<PAGE>

================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ----------------------
                                    FORM 10-K

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

                           COMMISSION FILE NO. 0-17082

                                    QLT INC.
             (Exact Name of Registrant as Specified in its Charter)

      BRITISH COLUMBIA, CANADA                              N/A
      (State or Other Jurisdiction of Incorporation or      (I.R.S. Employer
      Organization)                                         Identification No.)

      887 GREAT NORTHERN WAY, VANCOUVER, B.C., CANADA       V5T 4T5
      (Address of principal executive offices)              (Zip Code)

       Registrant's telephone number, including area code: (604) 707-7000

           Securities registered pursuant to Section 12(b) of the Act:

                                      NONE

           Securities registered pursuant to Section 12(g) of the Act:

                        COMMON SHARES, WITHOUT PAR VALUE
                          COMMON SHARE PURCHASE RIGHTS
                                (Title of class)

                               -------------------
      Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]  No [ ]

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X]

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X]  No [ ]

      As of June 30, 2004 the aggregate market value of the common shares held
by non-affiliates of the registrant (based on the last reported sale price of
the common shares of U.S $20.04, as reported on The NASDAQ Stock Market) was
approximately U.S $1,394,430,000.

      As of March 10, 2005 the registrant had 93,389,439 outstanding common
shares.
================================================================================

                                       1

<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

      The United States Securities and Exchange Commission, or the SEC, allows
us to disclose important information to you by referring you to other documents
we have filed with the SEC. The information that we refer you to is
"incorporated by reference" into this Form 10-K.

      Portions of the Proxy Statement for the Annual Meeting of Shareholders to
be held on May 25, 2005 are incorporated by reference into Part III of this
Annual Report on Form 10-K.

NOTE REGARDING REFERENCES TO QLT

      Throughout this Form 10-K , the words "we", "us", "our", the "Company" and
"QLT" refer to QLT Inc., as a whole, including our wholly owned subsidiary QLT
USA, Inc., unless stated otherwise.

NOTE REGARDING CURRENCY AND ACCOUNTING STANDARD

      In this Annual Report on Form 10-K all dollar amounts are in U.S. dollars,
except where otherwise stated, and financial reporting is made in accordance
with U.S. generally accepted accounting principles, or U.S. GAAP. Effective
December 31, 2002, we adopted U.S. GAAP as our primary basis of disclosure on
Form 10-K. In addition, on December 31, 2002, we adopted the U.S. dollar as our
reporting currency. Prior to that date we reported in Canadian dollars and in
accordance with Canadian generally accepted accounting principles, or Canadian
GAAP.

      We continue to maintain the Canadian dollar as our functional currency.

      We have also prepared consolidated financial statements in accordance with
Canadian GAAP and in U.S. dollars, which are available on our website at:
www.qltinc.com.

NOTE REGARDING EXCHANGE RATE

      The table below shows relevant exchange rates which approximate the noon
buying rates in New York City as reported by the Federal Reserve Bank of New
York for cable transfers expressed in Canadian dollars for the five most recent
fiscal years of the Company.


<TABLE>
<CAPTION>
                                           FISCAL YEAR ENDED DECEMBER 31,
                                  2004      2003       2002       2001        2000
                                -------   -------    --------   --------    --------
<S>                             <C>       <C>        <C>        <C>         <C>
High.....................       $1.3970   $1.5750    $ 1.6128   $ 1.6023    $ 1.5600
Low......................        1.1775    1.2923      1.5108     1.4933      1.4350
Average..................        1.3017    1.4008      1.5704     1.5487      1.4855
Period End...............        1.2034    1.2923      1.5800     1.5925      1.4995
</TABLE>


               NOTICE REGARDING WEBSITE ACCESS TO COMPANY REPORTS

     We make available on our website our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, and Current Reports on Form 8-K, and any amendments to
those Reports, as soon as reasonably practicable after we electronically file
them with the SEC. Our website address is: www.qltinc.com.

                                       2

<PAGE>

                                    QLT INC.
                           ANNUAL REPORT ON FORM 10-K
                                DECEMBER 31, 2004

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
<S>                                                                                                             <C>

ITEM 1.      BUSINESS........................................................................................     5
   OVERVIEW..................................................................................................     5
   OUR APPROVED PRODUCTS.....................................................................................    11
   OUR PRODUCTS UNDER REGULATORY REVIEW......................................................................    14
   OUR PRODUCTS IN DEVELOPMENT...............................................................................    15
   OUR PROPRIETARY TECHNOLOGIES..............................................................................    17
   SIGNIFICANT COLLABORATIVE ARRANGEMENTS....................................................................    18
   PRODUCT MANUFACTURING.....................................................................................    20
   FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS.................................................    21
   SUPPLY OF MEDICAL LASERS REQUIRED FOR VISUDYNE THERAPY....................................................    21
   PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS................................................................    21
   INTERNATIONAL DENTAL BUSINESS.............................................................................    23
   COMPETITION...............................................................................................    24
   GOVERNMENT REGULATION.....................................................................................    25
   THIRD-PARTY REIMBURSEMENT.................................................................................    28
   LIABILITY AND PRODUCT RECALL..............................................................................    28
   RESEARCH AND DEVELOPMENT..................................................................................    29
   HUMAN RESOURCES...........................................................................................    29

ITEM 2.      PROPERTIES......................................................................................    43

ITEM 3.      LEGAL PROCEEDINGS...............................................................................    43

ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................    45

ITEM 5.      MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS.......................    46

ITEM 6.      SELECTED FINANCIAL DATA.........................................................................    48

ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........    51

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................................................    69

ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............   105

ITEM 9A.     CONTROLS AND PROCEDURES.........................................................................   105

ITEM 9B.     OTHER INFORMATION...............................................................................   105

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............................................   106

ITEM 11.     EXECUTIVE COMPENSATION..........................................................................   106

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................   104

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................   107

ITEM 14.     PRINCIPAL ACCOUNTANTS' FEES AND SERVICES........................................................   107
</TABLE>


                                       3

<PAGE>


<TABLE>
<S>          <C>                                                                                                <C>

ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES.........................................................   108
</TABLE>


                                       4

<PAGE>

                                    QLT INC.

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

      This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the United States Private Securities Litigation Reform Act of
1995 which are based on our current expectations and projections. Words such as
"anticipate", "project", "expect", "forecast", "outlook", "plan", "intend",
estimate", "should", "may", "assume", "continue", and variations of such words
or similar expressions are intended to identify our forward-looking statements.
Forward looking statements include, but are not limited to, those in which we
state:

      -     anticipated levels of sales of our products;

      -     anticipated future operating results; 

      -     our expectations regarding the pending patent-related litigation 
            against us;

      -     the anticipated timing and progress of clinical trials;

      -     the anticipated timing of regulatory submissions for our products;

      -     the anticipated timing and receipt of regulatory approvals for our
            products; and

      -     the anticipated timing for and receipt of further reimbursement
            approvals for our products in development.

We caution that actual outcomes and results may differ materially from those
expressed in our forward-looking statements because such statements are
predictions only and they are subject to a number of important risks factors and
uncertainties. Risk factors and uncertainties which could cause actual results
to differ from what is expressed or implied by our forward-looking statements
are described in this Annual Report under the headings: "Business -- Risk
Factors", "Legal Proceedings", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the "Notes to the
Consolidated Financial Statements". We encourage you to read those descriptions
carefully. We caution investors not to place undue reliance on the
forward-looking statements contained in this report. These statements, like all
statements in this report, speak only as of the date of this report, unless an
earlier date is indicated, and, except as required by law and the rules and
regulations of the SEC and Canadian regulatory authorities, we undertake no
obligation to update or revise the statements.


                                     PART I


ITEM  1. BUSINESS

OVERVIEW

      We are a global biopharmaceutical company dedicated to the discovery,
development and commercialization of innovative therapies in the fields of
ophthalmology, dermatology, oncology and urology. Our company was formed in 1981
under the laws of the Province of British Columbia, Canada.

      Our first commercial product was in the field of photodynamic therapy, or
PDT, which uses photosensitizers (light activated drugs) in the treatment of
disease. Our primary commercial product, Visudyne(R), utilizes PDT to treat the
eye disease known as wet-form age related macular degeneration, or wet AMD, the
leading cause of blindness in people over the age of 55 in North America and
Europe.

      Visudyne is commercially available in more than 70 countries, including
the U.S., Canada, Japan and the European Union countries, for the treatment of a
form of wet AMD known as predominantly classic subfoveal choroidal
neovascularization, or CNV, and in over 40 countries for the form of wet AMD
known as occult subfoveal CNV. Visudyne is reimbursed in the U.S. by the Centers
for Medicare & Medicaid Services for certain patients with the occult and
minimally classic forms of wet AMD. It is also approved in more than 55
countries, including the U.S., Canada and the European Union countries, for the
treatment of subfoveal CNV due to pathologic myopia (severe near-sightedness).
In some countries, including the U.S. and Canada, Visudyne is also approved for
presumed ocular histoplasmosis or other macular diseases. QLT developed and
commercializes Visudyne through a contractual alliance with Novartis Ophthalmics
(a division of Novartis Pharma AG).

                                       5

<PAGE>

      In November 2004, we acquired Atrix Laboratories, Inc., a Fort Collins,
Colorado based biopharmaceutical company focused on advanced drug delivery, for
which we paid aggregate consideration of $870.5 million, in cash and equity.
With our acquisition of Atrix (now our wholly owned subsidiary QLT USA, Inc.) we
have expanded and diversified our portfolio of approved products, products in
development or under regulatory review, and proprietary technologies. (For
product revenues, see our Consolidated Financial Statements - Note 21).

      In addition to our lead commercial product Visudyne, as a result of the
Atrix acquisition, we now market, through commercial partners, the Eligard(R)
group of products for the treatment of prostate cancer, a line of dermatology
products and a line of dental products. The Eligard product line includes four
different commercial formulations of our Atrigel(R) technology combined with
leuprolide acetate for the treatment of prostate cancer. The U.S. Food and Drug
Administration, or FDA, has approved all four products: Eligard 7.5-mg
(one-month), Eligard 22.5-mg (three-month), Eligard 30.0-mg (four-month) and
Eligard 45.0-mg (six-month). The Eligard 7.5-mg and Eligard 22.5-mg products are
also approved in a number of other countries, including most European countries,
Canada, Australia and a number of Latin American countries.

      Our newly acquired portfolio of dermatology products consists of both
proprietary and generic products that are commercialized, under regulatory
review, or in various stages of development. Our lead proprietary dermatology
product, Aczone(TM), is currently undergoing regulatory review; a new drug
application, or NDA, was filed with the FDA for Aczone in the third quarter of
2004. Our generic dermatology business, which is part of a 50/50 joint venture
with Sandoz, Inc., currently comprises five marketed products and five under
regulatory review.

      Our efforts to increase our portfolio of marketed products are ongoing. We
have a number of product candidates in our development pipeline in addition to
Aczone including another photosensitizer, lemuteporfin (which we used to call
QLT0074), currently being studied in the treatment of benign prostatic
hyperplasia, or BPH, the most common prostatic disease. We carry out research
and pre-clinical projects, in fields such as ophthalmology, dermatology, and
oncology. We also conduct contract research and development work on product
candidates of third parties from which we can potentially derive royalty revenue
upon commercialization.

                                       6

<PAGE>

                              OUR APPROVED PRODUCTS


<TABLE>
<CAPTION>
PRODUCT/INDICATION                                        LOCATION(S)                    COLLABORATIVE PARTNER (S)
------------------                                        -----------                    -------------------------
<S>                                                       <C>                            <C>
VISUDYNE(R)

   Predominantly classic subfoveal choroidal              Over 70 countries including    Novartis
   neovascularization, or CNV, in  wet age-related        the U.S., Canada, Japan,
   macular degeneration, or AMD                           Australia, New Zealand and
                                                          those of the European Union

   Occult with no classic subfoveal CNV in AMD            Over 40 countries including    Novartis
                                                          Japan, Australia, New
                                                          Zealand, Switzerland and
                                                          those of the European Union

   Subfoveal CNV due to pathologic myopia                 Over 50 countries including    Novartis
                                                          the U.S., Canada,  and those
                                                          of the European Union

   Predominantly classic subfoveal CNV due to presumed    U.S.                           Novartis
   ocular histoplasmosis syndrome

   Minimally Classic CNV in AMD                           Japan                          Novartis

ELIGARD(R) 7.5-MG ONE-MONTH

   Prostate cancer                                        Over 30 countries, including   sanofi-aventis, Mayne
                                                          the U.S., Canada, Australia,   Pharma, MediGene/
                                                          25 European Union countries,   Yamanouchi, Tecnofarma
                                                          Switzerland, and a number of
                                                          Latin American countries

ELIGARD(R) 22.5-MG THREE-MONTH

   Prostate cancer                                        Over 30 countries, including   sanofi-aventis, Mayne
                                                          the U.S., Canada, Australia    Pharma, MediGene/
                                                          25 European Union countries,   Yamanouchi, Tecnofarma
                                                          Switzerland and a number of
                                                          Latin America countries

ELIGARD(R) 30.0-MG FOUR-MONTH

   Prostate cancer                                        U.S., Canada and Australia     sanofi-aventis, Mayne
                                                                                         Pharma

ELIGARD(R) 45.0-MG SIX-MONTH FORMULATION

   Prostate cancer                                        U.S.                           sanofi-aventis

LIDOCAINE 2.5% / PRILOCAINE 2.5% CREAM AN AB-RATED
GENERIC TO EMLA(R) ANESTHETIC CREAM

   Topical anesthetic                                     U.S.                           Sandoz
</TABLE>


                                       7

<PAGE>


<TABLE>
<CAPTION>
PRODUCT/INDICATION                                       LOCATION(S)                    COLLABORATIVE PARTNER (S)
------------------                                       -----------                    -------------------------
<S>                                                      <C>                            <C>
MOMETASONE FUROATE OINTMENT USP, 0.1% AN AB-RATED
GENERIC TO ELOCON(R) OINTMENT 0.1%

   Topical corticosteroid                                U.S.                           Sandoz

ERYTHROMYCIN AND BENZOYL PEROXIDE TOPICAL GEL, USP,
3%; 5%, AN AB-RATED GENERIC TO BENZAMYCIN(R)

   Topical Anti-Acne                                     U.S.                           Sandoz

BETAMETHASONE DIPROPIONATE CREAM USP, 0.05%
(AUGMENTED) AN AB-RATED GENERIC TO DIPROLENE(R) AF
 CREAM 0.05%

  Topical corticosteroid                                 U.S.                           Sandoz

 FLUTICASONE PROPIONATE CREAM,  0.05%, AN AB-RATED
GENERIC TO CUTIVATE(TM) CREAM, 0.05%

  Topical corticosteroid                                 U.S.                           Sandoz

ATRIDOX(R) (DOXYCYCLINE HYCALATE)

   Antibiotic therapy for chronic periodontitis          Over 15 countries including    CollaGenex, PharmaScience
                                                         U.S. and Canada

ATRISORB(R)-DOXYCYCLINE FREEFLOW GTR BARRIER

   Guided tissue regeneration and infection reduction    Over 10 countries including    CollaGenex, PharmaScience
  following periodontal surgery                          U.S. and Canada

ATRISORB(R) FREEFLOW GTR BARRIER

   Guided tissue regeneration following periodontal      Over 10 countries including    CollaGenex, PharmaScience
  surgery                                                U.S. and Canada

DOXIROBE(R) GEL

   Periodontitis in companion animals                    U.S. and Canada                Pfizer Animal Health
</TABLE>


                                       8

<PAGE>

                      OUR PRODUCTS UNDER REGULATORY REVIEW


<TABLE>
<CAPTION>
PRODUCT/INDICATION                                       LOCATION(S)                    STATUS
------------------                                       -----------                    ------
<S>                                                      <C>                            <C>
ELIGARD(R) 7.5-MG ONE-MONTH AND 22.5-MG THREE-MONTH

   Prostate Cancer                                       New Zealand, South Africa,     Marketing authorization
                                                         Israel and a number of Latin   applications filed and under
                                                         American countries             review

ELIGARD(R) 45.0-MG SIX-MONTH

   Prostate Cancer                                       Canada and Australia           Marketing authorization
                                                                                        applications filed

ELIGARD(R) 3.75-MG ONE-MONTH

   Prostate Cancer                                       Japan                          Marketing authorization
                                                                                        application filed February 2005

ACZONE(TM)

   Acne vulgaris                                         U.S. and Canada                NDAs and marketing
                                                                                        authorization applications
                                                                                        filed

FIVE PRESCRIPTION GENERIC PRODUCTS                       U.S.                           Five ANDAs under review

MOMETASONE FUROATE TOPICAL SOLUTION USP, 0.1% AN
AB-RATED GENERIC OF ELOCON(R) LOTION 0.1%

  Topical corticosteroid                                 U.S. and Canada                Tentative approval granted,
                                                                                        expected effective November
                                                                                        2007

MOMETASONE FUROATE CREAM USP, 0.1% AN AB-RATED
GENERIC OF ELOCON(R) LOTION 0.1%

  Topical corticosteroid                                 U.S. and Canada                Tentative approval granted,
                                                                                        expected effective April 2007
</TABLE>


                                       9

<PAGE>

                           OUR PRODUCTS IN DEVELOPMENT


<TABLE>
<CAPTION>
PRODUCT/INDICATION                                       LOCATION(S)                    STATUS
------------------                                       -----------                    ------
<S>                                                      <C>                            <C>
VISUDYNE(R)

   Occult with no classic subfoveal CNV in AMD           U.S.                           Phase III study ongoing

ELIGARD(R)11.25-MG THREE-MONTH 

   Prostate cancer                                       Japan                          Clinical study expected to be
                                                                                        initiated in 2005/2006

LEMUTEPORFIN

   Benign prostatic hyperplasia                          U.S.,  Canada and Argentina    Phase II study planned for
                                                                                        2005

DAPSONE TOPICAL CREAM

   Rosacea                                               U.S. and Canada                Preclinical studies ongoing;
                                                                                        Filing of IND and Phase I
                                                                                        studies planned for 2005

ATRIGEL(R) - OCTREOTIDE THREE-MONTH

   Symptoms of carcinoid syndrome and/or acromegaly      U.K.                           Preclinical studies ongoing;
                                                                                        Filing of IND and Phase I
                                                                                        studies planned for 2005
</TABLE>


                                       10

<PAGE>

OUR APPROVED PRODUCTS

      VISUDYNE(R)

      Visudyne is a photosensitizer developed by our company and Novartis
Ophthalmics for the treatment of choroidal neovascularization, or CNV, due to
wet AMD, the leading cause of severe vision loss in people over the age of 55 in
North America and Europe. We have been co-developing Visudyne with Novartis
Ophthalmics since 1995 pursuant to a product development, manufacturing and
distribution agreement which created a contractual alliance between our two
companies. Under that agreement, we are responsible for manufacturing and
product supply and Novartis Ophthalmics is responsible for marketing and
distribution.

            ABOUT WET AMD

      Wet AMD is an eye disease characterized by the growth of abnormal blood
vessels under the central part of the retina, called the macula. Because these
vessels do not mature properly in the elderly, they begin to leak and, over
time, cause photoreceptor damage that results in the formation of scar tissue
and a loss of central vision. Although the progression of the disease varies by
patient, the majority of patients with wet AMD become legally blind in the
affected eye within approximately two years following the onset of the disease.
Based upon proprietary market research, we estimate that worldwide approximately
500,000 new cases of wet AMD develop annually, of which approximately 200,000
develop in North America, approximately 200,000 develop in Europe and
approximately 100,000 develop in the remainder of the world.

      There are three forms of wet AMD: predominantly classic, minimally classic
and occult. These forms are distinguished by the appearance of the lesions that
form at the back of the eye.

            VISUDYNE(R) APPROVALS

                  Predominantly Classic CNV in AMD

      Visudyne has been approved for marketing for predominantly classic
subfoveal CNV in AMD in over 70 countries, including the U.S., Canada, Japan,
Australia, New Zealand and those of the European Union.

                  Occult with no Classic CNV in AMD

      In the occult form of wet AMD a different pattern of CNV leakage is
evident, and patients present with lesions which do not contain any classic-like
leakage as determined using fluoroscein angiography. Visudyne has been approved
for the occult form of CNV in over 40 countries, including Australia, New
Zealand, Switzerland, Japan, and those of the European Union. (For more
information regarding the status of regulatory approval and reimbursement for
Visudyne therapy in the occult form of the disease, see "Expansion and
Improvement of Visudyne Therapy - Occult AMD" below).

                  CNV due to Pathologic Myopia (PM)

      Pathologic myopia, or PM, is a degenerative form of near-sightedness that
occurs largely in persons aged 30 to 50 and can result in CNV. Based on
proprietary market research, we estimate that the worldwide incidence of CNV
secondary to PM is approximately 50,000 new patients every year. We have
received regulatory approval of Visudyne for the treatment of subfoveal CNV due
to PM in over 50 countries, including the U.S., Canada and those of the European
Union.

                  CNV due to Presumed Ocular Histoplasmosis Syndrome (OHS)

      Presumed ocular histoplasmosis syndrome, or OHS, is a condition caused by
a fungal infection endemic to certain areas in central and eastern U.S. It can
lead to severe, irreversible vision loss and is a leading cause of

                                       11


<PAGE>

blindness in adults who have lived in geographic areas where the soil mould
Histoplasma capsulatum is found. There are an estimated 100,000 people who are
at risk for vision loss within this endemic area. The FDA approved Visudyne for
the treatment of subfoveal CNV secondary to OHS in 2001 and approval for this
indication was obtained in Canada in 2004.

                  Regulatory approval in Japan

      In October 2003, health authorities in Japan approved Visudyne therapy for
all types of subfoveal CNV in AMD. Regulatory approval in Japan for the laser
devices used in Visudyne therapy was obtained by Carl Zeiss-Meditic AG, one of
our suppliers, in early 2004. The application for regulatory approval made by
Lumenis Japan, Ltd., our other supplier, is still pending. In April 2004, we
received reimbursement approval for Visudyne therapy from the Japanese
authorities.

      ELIGARD(R)

      Our proprietary Eligard products for prostate cancer incorporate a
leutinizing hormone-releasing hormone agonist, or LHRH agonist, known as
leuprolide acetate with our proprietary Atrigel drug delivery system. The
Atrigel technology allows for sustained delivery of leuprolide acetate for
periods ranging from one month to six months.

      Clinical trials have demonstrated that the sustained release of an LHRH
agonist decreases testosterone levels to suppress tumor growth in patients with
hormone-responsive prostate cancer. The Phase III results for the Eligard 7.5-mg
one-month, 22.5-mg three-month, 30.0-mg four-month and 45.0-mg six-month
products demonstrated low testosterone levels with 99% of completing patients
achieving and maintaining suppression levels equivalent to castration before the
conclusion of the studies.

      Our Eligard products are injected subcutaneously as a liquid with a small
gauge needle. The polymers precipitate after injection forming a solid implant
in the body that slowly releases the leuprolide as the implant is bioabsorbed.

            ELIGARD(R) 7.5-MG ONE-MONTH PRODUCT

      We received FDA approval for our Eligard 7.5-mg one-month product in
January 2002. Our collaborative partner sanofi-aventis Group, or sanofi-aventis,
commenced U.S. marketing of this product in May 2002.

      In November 2001, MediGene AG, or MediGene, a German biotechnology
company, submitted a Marketing Authorization Application, or MAA, for our
Eligard 7.5-mg one-month product to the German pharmaceutical regulatory
authority, BfArM, as a Reference Member State under a Mutual Recognition
Procedure. MediGene received marketing authorization from the BfArM for our
Eligard 7.5-mg one-month product in December 2003. In January 2004, we entered
into an agreement with MediGene and Yamanouchi U.K. Limited, naming Yamanouchi
as our pan-European marketing partner. Yamanouchi launched this product in
Germany in May 2004. The Mutual Recognition Procedure was completed in the
European Union in December 2004 with approvals in twenty-four additional
European countries.

      Mayne Pharma Pty. Ltd., or Mayne Pharma, received marketing approval of
our Eligard 7.5-mg one-month product from the Australian Drug Evaluation
Committee in November 2003 and launched the product in Australia in February
2004.

      Sanofi-aventis Canada received notice of compliance from the Therapeutic
Products Directorate of Health Canada for our Eligard 7.5-mg one-month product
in November 2003 and launched the product in Canada in December 2003.

      Tecnofarma International Ltd, or Tecnofarma, launched Eligard 7.5-mg in
Argentina in May 2003, in Mexico in May 2004 and in Columbia in October 2004.
Tecnofarma obtained approvals in Bolivia, Chile, Columbia, Dominion Republic,
Mexico and Uruguay in 2004. Approvals in other Latin American countries are
pending.

                                       12


<PAGE>

            ELIGARD(R) 22.5-MG THREE-MONTH PRODUCT

      In July 2002, we received approval from the FDA for our Eligard 22.5-mg
three-month product. Sanofi-aventis commenced marketing in the U.S. in September
2002.

      In April 2002, MediGene submitted an MAA for our Eligard 22.5-mg
three-month product to the German pharmaceutical regulatory authority, BfArM, as
a Reference Member State under a Mutual Recognition Procedure and in January
2004 received marketing authorization. The three-month product was launched by
our collaborative partner Yamanouchi in Germany in May 2004. The Mutual
Recognition Procedure was completed in the European Union in December 2004 with
approvals in twenty-four additional European countries.

      Mayne Pharma received marketing approval from the Australian Drug
Evaluation Committee in November 2003. Mayne Pharma launched the Eligard 22.5-mg
three-month product in Australia in February 2004.

      In November 2003, sanofi-aventis Canada received notice of compliance from
the Therapeutic Products Directorate of Health Canada for our Eligard 22.5-mg
three-month product and launched the product in December 2003.

      Tecnofarma received approval for Eligard 22.5-mg three-month product in
Argentina in February 2003, Mexico in January 2004 and Uruguay in December 2004.

            ELIGARD(R) 30.0-MG FOUR-MONTH PRODUCT

      In February 2003, we received FDA approval for Eligard 30.0-mg four-month
product, and sanofi-aventis commenced U.S. marketing of this product in March
2003.

      Mayne Pharma received marketing approval for our Eligard 30.0-mg
four-month product from the Australian Drug Evaluation Committee in November
2003 and launched in February 2004

      Sanofi-aventis Canada received a notice of compliance from the Therapeutic
Products Directorate of Health Canada for our Eligard 30.0-mg four-month product
in February 2004 and launched the product in Canada in the second quarter of
2004.

            ELIGARD(R) 45.0-MG SIX-MONTH PRODUCT

      Our Eligard 45.0-mg six-month product was approved by the FDA in December
2004. Sanofi-aventis commercially launched this product in the U.S. in February
2005.

      GENERIC DERMATOLOGY PRODUCTS

            LIDOCAINE 2.5% PRILOCAINE 2.5% CREAM

      We received approval from the FDA for our abbreviated new drug
application, or ANDA, for Lidocaine 2.5%/ Prilocaine 2.5% cream in August 2003.
Our product is the AB-rated generic to EMLA Anesthetic Cream (lidocaine 2.5% and
prilocaine 2.5%) and is being marketed by our partner Sandoz.

            ERYTHROMYCIN AND BENZOYL PEROXIDE TOPICAL GEL, USP, 3%

      We received approval from the FDA for our ANDA for Erythromycin and
Benzoyl Peroxide Topical gel USP, 3%, in March 2004. Our product is the AB rated
generic to Benzamycin(R), and is being marketed by our partner Sandoz.

            MOMETASONE FUROATE OINTMENT USP, 0.1%

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<PAGE>

      We received approval from the FDA for our ANDA for Mometasone Furoate
Ointment USP, 0.1% in November 2003. Our product is an AB-rated generic of
Elocon(R) brand of Mometasone Furoate Ointment USP, 0.1% and is being marketed
by our partner Sandoz.

            BETAMETHASONE DIPROPIONATE CREAM USP, 0.05%

      We received approval from the FDA for our ANDA for Betamethasone
Dipropionate Cream USP, 0.05% (augmented) in January 2004. Our product is an
AB-rated generic to Diprolene(R) AF Cream 0.05% brand augmented betamethasone
dipropionate, and is being marketed by our partner Sandoz.

            FLUTICASONE PROPIONATE CREAM, 0.05%

      We received approval from the FDA for our ANDA for Fluticasone propionate
cream 0.05%, in May 2004. Our product is AB rated generic to Cutivate(TM) cream,
0.05%, and is being marketed by our partner Sandoz.

      DENTAL PRODUCTS

      Atridox(R), which combines the Atrigel system and the antibiotic
doxycycline, is a minimally invasive treatment intended to control the bacteria
that cause periodontal disease.

      Our Atrisorb-D(R) product also uses the Atrigel system to aid in the
guided tissue regeneration of tooth support following osseous flap surgery or
other periodontal procedures.

      The exclusive U.S. marketing rights for our dental products are licensed
to CollaGenex Pharmaceuticals, Inc. in the U.S., to PharmaScience Inc. in
Canada, and to other pharmaceutical companies in other territories. CollaGenex
commenced U.S. marketing of Atridox and Atrisorb FreeFlow in 2001 and Atrisorb-D
in 2002.

      We have recently announced our plan to reduce the number of licenses
outside North America because of low profitability in certain territories. These
licenses are not material to our business.

OUR PRODUCTS UNDER REGULATORY REVIEW

            ELIGARD(R) 7.5-MG ONE-MONTH, 22.5-MG THREE-MONTH, 30.0-MG
            THREE-MONTH

      Marketing authorization applications have been filed and are under review
in New Zealand (Mayne Pharma), South Africa (Key Oncologics), Israel (Luxembourg
Pharma) and various Latin American countries (Tecnofarma).

            ELIGARD(R) 45.0-MG SIX-MONTH

      Sanofi-aventis Canada filed the Canadian new drug application, or NDA, in
May 2004 and Mayne Pharma filed the Australian NDA in April 2004.

            ELIGARD(R) 3.75-MG ONE-MONTH

      In February 2005, our collaborative partner Sosei Co. Ltd. submitted a
marketing authorization application for a 3.75-mg one-month dosage of Eligard
for the treatment of prostate cancer to the Japanese Ministry of Health, Labor
and Welfare requesting marketing approval for this formulation in Japan.

            ACZONE(TM)

      We are currently developing Aczone, our proprietary product for the
treatment of acne. Aczone incorporates dapsone, an anti-inflammatory and
antimicrobial drug, with our proprietary solvent microparticle system drug
delivery system, or SMP(TM). Dapsone is an antibiotic with a separate
anti-inflammatory activity, which may reduce inflammation associated with acne.
After topical application, the blood levels of dapsone are over 100 times less

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<PAGE>

than found when the compound is administered orally, significantly reducing the
potential for systemic side effects.

      In January 2004, we completed two pivotal Phase III clinical efficacy
studies for our Aczone acne product. Over 3,000 patients were enrolled in these
double-blind, randomized, vehicle-controlled studies, which were conducted in
over 100 centers around the U.S. and Canada. In February 2005, we began a Phase
III clinical trial evaluating Aczone efficacy and safety when used in
combination with a retinoid or benzoyl peroxide. We filed an NDA with the FDA
for the Aczone acne product in August 2004 and Fujisawa Canada filed the
Canadian NDA in December 2005.

            MOMETASONE FUROATE SOLUTION USP, 0.1%

      In December 2003, we received tentative approval from the FDA for
Mometasone Furoate Lotion USP, 0.1%, an AB-rated generic of Elocon(R) lotion
0.1% currently on patent until 2007. Sandoz intends to market this product upon
patent expiration.

            MOMETASONE FUROATE CREAM USP, 0.1%

      In July 2004, we received tentative approval from the FDA for Mometasone
Furoate Cream USP, 0.1%, an AB-rated generic of Elocon(R) lotion 0.1% currently
on patent until 2006. Sandoz intends to market this product upon patent
expiration.

            THREE UNDISCLOSED GENERIC DERMATOLOGY PRODUCTS

      In January 2004, we announced that we submitted three ANDAs to the FDA for
approval of generic formulations of undisclosed dermatology products. With these
applications, we currently have five ANDA submissions under FDA review. Of the
generic topical products approved thus far, we were in each case the second or
later approval.

OUR PRODUCTS IN DEVELOPMENT

      EXPANSION AND IMPROVEMENT OF VISUDYNE(R) THERAPY

      QLT and Novartis Ophthalmics are engaged in efforts to expand the
indications for which Visudyne is approved. We are also continuing efforts to
improve the effectiveness of Visudyne therapy by exploring combination therapies
and the effect of reduced fluence, or light levels administered during the PDT
process.

            Occult AMD

      QLT and Novartis Ophthalmics have initiated a Phase III clinical trial
(referred to as the VIO Study, or Visudyne in Occult Study), to demonstrate that
Visudyne therapy is effective in reducing vision loss in patients with occult
AMD.

      The VIO Study was initiated in 2002 as a follow-up study to an earlier
Phase III occult AMD trial (referred to as the VIP Trial) which showed
statistically significant outcomes for visual acuity endpoints and resulted in
approval of Visudyne for the treatment of occult AMD in over 40 countries. The
VIO Study is designed to confirm the results of the VIP Trial in patients with
similar lesion types and to obtain marketing authorization for this indication
in the U.S. While some benefit was seen in year one in the VIP Trial, the trial
did not achieve statistical significance in the primary outcome until year two.
The VIO Study did not achieve statistical significance at the 12-month time
point, however the Study prospectively designated both 12 and 24 months as
primary endpoints so that either time point would be sufficient to conclude that
the VIO Study is positive. Based on the recommendation of the Data and Safety
Monitoring Committee at the 12-month time point, the VIO Study is continuing to
its conclusion at 24 months and we expect results in late 2005.

                                       15


<PAGE>

      Despite the lack of U.S. regulatory approval, in April 2004 the Centers
for Medicare & Medicaid Services, or CMS, in the U.S. implemented its decision
to provide coverage for Visudyne treatment to patients with AMD who have occult
and minimally classic lesions that are four disc areas or less in size and show
evidence of recent disease progression. Although our commercial partner Novartis
is not permitted to market Visudyne in these indications, sales are made in the
U.S. to physicians who are treating patients with occult and minimally classic
lesions.

            Minimally Classic AMD

      In February 2004, we announced the results of a Phase II clinical trial
[referred to as the "VIM (Visudyne in Minimally Classic) Investigation"] that
evaluated the efficacy and safety of Visudyne therapy in patients with minimally
classic AMD. At 24 months, this study found a statistically significant better
result with Visudyne than with placebo.

      In September 2003, we commenced a Phase III trial, which we refer to as
the VMC Trial, to generate confirmatory data in respect of this indication.
However, in April 2004, the CMS implemented its decision to reimburse Visudyne
for minimally classic AMD with lesions of a certain size based on the positive
data from the VIM Investigation. In light of the CMS decision, the VMC Trial was
halted in October 2004.

            Combination Trials

      At present, there are four investigator-sponsored trials currently
underway to evaluate the potential of Visudyne in combination with the steroid
triamcinalone, including three independent trials and one we have initiated with
the National Eye Institute at the National Institute of Health. We are also
planning a combination trial of Visudyne and an anti-vascular endothelial growth
factor, or anti-VEGF, in mid-2005.

      As a part of, or in addition to, the planned combination trials, we will
be investigating reduced fluence, or light levels, in the use of Visudyne
therapy to study the impact on the efficacy and safety of the treatment.

      ELIGARD(R) 11.25-MG THREE-MONTH

      Our collaborative partner Sosei Co. Ltd., or Sosei, plans to initiate a
Phase III bio-equivalence study in Japan with respect of this formulation for
the treatment of prostate cancer during 2005 or 2006.

      DAPSONE TOPICAL CREAM

      Dapsone topical cream is under development for the treatment of Rosacea.
We have completed preclinical studies and plan to file an investigational new
drug application, or IND, and initiate Phase I studies in 2005.

      ATRIGEL(R)-OCTREOTIDE THREE-MONTH

      We have developed a formulation of octreotide in the Atrigel delivery
system for the treatment of the symptoms of carcinoid syndrome and/or
acromegaly. We have completed preclinical studies and plan to file an IND and
initiate Phase I clinical studies in 2005.

      LEMUTEPORFIN

      Lemuteporfin (which we previously referred to as QLT0074) is a proprietary
photosensitizer to which we have all rights. We are currently developing
lemuteporfin for the treatment of benign prostatic hyperplasia. We halted
investigation of lemuteporfin for the treatment of androgenetic alopecia during
2004.

            Benign Prostatic Hyperplasia

      Benign prostatic hyperplasia, or BPH, is the most common prostatic
disease. According to the U.S. National Institute of Diabetes and Digestive and
Kidney Diseases, over 50% of men in their sixties and older have symptoms

                                       16


<PAGE>

of BPH. It is a progressive condition that results from an excessive benign
growth of prostatic tissue. The majority of patients with this disease will
experience developing symptoms of urinary obstruction (lower urinary tract
symptoms) of progressive severity. The methods of managing BPH symptoms depend
upon the severity of the symptoms. Treatments range in severity from
pharmacological treatment to minimally invasive therapy, and finally prostate
resection.

      We concluded a Phase I/II proof of concept clinical study of lemuteporfin
for the treatment of BPH in 2004. The results showed that the treatment was well
tolerated by most patients and indications of early efficacy with a 3-month
improvement in average American Urological Association, or AUA, symptom scores
in all cohorts. We plan to continue development of lemuteporfin for BPH in a
Phase II study that will be initiated in the second quarter of 2005. This
controlled dose-ranging trial will include 180 patients across 25 centers.
Enrollment is expected to conclude by the end of 2005 with six-month follow-up
and results in 2006.

