option Plan.Grant and Exercise of Options. Subject to the terms of the 1998 Incentive Stock Option
Plan, the Compensation Committee may grant to any eligible person one or more options as
it deems appropriate. The Compensation Committee may also impose such limitations or
conditions on the exercise or vesting of any option as it deems appropriate.Each option shall terminate on the 90th day after the date on which the
optionee ceases to be an eligible person, provided that if such optionee ceases to be an
eligible person by reason of the death of such optionee, all or any of the common shares
then covered by such option may be purchased by the legal representative of such
optionee, or by the person or persons to whom the right of such optionee under the
option agreement entered into with such optionee have passed by will or by operation of
the laws of devolution or distribution and descent, until the earlier of (i) the date
that is twelve months after the date of the death of such optionee, and (ii) the expiry
date of such option as set out in the respective option agreement.Transferability. No option granted under this plan may be transferred or assigned
except by will or by operation of the laws of devolution or distribution and descent or
pursuant to a qualified domestic relations order, as defined by the Internal Revenue
Code of 1986 and may be exercised only by an optionee during his or her lifetime.Amendments or Termination. Our Compensation Committee has the right at any time to
suspend, amend or terminate the 1998 Incentive Stock Option Plan subject to certain
exceptions.(ii)
    
    2000 Incentive Stock Option Plan, or 2000 PlanShare Reserve. We have reserved an aggregate of 7,000,000 common shares for issuance
under the 2000 Incentive Stock Option Plan. Common shares with respect to options that
are not exercised in full, will be available for grant under subsequent options under
this plan. In addition, the number of common shares reserved for issuance to any one
person shall not, in the aggregate, exceed five percent of the issued and outstanding
common shares (on a non-diluted basis). The Committee will not grant options to a
Director who is not an employee or executive of QLT where such grant will result in
those Directors who are not employees or executives of QLT and who hold options under
this plan, holding, in the aggregate, more than 0.25% of the issued and outstanding
common shares (on a non-diluted basis). At December 31, 2006, options to purchase an
aggregate total of 3,986,272 common shares were outstanding under the 2000 Plan and
exercisable in the future at prices ranging between CAD $7.79 and CAD $32.85 per common
share.Administration. The Compensation Committee administers the 2000 Incentive Stock Option
Plan.Eligibility. The Directors, officers, employees and consultants of QLT or our
affiliated companies, who is or will be, in the opinion of the Compensation Committee,
important for our growth and success and whose participation in this 2000 Incentive
Stock Option 2000 Incentive Stock Option Plan will, in the opinion of the Compensation
Committee, accomplish the purposes of this 2000 Incentive Stock Option Plan, are
eligible to participate in the 2000 Incentive Stock Option Plan.Grant and Exercise of Options. Subject to the terms of the 2000 Incentive Stock Option
Plan, the Compensation Committee may grant to any eligible person one or more options as
it deems appropriate. The Compensation Committee may also impose such limitations or
conditions on the exercise or vesting of any option as it deems appropriate.
 92




---



##### 



An option will expire automatically on the earlier of (i) the date on which such option
is exercised in respect of all of the common shares that may be purchased under this
2000 Incentive Stock Option Plan, and (ii) the date fixed by the Compensation Committee
as the expiry date of such option, which date will not be more than ten years from the
date of grant.If an optionees status as an eligible person terminates as a result of retirement or
ceases to be a consultant by normal termination of the consulting agreement or ceases to
be a Director of QLT, and if such optionee has worked on behalf of QLT for at least 20
years or is at least 60 years of age and has worked continuously for at least five
years, all options of such optionee will become immediately vested and will be
exerciseable until the expiry of the options. In all other cases, all options will
become immediately vested and will be exercisable for a period of the earlier of 90 days
and the expiry of the options. If the optionees status as an eligible person is
terminated for cause, the option shall terminate immediately. If an optionees status
as an eligible person is terminated as a result of disability, the option will expire 12
months after the date of termination, or on such other date determined by the
Compensation Committee and specified in the option agreement. In the event that the
optionee dies before otherwise ceasing to be an eligible person, or before the
expiration of the option following such a termination, the option will expire 12 months
after the date of death, or on such other date determined by the Compensation Committee
and specified in the option agreement. Notwithstanding the foregoing, except as
expressly permitted by our Compensation Committee, all stock options will cease to vest
as at the date upon which the optionee ceases to be eligible to participate in this
plan.Transferability. No option may be transferred or assigned except by will or by
operation of the laws of devolution or distribution and descent or pursuant to a
qualified domestic relations order, as defined by the U.S. Internal Revenue Code of 1986
and may be exercised only by an optionee during his or her lifetime.Amendments or Termination. Our Compensation Committee has the right at any time to
suspend, amend or terminate the 2000 Incentive Stock Option Plan, but will not have the
right to (i) affect in a manner that is adverse or prejudicial to, or that impairs, the
benefits and rights of any optionee under any option previously granted without the
consent of such optionee; (ii) decrease the number of common shares that may be issued
pursuant to any option granted under this plan without the consent of such optionee;
(iii) increase the option exercise price without the consent of the optionee; and (iv)
grant any option if this plan has been suspended.(iii)
    
    1987 Atrix Performance Stock Option Plan, or 1987 Atrix PlanShare Reserve. Prior to our acquisition of Atrix on November 19, 2004, an aggregate of
2,500,000 common shares of Atrix Laboratories, Inc. had been reserved for issuance under
the 1987 Atrix Performance Stock Option Plan. Upon the expiration or termination of an
option which has not been exercised in full, the number of common shares reserved for
issuance under that option which have not been issued will become available for issue
for the purpose of additional options which may be granted under this plan. Upon
acquisition, we assumed the remaining options outstanding and issuable under the 1987
Atrix Performance Stock Option Plan which, after converting, provide for the issuance of
up to 267,937 common shares of QLT Inc. At December 31, 2006, options to purchase an
aggregate total of 79,899 common shares were outstanding under the 1987 Atrix Plan and
exercisable in the future at prices ranging between U.S. $2.89 and U.S. $9.98 per common
share.Administration. The Compensation Committee administers the 1987 Atrix Performance Stock
Option Plan.Eligibility. The Directors, officers, and key employees of Atrix or of any subsidiary
companies, who, in the opinion of the Compensation Committee, contribute materially to
the profitability and success of Atrix are eligible to participate in this plan.Grant and Exercise of Options. Subject to the terms of the 1987 Atrix Performance Stock
Option Plan, the Compensation Committee may grant to any eligible person one or more
options as it deems
 93




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##### 



appropriate. The Compensation Committee may also impose such limitations or conditions
on the exercise or vesting of any option as it deems appropriate.If an employee ceases to be an employee of the Company for any reason, other than by
reason of death or disability, then all options held by such employee which are not
exercisable when the employee ceases to be an employee shall terminate. All options
which are exercisable when the employee ceases to be an employee must be exercised prior
to the earlier of (i) the expiration date of the options or (ii) the date occurring 3
months after the date on which the employee ceases to be an employee.
If an employee dies while in the employ of Atrix or during the 3 month post-termination
exercise period, the legal representative of such employee may exercise such option
prior to the earlier of (i) the expiration date of the options, or (ii) the date
occurring 12 months after the date of death. Such options shall terminate if they are
not exercised during such period.If the employment of an employee terminates by reason of the employees disability while
such employee is entitled to exercise an option, such option must be exercised prior to
the earlier of (i) the expiration date of the options or (ii) the date occurring 12
months after the date of the employees disability. Such options shall terminate if
they are not exercised during such period.Transferability. No option may be transferred or assigned except by will or by
operation of the laws of descent and distribution and may be exercised only by an
optionee during his or her lifetime.Amendments or Termination. The Board of Directors has the right at any time to suspend,
amend or terminate the 1987 Atrix Performance Stock Option Plan. No amendment to the
plan will be made without shareholder approval that will (i) increase the total number
of common shares reserved for options under the plan, (ii) reduce the exercise price of
any option granted under this plan below the fair market value at the time of grant,
(iii) modify the provisions of the plan pertaining to eligibility, or (iv) materially
increase the benefits accruing to participants under this plan.(iv)
    