OUR PROPRIETARY TECHNOLOGIES

      PHOTODYNAMIC THERAPY

      Our product Visudyne utilizes our patented photodynamic therapy, or PDT,
technology.

      PDT is a minimally invasive medical procedure that utilizes
photosensitizers (light-activated drugs) to treat a range of diseases associated
with rapidly growing tissue (such as the formation of solid tumors and abnormal
blood vessels). PDT is a two-step process. First, the photosensitizer is
administered to the patient by intravenous infusion or other means; depending on
the condition being treated. Second, a pre-determined dose of non-thermal light
is delivered at a particular wavelength to the target site to interact with the
photosensitizer. The photosensitizer traps energy from the light and causes
oxygen found in cells to convert to a highly energized form called "singlet
oxygen" that causes cell death by disrupting normal cellular functions. Because
the photosensitizer and light have no effect unless combined, PDT is a
relatively selective treatment that minimizes damage to normal surrounding
tissue and allows for multiple courses of therapy.

      For ocular PDT applications non-thermal lasers provide the necessary
intensity of light required. For applications of PDT to internal organs,
physicians use lasers and fiber optics to deliver the appropriate intensity of
light to abnormal tissue.

      ATRIGEL(R) SYSTEM FOR INJECTABLE SUSTAINED RELEASE DRUG DELIVERY

      Our Eligard products and dental products utilize the Atrigel drug delivery
system, our patented technology for the sustained release of drugs.

      The Atrigel drug delivery system consists of biodegradable polymers,
similar to those used in biodegradable sutures, dissolved in biocompatible
carriers. Pharmaceuticals may be blended into this liquid delivery system at the
time of manufacturing or, depending upon the product, may be added later by the
physician at the time of use. When the liquid product is injected through a
small gauge needle or placed into accessible tissue sites through a cannula,
displacement of the carrier with water in the tissue fluids causes the polymer
to precipitate, forming a solid film or implant. The drug encapsulated within
the implant is then released in a controlled manner as the polymer matrix
biodegrades over a specified time period. Depending upon the patient's medical
needs, the Atrigel system can deliver small molecules, peptides or proteins over
a period ranging from days to months.

      We believe that the Atrigel system may provide benefits over traditional
methods of drug administration such as tablets or capsules, injections and
continuous infusion as a result of the following properties:

      -     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.

                                       17


<PAGE>

      -     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.

      -     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

      Our Aczone product utilizes our patented proprietary Solvent Microparticle
System, or SMP(TM). The SMP technology comprises a two-stage system designed to
provide topical delivery of highly water-insoluble drugs to the skin. The
combination of dissolved drug with a microparticle suspension of the drug in a
single formulation allows a controlled amount of the dissolved drug to permeate
into the epidermal layer of the skin, while a high level of the microparticle
drug is maintained just above the outermost layer of the skin for later
delivery.

SIGNIFICANT COLLABORATIVE ARRANGEMENTS

      NOVARTIS OPHTHALMICS - JOINT COMMERCIALIZATION OF VISUDYNE(R) WORLDWIDE

      Since 1995 we have had a contractual collaboration, which we often refer
to as an alliance, with Novartis Ophthalmics, a division of Novartis Pharma AG,
for the worldwide joint development and commercialization of PDT products for
eye diseases, including Visudyne. Under the terms of our collaboration
agreement, we are responsible for manufacturing and product supply of Visudyne
and Novartis Ophthalmics is responsible for marketing and distribution. We and
Novartis Ophthalmics share equally the profits realized on revenues from product
sales after deductions for marketing costs and manufacturing costs (including
any third-party royalties).

      Our agreement with Novartis is in effect for a term expiring June 30,
2014, renewable by the parties for two further five year terms. Either our
Company or Novartis may terminate the NVO Co-development Agreement in the event
of an unremedied breach by the other party, or upon the dissolution or
insolvency of the other, or on 60 days notice to the other. The agreement
provides that, if Novartis were to terminate the agreement on 60 days notice to
our Company, it would be required to pay us a reasonable royalty on sales of
Visudyne thereafter.

      SANOFI-AVENTIS GROUP - MARKETING OF ELIGARD(R) IN THE U.S. AND CANADA

      Since late 2000, we have had a marketing agreement with sanofi-aventis
under which sanofi-aventis is the exclusive marketer of our Eligard 7.5-mg
one-month, 22.5-mg three-month, 30-mg four-month and 45-mg six-month prostate
cancer products in the U.S. and Canada. Our agreement provides that we
manufacture the Eligard products and receive an agreed upon transfer price from
sanofi-aventis as well as royalties on product sales.

      MEDIGENE AG AND YAMANOUCHI U.K. LIMITED - MARKETING OF ELIGARD(R) IN 
      EUROPE

      Since 2001, Medigene has been our development and regulatory partner for
Eligard in Europe. In 2004 we and Medigene selected Yamanouchi as the exclusive
marketer of the Eligard product line in Europe. Under the terms of our
agreements with both companies, we manufacture Eligard products and receive from
MediGene an agreed upon transfer price, royalties from sales and certain
reimbursement for development expenses.

      SOSEI CO., LTD. - REGULATORY APPROVAL AND COMMERCIALIZATION OF ELIGARD(R)-
      JAPAN

      Since 2003, we have had an exclusive licensing agreement with Sosei to
develop and commercialize our Eligard 3.75-mg one-month and 11.25-mg three-month
products in Japan. Sosei is responsible for the Japanese regulatory submissions
for those products. In February 2005, Sosei filed for approval of the Eligard
3.75-mg one-month

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<PAGE>

formulation. In December 2003, Sosei entered into a co-promotion agreement with
Nippon Organon K.K. for the Eligard products in Japan. Under that agreement,
upon commercialization, Nippon Organon and Sosei will be responsible for
co-marketing of Eligard in Japan.

      OTHER ELIGARD(R) MARKETING COLLABORATIONS

      We have partnered with a number of other companies to market Eligard
products throughout the world. Our Eligard marketing collaborations are set out
in the following table:

                       ELIGARD(R) MARKETING COLLABORATIONS


<TABLE>
<CAPTION>
COMPANY                             TERRITORY
===============================     =================================================================
<S>                                 <C>
Han All Pharmaceutical Co.          Korea

Key Oncologics                      South Africa

Luxembourg Pharmaceuticals, Ltd.    Israel

Mayne Pharma Pty, Ltd.              Australia, New Zealand

MediGene AG through its             Albania, Andorra, Armenia, Austria, Azerbaijan, Belarus, Belgium,
sublicensee, Yamanouchi U.K.        Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Czech
Ltd.                                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.           India

Sanofi-aventis Group                U.S., Canada

Sosei Co., Ltd.                     Japan

Tecnofarma 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
</TABLE>


      FUJISAWA HEALTHCARE, INC. - ACZONE(TM) DEVELOPMENT AND COMMERCIALIZATION
      IN NORTH AMERICA

      Fujisawa Healthcare, Inc., or Fujisawa, has been our collaborative partner
for the development and commercialization of Aczone in North America. Our
collaboration, license and supply agreement grants Fujisawa the exclusive North
American marketing and distribution rights for our Aczone acne treatment
product. Upon commercialization, we will manufacture Aczone and will receive
from Fujisawa an agreed upon transfer price as well as a royalty on sales of
Aczone. As part of our collaboration with Fujisawa, we are also co-developing

                                       19


<PAGE>

additional indications for the topical use of dapsone. For these additional
indications, Fujisawa is responsible for a significant portion of the research
and development costs.

      SANDOZ INC. - MARKETING OF GENERIC PRESCRIPTION DERMATOLOGY PRODUCTS -
      U.S.

      We entered into a development and supply agreement with Sandoz, Inc., or
Sandoz, a subsidiary of Novartis Pharma AG,to develop generic topical
prescription dermatology products for the U.S. Under the terms of the agreement,
we are responsible for validation, formulation, and development, including
required clinical studies and regulatory submissions for the products. Sandoz is
responsible for commercialization of the products. Sandoz reimburses us for one
half of the research and development expenses we incur, and both parties share
equally in the net profits from the sale of the products.

      PFIZER, INC. - COLLABORATIVE RESEARCH AND OUT-LICENSE OF OUR DRUG DELIVERY
      TECHNOLOGY

      In 2000, we entered into a non-exclusive comprehensive research and
worldwide licensing agreement with Pfizer Inc., or Pfizer, to provide Pfizer
with rights to our proprietary drug delivery systems in the development of new
Pfizer products. Under this agreement, Pfizer provides funding to develop
sustained release formulations of selected Pfizer compounds. We have
co-manufacturing rights and will receive royalties on the sales of products that
are successfully developed and commercialized under this agreement and certain
milestone payments. This is a five year agreement renewable after five years
unless either party elects to terminate.

      In January 2004, Pfizer completed Phase I clinical testing of a novel bone
growth product formulated in our Atrigel sustained-release drug delivery system.
Pfizer has announced its intention to advance the product into additional human
clinical testing. As of December 31, 2004, all other products under our
agreement with Pfizer were in preclinical stages of development.

      BIO DELIVERY SCIENCE INTERNATIONAL - OUT-LICENSE OF BEMA TECHNOLOGY

      In July 2004, we entered into an agreement with Arius Pharmaceuticals,
Inc., now Bio Delivery Systems International, or BDSI, to develop and market our
proprietary Bio Erodible Muco Adhesive, or BEMA, drug delivery system. The BEMA
delivery system is a polymer-based system designed to deliver systemic levels of
drugs across oral mucosal tissues. All research and development related to the
BEMA technology, including ownership of three existing INDs and certain
manufacturing equipment were transferred to BDSI. Under the terms of the
agreement, we may receive cash payments upon achievement of milestones,
including up to an aggregate of $5 million with respect to the first two
products, an additional $1 million with respect to each additional product
thereafter, and $2 million upon achieving a certain level of net sales. We may
also receive reimbursement for research and development support and royalties on
commercial sales of BEMA products.

PRODUCT MANUFACTURING

      Visudyne is currently manufactured in stages by several contract
facilities located in the U.S., Canada, Europe and Japan. We have long-term
supply agreements with Raylo Chemicals Inc., Nippon Fine Chemicals of Japan,
Parkedale Pharmaceuticals Co., Ltd., Orgapharm S.A.S., a subsidiary of Orgasynth
(formerly Merck Sante), Harimex Ligos BV and Sato Pharmaceuticals Co., Ltd. for
manufacturing activities in the commercial production of Visudyne. The key
starting materials for the Visudyne manufacturing process are secured by
long-term supply agreements.

      We manufacture our full line of Eligard finished products, Aczone topical
dermatological product, generic dermatology products, and dental products at our
58,000 square foot manufacturing facility in Fort Collins, Colorado. Some
intermediate portions of the manufacturing process are performed by a third
party (See Risk Factors). We also enter into selective agreements to perform
contract manufacturing of third party products in order to utilize available
manufacturing capacity at this facility.

      A pilot manufacturing facility was recently constructed within our
existing headquarters in Vancouver, British Columbia. This facility will be used
in conjunction with our Fort Collins facility to produce clinical trial material
for development programs.

                                       20


<PAGE>

      We own substantially all of our laboratory and manufacturing equipment,
which we consider to be adequate for our research, development and testing
requirements for the foreseeable future.

FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS

      The geographic information required herein is contained in Note 21 to our
Consolidated Financial Statements "Segmented Information" of this Annual Report
on Form 10-K and is incorporated by reference herein.

SUPPLY OF MEDICAL LASERS REQUIRED FOR VISUDYNE THERAPY

      Visudyne therapy requires a physician to deliver a dose of non-thermal
light at a particular wavelength to target tissue in the eye in order to
activate the photosensitizer. We do not manufacture the lasers required to
deliver this light. Diode laser systems required for Visudyne therapy are
manufactured and sold by at least two medical device companies, Carl
Zeiss-Meditic AG, and Lumenis Ltd., formerly Coherent Inc. We collaborate with
Lumenis and Carl Zeiss-Meditic for the supply of lasers for use in conjunction
with Visudyne therapy. Both Lumenis and Carl Zeiss-Meditic have portable diode
lasers that have been commercially approved for use with Visudyne in the U.S.,
Europe and elsewhere. Approximately 2,000 of these diode lasers have been placed
with medical facilities around the world. (See "Risk Factors").

PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS

      We seek to protect our proprietary technology by obtaining patents to the
extent we consider it advisable, and by taking contractual measures and other
safeguards to protect our trade secrets and innovative ideas We currently own or
have acquired rights to a number of patents and patent applications for the
technologies utilized in our commercial products and products under review and
in development in the U.S., Canada and other jurisdictions.

      Our policy is to file patent applications on a worldwide basis in those
jurisdictions where we consider it beneficial, depending on the subject matter
and our commercialization strategy. The most significant patents owned or
licensed by us are described below.

      VISUDYNE(R)

      Verteporfin, the active ingredient in Visudyne, is protected by granted
patents in major markets. These patents are owned by the University of British
Columbia, or UBC, and exclusively licensed by us. We entered into a license
agreement with UBC in 1988 which granted us a worldwide exclusive
royalty-bearing license, with the right to sublicense, to know-how and patents
relating to porphyrin derivates, including verteporfin, the active ingredient in
Visudyne. The license terminates upon the expiration of all of the licensed
patents. UBC has the right to terminate the license upon: our bankruptcy or
winding up, our failure to pay royalties owing, or our breach of contract which
is not remedied within 30 days.

      In the United States, verteporfin is covered by Patent Nos. 4,920,143 and
5,095,030, both having an expiration date of April 24, 2007. We have applied
for, and expect to be granted, a term extension of Patent No. 5,095,030 pursuant
to U.S. legislation that allows the extension of the term of one patent relating
to a product that is subject to regulatory review. Based upon the FDA's
determination of the regulatory review period for Visudyne, published in the
Federal Register on September 28, 2004 (Vol. 69, No.187) the term of the
5,095,030 patent could be extended until January 5, 2012. In Europe, verteporfin
is covered by European Patent 0352076, for which we applied for and received an
extension of patent term until July 18, 2014. In Japan, verteporfin is covered
by JP 2834294, having an expiration date of January 20, 2008 and JP 2137244,
having an expiration date of July 19, 2009. We have applied for, and expect to
receive, an extension of patent term for both of these patents.

      We also have an exclusive worldwide license from the Massachusetts General
Hospital, or MGH, of MGH's rights in a U.S. patent relating to verteporfin which
MGH owns jointly with us, and to all foreign equivalents (which rights

                                       21


<PAGE>

are non-exclusive if exclusive rights are not available in any foreign
jurisdiction). The term of the MGH license continues on a country by country
basis for so long as any such patent right remains in effect. The U.S. patent
expires in 2015. Under the MGH license, we make royalty payments to MGH based on
Visudyne sales.

      We own or exclusively license patents covering the Visudyne drug product
relating to the lipid-based formulation of verteporfin. U.S. Patent No.
5,214,036, which expires on May 25, 2010, is owned by the UBC and exclusively
licensed by us. U.S. Patent No. 5,707,608 expires on August 2, 2015, with
foreign equivalents expiring in 2016. U.S. Patent No. 6,074,666 expires on
February 5, 2012, with foreign equivalents expiring in 2013. In addition to
these patents, we own or license several patents and patent applications
covering alternative formulations of verteporfin.

      We own or license patents covering certain approved uses of Visudyne. U.S.
Patent Nos. 4,883,790 and 5,283,225, both of which expire on January 20, 2006,
cover methods of treating target tissues and destroying unwanted cells using
Visudyne and are owned by UBC and exclusively licensed to us. U.S. Patent No.
5,756,541, expiring on March 11, 2016, with foreign equivalents expiring in
2017, is co-owned by Novartis and us and covers methods of using Visudyne to
improve visual acuity in subjects having unwanted ocular neovasculature. U.S.
Patent No. 5,798,349, which expires on August 25, 2015, is co-owned by us,
Massachusetts General Hospital and Massachusetts Eye and Ear Infirmary and
covers methods of treating AMD using Visudyne. U.S. Patent No. 5,770,619, which
expires on November 12, 2012, with foreign equivalents expiring in 2013, is
owned by UBC and exclusively licensed to us and covers methods of using Visudyne
to treat neovasculature involving a reduced interval between drug and light
administration. In addition to these patents covering on-label uses of Visudyne,
we own or license several other patent applications relating to alternative
methods of using Visudyne in the treatment of ocular diseases, including AMD.

      LEMUTEPORFIN (PREVIOUSLY CALLED QLT0074)

      Lemuteporfin is protected by granted patents in major markets. All of
these patents are jointly owned by UBC and us. UBC has exclusively licensed
these patents to us. In the U.S., lemuteporfin is covered by Patent No.
5,929,105 which has an expiration date of May 7, 2017. If lemuteporfin is
approved by the FDA for marketing in the U.S., we plan to apply for a term
extension for U.S. Patent No. 5,929,105 pursuant to U.S. legislation that allows
the extension of the term of one patent relating to a product that is subject to
FDA review. In Europe, we own European Patent No. 983273 covering lemuteporfin.
This patent has been granted and was subsequently validated in 18 European
jurisdictions including France, Germany, Italy, Spain, and the United Kingdom.
All of the resultant national patents have an expiration date of May 6, 2018.
Where national law allows, we plan to apply for Supplementary Protection
Certificates for the patents resulting from European Patent 983273 pursuant to
the relevant European Union Regulation. In Japan we own Japanese Patent 3378889
covering lemuteporfin, which has an expiration date of May 6, 2018. We intend to
apply for a term extension for this patent.

      We own or license patents and patent applications covering the use of
lemuteporfin in prostatic disorders such as benign prostatic hyperplasia. If the
pending applications are granted, these patent rights will expire from 2013 to
2024.

      We own additional patent applications covering alternative formulations
and methods of use of lemuteporfin.

      We own or license additional patent applications relating to photodynamic
therapy, including numerous other photosensitizers, and methods of using
photosensitizers.

      ELIGARD(R)

      The Eligard one-, three-, four- and six-month products are protected by
granted patents in major markets. We own the following U.S. granted patents
covering the Atrigel drug delivery system used to deliver leuprolide acetate,
the active ingredient in the Eligard product: 4,938,763, expiring on October 3,
2008, 5,278,201, expiring on January 11, 2011, 5,324,519, expiring on June 28,
2011, 5,599,552, expiring on February 4, 2014, 5,739,176, expiring on October 3,
2008, and RE37950, expiring on October 3, 2008. The Atrigel drug delivery system
is protected in Europe by European Patent 436667, expiring on September 27,
2009, and European Patent539751, expiring on October 1, 2012 and in Japan by
Japanese Patent 2992046, expiring on September 27, 2009.

                                       22


<PAGE>

      Our U.S. Patents Nos. 6,626,870 and 6,773,714, both expiring on October
28, 2018, cover the Eligard drug products, and methods of making and using them.
Foreign equivalents of these patents are pending in Europe, Japan, Canada and
other countries.

      ACZONE(TM)

      We own a number of patents which protect Aczone in major markets. In the
U.S., Aczone is covered by Patent Nos. 5,863,560 and 6,620,435 which have
expiration date of September 11, 2016. In Europe, Aczone is covered by European
Patent No.957900. This patent has been granted and was subsequently validated in
17 European jurisdictions including France, Germany, Italy, Spain, and the
United Kingdom. All of the resultant national patents have an expiration date of
September 10, 2017. Equivalent applications or patents exist in Australia,
Canada, and Japan. We also own patent applications covering Aczone. If granted,
these patent rights will expire from 2022 to 2025.

      GENERALLY

      In addition to patent protection, we also rely on trade secrets,
proprietary know-how and continuing technological innovation to develop and
maintain a competitive position in our product areas.

      We require our collaborative partners and potential business partners,
consultants and employees who might have access to or be provided with
proprietary information to sign confidentiality undertakings.

      Our patent position and proprietary technologies are subject to certain
risks and uncertainties. Although a patent has a statutory presumption of
validity, the issuance of a patent is not conclusive as to its validity or as to
enforceability of its claims. Accordingly, there can be no assurance that our
patents will afford legal protection against competitors, nor can there be any
assurance that the patents will not be infringed by others, nor that others will
not obtain patents that we would need to license.

      Unpatented trade secrets, improvements, confidential know-how and
continuing technological innovation are important to our scientific and
commercial success. Although we attempt to and will continue to protect our
proprietary information through reliance on trade secret laws and the use of
confidentiality agreements with its corporate partners, collaborators, employees
and consultants and other appropriate means, there can be no assurance these
measures effectively will prevent disclosure of our proprietary information or
that others will not develop independently or obtain access to the same or
similar information or that our competitive position will not be affected
adversely thereby.

      There are four pending lawsuits relating to our patent rights. We discuss
those lawsuits in more detail in the section of this report headed "Legal
Proceedings", which we encourage you to read.

      We have included information about these and other risks and uncertainties
relating to protection of our proprietary information under the heading "Risk
Factors".

      Our products and services are sold around the world under brand-name
trademarks which we own or are authorized to use by others. We have several
registered trademarks in the U.S. and Canada and in other jurisdictions.

INTERNATIONAL DENTAL BUSINESS

      Since February 2000, our wholly owned subsidiary Atrix Laboratories GmbH,
based in Germany, has managed our business relationships with European
distributors for dental products. Atrix Laboratories GmbH currently holds the
marketing authorizations for European sales of Atridox. In 2005, we began
closing the operations of Atrix Laboratories GmbH, as part of our plan to
significantly reduce our international dental business. Our international dental
business is not material to our overall business.

                                       23


<PAGE>

COMPETITION

      The pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Our competitors include
major pharmaceutical and biopharmaceutical companies, many of which have
financial, technical and marketing resources significantly greater than ours and
substantially greater experience in developing products, conducting preclinical
and clinical testing, obtaining regulatory approvals, manufacturing and
marketing. In addition, many biopharmaceutical companies have formed
collaborations with large, established pharmaceutical companies to support
research, development and commercialization of products that may be competitive
with our products. Academic institutions, government agencies and other public
and private research organizations also are conducting research activities and
seeking patent protection and may commercialize products on their own or through
joint ventures. The existence of these products, or other products or treatments
of which we are not aware, or products or treatments that may be developed in
the future, may adversely affect the marketability of products developed by us.

      VISUDYNE(R)

      We are aware of a number of competitors or potential competitors to
Visudyne.

      In January 2005, Eyetech Pharmaceuticals, Inc., in partnership with
Pfizer, commercially launched its product Macugen(R), which has FDA approval for
treatment of all forms of wet AMD. Macugen now competes with Visudyne.

      In addition, Alcon, Inc. has announced that it has completed its final
submission to the FDA in respect of its pending NDA for its product Retaane(R),
for the treatment of wet AMD. Alcon has also submitted European Marketing
Authorization Applications for this product. Alcon recently announced that it
has obtained priority review and expects a decision from the FDA in May of 2005.
If that decision is favorable, it is possible that Retaane could be competing
with Visudyne as early as during 2005.

      Genentech, Inc., in collaboration with Novartis Pharma AG, is currently
conducting two Phase III studies of its product Lucentis, for the treatment of
AMD. Data from the two ongoing Phase III trials is expected in the second and
fourth quarters of 2005 respectively. If that data is successful, this product
could be commercially launched during 2006.

      We believe that Iridex Corporation, Genaera Corporation and GenVec, Inc.
are also developing or may develop competitive therapies targeted for wet AMD
employing different technologies. We also believe that Visudyne could be
competing against surgical or other treatments for AMD, including macular
translocation, submacular surgery and laser photocoagulation, among others.

      ELIGARD(R)

      There are a number of approved products on the market with which our
Eligard products compete. These include AstraZeneca's Zoladex(R) product, Bayer
Pharmaceuticals Corporation's Viadur(R) product, Pfizer's Trelstar(R) product
and TAP Pharmaceuticals, Inc.'s Lupron(R) product.

      ACZONE(TM)

      Upon FDA approval and commercialization, our Aczone product will directly
compete against several other prescription topical products for the treatment of
acne. These include, but are not limited to, erythromycin/benzoyl peroxide,
clindamycin/benzoyl peroxide, tretinoin, and adapalene products. Aczone will
also compete indirectly with systemic prescription products and topical
over-the-counter therapies.

      ATRIDOX, ATRISORB, ATRISORB-D

                                       24


<PAGE>

      Competitors of our dental products include OraPharma, Inc., whose
Arestin(TM) product is used for the treatment of periodontal disease.

      GENERALLY

      We are also aware that other companies are engaged in the development of
products that might become competitive to our products, but none are considered
as advanced as those of the companies mentioned above.

      We believe that these competitors are or might be conducting preclinical
studies and clinical testing on their own or with certain third parties in
various countries for a variety of diseases and medical conditions in which we
have ongoing development programs. These and other companies also may be
involved in competitive activities of which we are not aware.

      An important competitive factor is the timing of market introduction of
products by us or our competitors. Accordingly, the relative speed with which we
and our present and future collaborative partners can develop products, complete
the clinical trials and approval processes and supply commercial quantities of
products to the market is critical.

      Our competition will be determined in part by the potential indications
for which our products are developed and ultimately approved by regulatory
authorities. The development by competitors of new treatment methods for those
indications for which we are developing products could render our products
non-competitive or obsolete. We expect that competition among products approved
for sale will be based, among other things, on product efficacy, safety,
reliability, availability, price and intellectual property protection.

GOVERNMENT REGULATION

      The research and development, preclinical studies and clinical trials, and
ultimately, the manufacturing, marketing and labeling of our products, are
subject to extensive regulation by the FDA and other regulatory authorities in
the U.S. and other countries. The U.S. Food, Drug and Cosmetic Act and its
regulations govern, among other things, the testing, manufacturing, safety,
efficacy, labeling, storage, record keeping, approval, clearance, advertising
and promotion of our products. Preclinical studies, clinical trials and the
regulatory approval process typically take years and require the expenditure of
substantial resources. If regulatory approval or clearance of a product is
granted, the approval or clearance may include significant limitations on the
indicated uses for which the product may be marketed.

      FDA REGULATION -- APPROVAL OF THERAPEUTIC PRODUCTS

      Visudyne, Eligard, Aczone, our generic dermatology products, as well as
our Atridox and Doxirobe Gel products are regulated in the U.S. as drugs. The
steps ordinarily required before a drug may be marketed in the U.S. include:

      -     preclinical studies;

      -     the submission of an 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 an NDA or ANDA to the FDA; and

      -     FDA approval of the application, including approval of all labeling.

      Preclinical tests include laboratory evaluation of product chemistry and
formulation as well as animal studies to assess the potential safety and
efficacy of the product. Preclinical tests must be conducted in compliance with
good laboratory practice regulations. The results of preclinical testing are
submitted as part of an IND to the FDA. A 30-day waiting period after the filing
of each IND is required prior to the commencement of clinical testing in humans.
In addition, the FDA may, at any time during this 30-day period, or anytime
thereafter, impose a clinical hold on

                                       25


<PAGE>

proposed or ongoing clinical trials. If the FDA imposes a clinical hold,
clinical trials cannot commence or recommence without FDA authorization.

      Clinical trials to support NDAs are typically conducted in three
sequential phases, but the phases may overlap. In Phase I, the initial
introduction of the drug into healthy human subjects or patients, the drug is
tested to assess metabolism, pharmacokinetics and pharmacology and safety,
including side effects associated with increasing doses. Phase II usually
involves studies in a limited patient population to:

      -     assess the efficacy of the drug in specific, targeted indications;

      -     assess dosage tolerance and optimal dosage; and

      -     identify possible adverse effects and safety risks.

      If a compound is found to be potentially effective and to have an
acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to further demonstrate clinical efficacy and to further test for
safety within an expanded patient population at multiple study sites. Phase I,
Phase II or Phase III clinical studies may not be completed successfully within
any specified time period, if at all, with respect to any of our products
subject to such testing.

      After successful completion of the required clinical testing, generally an
NDA is submitted. Once the submission is accepted for filing, the FDA begins an
in-depth review of the NDA. Under the Food, Drug and Cosmetic Act and User Fee
legislation, the FDA has up to 12 months in which to review the NDA and respond
to the applicant. The FDA may refer the application to an appropriate advisory
committee, typically a panel of clinicians, for review, evaluation and a
recommendation as to whether the application should be approved. The FDA is not
bound by the recommendation of an advisory committee. If the FDA evaluations of
the NDA and the manufacturing facilities are favorable, the FDA may issue either
an approval letter or an approvable letter. The approvable letter usually
contains a number of conditions that must be met to secure final FDA approval of
the NDA. When, and if, those conditions have been met to the FDA's satisfaction,
the FDA will issue an approval letter. If the FDA's evaluation of the NDA or
manufacturing facility is not favorable, the FDA may refuse to approve the NDA
or issue a non-approvable letter that often requires additional testing or
information. Even if regulatory approval is obtained, a marketed product and its
manufacturing facilities are subject to continual review and periodic
inspections. In addition, identification of certain side effects after a drug is
on the market or the occurrence of manufacturing problems could cause subsequent
withdrawal of approval, reformulation of the drug, additional preclinical
testing or clinical trials and changes in labeling.

      Failure to comply with the FDA or other applicable regulatory requirements
may subject a company to administrative sanctions or judicially imposed
sanctions such as civil penalties, criminal prosecution, injunctions, product
seizure or detention, product recalls, or total or partial suspension of
production. In addition, non-compliance may result in the FDA's refusal to
approve pending NDAs or supplements to approved NDAs, pre-market approval
application, or PMA, or PMA supplements and the FDA's refusal to clear
pre-market notifications of new medical devices.

      FDA REGULATION - APPROVAL OF MEDICAL DEVICES

      Our Atrisorb GTR Barrier products are regulated in the U.S. as medical
devices. Certain medical devices are generally introduced to the market based on
a pre-market notification, or 510(k) submission, to the FDA. Under a 510(k)
submission, the sponsor establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or Class II medical device or to a
Class III device for which the FDA has not required registration through a
pre-market approval, or PMA. If the sponsor cannot demonstrate substantial
equivalence, the sponsor will be required to submit a PMA, which generally
requires preclinical and clinical trial data, to prove the safety and
effectiveness of the device.

      FDA REGULATION - POST-APPROVAL REQUIREMENTS

      Even if regulatory clearances or approvals for our products are obtained,
our products and the facilities manufacturing our products are subject to
continued review and periodic inspections by the FDA. Each U.S. drug

                                       26


<PAGE>

and device-manufacturing establishment must be registered with the FDA. Domestic
manufacturing establishments are subject to biennial inspections by the FDA and
must comply with the FDA's current good manufacturing practices, or cGMP, if the
facility manufactures drugs, and quality system regulations, or QSRs, if the
facility manufactures devices. In complying with cGMP and QSRs, manufacturers
must expend funds, time and effort in the area of production and quality control
to ensure full technical compliance. The FDA stringently applies regulatory
standards for manufacturing.

      The FDA also regulates labeling and promotional activities. Further, we
must report certain adverse events involving our drugs and devices to the FDA
under regulations issued by the FDA.

      EUROPEAN REGULATION - APPROVAL OF MEDICINAL PRODUCTS

      Our Eligard and Atridox products are regulated in Europe as medicinal
products. In 1993, legislation was adopted which established a new and amended
system for the registration of medicinal products in the European Union, or EU.
The objective of this system is to prevent the existence of separate national
approval systems that have been a major obstacle to harmonization. One of the
most significant features of this system was the establishment of a European
Agency for the Evaluation of Medicinal Products. Under this system, marketing
authorization may be submitted at either a centralized or decentralized level.

      The Centralized Procedure is administered by the European Agency for the
Evaluation of Medicinal Products. This procedure is mandatory for the approval
of biotechnology products and is available at the applicant's option for other
innovative products. The Centralized Procedure provides, for the first time in
the EU, for the granting of a single marketing authorization that is valid in
all EU member states.

      REGULATORY CONSIDERATIONS FOR OVER THE COUNTER DRUG PRODUCTS

      An over the counter, or OTC, drug may be lawfully marketed if:

      -     the drug is generally recognized as safe and effective, or GRAS/E;

      -     the drug is the subject of an approved NDA; or

      -     the drug complies with a tentative final or final monograph
            published by the FDA as part of the OTC review.

      Prior FDA approval is required only if an NDA is submitted. A company
makes the determination as to which route to market is the most appropriate. If
a company determines that the drug product is GRAS/E or is covered in a
monograph, it is the company's responsibility to substantiate the safety and
efficacy of the formulation and that the dosage form and claims are applicable
under GRAS/E or monograph status. Most OTC drug products are marketed pursuant
to an FDA monograph.

      There are several other regulatory requirements applicable to all OTC drug
products. These requirements pertain to labeling, drug registration and listing,
and manufacturing. With regard to labeling, the regulations require certain
language for statement of identity, net contents, adequate directions for use,
and name and address of the manufacturer, and their placement on the finished
package, as well as additional warning statements when relevant to the product.
All OTC manufacturers must register their establishments with the FDA and submit
to the FDA a list of products made within five days after beginning operations,
as well as submit a list of products in commercial distribution. The FDA must
inspect all registered establishments at least every two years and OTC drug
products must be manufactured in accordance with cGMP regulations. If the FDA
finds a violation of cGMPs, it may enjoin a company's operations, seize product,
or criminally prosecute the manufacturer.

      ABBREVIATED NEW DRUG APPLICATIONS (ANDAS)

      Any products emanating from our generic topical dermatological business
are subject to the ANDA approval process. The Food, Drug and Cosmetic Act, as
amended in 1984, established a statutory procedure to permit the marketing
approval for duplicate and related versions of previously approved pioneer drug
products. The procedure

                                       27


<PAGE>

provides for approval of these "duplicate" or generic drugs through an ANDA. The
process provides for approval for duplicate or related versions of approved
drugs whose patents have expired and that have been shown through the ANDA
requirements to be as safe and effective as their brand name counterparts but
without the submission of duplicative safety and efficacy data. Therefore, the
process is intended to encourage competition by decreasing the time and expense
of bringing generic drugs to market.

      Generic drug products are required to be shown as bioequivalent to the
pioneer drug product via an in-vivo bioavailability study. In addition, the ANDA
must contain information on the production and analytical testing of the drug
product and provide a certification regarding patent status of the pioneer drug.
To obtain approval, the ANDA must verify that the generic drug product is
bioequivalent to the pioneer drug product, that the necessary procedures and
controls are in place to produce the generic product under cGMP and that the
applicant has complied with the patent requirements of the Food, Drug and
Cosmetic Act.

      The innovator company holding patents for the pioneer drug product may
challenge an ANDA on the basis of alleged patent infringement. Such a legal
challenge can delay the approval of an ANDA for up to 30 months. Post approval,
generic drug products are subject to labeling, promotional, and cGMP compliance
requirements.

      ADDITIONAL REGULATORY ISSUES

      Under the Drug Price Competition and Patent Term Restoration Act of 1984,
a patent which claims a product, use or method of manufacture covering drugs and
certain other products may be extended for up to five years to compensate the
patent holder for a portion of the time required for research and FDA review of
the product. This law also establishes a period of time following approval of a
drug during which the FDA may not accept or approve applications for certain
similar or identical drugs from other sponsors unless those sponsors provide
their own safety and effectiveness data. We cannot provide assurance that we
will be able to take advantage of either the patent term extension or marketing
exclusivity provisions of this law.

      Various aspects of our business and operations are regulated by a number
of other governmental agencies including the U.S. Occupational Safety and Health
Administration and the SEC.

THIRD-PARTY REIMBURSEMENT

      Government and private insurance programs, such as Medicare, Medicaid,
health maintenance organizations and private insurers, fund the cost of a
significant portion of medical care in the U.S. Governmental imposed limits on
reimbursement of hospitals and other health care providers have significantly
impacted their spending budgets. Under certain government insurance programs, a
health care provider is reimbursed a fixed sum for services rendered in treating
a patient, regardless of the actual charge for such treatment. Private
third-party reimbursement plans are also developing increasingly sophisticated
methods of controlling health care costs through redesign of benefits and
exploration of more cost-effective methods of delivering health care. In
general, these government and private measures have caused health care providers
to be more selective in the purchase of medical products.

      Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and we cannot provide assurance that adequate
third-party coverage will be available. Limitations imposed by government and
private insurance programs and the failure of certain third-party payers to
fully, or substantially reimburse health care providers for the use of the
products could seriously harm our business.

LIABILITY AND PRODUCT RECALL

      The testing, manufacture, marketing and sale of human pharmaceutical
products entail significant inherent risks of allegations of product defects.
The use of our products in clinical trials and the sale of such products may
expose us to liability claims alleged to result from the use of such products.
These claims could be made directly by patients or consumers, healthcare
providers or others selling the products. In addition, we are subject to the
inherent risk that a governmental authority may require the recall of one or
more of our products. We currently carry clinical

                                       28


<PAGE>

trials and product liability insurance in amounts up to $25 million to cover
certain claims that could arise during the clinical studies or commercial use of
our products. Such coverage and the amount and scope of any coverage obtained in
the future may be inadequate to protect us in the event of a successful product
liability claim, and there can be no assurance that the amount of such insurance
can be increased, renewed or both. A successful product liability claim could
materially adversely affect the business, financial condition or results of
operations.

      Further, liability claims relating to the use of our products or a product
recall could negatively affect our ability to obtain or maintain regulatory
approval for our products. We have agreed to indemnify certain of our
collaborative partners against certain potential liabilities relating to the
manufacture and sale of our products.

RESEARCH AND DEVELOPMENT

      During the years ended December 31, 2004, 2003, and 2002, our total
research and development expenses were $50.1 million, $44.9 million and $42.3
million respectively. See: "Our Products in Development" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

HUMAN RESOURCES

      As of March 1, 2005 we had 474 employees, 317 of whom were engaged in
research, development, clinical and regulatory affairs, manufacturing and
process development, and medical devices, and 157 of whom were engaged in
administration, corporate communications, corporate development, finance,
information technology, human resource, legal and marketing and sales planning.
None of our employees belongs to a labor union and we consider our relationship
with our employees to be good. We believe we offer competitive compensation.