    2000 Atrix Performance Stock Option Plan, or 2000 Atrix PlanShare Reserve. Prior to the our acquisition of Atrix on November 19, 2004, an aggregate
of 4,750,000 common shares of Atrix Laboratories, Inc. had been reserved for issuance
under the 2000 Atrix Performance Stock Option Plan. Shares covered by an option grant
which is forfeited or cancelled, expires or is settled in cash, shall be deemed not to
have been issued for purposes of determining the maximum aggregate number of shares
which may be issued under this plan. The maximum number of common shares with respect
to which options may be granted to any one person in any fiscal year of Atrix shall be
400,000 shares. Where an optionee commences the provision of continuous service, the
optionee may be granted options for up to an additional 300,000 shares which shall not
count against the 400,000 limit. Upon acquisition, the Company assumed the remaining
options outstanding and issuable under the 2000 Atrix Performance Stock Option Plan
which, after converting, provide for the issuance of up to 6,794,636 common shares of
QLT Inc. At December 31, 2006, options to purchase an aggregate total of 2,920,257
common shares were outstanding under the 2000 Atrix Plan and exercisable at prices
ranging between U.S. $4.90 and U.S. $17.82 per common share.Administration. The Compensation Committee administers the plan.Eligibility. Awards other than incentive stock options as defined in Section 422 of the
Internal Revenue Code, may be granted to employees, Directors and consultants.
Incentive stock options as defined in Section 422 of the Internal Revenue Code may be
granted only to employees of Atrix, parent or a subsidiary.Grant and Exercise of Options. The Compensation Committee may grant to any eligible
person one or more options as it deems appropriate and may also impose such limitations
or conditions on the exercise or vesting of any option as it deems appropriate.An option will expire automatically on the earlier of (i) the date on which such option
is exercised in respect of all of the common shares that may be purchased under this
plan, and (ii) the date fixed by the Compensation Committee as the expiry date of such
option, which date will not be more than ten
 94




---



##### 



years from the date of grant (or five years for an option granted to an optionee that
owns shares representing more than 10% of the voting power of all classes of shares of
Atrix or any parent or subsidiary).Transferability. No incentive stock option may be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or by the
laws of descent or distribution and may be exercised only by an optionee during his or
her lifetime. Other awards may be transferred by gift or through a domestic relations
order to member of the grantees immediate family to the extent provided for in the
stock option agreement or determined and to the extent determined by the Compensation
Committee.Amendments or Termination. Our Compensation Committee has the right at any time to
suspend, amend or terminate the 2000 Atrix Performance Stock Option Plan. No options
may be granted during any suspension of this plan, or after termination of this plan.
Any amendment, suspension or termination shall not affect options already granted, and
such awards shall remain in full force and effect as if the plan had not been amended,
suspended or terminated, unless mutually agreed otherwise, which agreement must be in
writing and signed by the optionee and Atrix.(v)
    
    Non-Qualified Atrix Stock Option Plan, or Non-Qualified Atrix PlanShare Reserve. Prior to our acquisition of Atrix on November 19, 2004, an aggregate of
150,000 common shares of Atrix Laboratories, Inc. had been reserved for issuance under
the Non-Qualified Atrix Stock Option Plan. Options under the Non-Qualified Atrix Plan
are granted to outside consultants. Upon acquisition, the Company assumed the remaining
options outstanding and issuable under the Non-Qualified Atrix Plan which, after
converting, provide for issuance of up to 207,543 common shares of QLT Inc. At December
31, 2006, there were no options to purchase common shares outstanding under the
Non-Qualified Atrix Plan.Administration.The Compensation Committee of our board of Directors administers the
Non-Qualified Atrix Stock Option Plan.Eligibility.The board, upon recommendation of the Compensation Committee, may grant
options to any consultant, independent contractor and any other designated persons who
are not employees, which the Compensation Committee in its discretion shall designate.Grant and Exercise of Options. The Compensation Committee may grant to any eligible
person one or more options as it deems appropriate. The Compensation Committee may also
impose such limitations or conditions on the exercise or vesting of any option as it
deems appropriate. Options granted at different times under this plan need not contain
similar provisions.In the event of any termination of the consulting or other agreement between an optionee
and Atrix, all options which had not been exercised as of the date of such termination
will immediately expire. In the event that an optionee dies while retained by Atrix and
without having fully exercised his options, the executors or administrators, or legatees
or heirs of his estate shall have the right to exercise such options to the extent that
such deceased optionee was entitled to exercise the options on the date of death. In no
event shall the options be exercisable more than two years from the date of death.Transferability. Options shall not be transferable other than by will or by the laws of
descent and distribution, and during an optionees lifetime shall be exercisable only by
such optionee.Amendments or Termination. Our Compensation Committee has the right at any time
terminate, amend or revise the Non-Qualified Atrix Stock Option Plan. The Compensation
Committee may not, without the consent of the holder of an option, alter or impair any
option previously granted under this plan.
 95




---



##### 



Exercise Price
    
    Aggregate intrinsic(In Canadian dollars)
    
    Number of Options
    
    Per Share Range
    
    value (in millions)Outstanding at December 31, 2003
    
    
    7,236,624
    
    
    $
    12.10 - 108.60Granted
    
    
    950,200
    
    
    
    21.04 -   32.85Exercised
    
    
    (709,696
    )
    
    
    12.10 -   34.75Cancelled
    
    
    (1,046,730
    )
    
    
    12.10 - 108.60Outstanding at December 31, 2004
    
    
    6,430,398
    
    
    $
    12.10 - 108.60Granted
    
    
    1,447,450
    
    
    
    7.79 -   20.75Exercised
    
    
    (16,944
    )
    
    
    12.10 -   13.35Cancelled
    
    
    (2,391,054
    )
    
    
    9.84 - 108.60Outstanding at December 31, 2005
    
    
    5,469,850
    
    
    $
    7.79 - 108.60Granted
    
    
    1,846,968
    
    
    
    7.79 -   10.35Exercised
    
    
    (2,153
    )
    
    
    7.79 -     9.22Cancelled
    
    
    (3,248,643
    )
    
    
    7.79 - 108.60Outstanding at December 31, 2006
    
    
    4,066,022
    
    
    $
    7.79 -   32.85
    
    
    $
    3.0Exerciseable at December 31, 2006
    
    
    
    
    
    
    
    
    
    $
    0.9
   Exercise Price
    
    Aggregate intrinsic(In U.S. dollars)
    
    Number of Options
    
    Per Share Range
    
    value (in millions)Options assumed at November 19, 2004
    
    
    6,106,888
    
    
    $
    2.63 -   17.82Granted
    
    
    
    
    
    
    Exercised
    
    
    (136,023
    )
    
    
    5.29 -   14.23Cancelled
    
    
    
    
    
    
    Outstanding at December 31, 2004
    
    
    5,970,865
    
    
    $
    2.63 -   17.82Granted
    
    
    505,875
    
    
    
    6.54 -   12.37Exercised
    
    
    (1,287,565
    )
    
    
    2.63 -   16.22Cancelled
    
    
    (1,011,801
    )
    
    
    2.70 -   17.82Outstanding at December 31, 2005
    
    
    4,177,374
    
    
    $
    2.89 -   17.82Granted
    
    
    322,085
    
    
    
    7.27 -     8.62Exercised
    
    
    (125,146
    )
    
    
    2.89 -     8.64Cancelled
    
    
    (1,374,157
    )
    
    
    5.06 -   17.82Outstanding at December 31, 2006
    
    
    3,000,156
    
    
    $
    2.89 -   17.82
    
    
    $
    0.6Exerciseable at December 31, 2006
    
    
    
    
    
    
    
    
    
    $
    0.4
  96




---



##### 



(In Canadian dollars)

Options Outstanding
    
    Options ExercisableWeightedAverageWeighted
    
    Remaining
    
    
    
    
    
    WeightedNumber of
    
    Average
    
    Contractual
    
    Number of
    
    Average ExercisePrice Range
    
    Options
    
    Exercise Price
    
    Life (Years)
    
    Options
    
    PriceUnder $12.50
    
    
    2,409,785
    
    
    $
    8.72
    
    
    
    4.15
    
    
    
    681,190
    
    
    $
    8.78$12.51 - $17.50
    
    
    843,816
    
    
    
    14.44
    
    
    
    2.34
    
    
    
    656,531
    
    
    
    14.28$17.51 - $30.00
    
    
    354,751
    
    
    
    23.14
    
    
    
    0.60
    
    
    
    346,808
    
    
    
    23.19$30.01 - $37.50
    
    
    457,670
    
    
    
    32.76
    
    
    
    2.22
    
    
    
    417,875
    
    
    
    32.774,066,022
    
    
    $
    13.87
    
    
    
    
    
    
    
    2,102,404Options exercisable under the immediately above noted option Plans as at December 31, 2005 and
December 31, 2004 were 4,045,408 and 5,226,578 respectively.Additional information relating to stock options outstanding under all other Company options plans
as of December 31, 2006, is presented below:
 (In U.S. dollars)
    
    Options Outstanding
    
    Options ExercisableWeightedAverageWeighted
    
    Remaining
    
    
    
    
    
    WeightedNumber of
    
    Average
    
    Contractual
    
    Number of
    
    Average ExercisePrice Range
    
    Options
    
    Exercise Price
    
    Life (Years)
    
    Options
    
    PriceUnder $7.50
    
    
    250,374
    
    
    $
    6.27
    
    
    
    3.90
    
    
    
    147,460
    
    
    $
    5.80$7.51 - $10.00
    
    
    685,068
    
    
    
    8.63
    
    
    
    4.88
    
    
    
    537,394
    
    
    
    8.67$10.01 - $12.50
    
    
    744,791
    
    
    
    11.76
    
    
    
    5.15
    
    
    
    685,198
    
    
    
    11.70$12.51 - $16.00
    
    
    364,865
    
    
    
    13.92
    
    
    
    5.94
    
    
    
    364,865
    
    
    
    13.92$16.01 - $17.82
    
    
    955,058
    
    
    
    16.33
    
    
    
    7.44
    
    
    
    955,058
    
    
    
    16.333,000,156
    
    
    $
    12.31
    
    
    
    
    
    
    
    2,689,975
    97




---



##### 



15. NET PRODUCT REVENUE
  (In thousands of U.S. dollars)
    
    2006
    
    2005
    
    2004Visudyne® sales by Novartis Ophthalmics
    
    $
    353,759
    
    
    $
    483,762
    
    
    $
    448,277Less: Marketing and distribution costs
    
    
    (132,669
    )
    
    
    (142,244
    )
    
    
    (133,730
    )Less: Inventory costs
    
    
    (18,275
    )
    
    
    (24,060
    )
    
    
    (25,789
    )Less: Royalties to third parties
    
    
    (7,545
    )
    
    
    (10,699
    )
    
    
    (10,074
    )$
    195,270
    
    
    $
    306,759
    
    
    $
    278,684QLTs 50% share of Novartis Ophthalmics net
proceeds from Visudyne sales
    
    $
    97,635
    
    
    $
    153,379
    
    
    $
    139,342Add: Advance on inventory costs from Novartis
Ophthalmics
    
    
    15,063
    
    
    
    18,932
    
    
    
    21,791Add: Royalties reimbursed to QLT
    
    
    7,622
    
    
    
    10,431
    
    
    
    10,074Add: Other costs reimbursed to QLT
    
    
    9,046
    
    
    
    4,496
    
    
    
    6,250Revenue from Visudyne® sales
    
    $
    129,366
    
    
    $
    187,238
    
    
    $
    177,457Net product revenue from Eligard®
    
    
    22,494
    
    
    
    16,808
    
    
    
    931$
    151,860
    
    
    $
    204,046
    
    
    $
    178,388
  16. CONTRACT RESEARCH AND DEVELOPMENT
  (In thousands of U.S. dollars)
    
    2006
    
    2005
    
    2004Visudyne® ocular programs
    
    $
    
    
    
    $
    3,685
    
    
    $
    3,633Aczoneprograms
    
    
    
    
    
    
    2,716
    
    
    
    Eligard® programs
    
    
    202
    
    
    
    1,177
    
    
    
    Others
    
    
    953
    
    
    
    1,673
    
    
    
    396Contract research and development revenue
    
    $
    1,155
    
    
    $
    9,251
    
    
    $
    4,029
 17. RESTRUCTURING CHARGES
   98




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##### 



Severance and termination benefits accrued
 First
    
    Second
    
    Third(In thousands of U. S. dollars)
    
    Restructuring
    
    Restructuring
    
    Restructuring
    
    TotalBalance at December 31, 2005
    
    $
    227
    
    
    $
    4,499
    
    
    $
    
    
    
    $
    4,726Restructuring charge
    
    
    
    
    
    
    
    
    
    
    2,879
    
    
    
    2,879Adjustments
    
    
    (20
    )
    
    
    (240
    )
    
    
    
    
    
    
    (260
    )Cash payments
    
    
    (207
    )
    
    
    (3,573
    )
    
    
    (1,365
    )
    
    
    (5,145
    )Balance at December 31, 2006
    
    $
    
    
    
    $
    686
    
    
    $
    1,514
    
    
    $
    2,200
 Other related expenses accrued
 First
    
    Second
    
    Third(In thousands of U. S. dollars)
    
    Restructuring
    
    Restructuring
    
    Restructuring
    
    TotalBalance at December 31, 2005
    
    $
    
    
    
    $
    479
    
    
    $
    
    
    
    $
    479Restructuring charge
    
    
    
    
    
    
    
    
    
    
    164
    
    
    
    164Adjustments
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    45Cash payments
    
    
    
    
    
    
    (425
    )
    
    
    (80
    )
    
    
    (505
    )Balance at December 31, 2006
    
    $
    
    
    
    $
    99
    
    
    $
    84
    
    
    $
    183
 Combined Total
 First
    
    Second
    
    Third(In thousands of U. S. dollars)
    
    Restructuring
    
    Restructuring
    
    Restructuring
    
    TotalBalance at December 31, 2005
    
    $
    227
    
    
    $
    4,978
    
    
    $
    
    
    
    $
    5,205Restructuring charge
    
    
    
    
    
    
    
    
    
    
    3,043
    
    
    
    3,043Adjustments
    
    
    (20
    )
    
    
    (195
    )
    
    
    
    
    
    
    (215
    )Cash payments
    
    
    (207
    )
    