                             OUR EXECUTIVE OFFICERS

      Set out below is certain information with respect to our executive
officers as of March 15, 2005:


<TABLE>
<CAPTION>
                    NAME                            AGE                         POSITION
-------------------------------------------         ---      -------------------------------------------------------
<S>                                                 <C>      <C>
Paul J. Hastings...........................         45       President, Chief Executive Officer and Director

Mohammad Azab, M.D.........................         49       Executive Vice President, Research and Development and
                                                             Chief Medical Officer

Robert L. Butchofsky.......................         43       Senior Vice President, Marketing and Sales Planning

Alain H. Curaudeau.........................         48       Senior Vice President, Project Planning and Management

Michael J. Doty............................         58       Senior Vice President and Chief Financial Officer

Michael Duncan.............................         42       President, QLT USA, Inc.

Therese Hayes..............................         38       Vice President, Corporate Communications and
                                                             Investor Relations
</TABLE>


                                       29


<PAGE>


<TABLE>
<CAPTION>
                    NAME                            AGE                         POSITION
-------------------------------------------         ---      -------------------------------------------------------
<S>                                                 <C>      <C>
Linda M. Lupini............................         45       Senior Vice President, Human Resources and
                                                             Organizational Development

William J. Newell..........................         47       Senior Vice President and Chief Business Officer

Jim Redenbarger............................         51       Vice President, Operations
</TABLE>


      Paul J. Hastings was appointed President, Chief Executive Officer and a
Director of the Company effective February 17, 2002. From January 2001 to
February 15, 2002, Mr. Hastings was President, CEO and a Director of Axys
Pharmaceuticals, Inc., where he was responsible for all aspects of the
organization including leading the strategic acquisition of Axys by Celera
Corporation. Since starting his career in 1984 with Hoffman La Roche, Mr.
Hastings has held various positions of increasing responsibility with notable
biotech and pharmaceutical companies. From June 1999 to January 2001, Mr.
Hastings was President of Chiron BioPharmaceuticals. From June 1998 to June
1999, Mr. Hastings was President and Chief Executive Officer of LXR
Biotechnology. From 1994 to 1998, amongst his positions of increasing
responsibility at Genzyme, Mr. Hastings was Vice-President, Global Marketing,
Genzyme Corporation; Vice-President, General Manager of Genzyme Therapeutics
Europe; President, Genzyme Therapeutics Europe; and President, Genzyme
Therapeutics Worldwide. From 1988 to 1994, included in Mr. Hastings' increasing
positions of responsibility at Synergen, Mr. Hastings was Vice-President,
Marketing and Sales of Synergen, Inc. and Vice-President, General Manager of
Synergen Europe, Inc. Mr. Hastings holds a Bachelor of Science in Pharmacy from
the University of Rhode Island. Mr. Hastings is a member of the boards of
directors of several organizations including ViaCell Inc., B.C.'s Leading Edge
Endowment Fund and Arriva Pharmaceuticals.

      Mohammad Azab, M.D., joined the Company as Vice President, Clinical
Research and Medical Affairs in 1997 and was promoted to Senior Vice President,
Clinical Research and Medical Affairs in March 2000. Dr. Azab became Executive
Vice President, Research and Development and Chief Medical Officer in 2003.
Prior to joining QLT, Dr. Azab spent five years with Zeneca Pharmaceuticals in
Manchester, England, where he was responsible for international clinical
development of oncology and gynaecology drugs and three years with sanofi as
worldwide medical manager of oncology. Dr. Azab has been actively involved in
the development of several currently approved drugs mainly in the fields of
oncology and ophthalmology. Before joining industry, Dr. Azab practiced as an
oncologist and lectured in oncology at the Institute Gustave Roussy, the
University of Paris-Sud in France and at Cairo University in Egypt. Dr. Azab has
authored over one hundred papers and abstracts and is a member of the American
Society of Clinical Oncology and the European Society of Medical Oncology. Dr.
Azab obtained his medical degree from Cairo University and post-graduate degrees
from the University of Paris-Sud and the University of Pierre and Marie Curie in
France. Dr. Azab also has a Masters of Business Administration degree from the
Richard Ivey School of Business, University of Western Ontario, Canada. Dr. Azab
is a member of the board of directors of Xenon Pharmaceuticals Inc..

      Robert L. Butchofsky joined QLT in 1998 as Associate Director, Ocular
Marketing and was appointed Vice President, Marketing and Sales Planning in
September 2001. Mr. Butchofsky was promoted to Senior Vice President, Marketing
and Sales Planning in early March of this year. Mr. Butchofsky is now
responsible for the ongoing marketing of Visudyne as well as the potential
creation of a specialty sales force to market new products currently in
development. Prior to joining QLT, Mr. Butchofsky spent eight years at Allergan
where he built an extensive background with ocular products and Botox(R),
including sales, health economics, worldwide medical marketing, and product
management. Prior to joining Allergan, Mr. Butchofsky spent several years
managing clinical trials at the Institute for Biological Research and
Development. Mr. Butchofsky holds a Bachelor of Arts degree in Biology from the
University of Texas and a Masters of Business Administration from Pepperdine
University.

      Alain H. Curaudeau joined QLT in 2000 as Vice President, Project Planning
and Management and was promoted to Senior Vice President, Project Planning and
Management in July 2001. He came to QLT with

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<PAGE>

extensive global experience in pharmaceutical R&D after serving more than 15
years with Rhone-Poulenc Rorer (RPR), a major international pharmaceutical
company. Mr. Curaudeau's tenure with RPR included 14 years of progressively
senior positions in project management, in France and in the U.S. Most recently
he was designated head of Project Management for aventis, a new company formed
in 1999 by the merger between Rhone-Poulenc Rorer and Hoechst AG. Mr. Curaudeau
holds Bachelors and Masters degrees in Pharmacy from the University of
Chatenay-Malabry, Paris, France. He is also a graduate of the Toxicology and
Pharmacokinetics Programs from the same university and received academic
training in toxicological pathology from the National Veterinary School in
Toulouse, France.

      Michael J. Doty joined QLT as Senior Vice President and Chief Financial
Officer of the Company in November 2001. Mr. Doty is a Certified Public
Accountant with extensive experience in a wide range of financial,
administrative and planning positions at companies such as 3M, Honeywell, Inc.
and Reckitt & Colman, PLC (now Reckitt Benckiser PLC). Prior to joining QLT,
from May 1999 to October 2001, he was Senior Vice President and Chief Financial
Officer of Inamed Corporation, a global manufacturer and marketer of medical
devices. From 1997 to 1999, Mr. Doty was the Vice President and Chief Financial
Officer of O-Cedar Brands, Inc., a private consumer product company based in
Cincinnati and from 1994 to 1997, he was the Vice President and Chief Financial
Officer of White Systems, Inc., a manufacturer and software developer. Mr. Doty
holds Bachelor of Chemistry, Institute of Technology and Bachelor of Science,
Business Administration degrees from the University of Minnesota and a Master of
Business Administration degree from the University of St. Thomas. Mr. Doty is a
director and Associate Chair of the B.C. Biotech Association.

      Michael Duncan joined QLT in 2004 when the company merged with the former
Atrix Laboratories, Inc. Prior to becoming President of QLT USA, Mr. Duncan was
the Vice President and General Manager at Atrix. In his over nine years at
Atrix, Mr. Duncan has also held the positions of Senior Vice President,
Technical Operations as well as Vice President, Manufacturing and Process
Development. Previous to his career with Atrix he served as Director of
Production Operations for Geneva Pharmaceuticals, Inc. and as a Production
Planner at Roxanne Laboratories, Inc. Mr. Duncan holds a Bachelor of Science in
Business Administration from Regis University in Denver, Colorado.

      Therese Hayes became Vice President, Corporate Communications and Investor
Relations in February 2003. Ms. Hayes joined QLT in 2001 as Senior Director,
Corporate Communications and Investor Relations. Ms. Hayes is responsible for
all aspects of internal and external communications and investor relations for
the Company. Ms. Hayes brought 15 years of management experience in healthcare
and biotechnology, including scientific research, financial and scientific
communications and business development to QLT. Prior to joining QLT, Ms. Hayes
was Vice President, Corporate Communications at SangStat Medical Corporation, a
biotechnology company based in California from 1998 to 2001. Ms. Hayes holds a
Bachelor of Science degree from the University of Waterloo, a Masters of
Microbiology and Immunology and a Masters of Health Administration, both from
the University of Ottawa.

      Linda M. Lupini was promoted to Senior Vice President, Human Resources and
Organizational Development in February 2003. Ms. Lupini joined QLT in 1997 as
Director, Human Resources, and was promoted to Vice President, Human Resources
and Administration in March 2000. Ms. Lupini joined QLT after serving as Human
Resources Director at MacDonald Dettwiler and Associates Ltd., a leading
technology firm in Western Canada. Ms. Lupini, who holds a Bachelor of Arts
degree in psychology from the University of British Columbia, is a member of
several human resource and industry associations and serves as a board member of
the Simon Fraser University MBD Program Advisory Committee and a board member of
the BC Human Resources Council of Canada.

      William J. Newell joined QLT as Senior Vice President and Chief Business
Officer in June 2002. Mr. Newell is a lawyer with extensive legal and business
development experience. Prior to joining QLT, Mr. Newell was Senior Vice
President, Corporate and Business Development of Celera Genomics (previously
Axys Pharmaceuticals). Mr. Newell joined Axys in 1998 and held various positions
of increasing responsibility including Vice President, General Counsel and
Senior Vice President, Corporate and Business Development and General Counsel.
Prior to joining Axys, Mr. Newell was a partner in the law firm of McCutchen,
Doyle, Brown & Enersen LLP, where he specialized in strategic business
transactions, including mergers and acquisitions and licensing and financing
transactions. Mr. Newell is a member of the board of BIOTECanada and Vancouver's
St. Paul's Hospital Foundation. Mr. Newell is a graduate of Dartmouth College
(1979) and obtained his law degree from University of Michigan Law School in
1983.

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      Jim Redenbarger joined us in 2004 as Vice President, Operations. He brings
an extensive biopharmaceutical background with more than 25 years of experience
in pharmaceuticals, devices and biotechnology. Most recently he was a principal
at Growth Management Consulting, where he consulted to companies such as Amgen,
Array BioPharma, Myogen, Vitrolife, diaDeXus and Replidyne regarding operations,
start-up, facilities, growth and strategic planning. Previously, Mr. Redenbarger
was Vice President of Operations at Synergen. He is a graduate of Purdue
University, where he earned his Bachelor of Science in Microbiology.

                                  RISK FACTORS

      In addition to the other information included in this Annual Report, you
should consider carefully the following factors, which describe the risks,
uncertainties and other factors that may materially and adversely affect our
business, financial condition and operating results. We are identifying these as
important factors that could cause actual events or our actual results to differ
materially from those contained in any written or oral forward-looking
statements within the meaning of the Private Securities Reform Act of 1995 made
by us or on our behalf in this Annual Report or elsewhere. We are relying upon
the safe harbor for forward-looking statements and any such statements are
qualified by reference to the cautionary statements set out elsewhere in this
Annual Report.

OUR FUTURE OPERATING RESULTS ARE UNCERTAIN AND LIKELY TO FLUCTUATE.

      Until the fourth quarter of 2000, we had a history of operating losses.
Although we were profitable for the years 2000-2003 (2004 was impacted by a
charge of $236.0 million for purchase of in-process research and development
related to the Atrix acquisition -- see Note 4 to the Financial Statements),
future operating performance and profitability are not certain. Our accumulated
deficit at December 31, 2004 was approximately $173.8 million.

      Our operating results may fluctuate from period to period for a number of
reasons. In budgeting our operating expenses, some of which are fixed in the
short term, we assume that revenues will continue to grow. Even a relatively
small revenue shortfall or a small increase in operating expenses may cause a
period's results to be below expectations. A revenue shortfall or increase in
operating expenses could arise from any number of factors, such as:

      -     lower than expected revenues from sales of Visudyne, Eligard or our
            other products;

      -     changes in pricing strategies or reimbursement levels for Visudyne,
            Eligard or our other products;

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

      -     high levels of marketing expenses for Visudyne, such as may occur
            upon the launch of Visudyne in a new market;

      -     fluctuations in currency exchange rates;

      -     unfavorable outcome of pending patent-related litigation against the
            Company;

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

      -     increased operating expenses as a result of product, technology or
            other acquisitions or business combinations.

WE RECENTLY ACQUIRED ATRIX LABORATORIES, INC.; WE MAY BE UNABLE TO SUCCESSFULLY
INTEGRATE THE TWO COMPANIES.

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      Achieving the anticipated benefits of our recent acquisition of Atrix
Laboratories, Inc., or Atrix, will depend in part upon our ability to integrate
the two companies' businesses in an efficient and effective manner. Atrix was
headquartered in Fort Collins, Colorado, and QLT Inc. is headquartered in
Vancouver, British Columbia, Canada. The process of integrating the operations
and technology of two organizations that have historically been headquartered in
separate countries can take many months and there can be no assurances that we
will be able to accomplish the integration smoothly or successfully. Our failure
to do so may result in a significant diversion of management's time from ongoing
business matters, and may have a material adverse effect on the business,
results of operation and financial condition of the combined company.

IF WE ARE UNABLE TO PRESERVE THE COMMERCIAL RELATIONSHIPS WHICH WERE FORMED BY
ATRIX, WE MAY NOT REALIZE ALL OF THE ANTICIPATED BENEFITS OF THE ACQUISITION.

      The former Atrix established a number of commercial relationships with
third parties that are individually or collectively important to the success of
what is now QLT USA. For example, Atrix formed strategic relationships with
collaborators to help it commercialize and market its products, such as its
relationship with sanofi-aventis for the United States and Canadian
commercialization and marketing of the Eligard products. If our relationship
with those collaborators, such as Fujisawa, Medigene, Sandoz, or sanofi-aventis
was impaired, it could delay the applicable collaboration program or result in
expensive arbitration or litigation and QLT USA's revenue may significantly
decrease and its ability to develop and commercialize its technologies may be
hindered.

IF WE ARE UNABLE TO RETAIN KEY PERSONNEL AT QLT USA OUR BUSINESS MAY SUFFER AND
INTEGRATION OF THE COMBINED COMPANY MIGHT BE NEGATIVELY IMPACTED.

      The success of our integration of the acquisition of Atrix depends in part
on our ability to retain highly qualified management and scientific personnel
previously employed by Atrix. While we believe we have retained highly qualified
management or scientific personnel of the former Atrix, it is possible that some
of such individuals may decide not to remain. The vesting of all options
outstanding under Atrix's stock option plans were accelerated prior to
completion of the acquisition, which may reduce the financial incentive of
former Atrix employees to remain with the combined company. If key QLT USA
employees choose to terminate their employment in the near future, our business
relationships or research and development activities may be adversely affected,
management's attention may be diverted from successfully integrating the
combined company to focusing on identifying suitable replacements, and the
combined company's business may suffer. In addition, we may be unable to locate
suitable replacements for any key employees that leave the company or offer
employment to potential replacements on reasonable terms.

FUTURE SALES OF VISUDYNE(R), ELIGARD(R) AND OUR OTHER PRODUCTS MAY BE LESS THAN
EXPECTED.

      Our prospects are dependent on the sales of our primary commercial
product, Visudyne, and to a lesser extent those of Eligard and our other
products. Our revenues to date have consisted largely of revenue from product
sales of Visudyne. If sales of Visudyne, Eligard or our other products decline
or fail to increase, it would have a material adverse effect on our business,
financial condition and results of operations.

      A number of factors may affect the rate and breadth of market acceptance
and continued use of our commercial products, including:

      -     perceptions by physicians and other members of the health care
            community regarding the safety and efficacy of our products;

      -     patient and physician demand;

      -     the results of product development efforts for new indications for
            Visudyne, Eligard, and our other products;

      -     availability of sufficient commercial quantities of Visudyne,
            Eligard and our other products;

      -     price changes for our products, and the price of our products
            relative to other drugs or competing treatments;

      -     the need for retreatment of Visudyne throughout the treatment
            process not approximating retreatment rates during clinical
            development;

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<PAGE>
      -     the scope and timing of additional marketing approvals and favorable
            reimbursement programs for Visudyne, Eligard, and our other
            products;

      -     adverse side effects or unfavorable publicity concerning Visudyne,
            Eligard or our other products;

      -     a decline in the market for Visudyne, or incidence rates of wet AMD,
            such as might occur if preventative treatments currently in
            development are successful; or

      -     a decline in the markets for Eligard or our other products;

as well as the other factors which are described in this section.

WE FACE NEW COMPETITION FOR VISUDYNE(R), WE MAY FACE ADDITIONAL COMPETITION,
ELIGARD(R) AND ALL OF OUR OTHER APPROVED PRODUCTS FACE COMPETITION. WE MAY NOT 
BE SUCCESSFUL IN ADDRESSING COMPETITION FOR VISUDYNE, ELIGARD OR OUR OTHER
PRODUCTS.

      We may be unable to contend successfully with current or future
competitors. The pharmaceutical and biotechnology industries are characterized
by rapidly evolving technology and intense competition. Our competitors include
major pharmaceutical and biopharmaceutical companies, many of which have access
to financial, technical and marketing resources significantly greater than ours
and substantially greater experience in developing and manufacturing products,
conducting preclinical and clinical testing and obtaining regulatory approvals.

      We are aware of a number of competitors or potential competitors to
Visudyne.

      In January 2005, Eyetech Pharmaceuticals, Inc., in partnership with Pfizer
Inc., commercially launched its product Macugen(R), a product approved by the
FDA for the treatment of all forms of wet AMD. Macugen now competes with
Visudyne. The impact of sales of Macugen on sales of Visudyne is not presently
estimable but may be material.

      In addition, Alcon, Inc. has announced that it has completed its final
submission to the FDA in respect of its pending NDA for its product Retaane(R),
for the treatment of wet AMD. Alcon has also submitted European Marketing
Authorization Applications for this product. Alcon recently announced that it
has obtained priority review and expects a decision from the FDA in May 2005. If
that decision is favorable, it is possible that Retaane could be competing with
Visudyne as early as during 2005.

      Genentech, Inc., in collaboration with Novartis Pharma AG, is currently
conducting two Phase III studies of its product Lucentis, for the treatment of
AMD, and another is planned. Data from the two ongoing Phase III trials is
expected in the second and fourth quarters of 2005 respectively. If that data is
positive, this product could be commercially launched during 2006.

      We are aware of a number of other competitors developing treatments for
AMD including Iridex Corporation, Genaera Corporation and GenVec, Inc. Some of
these treatments are in late-stage clinical development. We also believe that
Visudyne could be competing against surgical or other treatments for AMD,
including macular translocation, submacular surgery and laser photocoagulation,
among others. If competing treatments for AMD are introduced to the market,
Visudyne's market share could be eroded or retreatment rates reduced. The terms
of our agreement with Novartis Ophthalmics do not restrict Novartis Ophthalmics
from developing or commercializing, whether by itself or in collaboration with
third parties, non-PDT products that could be competitive with our products that
utilize PDT for ophthalmological indications, including Visudyne.

      Each of our approved products faces competition and our products under
regulatory review and in development will also face competition. Our industry is
characterized by intense competition and new product innovation, which may limit
our commercial opportunities, render our products obsolete or reduce our
revenue.

      There are a number of approved products on the market with which our
Eligard products compete. These include AstraZeneca's Zoladex(R) product, Bayer
Pharmaceuticals Corporation's Viadur(R) product, Pfizer's Trelstar(R) product
and TAP Pharmaceuticals, Inc.'s Lupron(R) product.

      Upon FDA approval and commercialization, our Aczone product will directly
compete against several other prescription topical products for the treatment of
acne. These include, but are not limited to, erythromycin/benzoyl peroxide,
clindamycin/benzoyl peroxide, tretinoin, and adaoalene products. Aczone will
also compete indirectly with systemic prescription products and topical
over-the-counter therapies.

      Competitors of our dental products include OraPharma, Inc., whose
Arestin(TM) product is used for the treatment of periodontal disease.

      We believe that certain competitors are conducting preclinical studies and
clinical testing on their own or with certain third parties in various countries
for a variety of diseases and medical conditions for which we have ongoing
development programs. These companies may also be involved in competitive
activities of which we are not aware.

      The pharmaceutical and biotechnology industries are highly competitive. We
face intense competition from academic institutions, government agencies,
research institutions and other biotechnology and pharmaceutical companies,
including other drug delivery companies. Some of these competitors are also our
collaborators. Our competitors are working to develop and market other drug
delivery systems, vaccines, antibody therapies and other

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<PAGE>

methods of preventing or reducing disease, and new small-molecule and other
classes of drugs that can be used without a drug delivery system.

      We are aware of other products manufactured or under development by
competitors that are used for the prevention and treatment of certain diseases
that we have targeted for product development. The existence of these products,
or other products or treatments of which we are not aware, or products or
treatments that may be developed in the future, may adversely affect the
marketability of our products.

      Many of our competitors have much greater capital resources, manufacturing
and marketing experience, research and development resources and production
facilities than we do. Many of them also have much more experience than we do in
preclinical testing and clinical trials of new drugs and in obtaining FDA and
foreign approvals. In addition, they may succeed in obtaining patents that would
make it difficult or impossible for us to compete with their products.

      Because new product innovation can emerge unexpectedly in the
biotechnology and pharmaceutical industries, the development by competitors of
technologically improved or different products may make our products or product
candidates obsolete or non-competitive.

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.

      We are aware of reports that a trial has been or is about to be initiated
of a treatment for patients with the dry form of AMD who are at high risk of
developing wet AMD, with the objective of preventing the occurrence of wet AMD.
We are also aware of published reports of studies showing that supplemental
vitamin therapies reduce the risk of development of wet AMD. If these studies
show that new therapies are effective or if supplemental vitamin usage becomes
common place in patients with dry AMD, the incidence of wet AMD, which often
develops in patients initially diagnosed with dry AMD, might be reduced, and
Visudyne sales and the Company's revenues could be materially reduced.

WE ARE DEPENDENT ON THIRD PARTIES TO MARKET VISUDYNE(R) AND ELIGARD(R).

      A significant portion of our revenue depends on the efforts of Novartis
Ophthalmics to market and sell Visudyne. If Novartis Ophthalmics does not
dedicate sufficient resources to the promotion and sale of Visudyne, or if
Novartis Ophthalmics fails in its marketing efforts, or if marketing and
distribution expenses are excessive, the revenues we receive from the sale of
Visudyne would decrease and our business and operating results would be
adversely affected. The agreement between us and Novartis Ophthalmics pursuant
to which Novartis Opthalmics markets and sells Visudyne has a term extending to
2014 and may be terminated by Novartis Ophthalmics upon a default of the
agreement by us or on 60 days notice.

      We have formed strategic relationships with a number of other
collaborators to help us commercialize and market Eligard. Our revenues from
Eligard, and our dermatology and dental products are dependent on the efforts of
our marketing partners in promoting and selling those products. If those
partners do not dedicate sufficient resources to the promotion and sale of our
products, the revenues we receive from sales of those products would decrease
and our business and operating results would be adversely affected.

WE ARE DEPENDENT ON OTHER THIRD PARTIES FOR THE RESEARCH, DEVELOPMENT, AND
COMMERCIALIZATION OF OUR PRODUCTS.

      Our strategy for the development and commercialization of our products
includes entering into various arrangements with third parties and therefore is
dependent on the subsequent success of these third parties in performing their
responsibilities under such arrangements.

      Although we believe that parties to our collaborative arrangements have an
economic incentive to succeed in performing their contractual responsibilities,
the amount and timing of resources to be devoted to these activities generally
are not under our control. We cannot predict whether such parties will perform
their obligations as expected or whether significant revenue will be derived or
sustained from such arrangements. To the extent such parties do not perform
adequately under our various agreements with them, the development and
commercialization of our products

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<PAGE>

may be delayed, may become more costly to us or may be terminated , and may
require us to expend significant amounts of time and money to find new
collaborators and structure alternative arrangements. Disputes with a
collaborator could delay a program on which we are working with the collaborator
and could result in expensive arbitration or litigation, which may not be
resolved in our favor.

IN THE FIELD OF PDT, WE ARE DEPENDENT ON THE SUCCESS AND CONTINUED SUPPLY OF
THIRD-PARTY MEDICAL DEVICE COMPANIES WITH COMPLEMENTARY LIGHT SOURCE AND LIGHT
DELIVERY DEVICES BY THIRD PARTY SUPPLIERS.

      We currently depend on two third-party suppliers, Carl Zeiss-Meditic and
Lumenis, to provide the laser light delivery devices for Visudyne therapy.
Because PDT requires a light source, and in some instances a light delivery
system, to be used in conjunction with our photosensitizers, we are dependent on
the success of these medical device companies in placing and maintaining light
sources with the appropriate medical facilities and in distributing the light
delivery systems. Carl Zeiss-Meditic and Lumenis supply such lasers to treating
physicians directly, and neither QLT nor Novartis Ophthalmics has a supply or
distribution agreement with either Carl Zeiss-Meditic or Lumenis for the supply
of such devices. The relationship between our Company and Novartis Ophthalmics
and such suppliers, under which we and Novartis Ophthalmics provides support and
assistance to such suppliers, is an informal collaboration only (see "Medical
Devices for PDT"). If one or both of the medical device companies with whom we
and Novartis Ophthalmics have such collaborations cease to carry on business, or
if, as a result of industry consolidation, financial down-turn or for other
reasons, they no longer supply complementary light sources or light delivery
systems or if they are unable to achieve the appropriate placements of light
sources and ensure an uninterrupted supply of light delivery systems to treating
physicians, sales of Visudyne and our revenues from the sale of Visudyne may be
adversely affected. We may not be able to secure additional or replacement
arrangements with other satisfactory medical device companies to complement or
replace the activities of our current providers.

WE MAY BE UNABLE TO HAVE MANUFACTURED OR CONTINUE TO HAVE MANUFACTURED
EFFICIENTLY COMMERCIAL QUANTITIES OF VISUDYNE(R) OR OUR OTHER PRODUCTS IN
COMPLIANCE WITH FDA AND OTHER REGULATORY REQUIREMENTS OR OUR PRODUCT
SPECIFICATIONS.

      We depend on several third parties in the U.S., Canada, Europe and Japan
to manufacture Visudyne, and if such third parties fail to meet their respective
contract commitments, we may not be able to supply or continue to supply
commercial quantities of the product or conduct certain future clinical testing.
We are dependent upon Raylo Chemicals Inc., Nippon Fine Chemicals and Parkedale
Pharmaceuticals Inc. to manufacture Visudyne or components thereof. The
agreement between us and Raylo Chemicals is in effect for a term ending January
1, 2008, after which it will renew for a further two years unless one party
provides the other with 24 months advance notice of its intention not to renew.
Our agreement with Nippon Fine Chemicals is in effect for a term ending on
January 1, 2007. Our agreement with Parkedale Pharmaceuticals Inc. is in effect
for a term expiring December 31, 2009. Although none of these agreements is
terminable by the other party for convenience, if we were to commit a default
under or breach of any of such agreements, the other party could terminate such
agreement. We may be unable to renew such agreements after their expiry terms
which are commercially acceptable to us.

      Our ability to conduct clinical trials and commercialize Visudyne and our
other products, either directly or in conjunction with others, depends, in large
part, on our ability to have such products manufactured at a competitive cost
and in accordance with FDA and other regulatory requirements as well as our
product specifications. Our contract manufacturers' manufacturing and quality
procedures may not achieve or maintain compliance with applicable FDA and other
regulatory standards or product specifications, and, even if they do, we may be
unable to produce or continue to produce commercial quantities of Visudyne and
our other products at an acceptable cost or margin.

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

      If our manufacturers produce one or more product batches which do not
conform to FDA or other regulatory requirements, or our product specifications,
or if they introduce changes to their manufacturing processes, our

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<PAGE>

manufacturing expenses may increase materially, our product inventories may be
reduced to unacceptable levels and/or our ability to meet demand for Visudyne
may be detrimentally impacted, possibly materially. For example, during November
2003 two Visudyne batches did not pass quality inspection and product
inventories and our results were negatively impacted by the associated
accounting charge, although not materially. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Note 5" in "Notes to
the Consolidated Financial Statements".)

WE HAVE LIMITED EXPERIENCE IN MANUFACTURING PRODUCTS ON A COMMERCIAL SCALE, AND
IF WE ARE UNABLE TO PRODUCE ENOUGH ELIGARD(R) OR THE OTHER PRODUCTS WHICH WE
MANUFACTURE TO MEET MARKET DEMANDS, THIS COULD CAUSE A DECREASE IN REVENUE.

      Atrix Laboratories completed the expansion of its manufacturing facility,
which we now own, in the second quarter of 2003. Validation of the plant and
equipment was completed during the third quarter of 2003. Certain areas of the
plant were qualified by the FDA in 2004. We manufacture Eligard at this
facility. Even though we have obtained FDA and other regulatory approval to do
so, our manufacturing processes are subject to further review by other
regulatory authorities, and continued review by the FDA and other regulatory
authorities. If we modify our current manufacturing processes, the FDA and other
regulatory authorities will require us to demonstrate that the material produced
from the modified or new process or facility is equivalent to the material used
in the clinical trials or products previously approved. Any such modifications
to the manufacturing process or supply may not achieve or maintain compliance
with the applicable regulatory requirements or our product specifications. In
many cases, prior approval by regulatory authorities may be required before any
changes can be instituted.

      In addition, later discovery of problems with our products or
manufacturing processes could result in restrictions on such products or
processes, including potential withdrawal of Eligard or other products from the
market. If regulatory authorities determine that we have violated regulations or
if they restrict, suspend or revoke our prior approvals, they could prohibit us
from manufacturing or selling Eligard or other products until we comply, or
indefinitely. In addition, if regulatory authorities determine that we have not
complied with regulations in the research and development of a product
candidate, then they may not approve the product candidate and we will not be
able to market and sell it. If we were unable to market and sell our products or
product candidates, our business and results of operations would be materially
and adversely affected.

      There is also a risk that our manufacturing capabilities may not be
sufficient to meet market demands for Eligard or that we may experience a
disruption in our manufacturing processes. If we produce one more Eligard
product batches which do not conform to FDA or other regulatory requirements, or
our product specifications, our manufacturing expenses may increase materially,
our Eligard product inventories may be reduced to unacceptable levels, or we may
be unable to meet demand for Eligard. If we are unable to meet demand for
Eligard for a significant period of time our business would be harmed
materially.

WE HAVE A DEPENDENCE ON ONE CONTRACT MANUFACTURER INVOLVED IN THE PRODUCTION OF
OUR ELIGARD(R) PRODUCTS.

      We currently outsource the sterile filling and "lyophilization," also
known as freeze drying, process of our Eligard products to Chesapeake Biological
Laboratories, Inc., an approved contract manufacturer, and rely on this
manufacturer for this highly specialized service. Our contract with Chesapeake
Biological Laboratories is for a period of two years commencing January 23,
2004, and automatically renews for additional one-year terms unless either party
provides notice on non-renewal more than 90 days prior to termination. If this
vendor was to deteriorate or terminate, production of our Eligard products may
be temporarily discontinued for several months. We currently have one other
contract manufacturer as a back-up source for the sterile filling and
lyophilization process should there be a disruption in our Eligard product
supply chain. However, the FDA would need to approve the change in the
manufacturer of the sterile filling and lyophilization process for our Eligard
products, which could take several months. Additionally, we and our partners
have at least three months of inventory safety stock of Eligard products to meet
near term future demands, should a disruption in the sterile filling and
lyophilization process occur. To help address this risk, we have built our own
sterile filling and lyophilization facility which received FDA approval to
manufacture commercial product in December 2004.

THE SUCCESS OF VISUDYNE(R), ELIGARD(R) AND OUR OTHER PRODUCTS MAY BE LIMITED BY
GOVERNMENTAL AND OTHER THIRD-PARTY PAYERS.

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<PAGE>

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

      Third-party payers are challenging the price and cost-effectiveness of
medical products and services, and the adoption of new legislation and
regulations affecting the pricing of pharmaceuticals could further limit
reimbursement for medical products and services. To the extent such governmental
or private third-party payers introduce reimbursement changes which affect
Visudyne or our current or future product candidates, sales of such products
could be negatively affected. For example, in the U.S., the U.S. Congress
recently introduced legislation that has changed the methodologies under which
the Medicare program reimburses for office-administered therapies such as
Visudyne. The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 reduced the rate of reimbursement for Visudyne and certain other drugs by
allowing reimbursement based on 85% of the average wholesale price, down from
95%. We obtained an exemption from this rate adjustment for 2004 only.

      There can be no assurance that any of our applications or re-applications
for reimbursement for any of our products will result in approvals or that our
current reimbursement approvals will not be reduced or reversed in whole or in
part.

OUR PRODUCT SALES ARE WORLDWIDE, AND CURRENCY FLUCTUATIONS MAY IMPAIR OUR
REPORTED FINANCIAL RESULTS.

      Our products are marketed worldwide. In 2004, approximately 47% of total
Visudyne sales were in the U.S., with Europe and other markets responsible for
the remaining 53%. We expect that international revenues will continue to
account for a significant percentage of our revenues for the foreseeable future.
A significant portion of our business is conducted in currencies other than the
U.S. dollar, which is our reporting currency. The Canadian dollar is our
functional currency. We recognize foreign currency gains or losses arising from
our operations in the period incurred. As a result, currency fluctuations
between the currencies in which we do business, particularly the U.S. dollar,
the Euro, the Canadian dollar and the Swiss franc, have caused and could
continue to cause significant foreign currency transaction gains and losses. We
cannot predict the effects of exchange rate fluctuations on our future operating
results because of the number of currencies involved, the variability of
currency exposures and the potential volatility of currency exchange rates. We
engage from time to time in currency hedging techniques to mitigate the impact
of currency fluctuations on our financial results and cash flows, but we cannot
be assured that our strategies will adequately protect our operating results or
balance sheet from the full effects of exchange rate fluctuation

OUR PRODUCTS IN DEVELOPMENT MAY NOT ACHIEVE FAVORABLE RESULTS, MAY FAIL TO
ACHIEVE REGULATORY APPROVALS OR MARKET ACCEPTANCE, OR MAY ENCOUNTER DIFFICULTIES
WITH PROPRIETARY RIGHTS OR MANUFACTURING.

      Our success depends on our ability to successfully develop and obtain
regulatory approval to market new pharmaceutical products. Development of a
product requires substantial technical, financial and human resources even if
such product development is not successfully completed. The outcome of the
lengthy and complex process of new product development is inherently uncertain.

      Our potential products may appear to be promising at various stages of
development yet fail to reach the market for a number of reasons, including:

      -     lack of sufficient treatment benefit or unacceptable safety issues
            during preclinical studies or clinical trials;

      -     lack of commercial market opportunity;

      -     results from preclinical and early clinical studies not predictive
            of results obtained in large-scale clinical trials;

                                       38


<PAGE>

      -     unfavorable data during a clinical trial causing us to determine
            that continuation of the trial is not warranted. For example, in May
            2003, we halted our two Phase III studies of tariquidar in non-small
            cell lung cancer after a review of safety and efficacy data by the
            Independent Data Safety Monitoring Committee;

      -     the FDA or other regulatory authorities suspending our clinical
            trials at any time if, among other reasons, it concludes that
            patients participating in such trials are being exposed to
            unacceptable health risks;

      -     failure to receive necessary regulatory approvals after completion
            of clinical trials;

      -     existence of conflicting proprietary rights of third parties;

      -     inability to develop manufacturing methods that are efficient,
            cost-effective and capable of meeting stringent regulatory
            standards; and

      -     other business imperatives causing us to curtail a particular
            development program.

      We might fail to obtain the additional regulatory approvals we are seeking
to expand our product line and the indications for which our products are
approved. For example, we are currently seeking regulatory approval for Aczone,
for the treatment of acne vulgaris. The majority of patients to be treated with
acne products are adolescents and acne is not considered to be a serious
disease. The FDA approval process for Aczone, and that of other regulatory
authorities is expected to be stringent. There can be no assurance that we will
obtain FDA or other regulatory approval for Aczone for this indication. Those
approvals may be delayed, may not be obtained or may be more limited than
anticipated. We may lose market opportunities resulting from delays and
uncertainties in the regulatory approval process.

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.

      From time to time, we estimate the timing of the accomplishment of various
scientific, clinical, regulatory and other product development goals, which we
sometimes refer to as milestones. These milestones may include the commencement
or completion of scientific studies and clinical trials and the submission of
regulatory filings. From time to time, we publicly announce the expected timing
of some of these milestones. All of these milestones are based on a variety of
assumptions. The actual timing of these milestones can vary dramatically
compared to our estimates, or they might not be achieved, in some cases for
reasons beyond our control. If we do not meet these milestones as publicly
announced, the commercialization of our products may be delayed and, as a
result, our business could be harmed. Factors which could cause us to fail to
achieve milestones in accordance with our projections include:

      -     study results may vary from what had been predicted;

      -     studies may take longer to enroll or conclude than projected;

      -     unfavorable data during a clinical trial might cause us to determine
            that continuation of the trial is not warranted;

      -     the FDA or other regulatory authorities might suspend our clinical
            trials at any time if, for example, it concludes that patients
            participating in such trials are being exposed to unacceptable
            health risks;

      -     failure to receive necessary regulatory approvals after completion
            of clinical trials in a timely manner or at all; and

      -     other business imperatives might cause us to delay or discontinue
            certain development activities

PATIENT ENROLLMENT MAY NOT BE ADEQUATE FOR OUR CURRENT TRIALS OR FUTURE CLINICAL
TRIALS.