    
    (3,998
    )
    
    
    (1,445
    )
    
    
    (5,650
    )Balance at December 31, 2006
    
    $
    
    
    
    $
    785
    
    
    $
    1,598
    
    
    $
    2,383
 99




---



##### 



18. INCOME TAXES
  (In thousands of U.S. dollars)
    
    2006
    
    2005
    
    2004Canada
    
    $
    44,782
    
    
    $
    88,421
    
    
    $
    88,230United States and other
    
    
    (119,162
    )
    
    
    (409,082
    )
    
    
    (221,882
    )Loss before income taxes,
discontinued operations and
extraordinary gain
    
    $
    (74,380
    )
    
    $
    (320,661
    )
    
    $
    (133,652
    )
  (In thousands of U.S. dollars)
    
    2006
    
    2005
    
    2004Canada
    
    $
    9,130
    
    
    $
    27,661
    
    
    $
    30,051United States and other
    
    
    (95
    )
    
    
    (34,838
    )
    
    
    (499
    )Provision
for (recovery of)  income taxes
    
    $
    9,035
    
    
    $
    (7,177
    )
    
    $
    29,552
 (In thousands of U.S. dollars)
    
    2006
    
    2005
    
    2004Provision for current and deferred income taxes
    
    $
    (35,295
    )
    
    $
    (9,903
    )
    
    $
    28,669Increase in valuation allowance
    
    
    44,330
    
    
    
    2,726
    
    
    
    883Provision
for (recovery of) income taxes
    
    $
    9,035
    
    
    $
    (7,177
    )
    
    $
    29,552
 (In thousands of U.S. dollars)
    
    2006
    
    2005
    
    2004Current income taxes
    
    $
    19,427
    
    
    $
    30,439
    
    
    $
    9,346Deferred income taxes
    
    
    (10,392
    )
    
    
    (37,616
    )
    
    
    20,206Provision
for (recovery of) income taxes
    
    $
    9,035
    
    
    $
    (7,177
    )
    
    $
    29,552
 100




---



##### 



(In thousands of U.S. dollars)
    
    2006
    
    2005
    
    2004Loss before income taxes
    
    $
    (74,380
    )
    
    $
    (320,661
    )
    
    $
    (121,135
    )Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    (12,517
    )Loss before income taxes, discontinued
operations and extraordinary gain
    
    $
    (74,380
    )
    
    $
    (320,661
    )
    
    $
    (133,652
    )Canadian statutory tax rates
    
    
    34.12
    %
    
    
    34.86
    %
    
    
    35.62
    %Expected income tax (recovery) provision
    
    $
    (25,378
    )
    
    $
    (111,782
    )
    
    $
    (47,607
    )Charge for goodwill impairment
    
    
    
    
    
    
    113,265
    
    
    
    Purchased in-process research and development
    
    
    
    
    
    
    
    
    
    
    82,264Increase in valuation allowance
    
    
    44,330
    
    
    
    2,726
    
    
    
    480Provincial tax credits on patent sourced income
    
    
    (4,582
    )
    
    
    
    
    
    
    Foreign tax rate differences
    
    
    (3,498
    )
    
    
    (8,984
    )
    
    
    (3,186
    )Investment tax credits
    
    
    (1,685
    )
    
    
    (2,261
    )
    
    
    (2,378
    )Recovery of prior year taxes
    
    
    (1,576
    )
    
    
    
    
    
    
    Stock Options
    
    
    1,318
    
    
    
    
    
    
    
    Future tax rate reductions
    
    
    481
    
    
    
    
    
    
    
    Deferred gain on sale of Photofrin®
    
    
    
    
    
    
    
    
    
    
    (341
    )Permanent differences and other
    
    
    (375
    )
    
    
    (141
    )
    
    
    320Provision for (recovery of) income taxes
    
    $
    9,035
    
    
    $
    (7,177
    )
    
    $
    29,552
  101




---



##### 



(In thousands of U.S. dollars)
    
    2006
    
    2005Deferred tax assetsNet operating loss carryforwards
    
    $
    51,563
    
    
    $
    48,515Litigation settlement
    
    
    41,868
    
    
    
    Research & development tax credit carryforwards
    
    
    9,518
    
    
    
    7,261Capital loss carryforwards
    
    
    6,302
    
    
    
    6,450Depreciable and amortizable assets
    
    
    6,960
    
    
    
    3,455Provincial tax credits on patent sourced income
    
    
    4,469
    
    
    
    Provision for non-completion of product inventory
    
    
    1,651
    
    
    
    706Deferred Revenue
    
    
    1,457
    
    
    
    1,776Unpaid employee compensation
    
    
    511
    
    
    
    44Other temporary differences
    
    
    886
    
    
    
    637Total gross deferred income tax assets
    
    $
    125,185
    
    
    $
    68,844Less: valuation allowance
    
    
    (106,690
    )
    
    
    (58,771
    )Total deferred income tax assets
    
    $
    18,495
    
    
    $
    10,073Less: current portion
    
    
    (8,657
    )
    
    
    (2,480
    )Net long-term portion of deferred income tax assets
    
    $
    9,838
    
    
    $
    7,593Deferred tax liabilitiesDeferred tax liability associated with the
tangible and intangible assets acquired in the
acquisition of Atrix
    
    $
    (89
    )
    
    $
    (3,834
    )Unrealized foreign exchange gains
    
    
    (5,394
    )
    
    
    (5,532
    )Other temporary differences
    
    
    
    
    
    
    (434
    )Total deferred income tax liabilities
    
    $
    (5,483
    )
    
    $
    (9,800
    )Net deferred income tax (liabilities) assets
    
    $
    13,012
    
    
    $
    273
   102




---



##### 



19. DISCONTINUED OPERATIONS
 Goodwill and Other Intangibles
   103




---



##### 



(In thousands of U.S. dollars)
    
    2006
    
    
    2005
    
    
    2004Net revenue
    
    $
    15,077
    
    
    $
    12,136
    
    
    $
    1,317Write-down of assets held for sale
    
    $
    (8,592
    )
    
    
    
    
    
    
    Pretax losses
    
    $
    (11,322
    )
    
    $
    (16,157
    )
    
    $
    (15,126
    )Income taxes
    
    
    1,093
    
    
    
    4,229
    
    
    
    104(10,229
    )
    
    
    (11,928
    )
    
    
    (15,022
    )Loss on disposal
    
    $
    (10,488
    )
    
    
    
    
    
    
    Income tax on disposal
    
    
    2,527
    
    
    
    
    
    
    
    Net loss from discontinued operations
    
    $
    (18,190
    )
    
    $
    (11,928
    )
    
    $
    (15,022
    )
 20. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
   .
 Maturity Period
    
    Quantity (millions)
    
    Average PriceU.S. / Canadian dollar option-dated
forward contracts to sell USD
    
    
    2007
    
    
    USD 1.0
    
    1.34014 per USDSwiss franc / Canadian dollar option-dated forward contract to sell CHF
    
    
    2007
    
    
    CHF 29.7
    
    0.90587 per CHF
 21. COMMITMENTS AND GUARANTEES
  104




---



##### 



(In thousands of U.S. dollars)Year ending December 31,2007
    
    $
    29,9892008
    
    
    13,7132009
    
    
    1,1712010
    
    
    1942011
    
    
    145
  22. SEGMENTED INFORMATION
    (In thousands of U.S. dollars)
    
    2006
    
    
    2005
    
    
    2004Visudyne®
    
    $
    129,366
    
    
    $
    187,238
    
    
    $
    177,457Eligard®
    
    
    42,324
    
    
    
    31,588
    
    
    
    3,270Other
    
    
    1,269
    
    
    
    1,036
    
    
    
    Contract research and development
    
    
    1,155
    
    
    
    9,251
    
    
    
    4,028Licensing and Milestones
    
    
    976
    
    
    
    724
    
    
    
    $
    175,090
    
    
    $
    229,837
    
    
    $
    184,755
 105




---



##### 



1
 (In thousands of U.S. dollars)
    
    2006
    
    
    2005
    
    
    2004U.S.
    