      Our future prospects could suffer if we fail to develop and maintain
sufficient levels of patient enrollment in our current or future clinical
trials. Our willingness and ability to complete clinical trials is dependent on,
among other factors, the rate of patient enrollment, which is a function of many
factors, including:

      -     the nature of our clinical trial protocols or products;

      -     the inability to secure regulatory approval to modify previously
            approved clinical trial protocols;

      -     the existence of competing protocols;

      -     the size and longevity of the target patient population;

      -     the proximity of patients to clinical sites;

      -     the eligibility criteria for the trials; and

                                       39


<PAGE>

      -     the patient dropout rates for the trials.

      Delays in planned patient enrollment may result in increased costs, delays
or termination of clinical trials, which could materially harm our future
prospects.

VISUDYNE(R), ELIGARD(R) OR OUR OTHER PRODUCTS MAY EXHIBIT ADVERSE SIDE EFFECTS
THAT PREVENT THEIR WIDESPREAD ADOPTION OR THAT NECESSITATE WITHDRAWAL FROM THE
MARKET.

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

WE MAY FACE FUTURE PRODUCT LIABILITY CLAIMS THAT MAY RESULT FROM THE SALE OF
VISUDYNE(R), ELIGARD(R) AND OUR OTHER PRODUCTS.

      The testing, manufacture, marketing and sale of human pharmaceutical
products entail significant inherent risks of allegations of product liability.
Our use of such products in clinical trials and our sale of Visudyne, Eligard
and our other product candidates may expose us to liability claims allegedly
resulting from the use of these products. These claims might be made directly by
consumers, healthcare providers or others selling our products. We carry
clinical trials and product liability insurance to cover certain claims that
could arise during the clinical trials for our product candidates or during the
commercial use of Visudyne, Eligard or our other products. Such coverage, and
any coverage obtained in the future, may be inadequate to protect us in the
event of a successful product liability claim, and we may not be able to
increase the amount of such insurance or even renew it. A successful product
liability claim could materially harm our business. In addition, substantial,
complex or extended litigation could cause us to incur large expenditures and
distract our management.

WE MAY BE UNABLE TO COMPLY WITH ONGOING REGULATORY REQUIREMENTS.

      Our commercial products and our products under development are subject to
extensive and rigorous regulation for safety, efficacy and quality by the U.S.
federal government, principally the FDA, and by state and local governments. To
the extent Visudyne, Eligard, our other commercial products or products under
development are marketed abroad; they are also subject to export requirements
and to regulation by foreign governments. The regulatory clearance process is
lengthy, expensive and uncertain. We may not be able to obtain, or continue to
obtain, necessary regulatory clearances or approvals on a timely basis, or at
all, for any of our commercial products or any of our products under
development, and delays in receipt or failure to receive such clearances or
approvals, the loss of previously received clearances or approvals, or failure
to comply with existing or future regulatory requirements could materially harm
our business.

      Drugs manufactured or distributed pursuant to the FDA's approval are
subject to pervasive and continuing regulation by the FDA, certain state
agencies and various foreign governmental regulatory agencies such as the EMEA
Manufacturers are subject to inspection by the FDA and those state agencies, and
they must comply with the host of regulatory requirements that usually apply to
drugs marketed in the U.S., including but not limited to the FDA's labelling
regulations, Good Manufacturing Practice requirements, adverse event reporting
and the FDA's general prohibitions against promoting products for unapproved or
"off-label" uses. Our failure to comply with applicable requirements could
result in sanctions being imposed on us. These sanctions could include warning
letters, fines, product recalls or seizures, injunctions, refusals to permit
products to be imported into or exported out of the U.S., FDA refusal to grant
approval of drugs or to allow us to enter into governmental supply contracts,
withdrawals of previously approved marketing applications and criminal
prosecutions.

      We, our contract manufacturers, all of our subsuppliers, as well as the
suppliers of the medical lasers required for Visudyne and other PDT therapy, are
subject to numerous federal, state and local laws relating to such matters as
safe working conditions, manufacturing practices, environmental protection, fire
hazard control and disposal of hazardous or potentially hazardous substances. In
addition, advertising and promotional materials relating to medical devices and
drugs are, in certain instances, subject to regulation by the Federal Trade
Commission or the FDA. We,

                                       40

<PAGE>

our contract manufacturers, subsuppliers and laser suppliers may be required to
incur significant costs to comply with such laws and regulations in the future,
and such laws or regulations may materially harm our business. Unanticipated
changes in existing regulatory requirements, the failure of us, our any of these
manufacturers, subsuppliers or suppliers to comply with such requirements or the
adoption of new requirements could materially harm our business.

OUR BUSINESS COULD SUFFER IF WE ARE UNSUCCESSFUL IN IDENTIFYING, NEGOTIATING OR
INTEGRATING FUTURE ACQUISITIONS, BUSINESS COMBINATIONS OR STRATEGIC ALLIANCES.

From time to time, we may engage in negotiations to expand our operations and
market presence by future product, technology or other acquisitions and business
combinations, joint ventures or other strategic alliances with other companies.
We may not be successful in identifying, initiating or completing such
negotiations. Competition for attractive product acquisition or alliance targets
can be intense, and there can be no guarantee that we will succeed in completing
such transactions on terms which are acceptable to us. Even if we are successful
in these negotiations, these transactions create risks, such as the difficulties
in assimilating the operations and personnel of an acquired business; the
potential disruption to our ongoing business, and the potential negative impact
on our earnings. We may not succeed in addressing these risks. If we are not
successful, our business could suffer.

WE ARE A DEFENDANT IN PENDING INTELLECTUAL PROPERTY AND PATENT LAWSUITS THAT MAY
REQUIRE US TO PAY SUBSTANTIAL ROYALTIES OR DAMAGES, MAY SUBJECT US TO OTHER
EQUITABLE RELIEF OR MAY OTHERWISE SERIOUSLY HARM OUR BUSINESS.

      We are a defendant in four lawsuits filed against us (see "Item 3. Legal
Proceedings".) Although we believe that the claims of the plaintiffs in these
lawsuits are without merit, these lawsuits may not ultimately be resolved in our
favor. If they are not resolved in our favor, we may be obligated to pay
damages, may be obligated to pay an additional royalty or damages for access to
the inventions covered by claims in issued U.S. patents, may be subject to such
equitable relief as a court may determine (which could include an injunction) or
may be subject to a remedy combining some or all of the foregoing.

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.

      We may not be able to obtain and enforce patents, to maintain trade secret
protection for our technology and to operate without infringing on the
proprietary rights of third parties. The extent to which we are unable to do so
could materially harm our business.

      We have applied for and will continue to apply for patents for certain
aspects of Visudyne and our other products and technology. Such applications may
not result in the issuance of any patents, and any patents now held or that may
be issued may not provide us with a preferred position with respect to any
product or technology. It is possible that patents issued or licensed to us may
be challenged successfully. In that event, to the extent a preferred position is
conferred by such patents, any preferred position held by us would be lost. If
we are unable to secure or to continue to maintain a preferred position,
Visudyne and our other products could become subject to competition from the
sale of generic products. In addition, we have an exclusive worldwide license
from UBC, (see "Patents, Trademarks and Proprietary Rights") for all of the
patents and know-how owned by UBC relating to verteporfin, QLT0074 and certain
additional photosensitizers and their use as therapeutics or diagnostics. Under
our license agreement with UBC, if we fail to make any required payments to UBC,
UBC would have the right to terminate these licenses. Under our license
agreement with MGH (see "Patents, Trademarks and Proprietary Rights"), MGH would
have the right to terminate the license if we defaulted under the agreement and
failed to cure such default within 60 days.

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

      It is also possible that a court may find us to be infringing validly
issued patents of third parties. In that event, in addition to the cost of
defending the underlying suit for infringement, we may have to pay license fees
and/or damages and may be enjoined from conducting certain activities. Obtaining
licenses under third-party patents can be costly, and

                                       41

<PAGE>

such licenses may not be available at all. Under such circumstances, we may need
to materially alter our products or processes.

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

WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE, AND OUR PROSPECTS FOR OBTAINING IT
ARE UNCERTAIN.

      Our business may not generate the cash necessary to fund our operations
and anticipated growth. We expect that the funding requirements for our
operating activities will continue to increase substantially in the future,
primarily due to the expanded clinical testing of our other products. The amount
required to fund additional operating expenses will also depend on other
factors, including the status of competitive products, the success of our
research and development programs, the extent and success of any collaborative
research arrangements and the results of product, technology or other
acquisitions or business combinations. We could seek additional funds in the
future from a combination of sources, including product licensing, joint
development and other financing arrangements. In addition, we may issue debt or
equity securities if we determine that additional cash resources could be
obtained under favorable conditions or if future development funding
requirements cannot be satisfied with available cash resources. Additional
capital may not be available on terms favorable to us, or at all. If adequate
capital is unavailable, we may not be able to engage in desirable acquisition or
in-licensing opportunities and may have to reduce substantially or eliminate
expenditures for research, development, clinical testing, manufacturing and
marketing for Visudyne and our other products.

WE ARE SUBJECT TO ENVIRONMENTAL COMPLIANCE RISKS.

      Our research, development and manufacturing areas involve the controlled
use of hazardous chemicals, primarily flammable solvents, corrosives, and
toxins. The biologic materials include microbiological cultures, animal tissue
and serum samples. Some experimental and clinical materials include human source
tissue or fluid samples. We are subject to federal, state/provincial and local
government regulation in the conduct of business, including regulations on
employee safety and handling and disposal of hazardous and radioactive
materials. Any new regulation or change to an existing regulation could require
it to implement costly capital or operating improvements for which we have not
budgeted. If we do not comply with these regulations, we may be subject to fines
and other liabilities.

VARIOUS PROVISIONS OF OUR CHARTER AND OUR SHAREHOLDER RIGHTS PLAN MAY HAVE THE
EFFECT OF IMPEDING A CHANGE IN CONTROL, MAKING REMOVAL OF THE PRESENT MANAGEMENT
MORE DIFFICULT OR RESULTING IN RESTRICTIONS ON THE PAYMENT OF DIVIDENDS AND
OTHER DISTRIBUTIONS TO THE SHAREHOLDERS.

      With shareholder approval, we have adopted a shareholder rights plan that
will be in effect for six years commencing March 17, 2002, subject to further
confirmation by shareholders at our Annual Meeting of Shareholders this year.
The general effect of the plan is to require anyone who seeks to acquire 20% or
more of our outstanding common shares to make a bid complying with specific
provisions included in the plan. In certain circumstances, holders of common
shares may acquire additional shares of QLT (or those of the acquirer) at a 50%
discount from the then-prevailing market price. The provisions of the plan could
prevent or delay the acquisition of our company by means of a tender offer, a
proxy contest or otherwise, making it more difficult for shareholders to receive
any premium over the current market price that might be offered.

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

                                       42

<PAGE>

THE MARKET PRICE OF OUR COMMON SHARES IS EXTREMELY VOLATILE.

      The stock prices of pharmaceutical and biopharmaceutical companies,
including QLT, are extremely volatile, and it is likely that the market price of
our common shares will continue to be highly volatile. During 2004, the closing
market price of our common shares on NASDAQ has ranged from a low of $14.69 per
share in the fourth quarter to a high of $30.30 in the second quarter. Our stock
price could be subject to wide fluctuations in response to a number of factors,
including:

      -     announcements by us or our competitors of favorable product sales,
            significant acquisitions, strategic relationships, joint ventures or
            capital commitments;

      -     announcements by us or our competitors of technological innovations
            or new commercial products;

      -     results of clinical trials for our products under development;

      -     developments relating to patents, proprietary rights and potential
            infringement;

      -     expense and time associated with obtaining government approvals for
            marketing of Visudyne and our other products under development;

      -     reimbursement policies of various government and third-party payers;

      -     public concern over the safety of Visudyne, Eligard and our other
            products under development or those of our competitors;

      -     changes in estimates of our revenue and operating results;

      -     variances in our revenue or operating results from forecasts or
            projections;

      -     recommendations of securities analysts regarding investment in our
            stock;

      -     governmental medical price discussions;

      -     factors beyond our control which affect the stock markets generally,
            including, but not limited to, current political and economic
            events, market and industry trends and broad market fluctuations;
            and

      -     adverse developments in the litigation to which we are a party.

      These broad market and industry factors may materially and adversely
affect our stock price, regardless of our operating performance.


I
TEM  2. PROPERTIES

      In Vancouver, British Columbia, Canada we own and occupy a 160,000 square
foot facility on the 2.3 acre site where our head office, certain research
facilities and pilot manufacturing facility are located. We also own an
additional 2.6 acres of land immediately adjacent to our head office facilities.
At present, we have no plans to construct facilities on our adjacent site.

      In the U.S., we lease 43,000 square feet of office and research laboratory
space located in Fort Collins, Colorado, pursuant to a lease that expires in
June 2006. We own a manufacturing facility in Fort Collins that we acquired in
July 1996 and we completed an expansion of this facility in the second quarter
of 2003. The expansion increased the square footage of the manufacturing
facility from 26,000 square feet to 58,000 square feet. As part of the building
acquisition, we acquired two acres of vacant land, directly adjacent to the
building. In August 1997, we acquired an additional 2.7 acres of vacant land in
Fort Collins. We currently have approximately four acres of vacant land in Fort
Collins for possible future development or expansion.

      We believe that our existing facilities are adequate to meet our needs for
the foreseeable future.


ITEM  3. LEGAL PROCEEDINGS

      Certain of our legal proceedings are discussed below and in Note 22 to the
consolidated financial statements, "Contingencies". While we believe the claims
against us are without merit and we intend to vigorously defend against these
claims, it is impossible to predict accurately or determine the eventual outcome
of these proceedings.

                                       43

<PAGE>

      TAP LITIGATION

      In 2003, TAP Pharmaceutical Products, Inc., or TAP Pharmaceutical, Takeda
      Chemical Industries Ltd. and Wako Pure Chemical Industries, Ltd. filed
      suit against Atrix (now QLT USA, Inc.), in a U.S. federal court, alleging
      that the Eligard delivery system infringes a patent (U.S. Patent
      No.4,728,721) licensed to TAP Pharmaceutical by the two other plaintiffs.
      The patent expires on May 1, 2006. In March 2004, the court granted our
      motion to stay the patent infringement suit, pending the outcome of
      re-examination of the patent-in-suit by the U.S. Patent and Trademark
      Office. The plaintiffs filed a motion seeking reconsideration of the stay
      order, but the motion was denied. TAP Pharmaceutical requested that it be
      allowed to file a motion for preliminary injunction, and the court denied
      that request. The court lifted the stay on November 16, 2004 following the
      conclusion of the re-examination proceedings. The judge has not yet set a
      trial date. If this lawsuit is not resolved in our favor, we may be
      enjoined from selling some or all of our Eligard products until the patent
      expires in 2006, and/or may be required to pay financial damages, which
      could be substantial.

      On June 21, 2004, Takeda Chemical Industries Ltd., or Takeda, Wako Pure
      Chemical Industries, Ltd. and Takeda Pharma GmbH filed a Request for
      Issuance of a Provisional Injunction against MediGene AG and Yamanouchi
      Pharma GmbH, or Yamanouchi, in the Regional Court Hamburg, the Federal
      Republic of Germany. The request alleged that MediGene AG and Yamanouchi
      Pharma GmbH infringe a German patent, EP 0 202 065, and sought an
      injunction preventing defendants from producing, offering, putting on the
      market or using, or importing or possessing for these purposes, in the
      Federal Republic of Germany a solvent for preparing an injectable solution
      containing a polymer claimed in EP 0 202 065. On July 26, 2004, the Court
      denied the plaintiff's request for a Provisional Injunction.

      On June 28, 2004, Takeda Chemical Industries Ltd., Wako Pure Chemical
      Industries, Ltd. and Takeda GmbH filed a complaint in the Regional Court
      Dusseldorf, the Federal Republic of Germany, against MediGene AG, or
      MediGene, and Yamanouchi Pharma GmbH alleging infringement of the same
      patent. On June 1, 2004, MediGene AG filed an action in the Federal Patent
      Court in Munich, Germany seeking the nullification of the patent that is
      the subject of the June 28, 2004 complaint. If the patent is not nullified
      by the Federal Patent Court and Takeda's action in the Regional Court
      Dusseldorf is not resolved in favor of MediGene and Yamanouchi, they may
      be precluded from selling Eligard products in Germany until the patent
      expires in 2006. In such event, our revenue from sales of Eligard in
      Germany may decrease. Trial of the action in the Regional Court Dusseldorf
      is expected to take place in July 2005. Trial of the nullity action in
      Munich has been scheduled for April 2005.

      PATENT LITIGATION WITH MEEI

      First MEEI Lawsuit

      In April 2000, Massachusetts Eye and Ear Infirmary, or MEEI, filed a civil
      suit against us in the U.S. District Court (the "Court") for the District
      of Massachusetts seeking to establish exclusive rights for MEEI as the
      owner of certain inventions relating to the use of verteporfin as the
      photoactive agent in the treatment of certain eye diseases including AMD.

      In 2002, we moved for summary judgement against MEEI on all eight counts
      of MEEI's complaint in Civil Action No. 00-10783-JLT. The Court granted
      all of our summary motions, dismissing all of MEEI's claims. With respect
      to our counterclaim requesting correction of inventorship of U.S. Patent
      No. 5,798,349, or the `349 Patent, to add an additional Massachusetts
      General Hospital inventor, the Court stayed the claim pending the outcome
      of the lawsuit described below.

      MEEI appealed the decision of the Court to the U.S. District Court of
      Appeals. On February 19, 2005, the Court of Appeals issued its ruling,
      upholding the dismissal of five of MEEI's eight claims, and remanding
      three claims to trial on the basis that they should not have been
      determined on summary judgment.

      No trial has been scheduled.

                                       44

<PAGE>

      Second MEEI Lawsuit

      In May 2001, the U.S. Patent Office issued U.S. Patent No. 6,225,303, or
      the '303 Patent, to MEEI. The `303 Patent is derived from the same patent
      family as the patent in issue in the first suit, the '349 Patent, and
      claims a method of treating unwanted choroidal neovasculature in a
      shortened treatment time using verteporfin. The patent application which
      led to the issuance of the `303 Patent was filed and prosecuted by
      attorneys for MEEI and, in contrast to the '349 Patent, named only MEEI
      researchers as inventors.

      The same day the `303 Patent was issued, MEEI commenced a second civil
      suit against us and Novartis Ophthalmics, Inc. (now Novartis Ophthalmics,
      a division of Novartis Pharma AG) in the U.S. District Court for the
      District of Massachusetts alleging infringement of the `303 Patent (Civil
      Action No. 01-10747-EFH). The suit seeks damages and injunctive relief for
      patent infringement and unjust enrichment. We have answered the complaint,
      denying its material allegations and raising a number of affirmative
      defenses, and have asserted counterclaims against MEEI and the two MEEI
      researchers who are named as inventors on the `303 Patent.

      In April 2003, we moved to dismiss MEEI's claim for unjust enrichment on
      the grounds that this claim had been previously decided by a court. The
      Court granted our motion in May 2003.

      In January 2005, the Court ruled in our favor on one of our counterclaims
      and declared that the inventorship of the `303 Patent be corrected to add
      QLT scientist Dr. Julia Levy as a joint inventor. That ruling gives us the
      right, as a co-owner to exploit the patent in issue. MEEI has a right to
      appeal the Court's ruling.

      The final outcomes of these disputes are not presently determinable or
estimable and there can be no assurance that the matters will be finally
resolved in favor of the Company. If the lawsuits are not resolved in our favor,
we might be obliged to pay damages, or an additional royalty or damages for
access to the inventions covered by claims in issued U.S. patents, and might be
subject to such equitable relief as a court may determine (which could include
an injunction) or a remedy combining some or all of those remedies foregoing.


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

      A special meeting of shareholders of the Company (the "Meeting") was held
on November 19, 2004. The resolution voted on at the Meeting, and the outcome,
was as follows:

Resolution

   Be it resolved that the issuance of Company common shares pursuant to the
   Agreement and Plan of Merger, dated as of June 14, 2004, by and among the
   Company, Aspen Acquisition Corp., which is a wholly owned subsidiary of the
   Company, and Atrix Laboratories, Inc., all as more particularly described in
   the Joint Proxy Statement/Prospectus which was mailed to shareholders along
   with the notices of the meeting be approved.

                                       45

<PAGE>

      The proxies received by the Company for the Meeting and votes cast at the
meeting were voted as follows on the foregoing resolution, and the resolution
was declared passed:


<TABLE>
<CAPTION>
Shares For     Shares Against    Shares Withheld     Abstentions      Broker Non-Votes
----------     --------------    ---------------     -----------      ----------------
<S>            <C>               <C>                 <C>              <C>
39,811,521        2,274,992              0                 0                   0
</TABLE>



                                     PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER
        MATTERS

COMMON SHARE INFORMATION

      The common shares of the Company trade in Canada on the Toronto Stock
Exchange under the symbol "QLT" and in the U.S. on The NASDAQ Stock Market under
the symbol "QLTI". The following table sets out, for the periods indicated, the
high and low closing sales prices and trading volumes of the common shares, as
reported by the Toronto Stock Exchange and The NASDAQ Stock Market.


<TABLE>
<CAPTION>
                    THE TORONTO STOCK EXCHANGE            THE NASDAQ STOCK MARKET
                  -------------------------------     ----------------------------------
                   HIGH      LOW                       HIGH         LOW
                  (CAD$)    (CAD$)       VOLUME       (U.S.$)     (U.S.$)       VOLUME
<S>               <C>       <C>        <C>            <C>          <C>        <C>
2004

Fourth Quarter    $ 22.90   $ 17.96    19,079,853     $ 17.92     $ 14.77     82,779,712
Third Quarter       26.15     19.16    21,139,783       19.80       14.69     86,854,431
Second Quarter      40.54     24.00    24,245,951       30.30       17.55     85,419,736
First Quarter       34.73     21.76    26,639,428       26.60       16.85     90,963,605

2003

Fourth Quarter    $ 25.60   $ 20.07    22,771,773     $ 19.55     $ 15.40     61,456,084
Third Quarter       24.19     17.80    27,722,610       17.80       12.79     57,616,105
Second Quarter      19.53     14.09    23,173,048       14.60        9.56     26,128,320
First Quarter       15.00     11.82    15,341,498       10.16        7.73     13,683,009
</TABLE>


      The last reported sale price of the common shares on The Toronto Stock
Exchange and on The NASDAQ Stock Market on March 10, 2005 was CAD $15.63 and
U.S. $12.98, respectively.

      As of March 1, 2005, there were 992 registered holders of our common
shares, 820 of who were residents of the U.S. Of the total 93,375,154 common
shares outstanding, the portion held by registered holders resident in the U.S.
was 44,059,775 or 47.2%.

DIVIDEND POLICY


                                       46

<PAGE>

      The Company has not declared or paid any dividends on its common shares
since inception. The Company currently anticipates that it will retain any
future earnings, if any, to finance the expansion of its business and does not
anticipate paying dividends in the foreseeable future.

EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING HOLDERS OF COMMON SHARES

      There is no law, governmental decree or regulation in Canada that
restricts the export or import of capital, or which would affect the remittance
of dividends or other payments by the Company to non-resident holders of common
shares in the Company, other than withholding tax requirements.

      There is no limitation imposed by Canadian law or the charter or other
constituent documents of the Company on the right of non-residents to hold or
vote common shares in the Company, other than those imposed by the Investment
Canada Act (Canada) (the "Investment Act").

      The Investment Act requires each individual, government or agency thereof,
corporation, partnership, trust or joint venture that is not a "Canadian" as
defined in the Investment Act (a "non-Canadian") who commences a new business
activity in Canada or acquires control of an existing Canadian business, where
the establishment or acquisition of control is not a reviewable transaction, to
file a notification with Industry Canada. The Investment Act generally prohibits
implementation of a reviewable transaction by a non-Canadian unless after review
the minister responsible for the Investment Act is satisfied that the investment
is likely to be of net benefit to Canada. An investment in common shares of the
Company by a non-Canadian would be reviewable under the Investment Act if it
were an investment to acquire control of the Company and the value of the assets
of the Company was $5 million or more. Higher limits apply for acquisitions by
or from World Trade Organization, or WTO, member country investors.

      The acquisition of a majority of the voting interests of an entity or of a
majority of the undivided ownership interests in the voting shares of an entity
that is a corporation is deemed to be acquisition of control of that entity. The
acquisition of less than a majority but one-third or more of the voting shares
of a corporation or of an equivalent undivided ownership interest in the voting
shares of the corporation is presumed to be acquisition of control of that
corporation unless it can be established that, on the acquisition, the
corporation is not controlled in fact by the acquirer through the ownership of
voting shares. The acquisition of less than one-third of the voting shares of a
corporation or of an equivalent undivided ownership interest in the voting
shares of the corporation is deemed not to be acquisition of control of that
corporation. Certain transactions in relation to common shares in the Company
would be exempt from review from the Investment Act, including:

      (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.

      The Investment Act was amended with the Act to Implement the Agreement
Establishing the World Trade Organization, or WTO, to provide for special review
thresholds for WTO member country investors. Under the Investment Act, as
amended, an investment in common shares of the Company by a non-Canadian who is
a WTO investor (as defined in the Investment Act) would be reviewable only if it
were an investment to acquire control of our Company and the value of the assets
of our Company was equal to or greater than a specified amount (the "Review
Threshold"), which increases in stages. The Review Threshold was $223 million in
2003, $237 million in 2004, and is $250 million in 2005. This amount is subject
to an annual adjustment on the basis of a prescribed formula in the Investment
Act to reflect inflation and real growth within Canada.

                                       47

<PAGE>

CERTAIN CANADIAN AND U.S. FEDERAL INCOME TAX INFORMATION FOR U.S. RESIDENTS

      The following is a summary of certain Canadian and U.S. federal income tax
considerations applicable to holders of common shares of our Company. These tax
considerations are stated in brief and general terms and are based on Canadian
and U.S. law currently in effect. There are other potentially significant
Canadian and U.S. federal income tax considerations and provincial, state and
local income tax considerations with respect to ownership and disposition of the
common shares which are not discussed herein. The tax considerations relative to
ownership and disposition of the common shares may vary from shareholder to
shareholder depending on the shareholder's particular status. Accordingly,
shareholders and prospective shareholders are encouraged to consult with their
tax advisors regarding tax considerations, which may apply to the particular
situation.

CANADIAN FEDERAL TAX INFORMATION

      Dividends paid on the common shares held by non-residents of Canada will
generally be subject to Canadian withholding tax at the rate of 25%. The
Canada-U.S. Income Tax Convention (1980) (the "Convention") provides that the
withholding rate on dividends paid to U.S. residents on the common shares is
generally 15%.

      Gains on sales or other dispositions of the common shares of our Company
by a U.S. resident generally are not subject to Canadian income tax, unless the
shareholder realizes the gains in connection with a business carried on in
Canada. A gain realized upon the disposition of the common shares by a U.S.
resident that is otherwise subject to Canadian tax may be exempt from Canadian
tax under the Convention.

      Where the common shares are disposed of by way of an acquisition of such
common shares by our Company, other than a purchase in the open market in the
manner in which common shares normally would be purchased by any member of the
public in the open market, the amount paid by our Company in excess of the
paid-up capital of such common shares will be treated as a dividend and will be
subject to non-resident withholding tax as described above.

U.S. FEDERAL TAX INFORMATION

      Distributions with respect to our common shares generally will be taxable
as dividends to the extent of our Company's earnings and profits, determined
under U.S. tax principles, subject to the same preferential rate that applies to
long-term capital gain (currently, 15%). Under current law, for taxable years
beginning after December 31, 2008, distributions will be taxed at ordinary rates
without the benefit of such preferential rates.

      Corporate U.S. Holders generally will not be allowed a deduction for
dividends received in respect of distributions on our common shares. Dividends
will be treated as income from sources outside the U.S., but generally will be
"passive income," or in the case of a financial services entity, "financial
services income" (and, for taxable years beginning after December 31, 2005, as
"general category income") for U.S. foreign tax credit purposes.

      Special rules apply to U.S. Holders that hold stock in a "passive foreign
investment company" ("PFIC"). A foreign corporation generally will be a PFIC for
any taxable year in which either (i) 75% or more of its gross income is passive
income or (ii) 50% or more of the average value of its assets consist of assets
that produce, or that are held for the production of, passive income. For this
purpose, passive income generally includes, among other things, interest,
dividends, rents, royalties and gains from certain commodities transactions.

      We believe that our Company was not a PFIC in 2004 and anticipate that it
will not be a PFIC with respect to any subsequent taxable year. However, there
can be no assurance that our Company will not be considered a PFIC in a future
taxable year, because status under the PFIC rules is based in part on factors
not entirely within the Company's control (such as market capitalization).

      We believe that our Company was a PFIC in one or more taxable years prior
to 2000. Accordingly, a U.S. Holder whose common shares were held at any time
during a taxable year in which our Company was a PFIC may be subject to
increased tax liability upon the sale, exchange or other disposition of shares
of our common shares or

                                       48

<PAGE>

upon the receipt of certain distributions. These adverse tax consequences will
not apply, however, if a U.S. Holder timely filed and maintained (and in certain
cases, continue to maintain) a qualified electing fund ("QEF") election to be
taxed annually on the holder's pro rata portion of our Company's earnings and
profits.

      We intend to comply with all record-keeping, reporting and other
requirements so that U.S. Holders, who must continue to maintain a QEF election
to avoid increased tax liability with respect to our common shares, may do so.
However, if meeting those record-keeping and reporting requirements becomes
onerous, we may decide, in our sole discretion, that such compliance is
impractical and will so notify U.S. Holders. 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. THIS STATEMENT IS AVAILABLE ON OUR WEBSITE AT:
WWW.QLTINC.COM.


ITEM  6. SELECTED FINANCIAL DATA

ANNUAL FINANCIAL DATA


<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                      2004 (1)(2)    2003 (2)      2002         2001          2000
(In thousands of U.S. dollars except per share information)  -----------   ---------    ---------    ---------    -----------
<S>                                                          <C>           <C>          <C>          <C>          <C>
CONSOLIDATED STATEMENT OF INCOME DATA
   Total revenues                                            $   186,072   $ 146,750    $ 110,513    $  83,375    $    32,399
   Research and development costs                                 50,059      44,905       42,252       42,909         32,802
   (Loss) income before extraordinary gain                      (178,226)     44,817       13,595       71,512          4,399
   Net (loss) income                                            (165,709)     44,817       13,595       71,512          4,399
   Basic net (loss) income per common share
      (Loss) income before extraordinary gain                      (2.43)       0.65         0.20         1.05           0.07
      Extraordinary gain (3)                                        0.17           -            -            -              -
                                                             -----------   ---------    ---------    ---------    -----------
      Net (loss) income                                            (2.26)       0.65         0.20         1.05           0.07
                                                             -----------   ---------    ---------    ---------    -----------
   Diluted net (loss) income per common share
      (Loss) income before extraordinary gain                      (2.43)       0.59         0.20         1.04           0.06
      Extraordinary gain (3)                                        0.17           -            -            -              -
                                                             -----------   ---------    ---------    ---------    -----------
      Net (loss) income                                            (2.26)       0.59         0.20         1.04           0.06
                                                             -----------   ---------    ---------    ---------    -----------

CONSOLIDATED BALANCE SHEET DATA
   Cash, cash equivalents and short-term investment
     securities                                              $   379,852   $ 495,430    $ 207,935    $ 162,774    $   165,430
   Working capital                                               465,826     556,733      260,127      223,585        201,319
   Total assets                                                1,116,249     634,722      345,841      317,933        259,957
   Long term obligations                                         172,500     172,500            -            -          8,716
   Total shareholders' equity                                    856,779     433,371      313,545      292,701        235,982
                                                             -----------   ---------    ---------    ---------    -----------
</TABLE>


For all years presented there were no cash dividends per common share.

                                       49

<PAGE>

QUARTERLY FINANCIAL DATA (2)

      Set out below is selected unaudited consolidated financial information for
each of the fiscal quarters of 2004 and 2003.


<TABLE>
<CAPTION>
THREE MONTHS ENDED                                           DECEMBER 31 (1)    SEPTEMBER 30     JUNE 30        MARCH 31
(In thousands of U.S. dollars except per share information)  ---------------    ------------    ----------     ----------
<S>                                                          <C>                <C>             <C>            <C>
2004
   Total revenues                                            $        53,809    $     46,553    $   44,399     $   41,311
   Research and development costs                                     17,192          12,200        11,257          9,410
   (Loss) income before extraordinary gain                          (223,240)         16,701        14,684         13,629
   Net (loss) income                                                (221,116)         16,701        14,684         24,022
   Basic net (loss) income per common share
      (Loss) income before extraordinary gain                          (2.64)           0.24          0.21           0.20
      Extraordinary gain (3)                                            0.02               -             -           0.15
                                                             ---------------    ------------    ----------     ----------
      Net (loss) income                                                (2.62)           0.24          0.21           0.35
                                                             ---------------    ------------    ----------     ----------
   Diluted net (loss) income per common share
      (Loss) income before extraordinary gain                          (2.64)           0.24          0.20           0.19
      Extraordinary gain (3)                                            0.02               -             -           0.15
                                                             ---------------    ------------    ----------     ----------
      Net (loss) income                                                (2.62)           0.24          0.20           0.34
                                                             ---------------    ------------    ----------     ----------

  2003
     Total revenues                                          $        39,488    $     38,282    $   36,009     $   32,971
     Research and development costs                                   12,259           9,684        12,087         10,875
     Net income                                                        8,970          13,149        11,159         11,539
     Basic net income per common share                                  0.13            0.19          0.16           0.17
     Diluted net income per common share                                0.13            0.19          0.16           0.17
                                                             ---------------    ------------    ----------     ----------
</TABLE>


(1) 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 $4.1 million, a $236 million charge for
purchased in-process research and development, and amortization of acquired
intangibles of $0.9 million.

(2) In accordance with EITF Issue No. 04-08, The Effect of Contingently
Convertible Debt on Diluted Earnings per Share, the diluted earnings per share
for the year ended December 31, 2004 include the dilutive effect of convertible
debt. The diluted earnings per share for the year ended December 31, 2003 and
the quarterly results reported for 2004 have been restated to conform with EITF
No. 04-08.

(3) 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.

(4) 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 results
of using different weighted average numbers of shares outstanding.

                                       50

<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

      The following information should be read in conjunction with our 2004
consolidated financial statements and notes thereto, which are prepared in
accordance with generally accepted accounting principles, or GAAP, in the United
States of America, or U.S.. All amounts following are expressed in U.S. dollars
unless otherwise indicated.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

      This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the United States Private Securities Litigation Reform Act of
1995 which are based on our current expectations and projections. Words such as
"anticipate", "project", "expect", "forecast", "outlook", "plan", "intend",
estimate", "should", "may", "assume", "continue", and variations of such words
or similar expressions are intended to identify our forward-looking statements.
Forward looking statements include, but are not limited to, those in which we
state:

      -     anticipated levels of sales of our products;

      -     anticipated future operating results;

      -     our expectations regarding the pending patent-related litigation
            against us;

      -     the anticipated timing and progress of clinical trials;

      -     the anticipated timing of regulatory submissions for our products;

      -     the anticipated timing and receipt of regulatory approvals for our
            products; and

      -     the anticipated timing for and receipt of further reimbursement
            approvals for our products in development.

We caution that actual outcomes and results may differ materially from those
expressed in our forward-looking statements because such statements are
predictions only and they are subject to a number of important risks factors and
uncertainties. Risk factors and uncertainties which could cause actual results
to differ from what is expressed or implied by our forward-looking statements
are described in more detail in this Annual Report under the headings: "Business
-- "Risk Factors", "Legal Proceedings", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the "Notes to the
Consolidated Financial Statements". We encourage you to read those descriptions
carefully. We caution investors not to place undue reliance on the
forward-looking statements contained in this report. These statements, like all
statements in this report, speak only as of the date of this report, unless an
earlier date is indicated, and, except as required by law and the rules and
regulations of the SEC and Canadian regulatory authorities, we undertake no
obligation to update or revise the statements.

OVERVIEW

      We are a global biopharmaceutical company dedicated to the discovery,
development and commercialization of innovative therapies in the fields of
ophthalmology, dermatology, oncology and urology. Our company was formed in 1981
under the laws of the Province of British Columbia, Canada.

      Our first commercial product was in the field of photodynamic therapy, or
PDT, which uses photosensitizers (light activated drugs) in the treatment of
disease. Our most significant commercial product, Visudyne(R), utilizes PDT to
treat the eye disease known as wet-form age related macular degeneration, or wet
AMD, the leading cause of blindness in people over 55 in North American and
Europe.

      Visudyne is commercially available in more than 70 countries, including
the U.S., Canada, Japan and the European Union countries, for the treatment of a
form of wet AMD known as predominantly classic subfoveal choroidal
neovascularization, or CNV, and in over 40 countries for the form of wet AMD
known as occult subfoveal CNV. Visudyne is reimbursed in the U.S. by the Centers
for Medicare & Medicaid Services for certain patients with the occult and
minimally classic forms of wet AMD. It is also approved in more than 55
countries, including the U.S., Canada and the European Union countries, for the
treatment of subfoveal CNV due to pathologic myopia (severe near-sightedness).
In some countries (including the U.S. and Canada) Visudyne is also approved for

                                       51

<PAGE>

presumed ocular histoplasmosis or other macular diseases. QLT developed and
commercializes Visudyne through a contractual alliance with Novartis Ophthalmics
(a division of Novartis Pharma AG).