    $
    54,776
    
    
    $
    102,967
    
    
    $
    99,356Europe
    
    
    83,321
    
    
    
    87,852
    
    
    
    65,800Canada
    
    
    17,438
    
    
    
    16,171
    
    
    
    10,149Other
    
    
    19,555
    
    
    
    22,847
    
    
    
    9,450$
    175,090
    
    
    $
    229,837
    
    
    $
    184,755
  (In thousands of U.S. dollars)
    
    2006
    
    
    2005Canada
    
    $
    45,634
    
    
    $
    48,379U.S.
    
    
    4,863
    
    
    
    4,418$
    50,497
    
    
    $
    52,797
  23. CONTINGENCIES
 (a) Eligard Patent Litigation
 United States Patent Litigation
 ®
  ®
 106




---



##### 



Germany Patent Litigation
      (b) Patent Litigation with MEEI
 The First MEEI Lawsuit
 ®
   107




---



##### 



The Second MEEI Lawsuit
 ®
    (c) Effect of the German Eligard Patent Litigation and MEEI Litigation
 .
 108




---



##### 



24. RECONCILIATION FROM U.S. GAAP TO CANADIAN GAAP
   109




---



##### 



Years ended December 31,
    
    2006
    
    2005
    
    2004(In thousands of U.S. dollars, except per share amounts)Net loss, U.S. GAAP
    
    $
    (101,605
    )
    
    $
    (325,412
    )
    
    $
    (165,709
    )Stock-based compensation charge (a)
    
    
    
    
    
    
    (7,071
    )
    
    
    (11,233
    )Purchase of in-process research and development (b)
    
    
    
    
    
    
    
    
    
    
    222,000Amortization of in-process research and development (b)
    
    
    (4,457
    )
    
    
    (13,059
    )
    
    
    (1,486
    )FIT recovery on amortization of in-process research and
development (b)
    
    
    1,694
    
    
    
    4,962
    
    
    
    566Imputed interest on convertible debt (c)
    
    
    (8,018
    )
    
    
    (7,437
    )
    
    
    (7,073
    )Unrealized foreign exchange gain (loss) on convertible
debt (c)
    
    
    1,303
    
    
    
    292
    
    
    
    (1,387
    )License and option fees (d)
    
    
    1,910
    
    
    
    
    
    
    
    Amortization of license and option fees (d)
    
    
    (76
    )
    
    
    
    
    
    
    Goodwill impairment charge (e)
    
    
    
    
    
    
    (174,963
    )
    
    
    (Provision for) recovery of income taxes on above items
(b), (f)
    
    
    (1,420
    )
    
    
    48,308
    
    
    
    655(Loss) income from discontinued operations, net of
income taxes (l)
    
    
    (9,968
    )
    
    
    (6,469
    )
    
    
    13,941Net (loss) income, Canadian GAAP
    
    $
    (120,637
    )
    
    $
    (480,849
    )
    
    $
    50,274Basic net (loss) income per common share, Canadian GAAP(Loss) income before discontinued operations and
extraordinary gain
    
    $
    (1.09
    )
    
    $
    (4.99
    )
    
    $
    0.53Discontinued operations
    
    
    (0.33
    )
    
    
    (0.20
    )
    
    
    (0.01
    )Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    0.17Net (loss) income
    
    $
    (1.43
    )
    
    $
    (5.19
    )
    
    $
    0.69Diluted net income per common share, Canadian GAAP(Loss) income before discontinued operations and
extraordinary gain
    
    $
    (1.09
    )
    
    $
    (4.99
    )
    
    $
    0.52Discontinued operations
    
    
    (0.33
    )
    
    
    (0.20
    )
    
    
    (0.01
    )Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    0.17Net (loss) income
    
    $
    (1.43
    )
    
    $
    (5.19
    )
    
    $
    0.68Weighted average number of common shares outstanding
(in thousands)Basic
    
    
    84,596
    
    
    
    92,637
    
    
    
    73,240Diluted
    
    
    84,596
    
    
    
    92,637
    
    
    
    73,771
  110




---



##### 



As at December 31,
    

2006
    

2005(In thousands of United States dollars)Total assets under U.S. GAAP
    
    $
    639,107
    
    
    $
    776,494Short-term investments (g)
    
    
    
    
    
    
    137Future income tax assets (f)
    
    
    (1,166
    )
    
    
    Intangibles,
net (b), (d)
    
    
    69,641
    
    
    
    83,880Goodwill
(b), (e)
    
    
    40,067
    
    
    
    41,923Other long-term assets (g)
    
    
    14
    
    
    
    313Total assets under Canadian GAAP
    
    $
    747,663
    
    
    $
    902,747Total liabilities under U.S. GAAP
    
    
    335,893
    
    
    
    250,383Future income tax liabilities (b), (f)
    
    
    24,845
    
    
    
    31,289Long-term debt (c)
    
    
    (11,258
    )
    
    
    (17,848
    )Total liabilities under Canadian GAAP
    
    $
    349,480
    
    
    $
    263,824Total shareholders equity under U.S. GAAP
    
    $
    303,214
    
    
    $
    526,111Common shares (a), (h), (i)
    
    
    (2,434
    )
    
    
    (2,434
    )Contributed surplus (a)
    
    
    58,938
    
    
    
    59,000Equity component of convertible debt (c)
    
    
    33,500
    
    
    
    33,500(Deficit) Retained earnings (j)
    
    
    (739
    )
    
    
    16,758Cumulative translation adjustment (g), (k)
    
    
    5,704
    
    
    
    5,988Total shareholders equity under Canadian GAAP
    
    $
    398,183
    
    
    $
    638,923
 (a)
    
    Effective January 1, 2004, we adopted the fair value method of accounting for all employee
and non-employee stock-based compensation for Canadian GAAP purposes on a retroactive basis,
without restatement of prior periods. Compensation expense is recorded for stock options
issued to employees using the fair value method. Under U.S. GAAP, we adopted SFAS 123R for
stock options granted to employees and directors on January 1, 2006, using the modified
prospective method, resulting in no material difference between U.S. GAAP and Canadian GAAP
for the year ended December 31, 2006.(b)
    
    Under Canadian GAAP, acquired in-process research and development (IPR&D) projects are
recorded as an intangible asset and amortized over their useful life. On November 19, 2004,
we acquired IPR&D of $236.0 million through the acquisition of Atrix Laboratories, Inc.
Accordingly, this amount was capitalized for Canadian GAAP purposes and is being amortized
using the straight-line method over its useful life of seventeen years. As a result of
book-tax basis differences attributable to IPR&D, an additional deferred tax liability of
$89.7 million was recorded. During the year ended December 31, 2006, the future income tax
liability was adjusted by $1.7 million for Canadian GAAP purposes to reflect the reduction in
the temporary difference due to the amortization of the IPR&D. Under U.S. GAAP, IPR&D is
expensed at time of acquisition. As a result of the impairment charge during 2005,
amortization of IPR&D was lower for the year ended December 31, 2006. In addition, the future
income tax liability was reduced by $91.8 million under Canadian GAAP ($39.9 million under
U.S. GAAP). See note (e) for further discussion on the impairment charge.(c)
    