      In November 2004, we acquired Atrix Laboratories, Inc., a Fort Collins,
Colorado based biopharmaceutical company focused on advanced drug delivery, for
which we paid aggregate consideration of $870.5 million, in cash and equity.
With our acquisition of Atrix (now our wholly owned subsidiary QLT USA, Inc.) we
have expanded and diversified our portfolio of approved products, products in
development or under regulatory review, and proprietary technologies.

      In addition to our lead commercial product Visudyne, as a result of the
Atrix acquisition, we now market, through commercial partners, the Eligard(R)
group of products for the treatment of prostate cancer, a line of dermatology
products and a line of dental products. The Eligard product line includes four
different commercial formulations of our Atrigel(R) technology combined with
leuprolide acetate for the treatment of prostate cancer. The U.S. Food and Drug
Administration, or FDA, has approved all four products: Eligard 7.5-mg
(one-month), Eligard 22.5-mg (three-month), Eligard 30.0-mg (four-month) and
Eligard 45.0-mg (six-month). The Eligard 7.5-mg and Eligard 22.5-mg products are
also approved in a number of other countries, including most European countries,
Canada, Australia and a number of Latin American countries.

      Our newly acquired portfolio of dermatology products consists of both
proprietary and generic products that are commercialized, under regulatory
review, or in various stages of development. Our lead proprietary dermatology
product, Aczone(TM), is currently undergoing regulatory review; a new drug
application, or NDA, was filed with the FDA for Aczone in the third quarter of
2004. Our generic dermatology business, which is part of a 50/50 joint venture
with Sandoz, Inc., currently comprises five marketed products and five under
regulatory review.

      Our efforts to increase our portfolio of marketed products are ongoing. We
have a number of product candidates in our development pipeline in addition to
Aczone including another photosensitizer, lemuteporfin (which we used to call
QLT0074), currently being studied in the treatment of benign prostatic
hyperplasia, or BPH, the most common prostatic disease. We carry out research
and pre-clinical projects, in fields such as ophthalmology, dermatology, and
oncology. We also carry out contract research and development work on product
candidates of third parties from which we can potentially derive royalty revenue
upon commercialization.

                                       52

<PAGE>

ACQUISITION OF ATRIX LABORATORIES, INC.

      On November 19, 2004, we completed our acquisition of Atrix Laboratories,
Inc., or Atrix, a biopharmaceutical company focused on advanced drug delivery.
Upon completion of the acquisition, each outstanding share of Atrix common stock
was converted into the right to receive one QLT Inc. common share and $14.61 in
cash. In addition, each option to purchase Atrix common stock that was
outstanding at the closing of the acquisition was assumed by QLT in accordance
with the Agreement and Plan of Merger dated June 14, 2004 among QLT and Atrix.
The results of operations of Atrix are included in the consolidated statement of
operations since the acquisition date, and the related assets and liabilities
were recorded based upon their respective fair values at the date of
acquisition.

      We paid aggregate consideration of $870.5 million ($325.6 million in cash,
$436.1 million in common shares, $93.9 million in other equity, and $15.0
million in acquisition related expenditures) for the Atrix business. We
allocated the total consideration for Atrix, including acquisition costs, based
on our preliminary assessment as to the estimated fair values on the acquisition
date. Our preliminary assessment is subject to change upon the final
determination of the fair value of the assets acquired and liabilities assumed.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      In preparing our consolidated financial statements, we are required to
make certain estimates, judgements and assumptions that we believe are
reasonable based upon the information available. These estimates and assumptions
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods presented. Significant estimates are used for, but not limited to,
provisions for non-completion of inventory, assessment of the net realizable
value of long-lived assets, accruals for contract manufacturing and research and
development agreements, allocation of costs to manufacturing under a standard
costing system, allocation of overhead expenses to research and development,
determination of fair value of assets and liabilities acquired in the purchase
business combinations, and provisions for taxes and contingencies. The
significant accounting policies which we believe are the most critical to aid in
fully understanding and evaluating our reported financial results include those
which follow:

REPORTING CURRENCY AND FOREIGN CURRENCY TRANSLATION

      We use the U.S. dollar as our reporting currency, while the Canadian
dollar is the functional currency for the parent company and the U.S. dollar is
the functional currency for the U.S. subsidiary. Our consolidated financial
statements are translated into U.S. dollars using the current rate method.
Assets and liabilities are translated at the rate of exchange prevailing at the
balance sheet date. Shareholders' equity is translated at the applicable
historical rates. Revenues and expenses are translated at a weighted average
rate of exchange for the respective years. Translation gains and losses are
included as part of the cumulative foreign currency translation adjustment,
which is reported as a component of shareholders' equity under accumulated other
comprehensive income (loss). As of December 31, 2004, our accumulated other
comprehensive income totalled $89.9 million.

REVENUE RECOGNITION

Net Product Revenue

      Our net product revenues are primarily derived from sales of Visudyne and
Eligard.

      With respect to Visudyne, under the terms of our collaborative agreement
with Novartis Ophthalmics we are responsible for Visudyne manufacturing and
product supply and Novartis Ophthalmics is responsible for marketing and
distribution of Visudyne. Our agreement with Novartis Ophthalmics provides that
the calculation of total revenue for the sale of Visudyne be composed of three
components: (1) an advance on the cost of inventory sold to Novartis
Ophthalmics, (2) an amount equal to 50% of the profit that Novartis Ophthalmics
derives from the sale of Visudyne to end-users, and (3) the reimbursement of
other specified costs incurred and paid for by us (See Note 15 - Net Product
Revenues). We recognize revenue from the sale of Visudyne when persuasive
evidence of an

                                       53

<PAGE>

arrangement exists, delivery to Novartis Ophthalmics has occurred, the end
selling price of Visudyne is fixed or determinable, and collectibility is
reasonably assured. Under the calculation of revenue noted above, this occurs
upon "sell through" of Visudyne to the end customers. Our revenue from Visudyne
will fluctuate dependent upon Novartis Ophthalmics' ability to market and
distribute the Visudyne to end customers.

      With respect to Eligard, under the terms of our collaborative agreements
with our marketing partners, we are responsible for the manufacture of Eligard
and receive from our marketing partners an agreed upon sales price upon shipment
to them. (We also earn royalties from certain marketing partners based upon
their sales of Eligard products to end customers which royalties are included in
net royalty revenue.) We recognize net revenue from product sales when
persuasive evidence of an arrangement exists, product is shipped and title is
transferred to our marketing partners, collectibility is reasonably assured and
the price is fixed or determinable. Our net product revenue from Eligard will
fluctuate dependent upon our ability to deliver Eligard products to our
marketing partners. Our Eligard marketing partners are responsible for all
products after shipment from our facility.

      We do not offer rebates or discounts and have not experienced any material
product returns; accordingly, we do not provide an allowance for rebates,
discounts, and returns.

Net Royalties

      We recognize net royalties when product is shipped by certain of our
marketing partners to end customers based on royalty rates and formulas
specified in our agreements with them. Generally, royalties are based on
estimated net product sales (gross sales less discounts, allowances and other
items) based on information supplied to us by our marketing partners.

Contract Research and Development

      Contract research and development revenues consist of non-refundable
research and development funding under collaborative agreements with our various
strategic partners. Contract research and development funding generally
compensates us for discovery, preclinical and clinical expenses related to
collaborative development programs for certain products and product candidates,
and is recognized as revenue at the time research and development activities are
performed under the terms of the collaborative agreements. For fixed price
contracts we recognize contract research and development revenue over the term
of the agreement, which is consistent with the pattern of work performed.
Amounts received under the collaborative agreements are non-refundable even if
the research and development efforts performed by us do not eventually result in
a commercial product. Contract research and development revenues earned in
excess of payments received are classified as contract research and development
receivables and payments received in advance of revenue recognition are recorded
as deferred revenue. (See Note 5 - Accounts Receivable and Note 16 - Contract
Research and Development).

COST OF SALES

Visudyne cost of sales, consisting of expenses related to the production of bulk
Visudyne and royalty expense on Visudyne sales, are charged against earnings in
the period that Novartis Ophthalmics sells to third parties. Cost of sales
related to the production of various Eligard, generic dermatology, and Atridox
products are charged against earnings in the period of the related product sale
to our marketing partners. We utilize a standard costing system, which includes
a reasonable allocation of overhead expenses, to account for inventory and cost
of sales, with adjustments being made periodically to reflect current
conditions. Our standard costs are estimated based on management's best estimate
of annual production volumes and material costs. Overhead expenses comprise
direct and indirect support activities related to the manufacture of bulk
Visudyne, various Eligard, generic dermatology, and Atridox products and involve
costs associated with activities such as quality inspection, quality assurance,
supply chain management, safety and regulatory. Overhead expenses are allocated
to inventory during each stage of the manufacturing process under a standard
costing system, and eventually to cost of sales as the related products are sold
to our marketing partners or in the case of Visudyne, by Novartis Ophthalmics to
third parties. While we believe our standard costs are reliable, actual
production costs and volume changes may impact inventory, cost of sales, and the
absorption of production overheads. For Visudyne, we record a provision for the
non-completion of product inventory based on our history of batch completion to
provide for the potential failure of inventory batches to pass quality
inspection. The provision is calculated at each stage of the manufacturing
process. We estimate our

                                       54

<PAGE>

non-completion rate based on past production and adjust our provision quarterly
based on actual production volume. A batch failure may utilize a significant
portion of the provision as a single completed batch currently costs between
$0.7 million and $1.3 million, depending on the stage of production. We provide
a reserve for obsolescence of our Eligard inventory and component materials
based on our periodic evaluation of potential obsolete inventory.

STOCK-BASED COMPENSATION

      As allowed by the provisions of SFAS 123, Accounting for Stock-based
Compensation, or SFAS 123, we apply Accounting Principles Board, Opinion No. 25,
or APB 25, and related interpretations in the accounting for employee stock
option plans. SFAS 123 requires that all stock-based awards made to
non-employees be measured and recognized using a fair value based method. The
standard encourages the use of a fair value based method for all awards granted
to employees, but only requires the use of a fair value based method for direct
awards of stock, stock appreciation rights, and awards that call for settlement
in cash or other assets. Estimates of fair value are determined using the
Black-Scholes option pricing model. The use of this model requires certain
assumptions regarding the volatility, term, and risk free interest rate
experienced by the holder. Awards that a company has the ability to settle in
stock are recorded as equity, whereas awards that the entity is required to or
has a practice of settling in cash are recorded as liabilities. We have adopted
the disclosure only provision for stock-based compensation for stock options
granted to employees and directors, consistent with SFAS 123. If we had adopted
a fair value based method for stock-based compensation under SFAS 123, the
impact on our net (loss) income and net (loss) income per common share would
have been as described in Note 3 in "Notes to the Consolidated Financial
Statements".

      In December 2004, the Financial Accounting Standards Board, or FASB,
issued SFAS 123 Revised, Share-Based Payment, or SFAS 123R. The statement
eliminates the alternative to account for stock-based compensation using APB 25
and requires such transactions be recognized as compensation expense in the
statement of earnings based on their fair values on the date of the grant, with
the compensation expense recognized over the period in which a grantee is
required to provide service in exchange for the stock award. We will adopt this
statement on July 1, 2005 using a modified prospective application as defined in
SFAS 123R. As such, the compensation expense recognition provisions will apply
to new awards and to any awards modified, repurchased or cancelled after the
adoption date. Additionally, for any unvested awards outstanding at the adoption
date, we will recognize compensation expense over the remaining vesting period.

RESEARCH AND DEVELOPMENT

      Research and development costs consist of direct and indirect
expenditures, including a reasonable allocation of overhead expenses, associated
with our various research and development programs. Overhead expenses comprise
general and administrative support provided to the research and development
programs and involve costs associated with support activities such as facility
maintenance, utilities, office services, information technology, legal,
accounting and human resources. Research and development costs are expensed as
incurred. Costs related to the acquisition of development rights for which no
alternative use exists are classified as research and development and expensed
as incurred. Patent application, filing and defense costs are also expensed as
incurred.

                                       55

<PAGE>

INCOME TAXES

      Income taxes are reported using the asset and liability method, whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carry forwards using applicable enacted
tax rates. An increase or decrease in these tax rates will increase or decrease
the carrying value of future net tax assets resulting in an increase or decrease
to net income. Income tax credits are included as part of the provision for
income taxes. The realization of our deferred tax assets is primarily dependent
on generating sufficient taxable income prior to expiration of any loss carry
forward balance. A valuation allowance is provided when it is more likely than
not that a deferred tax asset may not be realized.

LEGAL PROCEEDINGS

      We are involved in a number of legal actions, the outcomes of which are
not within our complete control and may not be known for prolonged periods of
time. In these legal actions, the claimants seek damages, as well as other
relief, which, if granted, would require significant expenditures. We record a
liability in the consolidated financial statements for these actions when a loss
is known or considered probable and the amount can be reasonably estimated. If
the loss is not probable or cannot be reasonably estimated, a liability is not
recorded in the consolidated financial statements. Our potentially material
legal proceedings are discussed in Note 22 to the consolidated financial
statements. As of December 31, 2004, no reserve has been established related to
these proceedings.

LONG-LIVED AND INTANGIBLE ASSETS

      Occasionally we incur costs to purchase and construct property, plant and
equipment. The treatment of costs to purchase or construct these assets depends
on the nature of the costs and the stage of construction. Costs incurred in the
initial design and evaluation phase, such as the cost of performing feasibility
studies and evaluating alternatives are charged to expense. Costs incurred in
the committed project planning and design phase, and in the construction and
installation phase, are capitalized as part of the cost of the asset. We stop
capitalizing costs when an asset is substantially complete and ready for its
intended use. Since 2003, we have been depreciating plant and equipment using
the straight-line method over their estimated economic lives, which range from
3-40 years. Determining the economic lives of plant and equipment requires us to
make significant judgments that can materially impact our operating results.

      In accounting for acquisitions, we allocate the purchase price to the fair
value of the acquired tangible and intangible assets, including in-process
research and development, or IPR&D. We generally estimate the value of acquired
intangible assets and IPR&D using a discounted cash flow model, which requires
us to make assumptions and estimates about, among other things: the time and
investment that is required to develop products and technologies; our ability to
develop and commercialize products before our competitors develop and
commercialize products for the same indications; the amount of revenue to be
derived from the products; and appropriate discount rates to use in the
analysis. Use of different estimates and judgments could yield materially
different results in our analysis, and could result in materially different
asset values and IPR&D charges.

      As of December 31, 2004, there were approximately $402.5 million of
goodwill and approximately $119.6 million of net acquired intangibles on our
consolidated balance sheet. We amortize acquired intangible assets using the
straight-line method over their estimated economic lives, which range from 16 to
17 years. Determining the economic lives of acquired intangible assets requires
us to make significant judgments and estimates and can materially impact our
operating results.

IMPAIRMENT OF GOODWILL

      In accordance with SFAS 142, Goodwill and Other Intangibles, we are
required to perform impairment tests annually or whenever events or changes in
circumstances suggest that the carrying value of an asset may not be
recoverable. Assumptions and estimates were made at the time of acquisition of
Atrix specifically regarding product development, market conditions and cash
flows that were used to determine the valuation of goodwill and intangibles.
When we perform impairment tests in future years, the possibility exists that
changes in forecasts and

                                       56

<PAGE>

estimates from those used at the acquisition date could result in impairment
charges.

RECENTLY ISSUED ACCOUNTING STANDARDS

      In September 2004, the Emerging Issues Task Force, or EITF, reached a
consensus on Issue No. 04-08, The Effect of Contingently Convertible Debt on
Diluted Earnings per Share. Issue No. 04-08 addresses the issue of when the
dilutive effect of contingently convertible debt instruments should be included
in diluted earnings per share. Previously, the potential dilutive effect of the
conversion feature was excluded from diluted earnings per share until the
contingent feature was met. Issue No. 04-08 results in contingently convertible
debt instruments being included in diluted earnings per share computations
regardless of whether the contingent features are met. The provisions of Issue
No. 04-08 apply to reporting periods ending after December 15, 2004. The
adoption of Issue No. 04-08 has resulted in our diluted earnings per share
calculation including the dilutive effect of contingently convertible debt.
Prior period diluted earnings per share amounts presented for comparative
purposes have been restated to conform to this method.

      In November 2004, FASB issued SFAS 151, Inventory Costs an amendment of
ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter
4, "Inventory Pricing," to clarify that abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage) be treated as
current period charges. In addition, this Statement requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities during periods of below normal production.
Our consolidated financial statements comply with the requirements of SFAS No.
151.

      In December 2004, FASB issued SFAS 123 Revised, Share-Based Payment, or
SFAS 123R. This statement eliminates the alternative to account for stock-based
compensation using APB 25 and requires such transactions be recognized as
compensation expense in the statement of earnings based on their fair values on
the date of the grant, with the compensation expense recognized over the period
in which a grantee is required to provide service in exchange for the stock
award. We will adopt this statement on July 1, 2005 using a modified prospective
application. As such, the compensation expense recognition provisions will apply
to new awards and to any awards modified, repurchased or cancelled after the
adoption date. Additionally, for any unvested awards outstanding at the adoption
date, we will recognize compensation expense over the remaining vesting period.

      We have begun, but have not yet completed, evaluating the impact of
adopting SFAS 123R on our results of operations. We currently determine the fair
value of stock-based compensation using a Black-Scholes option pricing model for
pro forma purposes. In connection with evaluating the impact of adopting SFAS
123R, we are also considering the potential implementation of different
valuation models to determine the fair value of stock-based compensation,
although no decision has yet been made. However, we believe the adoption of SFAS
123R will have a material impact on our results of operations, regardless of the
valuation technique used.

COMPARISON OF YEARS ENDED DECEMBER 31, 2004 AND 2003

      For the year ended December 31, 2004, we recorded a net loss of $165.7
million, or $2.26 per common share. These results compare with net income of
$44.8 million, or $0.59 per common share, for the year ended December 31, 2003.
During 2004, we recorded a $236.0 million charge for in-process research and
development when we completed our acquisition of Atrix Laboratories, Inc. Also
during 2004, we completed our acquisition of Kinetek Pharmaceuticals, Inc.,
which resulted in an extraordinary gain of $12.5 million, primarily due to the
recognition of certain tax assets. Excluding the charge for in-process research
and development and the extraordinary gain, net income would have been $57.8
million.

REVENUES

NET PRODUCT REVENUE

      Net product revenue was determined as follows:

                                       57

<PAGE>


<TABLE>
<CAPTION>
                                                           For the year        For the year
                                                               ended              ended
                                                          December  31,        December 31, 
                                                               2004                2003
                                                          --------------    ------------------
(In thousands of U.S. dollars)
<S>                                                       <C>               <C>
Visudyne(R) sales by Novartis Ophthalmics                 $      448,277    $          356,948
Less: Marketing and distribution costs                          (133,730)             (110,958)
Less: Inventory costs                                            (25,789)              (22,624)
Less: Royalties                                                  (10,074)               (8,082)
                                                          --------------    ------------------
                                                          $      278,684    $          215,284
                                                          ==============    ==================

QLT share of remaining revenue on final sales (50%)       $      139,342    $          107,642
Add: Inventory costs reimbursed to QLT                            21,791                19,757
Add: Royalties reimbursed to QLT                                  10,074                 8,082
Add: Other costs reimbursed to QLT                                 6,250                 6,644
                                                          --------------    ------------------
Revenue from Visudyne(R) sales                            $      177,457    $          142,125

Net product revenue from Eligard(R) and
other products (from November 20 to December 31, 2004)             1,841                     -
                                                          --------------    ------------------
                                                          $      179,298    $          142,125
                                                          ==============    ==================
</TABLE>


      The 2004 revenue from Visudyne sales of $177.5 million increased by $35.3
million (or 25%) over the year ended December 31, 2003. The increase was
primarily due to a 26% increase in Visudyne sales, which resulted from (i)
continued market growth in Europe, (ii) receipt of reimbursement for certain
occult and minimally classic lesions in the U.S., and (iii) favorable foreign
exchange rates, particularly the strengthening of the Euro relative to the U.S.
dollar (contributing six percentage points of the increase in Visudyne sales).
In 2004, approximately 47% of total Visudyne sales by Novartis Ophthalmics were
in the U.S., compared to approximately 51% in 2003. Overall, the ratio of our
share of revenue on final sales compared to Visudyne sales was 31.1% in 2004, up
from 30.2% in the prior year. Marketing and distribution costs rose to $133.7
million for the year, compared to $111.0 million in 2003, due primarily to
increases in advertising and promotion and sales force expenses.

      As a result of our acquisition of Atrix, our net product revenue included
$1.8 million from Eligard and other Atrix products since November 19, 2004.

NET ROYALTIES

      As a result of our acquisition of Atrix, we have included $2.3 million of
net royalties related to Eligard and other Atrix products since November 19,
2004.

CONTRACT RESEARCH AND DEVELOPMENT REVENUE

      We receive non-refundable research and development funding from Novartis
Ophthalmics and other strategic partners, which is recorded as contract research
and development revenue. For the year ended December 31, 2004, contract research
and development revenue decreased by 4% to $4.4 million. The decrease was due to
the elimination of the multiple basal cell carcinoma program and the cessation
of reimbursement from Xenova Limited for tariquidar development. This was
partially offset by an increase in contract research and development programs
resulting from our acquisition of Atrix.

                                       58

<PAGE>

COSTS AND EXPENSES

COST OF SALES

      For the year ended December 31, 2004, cost of sales was $33.4 million, up
37% compared to $24.3 million for the year ended December 31, 2003. Cost of
sales related to revenue from Visudyne increased to $31.5 million in 2004, from
$24.3 million in 2003, due primarily to the increase in Visudyne sales in the
year. Cost of sales in 2004 also included $1.8 million related to revenue from
Eligard and other products acquired in our acquisition of Atrix. Of this amount,
$0.6 million was related to the fair value adjustment to Atrix's inventory at
the time of the acquisition.

RESEARCH AND DEVELOPMENT

      Research and development, or R&D, expenditures increased $5.2 million (or
11%) to $50.1 million for the year ended December 31, 2004, compared to $44.9
million for the year ended December 31, 2003. The increase was primarily due to
higher spending on integrin-linked kinase, or ILK, research, increased
development work on lemuteporfin, the addition of R&D expenses related to Atrix
projects post-acquisition, and negative foreign exchange effects (primarily the
strengthening of the Canadian dollar against the U.S. dollar). Combined, these
increases more than offset the decrease in spending related to the development
of tariquidar, which was halted during 2003.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

      For the year ended December 31, 2004, selling, general and administrative,
or SG&A, expenses of $17.5 million were up 4% compared to $16.8 million for the
year ended December 31, 2003. The increase primarily related to the addition of
SG&A expenses from the Atrix business post-acquisition, higher compensation
costs, expenses associated with our Sarbanes-Oxley Act compliance efforts and
negative foreign exchange effects (primarily the strengthening of the Canadian
dollar against the U.S. dollar). Combined, these increases were only partially
offset by higher inventory absorption of production overheads and decreased
funding for endowments. SG&A expenses include certain overhead expenses
associated with the manufacture of products.

DEPRECIATION EXPENSE

      Depreciation expense relates to the depreciation of property, plant, and
equipment. For the year ended December 31, 2004, depreciation expense of $3.7
million increased 18% compared to $3.1 million for the year ended December 31,
2003.

AMORTIZATION OF INTANGIBLES

      Amortization of intangibles of $0.9 million related to the developed
technology and trademark intangibles acquired in our acquisition of Atrix on
November 19, 2004. The estimated fair value of the trademark relates to the
Eligard trademark and the estimated fair value of developed technology relates
to existing FDA-approved products (certain Eligard, dermatology and dental
products). Developed technology and trademark intangibles are being amortized
over their expected useful lives of 16 to 17 years, respectively.

IN-PROCESS RESEARCH AND DEVELOPMENT

      In 2004, we incurred an in-process research and development, or IPR&D,
charge of $236 million. There were no IPR&D charges in 2003 or 2002. The amount
expensed to IPR&D in 2004 arose from our acquisition of Atrix. We calculated the
charge for IPR&D related to Atrix by determining the fair value of the existing
products as well as the technology that was currently under development, using
the income approach. Under the income approach, expected future after-tax cash
flows from each of the projects under development are estimated and discounted
to their net present value at an appropriate risk-adjusted rate of return.
Revenues were estimated based on relevant market size and growth factors,
expected industry trends, individual product sales cycles, and the estimated
life of each product's underlying technology. Estimated operating expenses,
income taxes and charges for the use of contributory assets were deducted from
estimated revenues to determine estimated after-tax cash flows for each

                                       59

<PAGE>

project. These projected future cash flows were further adjusted for additional
risks inherent in the development life cycle, the value contributed by any core
technology, and development efforts expected to be completed post acquisition.
These forecasted cash flows were then discounted based on rates derived from our
weighted average cost of capital, weighted average return on assets and the
internal rates of return for the transaction. As the cash flows for each project
had been adjusted to account for the risk associated with each product's
relative stage of development, including the characteristics and applications of
our products, the inherent uncertainties in achieving technological feasibility,
anticipated levels of market acceptance and penetration, market growth rates and
risks related to the impact of potential changes in future target markets, we
determined a discount rate of 13%. When we acquired Atrix, we did not expect to
achieve a material amount of expense reduction or synergies as a result of
integrating the acquired in-process technology. Therefore, the valuation
assumptions did not include anticipated cost savings. A description of the IPR&D
projects acquired are as follows:


<TABLE>
<S>                          <C>
Eligard(R) (Certain          Proprietary products for prostate cancer
formulations)                incorporating a leutinizing hormone-releasing
                             hormone with one of our drug delivery systems. The
                             Atrigel(R) drug delivery technology allows for
                             sustained delivery of leuprolide acetate for
                             periods ranging from one month to six months.

Aczone(TM)                   A proprietary product for the treatment of acne,
                             rosacea, atopic dermatitis and additional
                             indications. Aczone(TM) incorporates dapsone, an
                             anti-inflammatory and antimicrobial drug with one
                             of our drug delivery systems.

Octreotide                   A proprietary product for long term treatment of
                             symptoms associated with carcinoid tumors combined
                             with one of our drug delivery systems.

CP-533,536                   A Pfizer compound formulated with our Atrigel(R)
                             technology for bone growth.

Generic Dermatology          Various generic dermatology products at various
                             stages of clinical trial. 
</TABLE>


      All of the above IPR&D projects, at the date of the acquisition of Atrix,
were at various stages of clinical development and, with the exception of
Eligard 6-month, still required substantial costs to complete. Prior to
commercialization, FDA and other regulatory approvals are still required.
Current estimates of time and investment required to develop these products may
change and we cannot guarantee that we will be able to develop and commercialize
products before our competitors develop and commercialize products for the same
indications. If products based on our acquired IPR&D programs do not become
commercially viable, our results of operations could be materially affected.

INVESTMENT AND OTHER INCOME

NET FOREIGN EXCHANGE GAINS (LOSSES)

      Net foreign exchange gains comprise gains from the impact of foreign
exchange fluctuation on our cash and cash equivalents, short-term investments,
derivative financial instruments, foreign currency receivables, foreign currency
payables and U.S. dollar denominated long term debt. For the year ended December
31, 2004, we recorded net foreign exchange gains of $0.8 million versus net
foreign exchange gains of $3.3 million in 2003. The gains in the year ended
December 31, 2004 were from gains on U.S. dollar long-term debt and foreign
exchange contracts offset by losses on cash and foreign currency receivables and
payables. (See "Liquidity and Capital Resources - Interest and Foreign Exchange
Rates").
 
  Details of our net foreign exchange gains (losses) were as follows:

                                       60

<PAGE>


<TABLE>
<CAPTION>
                                                                For the year ended      For the year ended
                                                                    December 31,           December 31,
(In thousands of U.S. dollars)                                        2004                    2003
------------------------------                                  ------------------      ------------------
<S>                                                             <C>                     <C>
Cash and cash equivalents and short-term investments                 $(11,751)            $ (12,412)
U.S. dollar long-term debt                                             13,258                10,715
Foreign exchange contracts                                                905                 7,900
Foreign currency receivables and payables                              (1,575)               (2,858)
                                                                     --------             ---------
Net foreign exchange gains (losses)                                  $    837             $   3,345
                                                                     ========             =========
</TABLE>


INTEREST INCOME

      For the year ended December 31, 2004, interest income increased 18% to
$10.1 million compared to $8.6 million for the same period in 2003. This
increase was a result of higher cash reserves prior to the acquisition of Atrix
offset by lower yield on short-term investments and a lower cash balance as a
result of payments related to the acquisition of Atrix in November. Our treasury
policy is focused on minimizing risk of loss of principal.

INTEREST EXPENSE

      Interest expense comprised interest accrued on the 3% convertible senior
notes issued on August 15, 2003 and amortization of deferred financing expenses
related to this placement. For the year ended December 31, 2004 interest expense
increased to $6.3 million from $2.4 million in 2003 as a result of the 3%
convertible senior notes being outstanding for the full 2004 year.

OTHER GAINS

      In September 2004, we received payment from Axcan Pharma, Inc. of CAD $2.5
million (U.S. $1.9 million) for a milestone payment resulting from the approval
in Europe of Photofrin(R) for Barrett's esophagus. During the same period in
2003, we received the same amount of CAD $2.5 million (USD $1.8 million) from
Axcan Pharma, Inc. for approval in the U.S. of Photofrin for Barrett's
esophagus.

EXTRAORDINARY GAIN

      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, which focused on discovery and development
of new therapies. During the fourth quarter of 2004, we realized certain
previously unrecognized tax assets and recorded an additional extraordinary gain
of $2.1 million, bringing the total extraordinary gain from this transaction to
$12.5 million. This extraordinary gain is the result of the acquired net assets,
including certain tax assets, having a fair value in excess of the total
consideration paid.

INCOME TAXES

      The provision for income taxes was $29.4 million for the year ended
December 31, 2004, compared to a provision of $24.0 million in 2003. The
effective tax rate for 2004 (negative 19.8%) was impacted by the acquisition of
Atrix and therefore is not a meaningful measure. The effective tax rate reported
in 2003 was 34.8%. Adjusting for the purchase price accounting and increase in
valuation allowance associated with the Atrix acquisition in 2004 and the Diomed
Holdings, Inc., or Diomed, write down in 2003, the rates would have been 34.1%
in 2004 compared to 34.6% in 2003. The net decrease resulted from a reduction in
the Canadian statutory tax rate and was partially offset by revisions to prior
year estimates that ran through the current year provision.

      The net deferred tax asset of $11.7 million was largely the result of
research and development credits as well as other temporary differences. The net
deferred tax liability of $52.2 million was primarily a result of purchase price
accounting for tangible and intangible depreciable assets in connection with the
acquisition of Atrix in 2004.

                                       61

<PAGE>

      As of December 31, 2004, we had a valuation allowance against specifically
identified tax assets. The valuation allowance is reviewed periodically and if
management's assessment of the "more likely than not" criterion for accounting
purposes changes, the valuation allowance is adjusted accordingly (See Note 18
in "Notes to the Consolidated Financial Statements").

COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND 2002

      For the year ended December 31, 2003 we recorded net income of $44.8
million, or basic and diluted net income per common share of $0.65 and $0.59,
respectively. These results compare with net income of $13.6 million, or $0.20
per common share for the year ended December 31, 2002. During the fourth quarter
of 2002, we recorded a write-down of $6.2 million related to the impairment of
our equity investment in Kinetek, and a restructuring charge of $2.9 million
related to a reduction in the work force. These two charges negatively impacted
2002 earnings per share by approximately $0.12.

REVENUES

REVENUE FROM VISUDYNE(R)

      Our revenue from Visudyne was determined as follows:


<TABLE>
<CAPTION>
                                                              For the year      For the year
                                                                 ended             ended
                                                              December 31,       December 31,
(In thousands of U.S. dollars)                                    2003              2002
---------------------------------------------------           ------------      -------------
<S>                                                           <C>               <C>
Visudyne(R) sales by Novartis Ophthalmics                      $ 356,948         $  287,098
Less: Marketing and distribution costs                          (110,958)          (107,293)
Less: Inventory costs                                            (22,624)           (16,424)
Less: Royalties                                                   (8,082)            (6,604)
                                                               ---------         ----------
                                                               $ 215,284         $  156,777
                                                               =========         ==========

QLT share of remaining revenue on final sales (50%)            $ 107,642         $   78,388
Add: Inventory costs reimbursed to QLT                            19,757             13,574
Add: Royalties reimbursed to QLT                                   8,082              6,604
Add: Other costs reimbursed to QLT                                 6,644              5,521
                                                               ---------         ----------
Revenue from Visudyne(R) as reported by QLT                    $ 142,125         $  104,087
                                                               =========         ==========
</TABLE>


      For the year ended December 31, 2003, approximately 51% of total Visudyne
sales by Novartis Ophthalmics were in the U.S., compared to approximately 59% in
2002.

      For the year ended December 31, 2003, revenue from Visudyne increased by
37% over the year ended December 31, 2002. This increase was primarily due to a
24% increase in Visudyne sales, which resulted primarily from higher market
penetration in markets outside the U.S. and favorable exchange rates. Sales
outside the U.S. are primarily denominated in Euros, and the strengthening of
the Euro relative to our U.S. dollar reporting currency contributed to
approximately 9% of the 24% growth in sales. Marketing and distribution costs
were up $3.7 million over 2002, as reductions in advertising and promotion were
more than offset by increases in charges for sales force and other expenses.

                                       62

<PAGE>

CONTRACT RESEARCH AND DEVELOPMENT REVENUE

      We receive non-refundable research and development funding from Novartis
Ophthalmics and other strategic partners which is recorded as contract research
and development revenue. For the year ended December 31, 2003 contract research
and development revenue decreased 28% to $4.6 million. The decrease was due
primarily to our reacquisition of development rights to the multiple basal cell
carcinoma, or MBCC, program from Novartis Ophthalmics during the year, after
which Novartis Ophthalmics was no longer required to contribute to the funding
of this program.

COSTS AND EXPENSES

COST OF SALES

      For the year ended December 31, 2003, cost of sales increased 28% to $24.3
million compared to $19.1 million for the year ended December 31, 2002. The
increase was due primarily to an increase in Visudyne sales in 2003 and a $1.3
million reduction in the provision related to non-completion of product
inventory in 2002. During the fourth quarter of 2003, we experienced
non-completion of product inventory at two of our contract manufacturers. The
impact of this non-completion of product inventory was partly offset by the
provision for non-completion of product inventory and reimbursement from one of
the contract manufacturers. The resulting impact to cost of sales was $0.9
million. Our revenue from Visudyne contained reimbursement by our alliance
partner, Novartis Ophthalmics, related to inventory costs which serve to further
reduce the impact of the non-completion of product inventory on our net income
to nil.

RESEARCH AND DEVELOPMENT

      R&D expenditures increased 6% to $44.9 million for the year ended December
31, 2003, compared to $42.3 million for the year ended December 31, 2002. The
increase was primarily due to the foreign exchange impact of the strengthening
of the Canadian dollar relative to the U.S. dollar ($3.4 million), and increased
spending on clinical trials related to lemuteporfin (formerly QLT0074) ($1.5
million) and Visudyne in minimally classic AMD ($1.5 million). Partially
offsetting these increases were savings from lower tariquidar development costs
($2.0 million) and less spending on research projects ($0.6 million). During the
second quarter of 2003 we halted our Phase III tariquidar trials and during the
fourth quarter of 2003 we halted our Phase III MBCC trials.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

      For the year ended December 31, 2003, SG&A expenses increased 5% to $16.8
million compared to $16.1 million for the year ended December 31, 2002.
Excluding a $0.7 million negative foreign exchange impact, SG&A expenses would
have been approximately flat year-over-year. Increases due to an endowment to
the Wilmer Eye Institute at Johns Hopkins University in Baltimore ($2.0 million)
and higher directors' and officers' liability insurance premiums ($1.3 million)
were somewhat offset by higher inventory absorption of production overheads
($1.8 million) and lower consulting fees ($1.2 million). SG&A expenses include
certain overhead expenses associated with the manufacture of products.

DEPRECIATION EXPENSE

      Depreciation expense relates mainly to the depreciation of property and
equipment. For the year ended December 31, 2003, depreciation expense of $3.1
million was flat in comparison to the year ended December 31, 2002.

RESTRUCTURING

      In the fourth quarter of 2002 we restructured our operations to reduce
operating expenses and concentrate our resources on key product development
programs and business initiatives. We reduced our overall headcount by 62 people
or 17%. We provided affected employees with severance and support to assist with
outplacement. As a result, we recorded a $2.9 million restructuring charge in
the fourth quarter of 2002 related to severance and termination costs. During
the second quarter of 2003, we reassessed our restructuring reserve based on
expected

                                       63

<PAGE>

remaining cash outlays for severance, termination benefits and other related
costs, and accordingly reduced the reserve by $0.4 million. As of December 31,
2003, we had substantially completed all activities associated with the
restructuring. We estimate that the restructuring resulted in annual savings of
$4.4 million.

INVESTMENT AND OTHER INCOME

NET FOREIGN EXCHANGE GAINS (LOSSES)

      Net foreign exchange gains comprise gains from the impact of foreign
exchange fluctuation on our cash and cash equivalents, short-term investments,
derivative financial instruments, foreign currency receivables, foreign currency
payables and U.S. dollar denominated long-term debt. For the year ended December
31, 2003, we recorded net foreign exchange gains of $3.3 million versus net
foreign exchange losses of $0.3 million in 2002. The gains in the year ended
December 31, 2003 were from gains on U.S. dollar long-term debt and foreign
exchange contracts offset by losses on U.S. cash and foreign currency
receivables and payables. (See "Liquidity and Capital Resources - Interest and
Foreign Exchange Rates").