    In 2003, we completed a private placement of $172.5 million aggregate principal amount of
convertible senior notes. Under Canadian GAAP, an amount of $33.5 million, representing the
estimated value of the right of conversion, was allocated to the shareholders equity as the
equity component of the convertible debt. Furthermore, with bifurcation, accretion expense is
recorded as interest expense under Canadian GAAP. Under U.S. GAAP, bifurcation of debt is not
required. In addition, foreign exchange gains/losses are calculated for the full face value of
the debt under U.S. GAAP, and calculated only on the liability component under Canadian GAAP.(d)
    
    During the year ended December 31, 2006, we acquired certain license and option rights. Under
U.S. GAAP, technology licenses and options may not have alternative future uses and were
therefore expensed as research
 111




---



##### 



and development costs. Under Canadian GAAP, the license and option rights were capitalized as
intangibles and are amortized over their useful lives of 17  18 years.(e)
    
    As a result of our 2005 impairment tests for goodwill and other intangibles we recorded,
under U.S. and Canadian GAAP, non-cash impairment charges of $410.5 million and $594.9
million, respectively. The charge reduced the Canadian GAAP carrying amount of goodwill to
$145.9 million. Under U.S. GAAP, as explained in (b) above, we expensed IPR&D at the time of
acquisition which had the effect of lowering the carrying value of the assets we acquired from
Atrix as compared to Canadian GAAP. Under Canadian GAAP, as explained in (b) above, we
capitalized IPR&D at the time of acquisition, which increased the carrying value of the assets
we acquired from Atrix as compared to US GAAP. With the higher carrying value, impairment of
goodwill and other intangibles was higher under Canadian GAAP than under US GAAP. There was
no impairment in 2006.(f)
    
    The differences between Canadian GAAP and U.S. GAAP assets and liabilities resulted in
different deferred tax assets and deferred tax liabilities under the respective GAAPs.
Furthermore, investment tax credits are calculated using different formulas for Canadian and U.S.
GAAP purposes due to different forecasted earnings under the respective GAAPs. Under U.S. GAAP,
the benefits of investment tax credits are recorded as part of the tax provision. Under Canadian
GAAP, such tax credits are classified against the expenditure to which they relate, which is
research and development.(g)
    
    We hold certain investments which under Canadian GAAP are recorded at historical costs
adjusted for permanent impairment. Under U.S. GAAP they are recorded as available-for-sale
securities. Such securities are required to be marked to market, with unrealized holding
gains and losses recorded in other comprehensive income.(h)
    
    Under Canadian GAAP, beneficial conversion features attached
to certain historical preferred shares were not included in share capital. Under U.S. GAAP, in prior years, a beneficial
conversion feature attached to certain preferred shares was accreted as a return to the
preferred shareholders. This resulted in an increase in the stated amount of historical share
capital.(i)
    
    In 2000 and 2001, we accelerated the vesting of certain employee stock options as part of
their severance. Under U.S. GAAP we recorded compensation expense and additional paid in
capital in shareholders equity equal to the intrinsic value of the options and under Canadian
GAAP there was no charge recorded.(j)
    
    Certain adjustments to retained earnings are required to account for the accumulated
historical differences between Canadian GAAP and U.S. GAAP as discussed in the other parts of
this note.(k)
    
    The cumulative translation adjustment resulting from the translation of our Canadian
functional currency financial statements into U.S. dollar for reporting purposes differs
between Canadian GAAP and U.S. GAAP due to the difference in the value of our assets and
liabilities under the respective GAAPs.(l)
    
    Under Canadian GAAP, acquired in-process research and development (IPR&D) projects are
recorded as an intangible asset and amortized over their useful life. Generic dermatology
IPR&D projects were sold as part of the QLT USA sale of its generic dermatology and dental
businesses and related manufacturing facility. As a result, we included $8.0 million of
generic dermatology IPR&D, net of tax, in our loss from discontinued operations. Due to the
difference in carrying value of goodwill under Canadian GAAP (refer to note (e) above), we
allocated an additional $1.9 million of goodwill to loss from discontinued operations.(m)
    
    Recent accounting policy developments include the following:
     112




---



##### 



Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 Item 9A. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   Managements Report on Internal Control over Financial Reporting
   
 Item 9B. OTHER INFORMATION
  113




---



##### 



PART III
  
 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
   
 Item 11. EXECUTIVE COMPENSATION
  
 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 Equity Compensation Plan Information
  (a)
    
    (b)
    
    (c)Number of securitiesNumber of
    
    
    
    
    
    remaining availableSecurities to be
    
    
    
    
    
    for issuance underissued upon exercise
    
    Weighted average
    
    equity compensationof outstanding
    
    exercise price of
    
    plans (excludingoptions, warrants
    
    outstanding options,
    
    securities reflectedPLAN CATEGORY
    
    and rights
    
    warrants and rights
    
    in column (a))Equity compensation
plans approved by
security holders
    
    
    4,066,022
    (1)
    
    CAD  $13.87
    
    
    2,675,542Equity compensation
plans approved by
security holders
    
    
    3,000,156
    (1)
    
    USD  $12.31
    
    
    2,481,213Equity compensation
plans not approved
by security
holders(2)
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    7,066,178
    
    
    
    
    
    
    
    5,156,755
 114




---



##### 



(1)
    
    We currently maintain four equity compensation plans that have been approved by
shareholders which provide for the issuance of common stock to employees, officers and directors.
These four equity compensation plans are designated as the 1998 Incentive Stock Option Plan, the
2000 Incentive Stock Option Plan, the 1987 Atrix Performance Stock Option Plan and the 2000 Atrix
Performance Stock Option Plan. No further Company securities remain available for issuance under
either the 1998 Stock Option Plan or the 1987 Atrix Performance Stock Option Plan, however, both
Plans remain in effect for so long as options previously granted under these Plans remain
outstanding.(2)
    
    We currently maintain one equity compensation plan that has not been approved by
shareholders which provides for the issuance of common stock to certain outside consultants of the
Company. This plan has been designated as the Non-Qualified Atrix Stock Option Plan. The
Compensation Committee sets the option price and exercise terms granted under the Non-Qualified
Atrix Stock Option Plan. The exercise price of all options granted under the Non-Qualified Atrix
Stock Option Plan has been the closing market price at the time of the grant.  
 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 Item 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
  115




---



##### 



PART IV
 
 Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 Financial Statements
 (i)
    
    The following financial statement documents are included as part of Item 8 to this
Form 10-K.
 