Details of our net foreign exchange gains (losses) were as follows:


<TABLE>
<CAPTION>
                                                              For the year ended   For the year ended
                                                                  December 31,        December 31,
(In thousands of U.S. dollars)                                        2003               2002
----------------------------------------------------          ------------------   ------------------
<S>                                                           <C>                  <C>
Cash and cash equivalents and short-term investments             $  (12,412)            $ (887)
U.S. dollar long-term debt                                           10,715                  -
Foreign exchange contracts                                            7,900               (620)
Foreign currency receivables and payables                            (2,858)             1,229
                                                                 ----------             ------
Net foreign exchange gains (losses)                              $    3,345             $ (278)
                                                                 ==========             ======
</TABLE>


INTEREST INCOME

      For the year ended December 31, 2003, interest income increased 78% to
$8.6 million compared to $4.8 million for the same period in 2002. This increase
was a result of higher cash reserves and higher yield on short-term investment
in Canadian dollar denominated securities. The increase in our cash reserves was
the result of proceeds from the convertible senior notes, which added $0.7
million to interest income. Foreign exchange gains, due to the strengthening of
the Canadian dollar relative to the U.S. dollar, also contributed $0.9 million
to this increase. Our treasury policy is focused on minimizing risk of loss of
principal.

INTEREST EXPENSE

      Interest expense comprised the interest accrued on the 3% convertible
senior notes issued on August 15, 2003 and amortization of deferred financing
expenses related to this placement. For the year ended December 31, 2003
interest expense increased to $2.4 million from nil.

WRITE-DOWN OF INVESTMENT

      During the fourth quarter of 2003 our investment in Diomed, a public
company, was significantly diluted as a result of an equity financing by the
investee, resulting in an other than temporary impairment of $0.6 million.

      During the fourth quarter of 2002, due to Kinetek's reduced cash position
and exhaustion of various strategic alternatives, we contracted an impairment
assessment of Kinetek by an independent valuation consultant. Based on this
assessment, we wrote down our $6.2 million investment in Kinetek shares.

                                       64

<PAGE>

INCOME TAXES

      The provision for income taxes was $24.0 million for the year ended
December 31, 2003, compared to a provision of $11.4 million in 2002. The
effective tax rate reported in 2003 was 34.8%, compared to 45.6% reported in
2002. Adjusting for the Diomed write-down in 2003 and the Kinetek write-down in
2002, the rates would have been 34.6% in 2003 versus 36.5% in 2002. This
decrease resulted primarily from the decrease in the Canadian statutory tax
rate.

      As at December 31, 2003, we had $1.4 million of R&D expenditures available
as deductions for tax purposes that have no expiration date. As at December 31,
2003, we also had investment tax credits of $8.6 million available which will
expire at various dates through 2013. The net deferred tax benefit of these and
other temporary differences was estimated to be approximately $11.8 million, and
is ultimately subject to final determination by taxation authorities.

      As of December 31, 2003, we established a valuation allowance of $1.7
million against the tax effect of the write-down of our investments in Kinetek
and Diomed. The valuation allowance is reviewed periodically and if the "more
likely than not" criterion for accounting purposes changes, the valuation
allowance will be adjusted accordingly. (See Note 18 in "Notes to the
Consolidated Financial Statements").

OUTLOOK FOR 2005

      The statements contained in this section are forward-looking. See the
"Special Note Regarding Forward-looking Statements".

RESULTS OF OPERATIONS

      We expect growth of our business in 2005, driven primarily by increased
Visudyne sales and increased Eligard sales. A number of factors can impact sales
of our products; see: "Risk Factors" in Item 1 - Business. While Visudyne sales
growth is projected, Visudyne faces a competitor following the launch of Macugen
therapy by Eyetech Pharmaceuticals, Inc. and Pfizer, Inc. in the U.S., and the
impact of Macugen sales on sales of Visudyne cannot be predicted. It is also
difficult to accurately predict Eligard sales given that this is a relatively
new product and how quickly sales growth will be achieved is uncertain.

R & D EXPENDITURES

      Commensurate with the expansion of our development pipeline which resulted
from our acquisition of Atrix in November 2004, we are planning an increase in
our R&D expenditures in 2005. Our development efforts during the year will focus
on Octreotide three-month formulation, lemuteporfin in benign prostatic
hyperplasia, or BPH, and continued development of Visudyne and Aczone.

TRENDS OR OTHER FACTORS EXPECTED TO IMPACT FUTURE OPERATIONS

      Our future operating results can be impacted by a number of factors. The
following factors or trends are reasonably expected to impact our results in
2005:

            -     increased competition in the AMD market;

            -     increased impact of foreign exchange rates. With Visudyne
                  sales outside the U.S. surpassing sales within the U.S. for
                  the first time in 2004, foreign exchange rates will have an
                  increasingly significant impact on reported sales. These rates
                  are not predictable. We employ hedging measures to mitigate
                  the effects of changes in foreign exchange rates on our
                  earnings and cash flows. Our 2005 earnings and cash flow
                  projections assume that we are effectively hedged.

                                       65

<PAGE>

            -     the early part of 2005 has seen a downturn in the
                  biopharmaceutical industry generally; our stock price and that
                  of many others in the industry has recently declined. If this
                  downturn continues our stock price and our business might be
                  materially affected; and

            -     our approved products are sold through marketing
                  collaborations, and growth of our business will remain
                  dependent on the sales and marketing efforts of our
                  collaborative partners.

LIQUIDITY AND CAPITAL RESOURCES

      We have financed operations, product development and capital expenditures
primarily through proceeds from the commercialization of Visudyne, public and
private sales of equity securities, private placement of convertible senior
notes, licensing and collaborative funding arrangements with strategic partners,
and interest income.

      The primary drivers of our operating cash flows during 2004 were cash
receipts from Visudyne sales and cash payments related to the following: R&D
activities, SG&A expenses, raw materials purchases and contract manufacturing
fees for the manufacture of Visudyne, interest expense related to our
convertible notes and income tax installments.

      For the year ended December 31, 2004, we generated $65.2 million of cash
from operations as opposed to $65.0 million for the same period in 2003. Higher
cash receipts from Visudyne sales ($169.3 million as opposed to $134.6 million
in 2003) were offset by the payment of income tax installments of $4.0 million,
interest payments related to the convertible notes of $5.6 million, increased
operating and inventory related expenditures of $13.9 million, and lower foreign
exchange contract gains of $9.5 million as compared to the same period in 2003.
The payment of cash income tax installments was the result of the liability for
cash taxes in 2004. Previously, our deferred tax assets (tax losses and other
deductions from prior periods) were sufficient to eliminate cash taxes. We
expect to be cash taxable (having utilized the majority of our tax losses and
other tax assets) in 2005 as well. There was no interest paid on the convertible
notes in 2003 as these notes were issued in August of 2003 with the first two
scheduled interest payments occurring on March 15 and September 15 of 2004.

      During 2004, acquisitions and capital expenditures accounted for the most
significant cash outlays for investing activities, offset by net sales of
short-term investment securities to fund the acquisitions. In March 2004, we
used $2.3 million, net of cash acquired, to purchase Kinetek, and in November
2004, we used $301.1 million, net of cash acquired, to purchase Atrix. We also
used $11.7 million for the purchase of property, plant and equipment, primarily
related to our pilot manufacturing facility in Vancouver.

      Our cash flows from financing activities consisted primarily of cash
receipts of $15.2 million from stock option exercises.

INTEREST AND FOREIGN EXCHANGE RATES

      We are exposed to market risk related to changes in interest and foreign
currency exchange rates, each of which could adversely affect the value of our
current assets and liabilities. At December 31, 2004, we had an investment
portfolio consisting of fixed interest rate securities with an average remaining
maturity of approximately 24 days. If market interest rates were to increase
immediately and uniformly by 10% of levels at December 31, 2004, the fair value
of the portfolio would decline by an immaterial amount.

      At December 31, 2004, we had $379.9 million in cash, cash equivalents and
short-term investments (approximately $286.4 million denominated in U.S.
dollars) and $172.5 million of U.S. dollar-denominated debt. Of the $286.4
million U.S. dollar-denominated balance, $175.7 million was held by our Canadian
parent company, approximately offsetting our U.S. dollar-denominated debt. If
the U.S. dollar were to decrease in value by 10% against the Canadian dollar,
the decline in fair value of our U.S. dollar-denominated cash, cash equivalents
and short-term investments would be mostly offset by the decline in the fair
value of our $172.5 million U.S. dollar

                                       66

<PAGE>

denominated long-term debt, resulting in an immaterial amount of unrealized
foreign currency translation loss. As the functional currency of the U.S.
subsidiary is the U.S. dollar, the U.S. dollar-denominated cash, cash
equivalents and short-term investments holdings of our U.S. subsidiary do not
result in foreign currency gains and losses in operations.

      We enter into foreign exchange contracts to manage exposures to currency
rate fluctuations related to our expected future net income and cash flows. The
net unrealized gain in respect of such foreign currency contracts, as at
December 31, 2004, was approximately $1.8 million and was included in our
results of operations.

      We purchase goods and services primarily in Canadian and U.S. dollars and
earn a significant portion of our revenues in U.S. dollars. Foreign exchange
risk is also managed by satisfying U.S. dollar denominated expenditures with
U.S. dollar cash flows or assets.

CONTRACTUAL OBLIGATIONS

      During August of 2003, we completed a Rule 144A private placement of
$172.5 million aggregate principal amount of convertible senior notes due 2023.
The notes bear interest at 3% per annum, payable semi-annually beginning March
15, 2004. The convertible senior notes are convertible at the option of the
holders into common shares at the conversion rates referred to below only in the
following circumstances: (i) if our common share price, calculated over a
specified period, has exceeded 120% of the effective conversion price of the
convertible senior notes; (ii) if the trading price of the convertible senior
notes over a specified period has fallen below 95% of the amount equal to our
then prevailing common share price times the applicable conversion rate provided
that no notes may be converted pursuant to this condition after September 15,
2018, if, on any trading day during the specified period, the closing sale price
of our common shares is greater than the conversion price in effect during such
trading day and less than or equal to 120% of such conversion price; (iii) if
the convertible senior notes are called for redemption; or (iv) if specified
corporate transactions were to occur. The notes are convertible into our common
shares, at an initial conversion rate of 56.1892 shares per $1,000 principal
amount of notes, which represents a conversion price of approximately $17.80 per
share. The effect of approximately 9,692,637 shares related to the assumed
conversion of the $172.5 million 3% convertible senior notes has been included
in the computation of diluted earnings per share for the years ended December
31, 2004 and 2003. On or after September 15, 2008, we may at our option redeem
the notes, in whole or in part, for cash at a redemption price equal to 100% of
the principal amount of the notes to be redeemed, plus any accrued and unpaid
interest to, but excluding, the redemption date. We also have the option to
redeem for cash all, but not less than all, of the notes at 100% of their
principal amount, plus any accrued and unpaid interest to, but excluding, the
redemption date, in the event of certain changes to Canadian withholding tax
requirements. On each of September 15, 2008, 2013 and 2018, holders of the notes
may require us to purchase all or a portion of their notes for cash at a
purchase price equal to 100% of the principal amount of the notes, plus accrued
and unpaid interest to, but excluding, that date. On the occurrence of certain
events, such as a change in control or termination of trading, holders of the
notes may require us to repurchase all or a portion of their notes for cash at a
price equal to the principal amount plus accrued unpaid interest to, but
excluding, the repurchase date. The notes also become immediately due and
payable upon certain events of default by us. Total proceeds from the private
placement were $167.7 million, net of debt issue costs of $4.8 million. The
notes are senior unsecured obligations and rank equally with all of our future

senior unsecured indebtedness. The notes are effectively subordinated to all of
our future secured indebtedness and all existing and future liabilities of our
subsidiaries, including trade payables.

      In the normal course of business, we enter into product supply agreements
with contract manufacturers which expire at various dates through 2009 as well
as other purchase commitments related to daily operations. In addition, we have
entered into operating lease agreements related to office equipment and office
space. The minimum annual commitments related to these agreements and our
long-term debt are as follows:

                                       67

<PAGE>


<TABLE>
<CAPTION>
(in thousands of U.S. dollars)              PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS         TOTAL       LESS THAN 1 YEAR   1-3 YEARS    3-5 YEARS      MORE THAN 5 YEARS
-----------------------         ---------   ----------------   ---------    ---------      -----------------
<S>                             <C>         <C>                <C>          <C>            <C>
Long-Term Debt:(1)
    Principal                   $ 172,500       $      -       $      -     $      -           $ 172,500
    Interest                       98,325          5,175         10,350       10,350              72,450
                                                                                    
Operating Leases (2)                1,765            718            721          325                   -

Purchase Obligations (3)           31,387         20,953          8,942        1,392                 100
                                ---------       --------       --------     --------           ---------
  Total                         $ 303,977       $ 26,846       $ 20,013     $ 12,067           $ 245,050
                                =========       ========       ========     ========           =========
</TABLE>


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 2023 assuming neither conversion nor
redemption occurs earlier.

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 ($17.4 million) and other
outstanding purchase commitments related to the normal course of business ($14.0
million).

OFF-BALANCE SHEET ARRANGEMENTS

      Except for the contractual arrangements described in the Contractual
Obligations section above, we do not have any other arrangements that create
risk for QLT and are not recognized in our consolidated balance sheet.

GENERAL

      We believe that our available cash resources and working capital, and our
cash generating capabilities, should be more than sufficient to satisfy the
funding of product development programs and other operating and capital
requirements, including the in-licensing or acquisition of products and
technologies for the reasonably foreseeable future. The nature and form of any
future in-licensing or acquisition may have a material impact on our financial
position and results of operations. Depending on the overall structure of
current and future strategic alliances, we may have additional capital
requirements related to the further development, marketing and distribution of
existing or future products.

      Our working capital and capital requirements will depend upon numerous
factors, including: our ability to successfully execute our integration
strategies following the acquisition of Atrix; the progress of our preclinical
and clinical testing; fluctuating or increasing manufacturing requirements and
R&D programs; the timing and cost of obtaining regulatory approvals; the levels
of resources that we devote to the development of manufacturing, marketing and
support capabilities; technological advances; the status of competitors; the
cost of filing, prosecuting and enforcing our patent claims and other
intellectual property rights; our ability to establish collaborative
arrangements with other organizations; and the outcome of legal proceedings.

      We may require additional capital in the future to fund clinical and
product development costs for certain product applications or other technology
opportunities, and strategic acquisitions of products, product candidates,
technologies or other businesses. Accordingly, we may seek funding from a
combination of sources, including product licensing, joint development and new
collaborative arrangements, additional equity or debt financing or from other
sources. No assurance can be given that additional funding will be available or,
if available, on terms acceptable to us. If adequate capital is not available,
our business could be materially and adversely affected.


I
TEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources".

                                       68

<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

      Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in the U.S.
Securities Exchange Act of 1934, Rules 13a-15(f). Under the supervision and with
the participation of our management, including our principal executive officer
and principal financial officer, we conducted an evaluation of the effectiveness
of our internal control over financial reporting based on the framework in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. We acquired Atrix Laboratories, Inc.
(now QLT USA, Inc.) effective November 19, 2004. As a result, we have excluded
QLT USA/Atrix from our assessment of the evaluation of internal control over
financial reporting as of December 31, 2004, and management's conclusions about
the effectiveness of its internal control over financial reporting does not
extend to the internal controls of QLT USA/Atrix. The amounts relating to QLT
USA/Atrix that were consolidated into our annual financial statements as at
December 31, 2004 were as follows:


<TABLE>
<CAPTION>
                                                             For the year ended
(In thousands of U.S. dollars, except per share amounts)     December 31, 2004
--------------------------------------------------------     -----------------
<S>                                                          <C>
Current assets                                                   $ 141,129
Property, plant and equipment                                       26,842
Current liabilities                                                 (8,794)
Revenues                                                             4,982
Expenses and other                                                  (5,138)
</TABLE>


      Subject to the limitation outlined above, based on our evaluation under
the framework in Internal Control - Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of
December 31, 2004.

      Our management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2004 has been audited by Deloitte &
Touche LLP, the independent registered chartered accountants that audited our
December 31, 2004 consolidated annual financial statements, as stated in their
report which is included herein.

                                       69

<PAGE>


REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Shareholders of

QLT INC.

We have audited management's assessment, included in the accompanying
Management's Report on Internal Controls over Financial Reporting, that QLT Inc.
and subsidiaries (the "Company") maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As described in Management's Report on
Internal Controls over Financial Reporting, management excluded from their
assessment the internal control over financial reporting at Atrix Laboratories,
Inc., which was acquired on November 19, 2004 and whose financial statements
reflect total assets and revenues constituting 15 and 3 percent, respectively,
of the related consolidated financial statement amounts as of and for the year
ended December 31, 2004. Accordingly, our audit did not include the internal
control over financial reporting at Atrix Laboratories, Inc. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

                                       70

<PAGE>

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of the Company as of and for the year ended December 31, 2004 and our
report dated March 14, 2005 expressed an unqualified opinion on those financial
statements.

/s/ DELOITTE & TOUCHE LLP

Independent Registered Chartered Accountants

Vancouver, Canada
March 14, 2005


                                       71

<PAGE>


REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Shareholders of

QLT INC.

      We have audited the accompanying consolidated balance sheets of QLT Inc.
and subsidiaries ("the Company") as of December 31, 2004 and 2003 and the
consolidated statements of operations, cash flows and changes in shareholders'
equity for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

      We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

      In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of QLT Inc. and subsidiaries as of
December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004, in
conformity with accounting principles generally accepted in the United States of
America.

      We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on the criteria established in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 14, 2005 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.

      On March 14, 2005, we reported separately to the shareholders of the
Company on our audit, conducted in accordance with Canadian generally accepted
auditing standards, of the financial statements for the same period, prepared in
accordance with Canadian generally accepted accounting principles.

/s/ DELOITTE & TOUCHE LLP

Independent Registered Chartered Accountants

Vancouver, Canada
March 14, 2005


                                       72

<PAGE>

CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
As at December 31,                                                                                                       
------------------                                                                            2004                 2003
(In thousands of U.S. dollars)                                                            -----------           ---------
<S>                                                                                       <C>                   <C>
ASSETS
CURRENT ASSETS
      Cash and cash equivalents                                                           $   366,037           $ 262,408
      Short-term investment securities                                                         13,815             233,022
      Accounts receivable (Note 5)                                                             56,600              35,395
      Inventories (Note 6)                                                                     45,899              26,808
      Current portion of deferred income tax assets (Note 17)                                   4,753              11,801
      Other (Note 7)                                                                           13,521              16,150
                                                                                          -----------           ---------
                                                                                              500,625             585,584

PROPERTY, PLANT AND EQUIPMENT (NOTE 8)                                                         81,674              43,262
DEFERRED INCOME TAX ASSETS (NOTE 17)                                                            6,926                   -
INTANGIBLES, NET (NOTE 9)                                                                     119,600                   -
GOODWILL                                                                                      402,518                   -
OTHER LONG-TERM ASSETS (NOTE 10)                                                                4,906               5,876
                                                                                          -----------           ---------
                                                                                          $ 1,116,249           $ 634,722
                                                                                          ===========           =========

LIABILITIES
CURRENT LIABILITIES

      Accounts payable                                                                    $    12,993           $   8,683
      Accrued liabilities (Note 12)                                                            19,528              13,574
      Deferred revenue                                                                          2,278               6,594
                                                                                          -----------           ---------
                                                                                               34,799              28,851

DEFERRED INCOME TAX LIABILITIES (NOTE 17)                                                      52,171                   -
LONG-TERM DEBT (NOTE 13)                                                                      172,500             172,500
                                                                                          -----------           ---------
                                                                                              259,470             201,351
                                                                                          -----------           ---------

COMMITMENTS (NOTE 20)
CONTINGENCIES (NOTE 22)

SHAREHOLDERS' EQUITY
SHARE CAPITAL (NOTE 14)
      Authorized
           500,000,000 common shares without par value
           5,000,000 first preference shares without par value, issuable in series
      Issued and outstanding
           Common shares                                                                      848,498             395,627
                December 31, 2004  -92,021,572 shares
                December 31, 2003  -68,892,027 shares
ADDITIONAL PAID IN CAPITAL                                                                     92,193                   -
ACCUMULATED DEFICIT                                                                          (173,794)             (8,084)
ACCUMULATED OTHER COMPREHENSIVE INCOME                                                         89,882              45,828
                                                                                          -----------           ---------
                                                                                              856,779             433,371
                                                                                          -----------           ---------
                                                                                          $ 1,116,249           $ 634,722
                                                                                          ===========           =========
</TABLE>


See the accompanying "Notes to the Consolidated Financial Statements".

                                       73

<PAGE>

CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
Year ended December 31,                                                                                                         
-----------------------                                                            2004                 2003             2002
(In thousands of U.S. dollars except per share information)                     ----------           ----------       ----------
<S>                                                                             <C>                  <C>              <C>
REVENUES
      Net product revenue (Note 15)                                             $  179,298           $  142,125       $  104,087
      Net royalties                                                                  2,338                    -                -
      Contract research and development (Note 16)                                    4,436                4,625            6,426
                                                                                ----------           ----------       ----------
                                                                                   186,072              146,750          110,513
                                                                                ----------           ----------       ----------

COSTS AND EXPENSES
      Cost of sales                                                                 33,377               24,328           19,073
      Research and development                                                      50,059               44,905           42,252
      Selling, general and administrative                                           17,464               16,820           16,092
      Depreciation                                                                   3,715                3,141            3,121
      Amortization of intangibles                                                      852                    -                -
      Purchase of in-process research and development                              236,000                    -                -
      Restructuring (recovery) charge                                                    -                 (394)           2,867
                                                                                ----------           ----------       ----------
                                                                                   341,467               88,800           83,405
                                                                                ----------           ----------       ----------

OPERATING (LOSS) INCOME                                                           (155,395)              57,950           27,108

INVESTMENT AND OTHER INCOME (LOSS)
      Net foreign exchange gains (losses)                                              837                3,345            (278)
      Interest income                                                               10,136                8,581            4,814
      Interest expense                                                              (6,261)              (2,359)               -
      (Write-down) of investments (Note 17)                                              -                 (560)          (6,204)
      Equity loss in NSQ                                                                 -                    -             (277)
      Other gains (losses)                                                           1,905                1,813             (169)
                                                                                ----------           ----------       ----------

                                                                                  (148,778)              68,770           24,994
(LOSS) INCOME BEFORE INCOME TAXES

PROVISION FOR  INCOME TAXES (NOTE 18)                                              (29,448)             (23,953)         (11,399)
                                                                                ----------           ----------       ----------

(LOSS) INCOME BEFORE EXTRAORDINARY GAIN                                         $ (178,226)          $   44,817       $   13,595
                                                                                ----------           ----------       ----------

EXTRAORDINARY GAIN (NOTE 4)                                                         12,517                    -                -

                                                                                ==========           ==========       ==========
NET (LOSS) INCOME                                                               $ (165,709)          $   44,817       $   13,595
                                                                                ==========           ==========       ==========

BASIC NET (LOSS) INCOME PER COMMON SHARE
      (Loss) income before extraordinary gain                                   $    (2.43)          $     0.65       $     0.20
       Extraordinary gain                                                             0.17                    -                -
                                                                                ----------           ----------       ----------
        Net (loss) income                                                       $    (2.26)          $     0.65       $     0.20
                                                                                ----------           ----------       ----------

DILUTED NET (LOSS) INCOME PER COMMON SHARE
      (Loss) income before extraordinary gain                                   $    (2.43)          $     0.59       $     0.20
      Extraordinary gain                                                              0.17                    -                -
                                                                                ----------           ----------       ----------
        Net (loss) income                                                       $    (2.26)          $     0.59       $     0.20
                                                                                ----------           ----------       ----------

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (THOUSANDS)
      Basic                                                                         73,240               68,733           68,228
      Diluted                                                                       73,240               78,665           68,432
                                                                                ----------           ----------       ----------
</TABLE>


See the accompanying "Notes to the Consolidated Financial Statements".

                                       74


<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
Year ended December 31,                                                                                                        
-----------------------                                                                2004              2003            2002
(In thousands of U.S. dollars)                                                     -----------         --------        --------
<S>                                                                                <C>                 <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES

     Net (loss) income                                                             $  (165,709)        $ 44,817        $ 13,595
     Adjustments to reconcile net income to net cash from operating activities
           Charge for in process research and development                              236,000                -               -
           Amortization of intangibles                                                     852                -               -
           Depreciation                                                                  3,715            3,141           3,121
           Write-down of investments                                                         -              560           6,204
           Amortization of deferred financing expenses                                   1,053              397               -
           Unrealized foreign exchange gains                                           (12,396)          (8,375)           (566)
           Extraordinary gain                                                          (12,517)               -               -
           Deferred income taxes                                                        19,612           23,953          11,399
           Restructuring (recovery) charge                                                   -             (394)          2,631
           Equity loss in NSQ                                                                -                -             277
     Changes in non-cash operating assets and liabilities
           Accounts receivable                                                          (9,382)           1,254          (3,314)
           Inventories                                                                     749            2,167           7,872
           Other current assets                                                          7,219            3,984          (3,916)
           Accounts payable                                                                749           (1,038)           (341)
           Income tax payable                                                              (67)               -               -
           Accrued restructuring charge                                                      -           (2,437)              -
           Other accrued liabilities                                                       162            5,203            (654)
           Deferred revenue                                                             (4,845)          (8,251)          5,031
                                                                                   -----------         --------        --------
                                                                                        65,195           64,981          41,339
                                                                                   -----------         --------        --------

CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
     Short-term investment securities                                                  300,043         (127,719)         15,907
     Purchase of property, plant and equipment                                         (11,657)          (5,683)         (2,242)
     Proceeds from dissolution or sale of investments                                        -                -             488
     Purchase of Atrix Laboratories, Inc., net of cash acquired                       (301,145)               -               -
     Purchase of Kinetek Pharmaceuticals, Inc., net of cash acquired                    (2,316)               -               -
                                                                                   -----------         --------        --------
                                                                                       (15,075)        (133,402)         14,153
                                                                                   -----------         --------        --------

CASH PROVIDED BY FINANCING ACTIVITIES
     Long-term debt (net)                                                                 (123)         167,694               -
     Issuance of common shares                                                          15,205            3,903           3,726
                                                                                   -----------         --------        --------
                                                                                        15,082          171,597           3,726
                                                                                   -----------         --------        --------

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                            38,427           31,094           (743)
                                                                                   -----------         --------        --------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                              103,629          134,270          58,475
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                           262,408          128,138          69,663
                                                                                   -----------         --------        --------

CASH AND CASH EQUIVALENTS, END OF YEAR                                             $   366,037         $262,408        $128,138
                                                                                   -----------         --------        --------

SUPPLEMENTARY CASH FLOW INFORMATION:

Interest paid:                                                                     $     6,035         $    423        $    970
Income taxes paid:                                                                 $    11,342                -               -
                                                                                   -----------         --------        --------
</TABLE>


                                       75


<PAGE>

NON-CASH INVESTING AND FINANCING ACTIVITIES:

         1.       On February 1, 2002, we received 135,735 common shares of
                  Diomed Holdings, Inc., or Diomed, and on August 5, 2002, we
                  received 696,059 preferred shares of Diomed as part of the
                  consideration from the sale of our Optiguide(R) FiberOptics
                  business to Diomed on November 8, 2000. Under the terms of the
                  sale, Diomed elected to settle the amount owing in shares. We
                  recorded this investment at a carrying value of $0.7 million
                  and recorded a loss of $0.4 million on settlement of accounts
                  receivable of $1.2 million.

         2.       On November 19, 2004, in connection with the acquisition of
                  Atrix Laboratories, 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.

See the accompanying "Notes to the Consolidated Financial Statements".

                                       76

<PAGE>

            CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                              Accumulated
                                            Common Shares        Additional      Other                                    Total
                                       -----------------------    Paid-in    Comprehensive  Accumulated  Comprehensive Shareholders'
                                         Shares        Amount     Capital    Income (Loss)    Deficit    Income (Loss)    Equity
                                       ----------    ---------   ----------  -------------  -----------  ------------- -------------
<S>                                    <C>           <C>         <C>         <C>            <C>          <C>           <C>
(All amounts except share and per share information are expressed in thousands of U.S. dollars)

BALANCE AT DECEMBER 31, 2001           67,991,179    $ 387,990    $      -     $(28,793)     $ (66,496)            -    $ 292,701
Exercise of stock options at prices
ranging from CAD $9.28 to CAD
$39.23 per share                          416,574        3,726           -            -              -             -        3,726

OTHER COMPREHENSIVE INCOME:
Cumulative translation adjustment
from application of U.S. dollar
reporting                                       -            -           -        3,523              -     $   3,523        3,523
Net income                                      -            -           -            -         13,595       13, 595       13,595
                                                                                                           ---------
Comprehensive income                            -            -           -            -              -     $  17,118            -
                                       ----------    ---------    --------     --------      ---------     ---------    ---------
BALANCE AT DECEMBER 31, 2002           68,407,753    $ 391,716    $      -     $(25,270)     $ (52,901)            -    $ 313,545
Exercise of stock options at prices
ranging from CAD $9.28 to CAD
$23.50 per share                          484,274        3,911           -            -              -             -        3,911

OTHER COMPREHENSIVE INCOME:
Cumulative translation adjustment
from application of U.S. dollar
reporting                                       -            -           -       71,048              -     $  71,048       71,048
Unrealized gain on available for
sale securities                                 -            -           -           50              -            50           50
Net income                                      -            -           -            -         44,817        44,817       44,817
                                                                                                           ---------
Comprehensive income                            -            -           -            -              -     $ 115,915            -
                                       ----------    ---------    --------     --------      ---------     ---------    ---------
BALANCE AT DECEMBER 31, 2003           68,892,027    $ 395,627    $      -     $ 45,828       $ (8,084)            -    $ 433,371
Shares issued for the acquisition
of Atrix Laboratories, Inc.            22,283,826      436,094           -            -              -             -      436,094
Assumption of stock options and
warrant on the acquisition of
Atrix Laboratories, Inc.                        -            -      93,896            -              -             -       93,896
Exercise 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)           -              -             -       15,074

OTHER COMPREHENSIVE LOSS:
Cumulative translation adjustment
from application of U.S. dollar
reporting                                       -            -           -       44,168                    $  44,168       44,168
Unrealized (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(1)   $(173,794)            -    $ 856,779
                                       ==========    =========    ========     ========      =========     =========    =========
</TABLE>


----------
(1) At December 31, 2004, 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.

                                       77

<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

We are a global biopharmaceutical company dedicated to the discovery,
development and commercialization of innovative therapies in the fields of
ophthalmology, dermatology, oncology and urology.

1. BASIS OF PRESENTATION

These consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the U. S.. All amounts herein are
expressed in U.S. dollars unless otherwise noted.

2. PRINCIPLES OF CONSOLIDATION

These consolidated financial statements include the accounts of QLT Inc. and its
subsidiaries, all of which are wholly owned. The principal subsidiary included
in our consolidated financial statements is QLT USA, Inc., incorporated in the
U.S.. All significant intercompany transactions have been eliminated.

The long-term investment in NS & QLT Technologies, or NSQ, in which we exercised
joint control, was recorded using the equity method whereby we included a pro
rata share of NSQ's earnings in the carrying value of the investment and in our
net income. NSQ was our only investment accounted for using the equity method in
2002. In December 2002, dissolution procedures for NSQ were commenced and NSQ's
remaining assets have been distributed back to its shareholders. We do not
currently have any investments accounted for using the equity method.

3. SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting periods
presented. Significant estimates are used for, but not limited to, provisions
for non-completion of inventory, assessment of the net realizable value of
long-lived assets, accruals for contract manufacturing and research and
development agreements, allocation of costs to manufacturing under a standard
costing system, allocation of overhead expenses to research and development,
determination of fair value of assets and liabilities acquired in purchase
business combinations, and provisions for taxes and contingencies. Actual
results may differ from estimates made by management.

Reporting Currency and Foreign Currency Translation

We use the U.S. dollar as our reporting currency, while the Canadian dollar is
the functional currency for the parent company and the U.S. dollar is the
functional currency for our U.S. subsidiary. Our consolidated financial
statements are translated into U.S. dollars using the current rate method.
Assets and liabilities are translated at the rate of exchange prevailing at the
balance sheet date. Shareholders' equity is translated at the applicable
historical rates. Revenues and expenses are translated at a weighted average
rate of exchange for the respective years. Translation gains and losses are
included as part of the cumulative foreign currency translation adjustment,
which is reported as a component of shareholders' equity under accumulated other
comprehensive income (loss).

Segmented Information

We operate in one industry segment, which is the business of developing,
manufacturing, and commercialization of therapeutics for human health care. Our
chief operating decision makers review our operating results on an aggregate
basis and manage our operations as a single operating segment.


                                       78

<PAGE>

Cash, Cash Equivalents and Short-term Investment Securities

Cash equivalents include highly liquid investments with insignificant interest
rate risk and original maturities of three months or less at the date of
purchase. Short-term investment securities comprise investments with maturities
between three months and one year at the date of purchase, and
available-for-sale debt securities. We report available-for-sale investments at
fair value as of each balance sheet date and include any unrealized holding
gains and losses in shareholders' equity. Short-term investment securities
consist primarily of investment-grade commercial paper, bankers' acceptances,
certificates of deposit, and U.S. government and corporate bonds. All short-term
investment securities are carried at cost plus accrued interest which, due to
the short-term maturity of these financial instruments, approximates their fair
value.

Inventories

Raw materials and supplies inventories are carried at the lower of actual cost
and net realizable value. Finished goods and work-in-process inventories are
carried at the lower of weighted average cost and net realizable value. We
record a provision for non-completion of Visudyne(R) product inventory to
provide for potential failure of inventory batches in production to pass quality
inspection. The provision is calculated at each stage of the manufacturing
process. We estimate our non-completion rate based on past production and adjust
our provision quarterly based on actual production volume. A non-completed batch
may utilize a significant portion of the provision as a single completed batch
currently costs between $0.7 million and $1.3 million, depending on the stage of
production. We maintain a reserve for obsolescence for product expiration and
obsolescence. Inventory that is obsolete or expired is written down to its
market value if lower than cost.

Investments

Investments in affiliates, where we exercise significant influence and/or have
an ownership interest from 20% to 50%, are accounted for using the equity
method. Investments in shares of other companies are classified as
available-for-sale investments, and are carried at fair value at each balance
sheet date. Unrealized gains and losses on these investments are recorded in
accumulated other comprehensive income as a separate component of shareholders'
equity, unless the declines in market values are judged to be other than
temporary in which case the losses are recognized in income in the period.

Long-lived and Intangible Assets

Occasionally we incur costs to purchase and construct property, plant and
equipment. The treatment of costs to purchase or construct these assets depends
on the nature of the costs and the stage of construction. Costs incurred in the
initial design and evaluation phase, such as the cost of performing feasibility
studies and evaluating alternatives are charged to expense. Costs incurred in
the committed project planning and design phase, and in the construction and
installation phase, are capitalized as part of the cost of the asset. We stop
capitalizing costs when an asset is substantially complete and ready for its
intended use. Since 2003, we have been depreciating plant and equipment using
the straight-line method over their estimated economic lives, which range from
3-40 years. Determining the economic lives of plant and equipment requires us to
make significant judgments that can materially impact our operating results.

In accounting for acquisitions, we allocate the purchase price to the fair value
of the acquired tangible and intangible assets, including in-process research
and development, or IPR&D. We generally estimate the value of acquired tangible
and intangible assets and IPR&D using a discounted cash flow model, which
requires us to make assumptions and estimates about, among other things: the
time and investment that is required to develop products and technologies; our
ability to develop and commercialize products before our competitors develop and
commercialize products for the same indications; the amount of revenue to be
derived from the products; and appropriate discount rates to use in the
analysis. Use of different estimates and judgments could yield materially
different results in our analysis, and could result in materially different
asset values and IPR&D charges.

As of December 31, 2004, there was approximately $402.5 million of goodwill and
approximately $119.6 million of net acquired intangibles on our consolidated
balance sheet. We amortize acquired intangible assets using the straight-line
method over their estimated economic lives, which range from 16 to 17 years.
Determining the economic lives of acquired intangible assets requires us to make
significant judgments and estimates, and can materially impact our operating
results.

Goodwill Impairment


                                       79

<PAGE>

In accordance with Statement of Financial Accounting Standard, or FASB No. 142,
Goodwill and Other Intangibles, we are required to perform impairment tests
annually or whenever events or changes in circumstances suggest that the
carrying value of an asset may not be recoverable. Assumptions and estimates
were made at the time of acquisition of Atrix (Note 4 - "Business Combinations")
specifically regarding product development, market conditions and cash flows
that were used to determine the valuation of goodwill and intangibles.
Impairment tests in future years may result in changes in forecasts and
estimates from those used at the acquisition date, resulting in impairment
charges.

Property, Plant and Equipment

During the first quarter of 2003 we reviewed our intended use of property and
equipment and adopted the straight-line method for all newly acquired property
and equipment beginning in 2003. We retain the declining balance method for all
property and equipment acquired by our Canadian operations prior to 2003.

Property and equipment are recorded at cost and amortized as follows:


<TABLE>
<CAPTION>
                                                             Method         Rates          Method         Years
                                                        -----------------   -----     ----------------    -----
<S>                                                     <C>                 <C>       <C>                 <C>
Buildings                                               Declining balance      4%     or Straight-line      40
Office furnishings, fixtures and other                  Declining balance     20%     or Straight-line       5
Research and commercial manufacturing equipment and
    computer operating system                           Declining balance     20%     or Straight-line     3-5
Computer hardware                                       Declining balance     30%     or Straight-line     3-5
</TABLE>


Revenue Recognition

Net Product Revenues

Our net product revenues are primarily derived from sales of Visudyne and
Eligard.