 (ii)
    
    Schedules required by Article 12 of Regulation S-X:
  Schedule II  Valuation and Qualifying Accounts for the Years ended December 31, 2006,
2005 and 2004.
 Provision for non-completion of product inventory
 (In thousands of U.S. dollars)
 Additions chargedBalance at
    
    to costs and
    
    Write-offs, and
    
    Balance at endYear
    
    beginning of year
    
    expenses
    
    provision reduction
    
    of year2006
    
    $
    3,828
    
    
    $
    2,738
    
    
    $
    1,454
    
    
    $
    5,1122005
    
    
    1,457
    
    
    
    3,137
    
    
    
    766
    
    
    
    3,8282004
    
    
    
    
    
    
    3,655
    
    
    
    2,198
    
    
    
    1,457
 Reserve for inventory obsolescence
 (In thousands of U.S. dollars)
 Additions chargedBalance at
    
    to costs and
    
    Write-offs, and
    
    Balance at endYear
    
    beginning of year
    
    expenses
    
    provision reduction
    
    of year2006
    
    $
    1,452
    
    
    $
    1,924
    
    
    $
    3,376
    
    
    $
    2005
    
    
    
    
    
    
    2,306
    
    
    
    854
    
    
    
    1,4522004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Allowance for doubtful accounts
 (In thousands of U.S. dollars)
 Additions chargedBalance at
    
    to costs and
    
    Write-offs, and
    
    Balance at endYear
    
    beginning of year
    
    expenses
    
    provision reduction
    
    of year2006
    
    $
    673
    
    
    $
    62
    
    
    $
    610
    
    
    $
    1252005
    
    
    
    
    
    
    683
    
    
    
    10
    
    
    
    6732004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Deferred tax asset valuation allowance
 (In thousands of U.S. dollars)
 Additions chargedBalance at
    
    to costs and
    
    Write-offs, and
    
    Balance at endYear
    
    beginning of year
    
    expenses
    
    provision reduction
    
    of year2006
    
    $
    58,771
    
    
    $
    49,731
    
    
    $
    1,812
    
    
    $
    106,6902005
    
    
    54,113
    
    
    
    6,710
    
    
    
    2,052
    
    
    
    58,7712004
    
    
    1,654
    
    
    
    52,843
    
    
    
    384
    
    
    
    54,113
 116




---



##### 



Exhibits Index
  Exhibit
    
    Description
    
    Location2.1
    
    Asset Purchase Agreement, dated December 20,
2006, by and among Tolmar, Inc., Dillford
Company S.A. and QLT USA, Inc. (1)
    
    Filed herewith3.0
    
    Articles
    
    Exhibit 3.2 to the
Companys Current
Report on Form 8-K
dated May 25, 2005
and filed with the
Commission on June 1,
2005.4.1
    
    Shareholder Rights Plan Agreement, as amended
and restated, dated as of April 8, 2005, between
QLT Inc. and ComputerShare Trust Company of
Canada.
    
    Exhibit 41 to the
Companys Current
Report on Form 8-K
dated April 8, 2005
and filed with the
Commission on April
13, 2005.4.2
    
    Registration Rights Agreement, as amended and
restated, dated as of December 17, 2004 by and
between QLT Inc., Elan International Services,
Ltd., and Elan Pharmaceutical Investments III,
Ltd.
    
    Exhibit 4.2 to the
Companys Quarterly
Report on Form 10-Q
for the quarter ended
March 31, 2005.10.1
    
    Agreement, dated April 8, 1982, between Dr.
Julia Levy, Quadra Logic Technologies Inc. and
the University of British Columbia.
    
    Exhibit to the
Companys
Registration
Statement on Form F-1
(File No. 33-31222)
filed with the
Commission on
September 25, 1989.10.2
    
    Agreement, dated January 15, 1988, between Dr.
David Dolphin, Quadra Logic Technologies Inc.
and the University of British Columbia.
    
    Exhibit to the
Companys Annual
Report on Form 20-F
for the year ended
December 31, 1988.10.3
    
    Royalty Adjustment and Stock Option Agreement
dated August 10, 1989, between Quadra Logic
Technologies Inc. and Dr. David Dolphin.
    
    Exhibit to the
Companys Amendment
No. 1 to the
Registration
Statement on Form F-1
dated November 6,
1989.10.4
    
    Royalty Agreement, dated December 15, 1987,
between Quadra Logic Technologies Inc. and Dr.
David Dolphin.
    
    Exhibit to the
Companys Amendment
No. 1 to the
Registration
Statement on Form F-1
dated November 6,
1989.10.5
    
    1998 QLT Incentive Stock Option Plan.
    
    Exhibit 10.68 to the
Companys Annual
Report on Form 10-K
for the year ended
December 31, 1998.10.6*
    
    2000 QLT Incentive Stock Option Plan (as amended
in 2002); (formerly numbered 10.70).
    
    Exhibit to the
Companys
Registration
Statement on Form S-8
filed with the
Commission on
September 20, 2002.10.7*
    
    Employment Agreement dated December 18, 2001
between QLT Inc. and Paul J. Hastings.
    
    Exhibit 10.77 to the
Companys Annual
Report on Form 10-K
for the year ended
December 31, 2002.10.8*
    
    Employment Agreement dated May 19, 2000 between
QLT Inc. and Alain Curaudeau.
    
    Exhibit 10.80 to the
Companys Annual
Report on Form 10-K
for the year ended
December 31, 2002.10.9
    
    POT Development,
Manufacturing and Distribution Agreement, dated
July 1, 1994, between Quadra Logic Technologies
Inc. and CIBA Vision AG, Hettlingen (now
Novartis
    
    Exhibit to the
Companys Annual
Report on Form 10-K
for the year ended December 31, 1995.
 117




---



##### 



Exhibit
    
    Description
    
    LocationOphthalmics, a division of Novartis
Pharma AG).10.10
    
    BPD-MA Verteporfin Supply Agreement, dated March
12, 1999 between QLT PhotoTherapeutics Inc. and
Parkedale Pharmaceuticals, Inc. (1)
    
    Exhibit 10.54 to the
Companys Annual
Report on Form 10-K
for the year ended
December 31, 1998.10.11
    
    BPD-MA Presome Supply Agreement, dated February
26, 1998, between QLT PhotoTherapeutics Inc. and
Nippon Fine Chemical Co., Ltd. (1)
    
    Exhibit 10.55 to the
Companys Annual
Report on Form 10-K
for the year ended
December 31, 1998.10.12
    
    BPD-MA Supply Agreement, dated December 11,
1998, between QLT PhotoTherapeutics Inc. and
Raylo Chemicals Limited. (1)
    
    Exhibit 10.56 to the
Companys Annual
Report on Form 10-K
for the year ended
December 31, 1998.10.13
    
    License Agreement, dated December 8, 1998,
between QLT PhotoTherapeutics Inc. and The
General Hospital Corporation. (1)
    
    Exhibit 10.63 to the
Companys Annual
Report on Form 10-K
for the year ended
December 31, 1998.10.14
    
    Amending Agreement to PDT Product Development,
Manufacturing and Distribution Agreement dated
as of July 23, 2001 between Novartis Ophthalmics
AG and QLT Inc. (1)
    
    Exhibit 10.74 to the
Companys Quarterly
Report on Form 10-Q
for the quarter ended
September 30, 2002.10.15
    
    Amending Agreement to PDT Product Development,
Manufacturing and Distribution Agreement entered
into July 22, 2003 between Novartis Ophthalmics
AG (now Novartis Ophthalmics, a division of
Novartis Pharma AG) and QLT Inc.
    
    Exhibit 10.77 to the
Companys Quarterly
Report on Form 10-Q
for the quarter ended
June 30, 2003.10.16
    
    Agreement and Plan of Merger by and among QLT
Inc, Aspen Acquisition Corp. and Atrix
Laboratories, Inc. dated as of June 14, 2004.
    
    Annex A to the
Companys Joint Proxy
Statement/Prospectus
on Form S-4 dated
October 14, 2004.10.17
    
    License and Royalty Agreement, dated as of
August 8, 2000 between Atrix Laboratories, Inc.
and Pfizer Inc.
    
    Exhibit 99.3 to Atrix
Laboratories, Inc.s
Current Report on
Form 8-K dated August
8, 2000 and filed
with the Commission
on September 7, 2000.10.18
    
    Collaboration, Development and Supply Agreement
dated as of August 28, 2000 between Atrix
Laboratories, Inc. and Sandoz, Inc. (formerly
Geneva Pharmaceuticals, Inc.)
    
    Exhibit 10.13 to
Atrix Laboratories,
Inc.s Quarterly
Report on Form 10-Q
for the quarter ended
September 30, 2000.10.19
    
    Collaboration, License and Supply Agreement
dated as of December 8, 2000 between Atrix
Laboratories, Inc. and Sanofi-Synthelabo Inc. as
amended through February 15, 2007. (1)
    
    Filed herewith.10.20
    
    Collaboration, License and Supply Agreement,
dated as of April 4, 2001, between Atrix
Laboratories, Inc. and MediGene as amended
through May 17, 2006. (1)
    
    Filed herewith.10.21*
    
    Separation Letter Agreement with Michael J. Doty.
    
    Exhibit 10.1 to the
Companys Current
Report on Form 8-K
dated April 15, 2005
and filed with the
Commission on April
21, 2005.10.22*
    
    QLT Inc. 2005 Cash Incentive Plan.
    
    Exhibit 10.01 to the
Companys Current
Report on Form 8-K
dated May 10, 2005
and filed with
 118




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##### 



Exhibit
    
    Description
    
    Locationthe Commission on May 16, 2005.10.23*
    
    Deferred Share Unit Plan For Non-Employee
Directors.
    
    Exhibit 10.32 to the
Companys Quarterly
Report on Form 10-Q
for the quarter ended
June 30, 2005.10.24*
    
    Change Of Control Letter Agreement between QLT
Inc. and Cameron Nelson.
    
    Exhibit 10.34 to the
Companys Quarterly
Report on Form 10-Q
for the quarter ended
June 30, 2005.10.25*
    
    Letter Agreement dated September 23, 2005
between QLT Inc. and Paul J. Hastings.
    
    Exhibit 10.1 to the
Companys Current
Report on Form 8-K
dated September 23,
2005 and filed with
the Commission on
September 26, 2005.10.26*
    
    Employment Agreement dated September 26, 2005
between QLT Inc. and Robert L. Butchofsky.
    
    Exhibit 10.35 to the
Companys Quarterly
Report on Form 10-Q
for the quarter ended
September 30, 2005.10.27*
    
    Change of control letter agreement dated
September 26, 2005 for Robert L. Butchofsky.
    
    Exhibit 10.36 to the
Companys Quarterly
Report on Form 10-Q
for the quarter ended
September 30, 2005.10.28*
    
    Employment Agreement dated November 8, 2005
between QLT Inc. and Cameron Nelson.
    
    Exhibit 10.37 to the
Companys Quarterly
Report on Form 10-Q
for the quarter ended
September 30, 2005.10.29*
    
    Consultancy Agreement, dated December 7, 2005,
between QLT Inc. and Dr. Mohammad Azab.
    
    Exhibit 10.40 to the
Companys Annual
Report on Form 10-K
for the year ended
December 31, 2005.10.30*
    
    Employment Agreement dated December 9, 2005
between QLT USA, Inc. and Michael R. Duncan.
    
    Exhibit 10.41 to the
Companys Annual
Report on Form 10-K
for the year ended
December 31, 2005.10.31*
    
    Change of Control Letter Agreement dated
December 9, 2005 between QLT USA, Inc. and
Michael R. Duncan.
    
    Exhibit 10.42 to the
Companys Annual
Report on Form 10-K
for the year ended
December 31, 2005.10.32*
    
    Form of Stock Option Agreement for stock option
grants to senior employees and executive
officers.
    
    Exhibit 10.43 to the
Companys Quarterly
Report on Form 10-Q
for the quarter ended
June 30, 2006.10.33*
    
    Employment Agreement dated May 31, 2006 between
QLT Inc. and Peter J. OCallaghan.
    
    Exhibit 10.44 to the
Companys Quarterly
Report on Form 10-Q
for the quarter ended
June 30, 2006.10.34*
    
    Change of Control Agreement dated May 31, 2006
between QLT Inc. and Peter J. OCallaghan.
    
    Exhibit 10.45 to the
Companys Quarterly
Report on Form 10-Q
for the quarter ended
June 30, 2006.10.35
    
    Settlement, Release and Patent License dated
February 9, 2007 by and among Takeda
Pharmaceutical Company Limited, Wako Pure
Chemical Industries, Ltd., TAP Pharmaceutical
Products Inc., Abbott Laboratories, Limited 
Laboratories Abbott, Limitee, QLT USA, Inc., and
Sanofi-Synthelabo, Inc.
    
    Filed herewith.
 119




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##### 



Exhibit
    
    Description
    
    Location10.36
    
    Eligard® Manufacturing and Supply Agreement,
dated December 22, 2006, between Tolmar, Inc.
and QLT USA, Inc. (1)
    
    Filed herewith.10.37
    
    Amended and Restated Contribution Agreement,
dated February 9, 2007, between
Sanofi-Synthelabo, Inc. and QLT USA, Inc. (1)
    
    Filed herewith.11
    
    Statement re: computation of per share earnings.
    
    Filed herewith.21
    
    Subsidiaries of QLT Inc.
    
    Filed herewith.23
    
    Consent of Deloitte & Touche LLP.
    
    Filed herewith.31.1
    
    Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002: Robert L.
Butchofsky, President and Chief Executive
Officer.
    
    Filed herewith.31.2
    
    Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002: Cameron R. Nelson,
Vice President, Finance, and Chief Financial
Officer.
    
    Filed herewith.32.1
    
    Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002: Robert L.
Butchofsky, President and Chief Executive
Officer.
    
    Filed herewith.32.2
    
    Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002: Cameron R. Nelson,
Vice President, Finance, and Chief Financial
Officer.
    
    Filed herewith.
 
 Notes:
 *
    
    Denotes executive compensation plans or arrangements.
 (1)
    
    Certain portions of this exhibit have been omitted and filed separately with the Commission
pursuant to a grant of confidential treatment under Rule 24b-2 promulgated under the
Securities Exchange Act of 1934, as amended.
 120




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##### 



SIGNATURES
   QLT INC.By:
    
    /s/ Robert L. ButchofskyRobert L. Butchofsky, President and Chief Executive Officer(Principal Executive Officer)By:
    
    /s/ Cameron R. NelsonCameron R. Nelson, Vice President, Finance and Chief Financial Officer(Principal Financial and Accounting Officer)
 121




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##### 



POWER OF ATTORNEY
  Securities Exchange Act of 1934
  Signatures
    
    Title
    
    Date/s/ Robert L. Butchofsky
    
    President, Chief Executive Officer and Director (Principal Executive Officer)
    
    February 28, 2007Robert L. Butchofsky/s/ Cameron R. Nelson
    
    Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)
    
    February 28, 2007Cameron R. Nelson/s/ E. Duff Scott
    
    Director
    
    February 28, 2007E. Duff Scott/s/ Bruce L.A. Carter
    
    Director
    
    February 28, 2007Bruce L.A. Carter/s/ C. Boyd Clarke
    
    Chairman of the Board of Directors and Director
    
    February 28, 2007C. Boyd Clarke/s/ Peter A. Crossgrove
    
    Director
    
    February 28, 2007Peter A. Crossgrove/s/ Ronald D. Henriksen
    
    Director
    
    February 28, 2007Ronald D. Henriksen/s/ Ian J. Massey
    
    Director
    
    February 28, 2007Ian J. Massey/s/ Alan C. Mendelson
    
    Director
    
    February 28, 2007Alan C. Mendelson/s/ Richard R. Vietor
    
    Director
    
    February 28, 2007Richard R. Vietor/s/ Jack L. Wood
    
    Director
    
    February 28, 2007Jack L. Wood
 122