With respect to Visudyne, under the terms of our collaborative agreement with
Novartis Ophthalmics, a division of Novartis Pharma AG, we are responsible for
Visudyne manufacturing and product supply and Novartis Ophthalmics is
responsible for marketing and distribution of Visudyne. Our agreement with
Novartis Ophthalmics provides that the calculation of total revenue from the
sale of Visudyne be composed of three components: (1) an advance on the cost of
inventory sold to Novartis Ophthalmics, (2) an amount equal to 50% of the profit
that Novartis Ophthalmics derives from the sale of Visudyne to end-users, and
(3) the reimbursement of other specified costs incurred and paid for by us (See
Note 15 - "Net Product Revenue"). We recognize revenue from the sale of Visudyne
when persuasive evidence of an arrangement exists, delivery to Novartis
Ophthalmics has occurred, the end selling price of Visudyne is fixed or
determinable, and collectibility is reasonably assured. Under the calculation of
sales of Visudyne, this occurs upon "sell through" of Visudyne to the end
customers.

With respect to Eligard, under the terms of our collaborative agreements with
our marketing partners, we are responsible for the manufacture of Eligard and
receive from our marketing partners an agreed upon sales price upon shipment to
them. (We also earn royalties from certain marketing partners based upon their
sales of Eligard products to end customers which royalties were reported as net
royalty revenue.) We recognize net sales revenue from product sales when
persuasive evidence of an arrangement exists, product is shipped and title is
transferred to our marketing partners, collectibility is reasonably assured and
the price is fixed or determinable. Our Eligard marketing partners are
responsible for all products after shipment from our facility. Under this
calculation of revenue, we recognize net sales revenue from Eligard at the time
of shipment.

We do not offer rebates or discounts and have not experienced any material
product returns; accordingly, we do not provide an allowance for rebates,
discounts, and returns.

Net Royalties


                                       80

<PAGE>

We recognize net royalties when product is shipped by certain marketing partners
to end customers based on royalty rates and formulas specified in our agreements
with them. Generally, royalties are based on estimated net product sales (gross
sales less discounts, allowances and other items) based on information supplied
to us by our marketing partners.

Contract Research and Development

Contract research and development revenues consist of non-refundable research
and development funding under collaborative agreements with our various
strategic partners. Contract research and development funding generally
compensates us for discovery, preclinical and clinical expenses related to the
collaborative development programs for certain products and product candidates,
and is recognized as revenue at the time research and development activities are
performed under the terms of the collaborative agreements. For fixed price
contracts, we recognize contract research and development revenue over the term
of the agreement, which is consistent with the pattern of work performed.
Amounts received under the collaborative agreements are non-refundable even if
the research and development efforts performed by us do not eventually result in
a commercial product. Contract research and development revenues earned in
excess of payments received are classified as contract research and development
receivables and payments received in advance of revenue recognition are recorded
as deferred revenue. (See Note 5 - "Accounts Receivable" and Note 16 - "Contract
Research and Development").

Cost of Sales

Visudyne cost of sales, consisting of expenses related to the production of bulk
Visudyne and royalty expense on Visudyne sales, are charged against earnings in
the period that Novartis Ophthalmics sells to third parties. Cost of sales
related to the production of various Eligard, generic dermatology, and Atridox
products are charged against earnings in the period of the related product sale
to our marketing partners. We utilize a standard costing system, which includes
a reasonable allocation of overhead expenses, to account for inventory and cost
of sales with adjustments being made periodically to reflect current conditions.
Overhead expenses comprise direct and indirect support activities related to the
manufacture of bulk Visudyne, various Eligard, generic dermatology, and Atridox
products and involve costs associated with activities such as quality
inspection, quality assurance, supply chain management, safety and regulatory.
Overhead expenses are allocated to inventory during each stage of the
manufacturing process under a standard costing system, and eventually to cost of
sales as the related products are sold to our marketing partners or, in the case
of Visudyne, by Novartis Ophthalmics to third parties. We record a provision for
the non-completion of Visudyne product inventory based on our history of batch
completion and provide a reserve for obsolescence of our Eligard inventory and
component materials based on our periodic evaluation of potential obsolete
inventory.

Stock-Based Compensation

As allowed by SFAS 123, Accounting for Stock-based Compensation, or SFAS 123, we
apply Accounting Principles Board, or APB, Opinion No. 25 and related
interpretations in the accounting for employee stock option plans. SFAS 123
requires that all stock-based awards made to non-employees be measured and
recognized using a fair value based method. The standard encourages the use of a
fair value based method for all awards granted to employees, but only requires
the use of a fair value based method for direct awards of stock, stock
appreciation rights, and awards that call for settlement in cash or other
assets. Awards that an entity has the ability to settle in stock are recorded as
equity, whereas awards that the entity is required to or has a practice of
settling in cash are recorded as liabilities. We have adopted the disclosure
only provision for stock options granted to employees and directors, as
permitted by SFAS 123.

The following pro forma financial information presents the net (loss) income and
net (loss) income per common share had we recognized stock-based compensation
using a fair value based accounting method:


                                       81

<PAGE>


<TABLE>
<CAPTION>
(In thousands of U.S. dollars  except per share
information)                                              2004         2003        2002
-------------------------------------------------       ---------    --------    ---------
<S>                                                     <C>          <C>         <C>
Net (loss) income
 As reported                                            $(165,709)   $ 44,817    $  13,595
 Add: Employee stock option expense                             -           -            -
 Less:  Additional stock-based      
 compensation expense under
 the fair value method                                    (11,229)    (18,766)     (25,525)
                                                        ---------    --------    ---------
     Pro forma                                          $(176,938)   $ 26,051    $ (11,930)
                                                        ---------    --------    ---------
Basic net (loss) income per common share
  As reported                                           $   (2.26)   $   0.65    $    0.20
  Pro forma                                                 (2.42)       0.38        (0.17)
                                                        ---------    --------    ---------
Diluted net (loss) income per share
  As reported                                           $   (2.26)   $   0.59    $    0.20
  Pro forma                                                 (2.42)       0.38        (0.17)
                                                        ---------    --------    ---------
</TABLE>


The pro forma amounts may not be representative of future disclosures since the
estimated fair value of stock options is amortized to expense over the vesting
period and additional options may be granted in future years.

The Black-Scholes option pricing model was developed for use in estimating the
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. We use
projected data for expected volatility and expected life of our stock options
based upon historical and other economic data trended into future years. Because
our employee stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the estimate, in management's opinion, the existing
valuation models do not provide a reliable measure of the fair value of our
employee stock options.

The weighted average fair value of stock options granted in 2004 was CAD $11.70
whereas the 2003 and 2002 options were valued at CAD $4.36 and CAD $11.82,
respectively. We used the Black-Scholes option pricing model to estimate the
value of the options at each grant date, using the following weighted value
average assumptions:


<TABLE>
<CAPTION>
                             2004     2003     2002
                             ----     ----     ----
<S>                          <C>      <C>      <C>
Annualized volatility        55.9%    63.4%    83.1%
Risk-free interest rate       2.9%     3.3%     4.4%
Expected life (years)         2.5      2.5      2.5
</TABLE>


In December 2004, the FASB issued SFAS 123, Revised Share-Based Payment, or SFAS
123R. The statement eliminates the alternative to account for stock-based
compensation using APB 25 and requires such transactions be recognized as
compensation expense in the statement of earnings based on their fair values on
the date of the grant, with the compensation expense recognized over the period
in which a grantee is required to provide service in exchange for the stock
award. We will adopt this statement on July 1, 2005 using a modified prospective
application. As such, the compensation expense recognition provisions will apply
to new awards and to any awards modified, repurchased or cancelled after the
adoption date. Additionally, for any unvested awards outstanding at the adoption
date, we will recognize compensation expense over the remaining vesting period.


                                       82


<PAGE>

Research and Development

Research and development costs consist of direct and indirect expenditures,
including a reasonable allocation of overhead expenses, associated with our
various research and development programs. Overhead expenses comprise general
and administrative support provided to the research and development programs and
involve costs associated with support activities such as facility maintenance,
utilities, office services, information technology, legal, accounting and human
resources. Research and development costs are expensed as incurred. Patent
application, filing and defense costs are expensed as incurred.

Income Taxes

Income taxes are reported using the asset and liability method, whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and operating
loss and tax credit carry forwards using applicable enacted tax rates. An
increase or decrease in these tax rates will increase or decrease the carrying
value of the deferred net tax assets resulting in an increase or decrease to net
income. A valuation allowance is provided when it is more likely than not that a
deferred tax asset may not be realized. Investment tax credits are included as
part of the provision for income taxes.

Derivative Financial Instruments

We enter into foreign exchange contracts to manage exposure to currency rate
fluctuations related to our expected future net earnings and cash flows. We do
not engage in speculative trading of derivative financial instruments. The
foreign exchange contracts are not designated as hedging instruments, and as a
result all foreign exchange contracts are marked to market and the resulting
gains and losses are recorded in the statement of income in each reporting
period. Details of foreign exchange contracts outstanding at December 31, 2004
are described in Note 19 - "Financial Instruments and Concentration of Credit
Risk".

Legal Proceedings

We are involved in a number of legal actions, the outcomes of which are not
within our complete control and may not be known for prolonged periods of time.
In these legal actions, the claimants seek damages, as well as other relief,
which, if granted, would require significant expenditures. We record a liability
in the consolidated financial statements for these actions when a loss is known
or considered probable and the amount can be reasonably estimated. If the loss
is not probable or cannot be reasonably estimated, a liability is not recorded
in the consolidated financial statements. Our material legal proceedings are
discussed in Note 22 to the consolidated financial statements.

Net Income (Loss) Per Common Share

Basic net income per common share is computed using the weighted average number
of common shares outstanding during the period. Diluted net income per common
share is computed in accordance with the treasury stock method and "if
converted" method, as applicable, which uses the weighted average number of
common shares outstanding during the period and also includes the dilutive
effect of potentially issuable common stock from outstanding stock options,
warrants and convertible debt. In addition, the related interest and
amortization of deferred financing fees on convertible debt, when dilutive, (net
of tax) are added back to income, since these would not be paid or incurred if
the convertible senior notes were converted into common shares.


                                       83

<PAGE>

The following table sets out the computation of basic and diluted net income
(loss) per common share:


<TABLE>
<CAPTION>
(In thousands of U.S. dollars, except per share data)               2004       2003       2002
-----------------------------------------------------------      ----------   -------   --------
<S>                                                              <C>          <C>       <C>
Numerator:
(Loss) income before extraordinary gain                          $ (178,226)  $44,817   $ 13,595
Extraordinary gain                                                   12,517         -          -
                                                                 ----------   -------   --------
Net (loss) income                                                $ (165,709)  $44,817   $ 13,595
Effect of dilutive securities:
      Convertible senior notes - interest expense                         -     1,472
                                                                 ----------   -------   --------
Adjusted (loss) income                                           $ (165,709)  $46,289   $ 13,595
                                                                 ==========   =======   ========
Denominator (thousands):
      Weighted average common shares outstanding                     73,240    68,733     68,228
      Effect of dilutive securities:
          Stock options                                                   -       239        203
          Warrant                                                         -         -          -
          Convertible senior notes                                        -     9,693          -
                                                                 ----------   -------   --------
      Diluted  potential common shares                                    -     9,932        203
                                                                 ----------   -------   --------
      Diluted weighted average common shares outstanding             73,240    78,665     68,432
                                                                 ==========   =======   ========
Basic net income (loss) per common share
(Loss) income before extraordinary gain                          $    (2.43)  $  0.65   $   0.20
Extraordinary gain                                                     0.17         -          -
                                                                 ----------   -------   --------
Net (loss) income                                                $    (2.26)  $  0.65   $   0.20
                                                                 ==========   =======   ========
Diluted net income (loss) per common share
(Loss) income before extraordinary gain                          $    (2.43)  $  0.59   $   0.20
Extraordinary gain                                                     0.17         -          -
                                                                 ----------   -------   --------
Net (loss) income                                                $    (2.26)  $  0.59   $   0.20
                                                                 ==========   =======   ========
</TABLE>


In accordance with the Emerging Issues Task Force, or EITF, Issue No. 04-08, the
effect of approximately 9,692,637 shares related to the assumed conversion of
the $ 172.5 million 3% convertible senior notes has been included in the
computation of diluted earnings per share for the year ended December 31, 2003.
Excluded from the calculation of diluted net income per common share for the
year ended December 31, 2004 were 9,692,637 shares related to the conversion of
the $ 172.5 million 3% convertible senior notes and 12,401,263 shares (in 2003 -
6,290,893 shares, in 2002 - 7,334,365 shares) related to stock options because
their effect was anti-dilutive.

Recently Issued Accounting Standards

In September 2004, the EITF reached a consensus on Issue No. 04-08, The Effect
of Contingently Convertible Debt on Diluted Earnings per Share. Issue No. 04-08
addresses the issue of when the dilutive effect of contingently convertible debt
instruments should be included in diluted earnings per share. Previously, the
potential dilutive effect of the conversion feature was excluded from diluted
earnings per share until the contingent feature was met. Issue No. 04-08 results
in contingently convertible debt instruments being included in diluted earnings
per share computations regardless of whether the contingent features are met.
The provisions of Issue No. 04-08 apply to reporting periods ending after
December 15, 2004. The adoption of Issue No. 04-08 has resulted in our diluted
earnings per share calculation including the dilutive effect of contingently
convertible debt. Prior period diluted earnings per share amounts presented for
comparative purposes have been restated to conform to this consensus.

In November 2004, the FASB issued SFAS 151, Inventory Costs an amendment of ARB
No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify that abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) be treated as current


                                       84

<PAGE>

period charges. In addition, this Statement requires that the allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. Our consolidated financial statements
comply with the requirements of SFAS No. 151.

In December 2004, FASB issued SFAS 123, Revised Share-Based Payment, or SFAS
123R. The statement eliminates the alternative to account for stock-based
compensation using APB 25 and requires such transactions be recognized as
compensation expense in the statement of earnings based on their fair values on
the date of the grant, with the compensation expense recognized over the period
in which a grantee is required to provide service in exchange for the stock
award. We will adopt this statement on July 1, 2005 using a modified prospective
application. As such, the compensation expense recognition provisions will apply
to new awards and to any awards modified, repurchased or cancelled after the
adoption date. Additionally, for any unvested awards outstanding at the adoption
date, we will recognize compensation expense over the remaining vesting period.

We have begun, but have not yet completed, evaluating the impact of adopting
SFAS 123R on our results of operations. We currently determine the fair value of
stock-based compensation using a Black-Scholes option pricing model. In
connection with evaluating the impact of adopting SFAS 123R, we are also
considering the potential implementation of different valuation models to
determine the fair value of stock-based compensation, although no decision has
yet been made. However, we do believe the adoption of SFAS 123R may have a
material impact on our results of operations, regardless of the valuation
technique used.

4. BUSINESS COMBINATIONS

ACQUISITION OF ATRIX LABORATORIES, INC.

On November 19, 2004, we completed our acquisition of Atrix, a biopharmaceutical
company focused on advanced drug delivery. Upon completion of the acquisition,
each outstanding share of Atrix common stock was converted into the right to
receive one QLT Inc. common share and $14.61 in cash. In addition, each option
to purchase Atrix common stock that was outstanding at the closing of the
acquisition was assumed by us. The results of operations of Atrix were included
in the consolidated statement of operations since the acquisition date, and the
related assets and liabilities were recorded based upon their respective fair
values at the date of acquisition.

The aggregate consideration for the acquisition of Atrix was $870.5 million,
which included $325.6 million in cash, acquisition related expenditures of $15.0
million, and the issuance of 22.3 million common shares of QLT Inc., as set out
more fully below. In connection with the acquisition, we also assumed all of the
outstanding options and warrants to purchase Atrix common shares and exchanged
them for options to purchase our common shares. The total consideration paid for
Atrix, including acquisition costs, was allocated based on management's
preliminary assessment as to the estimated fair values on the acquisition date.
This preliminary assessment is subject to change upon the final determination of
the fair value of the assets acquired and liabilities assumed. The purchase
price and preliminary allocation of the purchase price to the fair value of the
acquired tangible and intangible assets and liabilities is as follows:

(In thousands of U.S. dollars)

PURCHASE PRICE


<TABLE>
<S>                                                        <C>
Cash paid for shares tendered                              $ 325,567
Issuance of 22,283,826 QLT Inc. common shares                436,094
Assumption of options to purchase 6,106,961 QLT
   Inc. common shares                                         77,655
Assumption of a warrant to purchase 1,000,000 QLT
   Inc. common shares                                         16,204
Acquisition costs                                             14,957
                                                           ---------
Total purchase price                                       $ 870,477
</TABLE>



                                       85

<PAGE>


<TABLE>
<S>                                                        <C>
FAIR VALUE OF TANGIBLE AND INTANGIBLE
   ASSETS ACQUIRED AND LIABILITIES
   ASSUMED
Cash and cash equivalents                                  $  30,121
Short-term investments                                        80,519
Other current assets                                         111,694
Property, plant and equipment                                 26,372
Goodwill                                                     402,518
In-process research and development                          236,000
Intangibles                                                  120,529
Current liabilities                                           (8,920)
Deferred income tax liability                                (47,837)
                                                           ---------
Net assets                                                 $ 870,477
                                                           =========
</TABLE>


The purchase price was allocated to the tangible and intangible assets acquired
and liabilities assumed based on their estimated fair values at the date of
acquisition. The excess of the purchase price over the estimated fair values of
the assets acquired and liabilities assumed amounted to $402.5 million which was
allocated to goodwill. We will perform an impairment test for the goodwill on a
periodic basis in accordance with the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets."

We issued 22.3 million common shares to Atrix's shareholders. These shares were
valued at $436.1 million average of the closing price of QLT Inc. common shares
for the period two business days before through two business days after June 14,
2004, the announcement date of the acquisition. The options and warrants to
purchase QLT shares were valued at $77.7 million and $16.2 million,
respectively, using the Black-Scholes option pricing model. Assumptions used for
this valuation are:


<TABLE>
<CAPTION>
                 Volatility     Risk-free Interest Rate    Expected Life (years)
                 ----------     -----------------------    --------------------
<S>              <C>            <C>                        <C>
Options              60%                3.38%                       4.0
Warrants             40%                2.36%                       0.4
</TABLE>


In connection with our acquisition of Atrix, we acquired IPR&D related to five
projects: advanced formulations of Eligard for prostate cancer, Aczone for acne,
Octreotide for symptoms associated with carcinoid tumors, CP-533,536 for bone
growth, and generic dermatology products. As of the acquisition date, these
projects had not reached technological feasibility and did not have an
alternative future use. Accordingly, we allocated to IPR&D, and charged to
expense in our consolidated statements of operations for the year ended December
31, 2004, $236.0 million, representing the portion of the purchase price
attributable to these projects.

Management assumed responsibility for determining the IPR&D valuation. We
calculated the charge for IPR&D related to Atrix by determining the fair value
of the existing products as well as the technology that was currently under
development, using the income approach. Under the income approach, expected
future after-tax cash flows from each of the projects under development are
estimated and discounted to their net present value at an appropriate
risk-adjusted rate of return. Revenues were estimated based on relevant market
size and growth factors, expected industry trends, individual product sales
cycles, and the estimated life of each product's underlying technology.
Estimated operating expenses, income taxes and charges for the use of
contributory assets were deducted from estimated revenues to determine estimated
after-tax cash flows for each project. These projected future cash flows were
further adjusted for additional risks inherent in the development life cycle,
the value contributed by any core technology, and development efforts expected
to be completed post acquisition. These forecasted cash flows were then
discounted based on rates derived from our weighted average cost of capital,
weighted average return on assets and the internal rates of return for the
transaction. As the cash flows for each project were adjusted to account for the
risk associated with each product's relative stage of development, including the
characteristics and applications of our products, the inherent uncertainties in
achieving technological feasibility, anticipated levels of market acceptance and
penetration, market growth rates and risks related to the impact of potential
changes in future target markets, we determined a discount rate of


                                       86

<PAGE>

13%. When we acquired Atrix, we did not expect to achieve a material amount of
expense reduction or synergies as a result of integrating the acquired in
process technology. Therefore, the valuation assumptions did not include
anticipated cost savings. A description of the IPR&D projects acquired are as
follows:

      Eligard(R)(certain  Proprietary products for prostate cancer
      formulations)       incorporating a leutinizing hormone-releasing hormone,
                          with our drug delivery system. The Atrigel(R) drug
                          delivery technology allows for sustained delivery of
                          leuprolide acetate for periods ranging from one month 
                          to six months.

      Aczone(TM)          A proprietary product for the treatment of acne,
                          rosacea, atopic dermatitis and additional indications.
                          Aczone(TM) incorporates dapsone, an anti-inflammatory
                          and antimicrobial drug with our drug delivery system.

      Octreotide          A proprietary product for long term treatment of
                          symptoms associated with carcinoid tumors combined
                          with our drug delivery system.

      CP-533,536          A Pfizer compound formulated with our Atrigel(R)
                          technology for bone growth.

      Generic             Various generic dermatology products at various stages
      Dermatology         of clinical trial.

All of the above IPR&D projects, at the date of the acquisition of Atrix, were
at various stages of clinical development and, with the exception of Eligard
6-month, still required substantial costs to complete. Prior to
commercialization, the U.S. Food and Drug Administration, or FDA, and other
regulatory approvals are still required. Current estimates of time and
investment required to develop these products may change and we cannot guarantee
that we will be able to develop and commercialize products before our
competitors develop and commercialize products for the same indications. If
products based on our acquired IPR&D programs do not become commercially viable,
our results of operations could be materially affected.

The amount allocated to acquired intangible assets comprises trademarks of $8.0
million and developed technology of $112.2 million. The estimated fair value of
trademarks relate to the Eligard trademark and the estimated fair value of
developed technology relate to existing FDA-approved products comprising
Eligard, certain dermatology products and dental products. The estimated fair
values for both were determined based on a discounted forecast of the estimated
net future cash flows to be generated from the trademark and developed
technology. The estimated fair value of the trademark and developed technology
are being amortized on a straight-line basis over 17 and 16 years, respectively,
which are the estimated periods over which cash flows will be generated.

Alan Mendelson, a member of our Board of Directors, is a senior partner of the
law firm Latham & Watkins LLP, which has provided us with legal representation
regarding the merger. During the year ended December 31, 2004, we incurred legal
expenses in the amount of $1.3 million (2003 - nominal) payable to this law
firm.

PRO FORMA FINANCIAL SUMMARY (UNAUDITED)

The following pro forma financial summary is presented as if the acquisition of
Atrix was completed as of January 1, 2004 and 2003. The pro forma combined
results are not necessarily indicative of the actual results that would have
occurred had the acquisition been consummated on those dates, or of the future
operations of the combined entities. Nonrecurring charges related to this
acquisition, included an IPR&D charge of $236.0 million, acquisition-related
expenses of $2.2 million, compensation expenses related to terminated employees
and accelerated vesting of stock options of $12.2 million, are not included in
the following pro forma financial summary for the years ended December 31, 2004
and 2003. In addition, foregone interest income of $2.5 million from cash
consumed in the merger has also been excluded from both years.


<TABLE>
<CAPTION>
                                                                      For the year ended
                                                                         December 31,
(In thousands of United States dollars, except per share amounts)     2004          2003
-----------------------------------------------------------------   ---------    ---------
<S>                                                                 <C>          <C>
Total revenues                                                      $ 236,191    $ 188,405
Income before extraordinary gain                                       50,060       24,772
</TABLE>



                                       87

<PAGE>


<TABLE>
<S>                                                                 <C>          <C>
Net income                                                             62,577       24,772
Basic net income per common share
     Income before extraordinary gain                                    0.54         0.27
     Extraordinary gain                                                  0.14            -
                                                                    ---------    ---------
                                                                         0.68         0.27
                                                                    ---------    ---------
Diluted net income per common share
     Income before extraordinary gain                                    0.54         0.26
     Extraordinary gain                                                  0.12            -
                                                                    ---------    ---------
                                                                         0.66         0.26
</TABLE>


ACQUISITION OF KINETEK PHARMACEUTICALS, INC.

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. The results of operations of Kinetek were included
in the consolidated statement of operations since the acquisition date, and the
related assets and liabilities were recorded based upon their respective fair
values at the date of acquisition. We paid an aggregate cash purchase price of
$2.4 million, which included acquisition related expenditures of $0.1 million.
The extraordinary gain 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.

The total consideration paid by us for Kinetek, including acquisition costs, was
allocated based on management's preliminary assessment as to the estimated fair
values on the acquisition date. This preliminary assessment is subject to change
upon the final determination of the fair value of the assets acquired and
liabilities assumed.

(In thousands of U.S. dollars)


<TABLE>
<S>                                                 <C>
Purchase price                                      $  2,447


Current assets acquired (including cash of $131)      15,865
Current liabilities assumed                             (901)
                                                    --------
Extraordinary gain                                  $ 12,517
                                                    ========
</TABLE>


On July 1, 2004, Kinetek was amalgamated with QLT and ceased to exist as a
separate legal entity. In the fourth quarter of 2004 we realized the benefit of
certain previously unrecognized tax assets and adjusted our allocation of
purchase price by recording an additional extraordinary gain of $2.1 million.

5. ACCOUNTS RECEIVABLE


                                       88

<PAGE>


<TABLE>
<CAPTION>
(In thousands of U.S. dollars)          2004          2003
---------------------------------     --------      --------
<S>                                   <C>           <C>
Visudyne(R)                           $ 42,983      $ 34,035
Royalties                                4,173             -
Contract research and development        3,801         1,032
Income taxes  receivable                 2,068             -
Eligard(R)                               1,532             -
Foreign exchange contracts                 164             -
Trade and other                          1,879           328
                                      --------      --------
                                      $ 56,600      $ 35,395
                                      ========      ========
</TABLE>


Accounts receivable - Visudyne represents amounts due from Novartis Ophthalmics
and consists of our 50% share of pre-tax profit on sales of Visudyne, amounts
due from the sale of bulk Visudyne to Novartis Ophthalmics and reimbursement of
specified royalty and other costs. We have not, in the past, experienced bad
debts. Based on this history and because our accounts receivable consist
primarily of receivables from our strategic partners, including Novartis
Ophthalmics, we do not provide an allowance for doubtful accounts.

6. INVENTORIES


<TABLE>
<CAPTION>
                  (In thousands of U.S. dollars)                         2004         2003
------------------------------------------------------------------     --------     --------
<S>                                                                    <C>          <C>
Raw materials and supplies                                             $ 14,340     $  2,066
Work-in-process                                                          30,864       24,660
Finished goods                                                            2,152           82
Provision for non-completion of product inventory                        (1,457)           -
                                                                       --------     --------
                                                                       $ 45,899     $ 26,808
                                                                       ========     ========
</TABLE>


We record a provision for non-completion of product inventory to provide for the
potential failure of inventory batches in production to pass quality inspection.
During the year ended December 31, 2004, we incurred charges to the provision
for non-completion of $2.2 million. In connection with the acquisition of Atrix
we acquired inventory which at December 31, 2004 comprised $13.2 million of raw
materials and supplies, $1.8 million of work in-process, and $2.1 million of
finished goods.

During the fourth quarter of 2003, the entire provision for non-completion of
product inventory was utilized for inventory batches in production which did not
pass quality inspection, leaving the December 31, 2003 balance at nil.

7. OTHER CURRENT ASSETS


<TABLE>
<CAPTION>
         (In thousands of U.S. dollars)                2004        2003
-------------------------------------------------    --------    ---------
<S>                                                  <C>         <C>
Inventory in transit held by Novartis Ophthalmics    $  8,981    $  10,122
Foreign exchange contracts                              1,874        4,447
Prepaid expenses and other                              2,666        1,581
                                                     --------    ---------
                                                     $ 13,521    $  16,150
                                                     ========    =========
</TABLE>


Inventory in transit comprises finished goods that have been shipped to and are
held by Novartis Ophthalmics. Under the terms of our collaborative agreement,
upon delivery of inventory to Novartis Ophthalmics, we are entitled to an
advance equal to our cost of inventory. The inventory in transit is also
included in deferred revenue at cost, and will be recognized as revenue in the
period of the related product sale and delivery by Novartis Ophthalmics to third
parties, where collection is reasonably assured.


                                       89

<PAGE>

Foreign exchange contracts consist of unrealized gains on foreign currency
derivative financial instruments.

8. PROPERTY, PLANT AND EQUIPMENT


<TABLE>
<CAPTION>
                                                             2004
                                            ---------------------------------------
                                                         Accumulated        Net
    (In thousands of U.S. dollars)            Cost       Depreciation    Book Value
---------------------------------------     ---------    ------------    ----------
<S>                                         <C>          <C>             <C>
Buildings                                   $  55,833    $    4,917      $  50,916
Office furnishings, fixtures, and other         8,537         3,616          4,921
Research equipment                             15,137         6,380          8,757
Commercial manufacturing equipment              5,490         1,825          3,665
Computer hardware and operating system         16,101         8,960          7,142
Land                                            6,273             -          6,273
                                            ---------    ----------      --------- 
                                            $ 107,371    $   25,698      $  81,674 
                                            =========    ==========      ========= 
</TABLE>



<TABLE>
<CAPTION>
                                                             2004
                                            ---------------------------------------
                                                         Accumulated        Net
    (In thousands of U.S. dollars)            Cost       Depreciation    Book Value
---------------------------------------     ---------    ------------    ----------
<S>                                         <C>          <C>             <C>
Buildings                                   $  29,227    $    3,567      $  25,660
Office furnishings, fixtures, and other         5,009         2,900          2,109
Research equipment                              8,148         5,183          2,965
Commercial manufacturing equipment              2,551         1,420          1,131
Computer hardware and operating system         13,313         6,736          6,577
Land                                            4,820             -          4,820
                                            ---------    ----------      ----------
                                            $  63,068    $   19,806      $  43,262
                                            =========    ==========      ==========
</TABLE>


9. INTANGIBLES, NET

Intangible assets subject to amortization consisted of the following:


<TABLE>
<CAPTION>
                                                               2004       2003
                                                             --------------------
                                              Amortization   Net Book    Net Book
(In thousands of U.S. dollars)       Cost     Accumulated      Value      Value
------------------------------    --------    ------------   ---------   --------
<S>                               <C>         <C>            <C>         <C>
Developed technology, net         $ 112,215   $     562      $ 111,653   $      -
Trademark                             8,000          53          7,947          -
                                  ---------   ---------      ---------   --------
                                  $ 120,215   $     615      $ 119,600   $      -
                                  =========   =========      =========   ========
</TABLE>


Developed technology, net consisted of the portion of the purchase price from
the acquisition of Atrix which related to FDA-approved products comprising
certain Eligard, dermatology and dental products, net of estimated legal fees to
defend the technology. Developed technology is being amortized on a
straight-line basis over its estimated useful live of 16 years.

Trademark consists of the portion of the purchase price from the acquisition of
Atrix which relates to the Eligard trademark. The Eligard trademark is being
amortized on a straight-line basis over its estimated useful


                                       90

<PAGE>

live of 17 years. Our expected annual amortization related to our intangible
assets for the next five years is $8.2 million per year.

10.   OTHER LONG-TERM ASSETS


<TABLE>
<CAPTION>
(In thousands of U.S. dollars)          2004             2003
------------------------------      ------------     ------------
<S>                                 <C>              <C>
Deferred financing expenses         $      4,161     $      4,784
Diomed Holdings, Inc.                        144              244
Other                                        601              848
                                    ------------     ------------
                                    $      4,906     $      5,876
                                    ------------     ------------
</TABLE>


Deferred financing expenses represent total debt issue costs related to the
convertible senior notes, net of amortization. Deferred financing expenses are
being amortized over five years commencing August 2003. The long-term investment
in Diomed Holdings, Inc., or Diomed, represents the restricted Class A
Convertible Preferred Stock we received as consideration for the sale of our
Optiguide fiber optic business to Diomed and was converted to Diomed common
shares during 2003. Other long-term assets consist principally of long-term
employee loans which are non-interest bearing with terms ranging from one to
five years, and which will be forgiven if certain conditions are met.

11.   CREDIT FACILITY

During 2004 we had a CAD $3.5 million unsecured credit facility agreement. A
segment of this facility was structured as a CAD $1.0 million revolving demand
loan which bore interest at the bank's prime rate for Canadian dollar drawdowns
and the U.S. base rate for U.S. dollar drawdowns. We terminated the unsecured
credit facility agreement during February 2004.

12.   ACCRUED LIABILITIES


<TABLE>
<CAPTION>
(In thousands of U.S. dollars)         2004          2003
------------------------------      ----------    ----------
<S>                                 <C>           <C>
Royalties                           $    3,158    $    2,470
Compensation                             7,633         5,325
Marketing  partners                      2,992             -
Foreign exchange contracts               2,222         3,589
Atrix acquisition costs                    714             -
Interest                                 1,745         2,132
Other                                    1,064            58
                                    ----------    ----------
                                    $   19,528    $   13,574
                                    ----------    ----------
</TABLE>


13.   LONG TERM DEBT

In August 2003, we completed a private placement of $172.5 million aggregate
principal amount of convertible senior notes due in 2023. The notes bear
interest at 3% per annum, payable semi-annually beginning March 15, 2004.

The notes are convertible at the option of the holders into common shares at the
conversion rates referred to below only in the following circumstances: (i) if
our common share price, calculated over a specified period,


                                       91

<PAGE>

has exceeded 120% of the effective conversion price of the convertible senior
notes; (ii) if the trading price of the convertible senior notes over a
specified period has fallen below 95% of the amount equal to our then prevailing
common share price times the applicable conversion rate; (iii) if, subject to
certain exceptions, the convertible senior notes are called for redemption; or
(iv) if specified corporate transactions were to occur. The notes are
convertible into common shares of QLT, at an initial conversion rate of 56.1892
shares per $1,000 principal amount of notes, which represents a conversion price
of approximately $17.80 per share.

We have the right to redeem the convertible senior notes for cash at any time on
or after September 15, 2008. We also had the option to redeem for cash all, but
not less than all, of the notes at 100% of their principal amount, plus any
accrued and unpaid interest to, but excluding, the redemption date, in the event
of certain changes to Canadian withholding tax requirements. Holders of the
convertible senior notes have the right to require us to redeem these notes, for
cash, at their issue price plus accrued interest on September 15 in each of
2008, 2013, and 2018. On the occurrence of certain events, such as a change in
control or termination of trading, holders of the notes may require us to
repurchase all or a portion of their notes for cash at a price equal to the
principal amount plus accrued unpaid interest to, but excluding, the repurchase
date. The notes also become immediately due and payable upon certain events of
default by us.

The notes are senior unsecured obligations and rank equally with all of our
future senior unsecured indebtedness. The notes are effectively subordinated to
all of our future secured indebtedness and all existing and future liabilities
of our subsidiaries, including trade payables.

14.   SHARE CAPITAL

      (a)   Authorized Shares

            There were no changes to the authorized share capital of QLT during
            the three-year period ended December 31, 2004.

      (b)   Share Buy-Back Program

            On August 12, 2004, the share buy-back program announced by us on
            August 11, 2003 expired. Under that program we had the ability to
            purchase a maximum of 5,000,000 common shares in the open market
            through the facilities of the Toronto Stock Exchange and The NASDAQ
            Stock Market, in accordance with all regulatory requirements, during
            the period from August 13, 2003 until August 12, 2004. We did not
            purchase any of our common shares under the program.

      (c)   Shareholder Protection Rights Plan

            Effective March 17, 2002 we adopted a Shareholder Rights Plan, which
            was then amended and restated effective April 8, 2002 (the "Rights
            Plan"), and approved, as amended, by the shareholders of QLT on
            April 25, 2002. The Rights Plan replaced the shareholder rights plan
            (the "Initial Rights Plan") that was initially adopted by us on
            March 17, 1992, confirmed by shareholders on April 28, 1992, amended
            March 31, 1997 and re-confirmed, as amended, by shareholders on May
            12, 1997. The Initial Rights Plan expired on March 17, 2002. The
            Rights Plan will remain in effect, unless earlier terminated
            pursuant to its terms, until the 2005 annual meeting of
            shareholders, and, if reconfirmed at the 2005 annual meeting, 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)   Warrants


                                       92

<PAGE>

            As 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 expires in July of 2005. As of December 31, 2004,
            this warrant remains outstanding and exercisable.

      (e)   Stock Options

            We have in place six stock-based plans which are described below. At
            present we may only grant options from three of these plans, namely,
            the 2000 Plan, the 2000 Atrix Plan, and the Non-Qualified Atrix
            Plan. The other plans remain in place for so long as options
            previously granted remain outstanding. The 2000 Plan provides for
            the grant of options to purchase common shares to directors,
            officers and employees of QLT, or any of our subsidiaries, to
            provide incentive to develop our growth. The 2000 Atrix Plan
            provides for the grant of options to purchase common shares to
            officers and employees of our US subsidiary, to provide incentive to
            develop our growth. All plans are administered by the Executive
            Compensation Committee (the "Committee") appointed by the Board of
            Directors. The vesting of stock options for all employees and
            directors, which is at the discretion of the Committee, is rateably
            over three years.

      (i)   1998 Incentive Stock Option Plan, or 1998 Plan

            The 1998 Plan, which provided for the issuance of up to 5,000,000
            common shares, was approved by shareholders in May 1998. The maximum
            term of any option granted under the 1998 Plan was five years. Under
            this Plan, the exercise price of an option was set by the Committee
            at the time of granting and could not be less than the fair market
            price of the common shares on the date of the granting. No option
            could be granted under the 1998 Plan if it would have resulted in
            the optionee holding options or rights to acquire in excess of 5% of
            the issued and outstanding common shares (on a non-diluted basis).
            The 1998 Plan automatically terminated on February 10, 2003 but
            options granted before the termination of the 1998 Plan may be
            exercised until they expire in accordance with their original terms.
            At December 31, 2004, options to purchase an aggregate total of
            740,040 common shares were outstanding under the 1998 Plan and
            exercisable in the future at prices ranging between CAD $12.10 and
            CAD $40.20 per common share.

      (ii)  2000 Incentive Stock Option Plan, or 2000 Plan

            The 2000 Plan, which provides for the issuance of up to 5,000,000
            common shares, was approved by shareholders on May 5, 2000. On April
            25, 2002, at our Annual General Meeting, the shareholders passed a
            resolution approving an amendment to the 2000 Plan by increasing the
            maximum number of common shares issuable under the Plan to 7,000,000
            common shares. The 2000 Plan is to replace the 1998 Plan. A
            guideline currently set in place by the Committee is for the maximum
            term of any option granted under the 2000 Plan not to exceed five
            years, subject to the right of the Committee to extend the term in
            certain circumstances. The exercise price of an option granted is
            set by the Committee at the time of granting and may not be less
            than the fair market price of the common shares on the date of the
            granting. No option may be granted under the 2000 Plan if it would
            result in the optionee holding options or rights to acquire in
            excess of 5% of the issued and outstanding common shares (on a
            non-diluted basis). The Committee may suspend, amend, or terminate
            the 2000 Plan at any time without notice, provided that no
            outstanding option is adversely affected thereby. The 2000 Plan will
            automatically terminate on March 1, 2010, unless it has previously
            been terminated by the Committee, but options granted before
            termination of the 2000 Plan may be exercised until they expire in
            accordance with their original terms. At December 31, 2004, options
            to purchase an aggregate total of 5,690,358 common shares were
            outstanding under the 2000 Plan and exercisable in the future at
            prices ranging between CAD $12.93 and CAD $108.60 per common share.

      (iii) 1987 Atrix Performance Stock Option Plan, or 1987 Atrix Plan


                                       93

<PAGE>

            On November 19, 2004, the Company assumed the 1987 Atrix Plan which
            provides for the issuance of up to 267,937 common shares. The
            maximum term of any option granted under the 1987 Atrix Plan is ten
            years. The exercise price of all options granted under the 1987
            Atrix Plan is the closing bid price of the stock on the date of
            grant. No stock options have been granted under this plan since it
            expired in May 2002. All currently outstanding options are fully
            vested and will be exercisable pursuant to their terms at grant. At
            December 31, 2004, options to purchase an aggregate total of 256,403
            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. $13.65 per common share.

      (iv)  2000 Atrix Performance Stock Option Plan, or 2000 Atrix Plan

            On November 19, 2004, the Company assumed the 2000 Atrix Plan which
            provides for the issuance of up to 6,794,636 common shares. Under
            the terms of the 2000 Atrix Plan, options expire ten years after
            grant. The exercise price of all options granted under the 2000
            Atrix Plan is the closing price of the stock on the date of grant.
            At December 31, 2004, options to purchase an aggregate total of
            5,678,286 common shares were outstanding under the 2000 Atrix Plan
            and exercisable at prices ranging between U.S. $2.63 and U.S. $17.82
            per common share.

      (v)   1999 Atrix Non-Employee Director Stock Incentive Plan or Atrix DSI
            Plan

            On November 19, 2004 we assumed the Atrix DSI Plan. This plan was
            originally set-up in 1999 by Atrix to attract and retain the best
            available non-employee directors, to provide them additional
            incentives, and to promote the success of its business. The Atrix
            DSI Plan was comprised of two components: an "Automatic Option Grant
            Program" and a "Stock Fee Program."

                  Automatic Option Grant Program

            All options previously awarded under this portion of the plan were
            made under the 2000 Stock Incentive Plan. These options vested
            rateably over a period of three years and expire ten years after
            grant. The exercise price of each option was equal to the market
            price of Atrix's common stock on the date of the grant. No options
            have been granted under this program since November 19, 2004. At
            December 31, 2004 there were no non-employee directors eligible
            under this program. All options previously issued and remaining
            outstanding under this program at December 31, 2004 are shown under
            the Atrix 2000 Plan. We do not intend to use this program in future.

                  Stock Fee Program

            Each Atrix non-employee director previously received an annual
            retainer fee as well as per meeting fees which were paid in cash,
            restricted shares of common stock or a combination thereof at the
            director's election. The number of shares issued was determined
            based on the fair value of the Atrix's common stock on the date
            paid. No restricted shares have been awarded under this program
            since November 19, 2004. We do not intend to use this program in
            future.

      (vi)  Non-Qualified Atrix Stock Option Plan, or Non-Qualified Atrix Plan

            On November 19, 2004 we assumed the Non-Qualified Atrix Plan which
            provides for issuance of up to 207,543 common shares. Options under
            the Non-Qualified Atrix Plan are granted to outside consultants. The
            Compensation Committee sets the option price and exercise terms
            granted under the Non-Qualified Atrix Plan. The exercise price of
            all options granted under the Non-Qualified Atrix Plan has been the
            closing market price at the date of grant. At December 31, 2004,
            options to purchase an aggregate total of 36,176 common shares were
            outstanding under the Non-Qualified Atrix Plan and exercisable in
            the future at prices ranging between U.S. $2.70 and U.S. $8.67 per
            common share.


                                       94

<PAGE>

Stock option activity with respect to our 1998 Plan and 2000 Plan is presented
below:


<TABLE>
<CAPTION>
                                                           Exercise Price
(In Canadian dollars)               Number of Options      Per Share Range
--------------------------------    -----------------     ----------------
<S>                                 <C>                   <C>
Outstanding at December 31, 2001        8,152,396         $  9.28 - 108.60

     Granted                            1,047,862           12.93 -  39.23
     Exercised                           (416,574)           9.28 -  39.23
     Cancelled                           (982,446)          13.78 - 108.60
                                        ---------         ----------------

Outstanding at December 31, 2002        7,801,238         $  9.28 - 108.60

     Granted                            1,005,322           12.10 -  18.36
     Exercised                           (484,274)           9.28 -  23.50
     Cancelled                         (1,085,662)           9.28 - 108.60
                                        ---------         ----------------

Outstanding at December 31, 2003        7,236,624         $ 12.10 - 108.60

     Granted                              950,200           21.04 -  32.85
     Exercised                           (709,696)          12.10 -  34.75
     Cancelled                         (1,046,730)          12.10 - 108.60
                                        ---------         ----------------

Outstanding at December 31, 2004        6,430,398         $ 12.10 - 108.60
                                        ---------         ----------------
</TABLE>


The weighted average exercise price of outstanding options under the 1998 Plan
and 2000 Plan as at December 31, 2004, December 31, 2003 and December 31, 2002
are CAD $47.64, CAD $47.82 and CAD $50.85, respectively.

Stock option activity with respect to all other Company option plans is
presented below:


<TABLE>
<CAPTION>
                                                              Exercise Price
(In U.S. dollars)                       Number of Options    Per Share Range
------------------------------------    -----------------    ---------------
<S>                                     <C>                  <C>
Options assumed at November 19, 2004        6,106,888        $  2.63 - 17.82
     Granted                                        -                      -
     Exercised                                136,023           5.29 - 14.23
     Cancelled                                      -                      -
                                        -------------        ---------------

Outstanding at December 31, 2004            5,970,865        $  2.63 - 17.82
                                        -------------        ---------------
</TABLE>


The weighted average exercise price of outstanding options under all other plans
as at December 31, 2004 was U.S. $11.65.


                                       95

<PAGE>

Additional information relating to stock options outstanding under the 1998 Plan
and the 2000 Plan as of December 31, 2004, is presented below:


<TABLE>
<CAPTION>
(In Canadian dollars)             Options Outstanding                Options Exercisable
----------------------------------------------------------------------------------------------
                                                       Weighted
                                                       Average
                                      Weighted        Remaining                   Weighted
                       Number of      Average        Contractual   Number of  Average Exercise
Price Range             Options    Exercise Price    Life (Years)   Options        Price
----------------------------------------------------------------------------------------------
<S>                    <C>             <C>           <C>           <C>             <C>
 Under $17.50            791,080       $ 13.49            3.22       426,958       $ 13.49
$17.51 - $25.00          760,550         22.25            2.53       606,070         22.41
$25.01 - $37.50        1,672,698         32.27            2.95     1,018,758         31.99
$37.51 - $50.00        1,697,919         39.44            1.39     1,670,141         39.46
  Over $50.00          1,508,151        104.65            0.37     1,504,651        104.70
----------------------------------------------------------------------------------------------
                       6,430,398                                   5,226,578
----------------------------------------------------------------------------------------------
</TABLE>


Options exercisable as at December 31, 2003 and December 31, 2002 were 5,697,500
and 5,330,702, respectively.

Additional information relating to stock options outstanding under all other
Company options plans as of December 31, 2004, is presented below:


<TABLE>
<CAPTION>
(In U.S. dollars)                 Options Outstanding                Options Exercisable
----------------------------------------------------------------------------------------------
                                                       Weighted
                                                       Average
                                      Weighted        Remaining                   Weighted
                       Number of      Average        Contractual   Number of  Average Exercise
Price Range             Options    Exercise Price    Life (Years)   Options        Price
----------------------------------------------------------------------------------------------
<S>                    <C>         <C>               <C>           <C>        <C>
  Under $5.00            380,163      $ 3.57             5.61        380,163       $ 3.57
$ 5.01 - $7.50           492,429        5.65             5.13        492,429         5.65
$ 7.51 - $10.00        1,438,871        8.72             7.29      1,438,871         8.72
$10.01 - $12.50        1,004,165       11.55             7.82      1,004,165        11.55
$12.51 - $15.00          713,820       13.53             7.59        713,820        13.53
$15.01 - $17.82        1,941,417       16.27             9.35      1,941,417        16.27
----------------------------------------------------------------------------------------------
                       5,970,865                                   5,970,865
----------------------------------------------------------------------------------------------
</TABLE>


The number of options issued and outstanding under all plans at any time is
limited to 15% of the number of our issued and outstanding common shares. As of
December 31, 2004, the number of options issued and outstanding under all plans
was 13.5% of the issued and outstanding common shares.

15. NET PRODUCT REVENUE

Net product revenue was determined as follows:


<TABLE>
<CAPTION>
(In thousands of U.S. dollars)                               2004          2003          2002
------------------------------------------------------------------------------------------------
<S>                                                       <C>           <C>           <C>
Visudyne(R) sales by Novartis Ophthalmics                 $  448,277    $  356,948    $  287,098
Less:  Marketing and distribution costs                     (133,730)     (110,958)     (107,293)
Less:  Inventory costs                                       (25,789)      (22,624)      (16,424)
Less:  Royalties                                             (10,074)       (8,082)       (6,604)
------------------------------------------------------------------------------------------------
                                                          $  278,684    $  215,284    $  156,777
================================================================================================
</TABLE>



                                       96


<PAGE>


<TABLE>
<S>                                                         <C>           <C>           <C>
QLT share of remaining revenue on final sales by
Novartis Ophthalmics (50%)                                  $  139,342    $  107,642    $   78,388
Add:   Inventory costs reimbursed to QLT                        21,791        19,757        13,574
Add:   Royalties reimbursed to QLT                              10,074         8,082         6,604
Add:   Other costs reimbursed to QLT                             6,250         6,644         5,521
                                                            --------------------------------------
Revenue from Visudyne(R) as reported by QLT                 $  177,457    $  142,125    $  104,087

  Net product revenue from Eligard(R) and other products         1,841             -             -
                                                            --------------------------------------
                                                            $  179,298    $  142,125    $  104,087
                                                            ======================================
</TABLE>


For the year ended December 31, 2004 approximately 47% (2003 - 51%, 2002 - 59%)
of total Visudyne sales were in the U.S., with Europe and other markets
responsible for the remaining 53% (2003 - 49%, 2002 - 41%).

As a result of our acquisition of Atrix our net product revenue includes $1.8
million of revenue from Eligard and other Atrix products.

16. CONTRACT RESEARCH AND DEVELOPMENT

We received non-refundable research and development funding from Novartis
Ophthalmics, Xenova Limited, and other strategic partners, which was recorded as
contract research and development revenue. Details of our contract research and
development revenue were as follows:


<TABLE>
<CAPTION>
(In thousands of U.S. dollars)                  2004       2003     2002
--------------------------------------------------------------------------
<S>                                            <C>       <C>       <C>
Visudyne(R) ocular programs                    $ 3,633   $ 2,527   $ 2,475
Visudyne(R) dermatology programs                     -     1,062     2,745
Tariquidar programs                                  -     1,000     1,000
Others                                             803        36       206
--------------------------------------------------------------------------
Contract research and development revenue      $ 4,436   $ 4,625   $ 6,426
==========================================================================
</TABLE>


17. (WRITE-DOWN) OF INVESTMENTS


<TABLE>
<CAPTION>
(In thousands of U.S. dollars)                               2004     2003       2002
---------------------------------------------------------------------------------------
<S>                                                         <C>      <C>       <C>
Write-down of investment in Diomed Holdings, Inc.           $    -   $ (560)   $      -
Write-down of investment in Kinetek Pharmaceuticals, Inc.        -        -      (6,204)
---------------------------------------------------------------------------------------
                                                            $    -   $ (560)   $ (6,204)
=======================================================================================
</TABLE>


Our investment in Diomed was significantly diluted as a result of an equity
financing by Diomed during the fourth quarter of fiscal 2003, and was also
impaired in the amount of $0.6 million to reflect an other than temporary
decline in value.

We perform periodic evaluations of our investments to assess for indications of
impairment. During the fourth quarter of fiscal 2002, we contracted an
impairment assessment by an independent valuation consultant. Based on this
assessment and the events affecting Kinetek, we recorded a write-down of $6.2
million.


                                       97


<PAGE>

18. INCOME TAXES

Income (loss) before income taxes and extraordinary gain was as follows:


<TABLE>
<CAPTION>
     (In thousands of U.S. dollars)                                2004        2003       2002
-------------------------------------------------------------------------------------------------
<S>                                                             <C>          <C>         <C>
Canada                                                          $  88,230    $ 68,770    $ 24,994
United States and other                                          (237,008)          -           -
-------------------------------------------------------------------------------------------------
(Loss) income before income taxes and
 extraordinary gain                                             $(148,778)   $ 68,770    $ 24,994
=================================================================================================
</TABLE>


The components of the provision for income taxes were as follows:


<TABLE>
<CAPTION>
     (In thousands of U.S. dollars)                               2004         2003        2002
-------------------------------------------------------------------------------------------------
<S>                                                             <C>          <C>         <C>
Canada                                                          $  30,051    $ 23,953    $ 11,399
United States and other                                              (603)          -           -
-------------------------------------------------------------------------------------------------
Provision for income taxes                                      $  29,448    $ 23,953    $ 11,399
=================================================================================================
</TABLE>



<TABLE>
<CAPTION>
     (In thousands of U.S. dollars)                                2004        2003        2002
-------------------------------------------------------------------------------------------------
<S>                                                             <C>          <C>         <C>
 Provision for deferred income taxes                            $  28,669    $ 23,853    $ 10,294
(Reduction of) increase in valuation allowance                        779         100       1,105
-------------------------------------------------------------------------------------------------
Provision for income taxes                                      $  29,448    $ 23,953    $ 11,399
=================================================================================================

</TABLE>



<TABLE>
<CAPTION>
     (In thousands of U.S. dollars)                               2004         2003        2002
-------------------------------------------------------------------------------------------------
<S>                                                             <C>          <C>         <C>
Current income taxes                                            $   9,346    $      -    $      -
Deferred income taxes                                              20,102      23,953      11,399
-------------------------------------------------------------------------------------------------
Provision for income taxes                                      $  29,448    $ 23,953    $ 11,399
=================================================================================================
</TABLE>


Differences between our statutory income tax rates and our effective income
tax rates applied to the pre-tax income consisted of the following:


                                       98


<PAGE>


<TABLE>
<CAPTION>
(In thousands of U.S. dollars)                                  2004               2003           2002
--------------------------------------------------------------------------------------------------------
<S>                                                          <C>                 <C>            <C>
(Loss) income before income taxes                            $ (136,261)         $ 68,770       $ 24,994
Extraordinary gain                                              (12,517)                -              -
--------------------------------------------------------------------------------------------------------
(Loss) income before income taxes and extraordinary          $ (148,778)         $ 68,770       $ 24,994
gain
Canadian  statutory tax rates                                     35.62%            37.62%         39.62%
--------------------------------------------------------------------------------------------------------
Expected income tax (recovery) provision                     $  (52,995)         $ 25,871       $  9,902
Purchased in-process research and development                    84,063                 -              -
Investment tax credits                                           (2,378)           (1,536)        (1,356)
Deferred gain on sale of Photofrin(R)                              (341)             (682)             -
Increase in  valuation allowance                                    779               100          1,105
Valuation allowance on write-down of investment                       -               105          1,229
Permanent differences and other                                     320                95            519
--------------------------------------------------------------------------------------------------------
Provision for income taxes                                   $   29,448          $ 23,953       $ 11,399
========================================================================================================
</TABLE>


The tax effects of temporary differences that give rise to significant
components of the deferred income tax assets and deferred income tax
liabilities are presented below:


                                       99


<PAGE>


<TABLE>
<CAPTION>
     (In thousands of U.S. dollars)                                     2004         2003
-------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C>
DEFERRED TAX ASSETS
Net operating loss carryforwards                                      $  45,316    $     -
Research & development tax credit carryforwards                           9,198       8,631
Capital loss carryforwards                                                4,475           -
Depreciable assets                                                        5,129       2,706
Unpaid employee bonuses                                                     841           -
Write-down of long-term investments                                           -       1,654
Development rights                                                            -       3,559
Research and development expenditures                                         -         510
Other temporary differences                                                 833      (3,605)
-------------------------------------------------------------------------------------------
Total gross deferred income tax assets                                $  65,792    $ 13,455
Less: valuation allowance                                               (54,113)     (1,654)
-------------------------------------------------------------------------------------------
Total deferred income tax assets                                      $  11,679    $ 11,801
Less: current portion                                                    (4,753)    (11,801)
-------------------------------------------------------------------------------------------
Net long-term portion of deferred income tax assets                   $   6,926    $      -
-------------------------------------------------------------------------------------------

DEFERRED TAX LIABILITIES
Deferred tax liability associated with the tangible and intangible    $ (47,234)   $      -
assets acquired in the acquisition of Atrix
Unrealized foreign exchange gain on convertible debt                     (4,937)          -
-------------------------------------------------------------------------------------------
Total deferred income tax liabilities                                 $ (52,171)   $      -
-------------------------------------------------------------------------------------------
Net deferred income tax (liabilities) assets                          $ (40,492)   $ 11,801
===========================================================================================
</TABLE>


In 2004, we acquired Atrix which had substantial non-capital loss and research
and development credit carryforwards. For 2004, a valuation allowance has been
applied to offset these respective deferred tax assets in recognition of the
uncertainty that such tax benefits will be realized. There may be limitations on
the utilization of our accumulated net operating losses and research and
development credit carryforwards as a result of changes in control that have
occurred.

At December 31, 2004, we had approximately $121.4 million of total operating
loss carryforwards with approximately $114.5 million relating to Atrix and $6.9
million relating to other foreign losses. The loss carryforwards expire at
various dates through 2024. We also had approximately $9.2 million of research
and development credits available for carryforward which expire at various dates
through 2014. We also had approximately $12.5 million of capital loss
carryforwards of which approximately $12.0 million carryforward indefinitely and
the remaining $0.5 million related to Atrix expire at various dates through
2008. The future tax benefit of these loss carryforwards and research and
development credits is ultimately subject to final determination by taxation
authorities.

As part of the purchase price accounting for the acquisition of Atrix, some of
the intangible and tangible assets were required to be recognized at fair value
by virtue of generally accepted accounting principles that are applicable to the
acquisition. This resulted in a deferred income tax liability associated with
property, plant and


                                      100

<PAGE>

equipment, trademarks, and developed technology that will be amortized over a
period of 5, 16, and 17 years, respectively, and an inventory adjustment that is
recognized in cost of sales as the related products are sold.

During 2004, we adjusted our valuation allowance associated with research and
development credits and our U.S. accumulated tax loss carryforwards. The
valuation allowance is reviewed periodically and if the assessment of the "more
likely than not" criterion changes, the valuation allowance is adjusted
accordingly.

19. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

As at December 31, 2004 and December 31, 2003, the carrying amounts for our cash
and cash equivalents, short-term investment securities, accounts receivable, and
accounts payable approximated fair value due to the short-term maturity of these
financial instruments. Our investment in common shares of Diomed Holdings Inc.
is carried at fair value based on quoted market prices. Our long-term debt
comprises $172.5 million aggregate principal amount of convertible senior and
had a fair value of $206.8 million as of December 31, 2004 as valued by an
independent investment bank. These notes are not listed on any securities
exchange or included in any automated quotation system. The quoted bid and ask
prices may not be reliable as the amounts cannot be independently verified and
not all trades are reflected.

With respect to the concentration of credit risk, our accounts receivable, as at
December 31, 2004 and December 31, 2003, comprise primarily aggregate amounts
owing from Novartis Ophthalmics.

We purchase goods and services primarily in Canadian ("CAD") and U.S. dollars
("USD"), and earn most of our revenues in U.S. dollars and Euros ("EUR"). We
enter into foreign exchange contracts to manage exposure to currency rate
fluctuations related to our expected future net income (primarily in U.S.
dollars and Euros) and cash flows (in U.S. dollars and Swiss francs ("CHF"). We
are exposed to credit risk in the event of non-performance by counterparties in
connection with these foreign exchange contracts. We mitigate this risk by
transacting with a diverse group of financially sound counterparties and,
accordingly, do not anticipate loss for non-performance. Foreign exchange risk
is also managed by satisfying foreign denominated expenditures with cash flows
or assets denominated in the same currency. The net unrealized gain in respect
of such foreign currency contracts, as at December 31, 2004, was approximately
$0.9 million, which was included in our results of operations. At December 31,
2004, we have outstanding forward foreign currency contracts as noted below.


<TABLE>
<CAPTION>
                                               Maturity Period     Quantity (millions)      Average Price
                                               ---------------     -------------------     ---------------
<S>                                            <C>                 <C>                     <C>
U.S. / Canadian dollar option-dated
forward contracts                                    2005               USD 23.2           1.30824 per USD

Swiss franc / Canadian dollar option-dated
forward contract                                     2005               CHF 21.8           1.05190 per CHF
</TABLE>



                                      101

<PAGE>

20. COMMITMENTS

In the normal course of business, we enter into product supply agreements with
contract manufacturers, which expire at various dates to 2009 and total $17.7
million, as well as other purchase commitments related to daily operations. In
addition, we have entered into operating lease agreements related to office
equipment and office space. Estimated lease payments for office space are
$451,000 in 2005, $210,000 in 2006, $38,000 in 2007. The minimum annual
commitment related to these agreements payable over the next five years is as
follows:

(In thousands of U.S. dollars)


<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S>                                  <C>
2005                                 $  21,671
                                     ---------
2006                                     6,410
                                     ---------
2007                                     3,253
                                     ---------
2008                                       395
                                     ---------
2009                                     1,323
                                     ---------
Thereafter                                 100
                                     ---------
</TABLE>


21. SEGMENTED INFORMATION

Details of our revenues by category are as follows:

Revenues


<TABLE>
<CAPTION>
(In thousands of U.S. dollars)             2004           2003            2002
----------------------------------      ----------      ---------      ----------
<S>                                     <C>             <C>            <C>
Visudyne(R)                             $  177,457      $ 142,125      $  104,087
Eligard(R)                                   3,270              -               -
Generic dermatology products                   501              -               -
Dental products                                408              -               -
Contract research and development            4,436          4,625           6,426
                                        ----------      ---------      ----------
                                        $  186,072      $ 146,750      $  110,513
                                        ----------      ---------      ----------
</TABLE>



                                      102

<PAGE>

Details of our revenues and property, plant and equipment by geographic segments
are as follows:

Revenues(1)


<TABLE>
<CAPTION>
(In thousands of U.S. dollars)         2004            2003            2002
------------------------------      ----------      ----------      ---------
<S>                                 <C>             <C>             <C>
U.S.                                $  100,898      $   86,754      $  73,309
Europe                                  65,776          47,637         30,722
Canada                                  10,300           7,734          4,544
Other                                    9,099           4,625          1,938
                                    ----------      ----------      ---------
                                    $  186,072      $  146,750      $ 110,513
                                    ----------      ----------      ---------
</TABLE>


Property, plant and equipment


<TABLE>
<CAPTION>
(In thousands of U.S. dollars)        2004           2003
------------------------------      --------       --------
<S>                                 <C>            <C>
Canada                              $ 54,152       $ 42,687
U.S.                                  27,523            575
                                    --------       --------
                                    $ 81,674       $ 43,262
                                    --------       --------
</TABLE>


Revenues are attributable to a geographic segment based on the location of: (a)
the customer, for revenue from and royalties on product sales; and (b) the head
office of the collaborative partner, in the case of revenues from contract
research and development and collaborative arrangements.

22. CONTINGENCIES

(a) TAP LITIGATION

      In 2003, TAP Pharmaceutical Products, Inc., or TAP Pharmaceutical, Takeda
Chemical Industries Ltd. and Wako Pure Chemical Industries, Ltd. filed suit
against Atrix (now QLT USA, Inc.), in a U.S. federal court, alleging that the
Eligard delivery system infringes a patent (U.S. Patent No. 4,728,721) licensed
to TAP Pharmaceutical by the two other plaintiffs. The patent expires on May 1,
2006. In March 2004, the court granted our motion to stay the patent
infringement suit, pending the outcome of re-examination of the patent-in-suit
by the U.S. Patent and Trademark Office. The plaintiffs filed a motion seeking
reconsideration of the stay order, but the motion was denied. TAP Pharmaceutical
requested that it be allowed to file a motion for preliminary injunction, and
the court denied that request. The court lifted the stay on November 16, 2004
following the conclusion of the re-examination proceedings. The judge has not
yet set a trial date. If this lawsuit is not resolved in our favor, we may be
enjoined from selling some or all of our Eligard products until the patent
expires in 2006, and/or may be required to pay financial damages, which could be
substantial.

      On June 21, 2004, Takeda Chemical Industries Ltd., or Takeda, Wako Pure
Chemical Industries, Ltd. and Takeda Pharma GmbH filed a Request for Issuance of
a Provisional Injunction against MediGene AG, or MediGene, and Yamanouchi Pharma
GmbH, or Yamanouchi, in the Regional Court Hamburg, the Federal Republic of
Germany. The request alleged that MediGene AG and Yamanouchi Pharma GmbH
infringe a German patent, EP 0 202 065, and sought an injunction preventing
defendants from producing, offering, putting on the market or using, or
importing or possessing for these purposes, in the Federal Republic of Germany a
solvent for preparing an injectable solution containing a polymer claimed in EP
0 202 065. On July 26, 2004, the Court denied the plaintiff's request for a
Provisional Injunction.


                                      103

<PAGE>

      On June 28, 2004, Takeda Chemical Industries Ltd., Wako Pure Chemical
Industries, Ltd. and Takeda GmbH filed a complaint in the Regional Court
Dusseldorf, the Federal Republic of Germany, against MediGene AG and Yamanouchi
Pharma GmbH alleging infringement of the same patent. Previously, on June 1,
2004, MediGene AG filed an action in the Federal Patent Court in Munich, Germany
seeking the nullification of the patent that is the subject of the June 28, 2004
complaint. If the patent is not nullified by the Federal Patent Court and
Takeda's action in the Regional Court Dusseldorf is not resolved in favor of
MediGene and Yamanouchi, they may be precluded from selling Eligard products in
Germany until the patent expires in 2006. In such event, Atrix's revenue from
sales of Eligard in Germany may decrease. Trial of the action in the Regional
Court Dusseldorf is expected to take place in July 2005. Trial of the nullity
action in Munich has been scheduled for April 2005.

(b) PATENT LITIGATION WITH MEEI

The First MEEI Lawsuit

      In April 2000, Massachusetts Eye and Ear Infirmary, or MEEI, filed a civil
suit against us in the U.S. District Court (the "Court") for the District of
Massachusetts seeking to establish exclusive rights for MEEI as the owner of
certain inventions relating to the use of verteporfin as the photoactive agent
in the treatment of certain eye diseases including AMD.

      In 2002, we moved for summary judgement against MEEI on all eight counts
of MEEI's complaint in Civil Action No. 00-10783-JLT. The Court granted all of
our summary motions, dismissing all of MEEI's claims. With respect to our
counterclaim requesting correction of inventorship of U.S. Patent No. 5,798,349
(the "'349 Patent") to add an additional Massachusetts General Hospital
inventor, the Court stayed the claim pending the outcome of the lawsuit
described below.

      MEEI appealed the decision of the Court to the U.S. District Court of
Appeals on February 19, 2005. The Court of Appeals issued its ruling, upholding
the dismissal of five of MEEI's eight claims, and remanding three claims to
trial on the basis that they should not have been determined on summary
judgment.

      No trial has been scheduled.

The Second MEEI Lawsuit

      In May 2001, the U.S. Patent Office issued U.S. Patent No. 6,225,303, or
the '303 Patent, to MEEI. The `303 Patent is derived from the same patent family
as the patent in issue in the first suit, the '349 Patent, and claims a method
of treating unwanted choroidal neovasculature in a shortened treatment time
using verteporfin. The patent application which led to the issuance of the `303
Patent was filed and prosecuted by attorneys for MEEI and, in contrast to the
'349 Patent, named only MEEI researchers as inventors.

      The same day the `303 Patent was issued, MEEI commenced a second civil
suit against us and Novartis Ophthalmics, Inc. (now Novartis Ophthalmics, a
division of Novartis Pharma AG) in the U.S. District Court for the District of
Massachusetts alleging infringement of the `303 Patent (Civil Action No.
01-10747-EFH). The suit seeks damages and injunctive relief for patent
infringement and unjust enrichment. We have answered the complaint, denying its
material allegations and raising a number of affirmative defenses, and have
asserted counterclaims against MEEI and the two MEEI researchers who are named
as inventors on the `303 Patent.

      In April of 2003, we moved to dismiss MEEI's claim for unjust enrichment
on the grounds that this claim had been previously decided by a court. The Court
granted our motion in May of 2003.

      In January of 2005, the Court ordered in our favour in one of our
counterclaims and declared that the inventorship of the `303 Patent be corrected
to add QLT as joint inventors. That ruling gives us the right to exploit the
patent in issue. MEEI has a right to appeal the Court's ruling.


                                      104

<PAGE>

            The final outcomes of these disputes are not presently determinable
      or estimable and there can be no assurance that the matters will be
      finally resolved in our favor. If the lawsuits are not resolved in our
      favor, we might be obliged to pay damages, or an additional royalty or
      damages for access to the inventions covered by claims in issued U.S.
      patents, and might be subject to such equitable relief as a court may
      determine (which could include an injunction) a remedy combining some or
      all of those remedies foregoing.


I
TEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

      None.


ITEM 9A. CONTROLS AND PROCEDURES

      DISCLOSURE CONTROLS AND PROCEDURES

            We maintain a set of disclosure controls and procedures designed to
      ensure that information required to be disclosed in filings made pursuant
      to the Securities Exchange Act of 1934 is recorded, processed, summarized
      and reported within the time periods specified in the Securities and
      Exchange Commission's rules and forms. Our principal executive and
      financial officers have evaluated our disclosure controls and procedures
      as of the end of the period covered by this report and concluded that our
      current disclosure controls and procedures are effective.

      MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

            Our management is responsible for establishing and maintaining
      adequate over financial reporting, as that term is defined in Exchange Act
      Rule 13a-15(f). Management's report on our internal controls over
      financial reporting is included at Item 8 of this Annual Report.


Item 9B. OTHER INFORMATION

     None


                                      105

<PAGE>


                                    PART III

      The Information required by Items 10 through 14 of Part III of this Annual
Report on Form 10-K are incorporated by reference to the proxy statement for use
in connection with the Company's Annual Meeting of Shareholders to be held on
May 25, 2005.


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required for this Item is incorporated by reference to the
proxy statement for our annual meeting of shareholders to be held on May 25,
2005.


ITEM 11. EXECUTIVE COMPENSATION

      The information required for this Item is incorporated by reference to the
proxy statement for our annual meeting of shareholders to be held on May 25,
2005.


Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

EQUITY COMPENSATION PLAN INFORMATION

      The following table sets out information regarding our common stock that
may be issued upon the exercise of options, warrants and other rights granted to
employees, consultants or directors under all of our existing equity
compensation plans, as of December 31, 2004:


<TABLE>
<CAPTION>
                                 (a)                  (b)                      (c)
                        --------------------   --------------------   --------------------

                                                                      Number of securities
                            Number of                                  remaining available
                         Securities to be                              for issuance under
                        issued upon exercise     Weighted average     equity compensation
                         of outstanding         exercise price of       plans (excluding
                         options,warrants      outstanding options,   securities reflected
   PLAN CATEGORY           and rights          warrants and rights       in column (a))
---------------------   ------------------------------------------------------------------
<S>                     <C>                    <C>                    <C>
Equity compensation
plans approved by
security holders                6,430,398(1)       CAD $  47.64                    987,087

Equity compensation
plans approved by
security holders                5,934,689(1)       USD $  11.68                    991,447

Equity compensation
plans not approved by
security holders                   36,176(2)       USD $   5.45                     80,008
                        ------------------------------------------------------------------
Total                            12,401,263                                      2,058,542
</TABLE>


      (1) We currently maintain five equity compensation plans that have been
approved by shareholders which provide for the issuance of common stock to
employees, officers and directors. These five equity compensation plans are
designated as the 1998 Incentive Stock Option Plan, the 2000 Incentive Stock
Option Plan, the 1987 Atrix


                                      106

<PAGE>

Performance Stock Option Plan, the 2000 Atrix Performance Stock Option Plan and
the 1999 Atrix Non-Employee Director Stock Incentive Plan. As of February 28,
2005 no 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.

      Other information required for this Item is incorporated by reference to
the proxy statement for use in connection with the annual meeting of
shareholders to be held on May 25, 2005.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required for this Item is incorporated by reference to the
proxy statement for use in connection with the annual meeting of shareholders to
be held on May 25, 2005.


ITEM 14. PRINCIPAL ACCOUNTANTS' FEES AND SERVICES

      The information required for this Item is incorporated by reference to the
proxy statement for use in connection with the annual meeting of shareholders to
be held on May 25, 2005.


                                      107

<PAGE>


                                     PART IV


ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

FINANCIAL STATEMENTS

      (i)   The following financial statement documents are included as part of

            Item 8 to this Form 10-K.


            Report of Independent Registered Chartered Accountants
            Consolidated Balance Sheets
            Consolidated Statements of Income
            Consolidated Statements of Cash Flows
            Consolidated Statements of Changes in Shareholders' Equity

            Notes to the Consolidated Financial Statements

      (ii)  Schedules required by Article 12 of Regulation S-X:

            Except for Schedule II - Valuation and Qualifying Accounts, all
            other schedules have been omitted because they are not applicable or
            not required, or because the required information is included in the
            consolidated financial statements or notes thereto.

 
           SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED
            DECEMBER 31, 2004, 2003 AND 2002.


                  PROVISION FOR NON-COMPLETION OF PRODUCT INVENTORY

                      (In thousands of U.S. dollars)


<TABLE>
<CAPTION>
                             ADDITIONS CHARGED                           
           BALANCE AT          TO COSTS AND         WRITE-OFFS, AND
YEAR    BEGINNING OF YEAR       EXPENSES          PROVISION REDUCTION
----    -----------------    -----------------    -------------------    --------
<S>     <C>                  <C>                  <C>                     <C>
2004        $     -             $  3,655               $  2,198          $  1,457
2003          1,664                1,075                  2,739                 -
2002          2,447                  493                  1,276             1,664
</TABLE>



                                      108

<PAGE>

EXHIBITS


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                       DESCRIPTION
--------  -----------------------------------------------------------------------------------------------------
<S>       <C>
     3.0  Memorandum and Articles; (1)

     3.1  Article 24 of the Articles of Quadra Logic Technologies Inc. as filed with the Registrar of Companies
          (British Columbia) on July 13, 1989; (4)

     3.2  Article 26 of the Articles of Quadra Logic Technologies Inc. as filed with the Registrar of Companies
          (British Columbia) on November 15, 1989; (4)

     3.3  Part 27 of the Articles of Quadra Logic Technologies Inc. dated February 21, 1991; (10)

     3.4  Part 28 of the Articles of QLT PhotoTherapeutics Inc. dated December 15, 1995; (17)

     4.1  Shareholder Rights Plan Agreement, as amended and restated, dated as of March 17, 2002, between QLT
          Inc. and ComputerShare Trust Company of Canada; (20)

                 Executive Compensation Plans and Arrangements

    10.1  Agreement, dated April 8, 1982, between Dr. Julia Levy, Quadra Logic Technologies Inc. and the
          University of British Columbia; (1)

    10.2  Agreement, dated January 15, 1988, between Dr. David Dolphin, Quadra Logic Technologies Inc. and the
          University of British Columbia; (6)

    10.3  Form of Employee Stock Option Agreement; (11)

    10.4  Royalty Adjustment and Stock Option Agreement dated, August 10, 1989, between Quadra Logic
          Technologies Inc. and Dr. David Dolphin; (2)

    10.5  Royalty Agreement, dated December 15, 1987, between Quadra Logic Technologies Inc. and Dr. David
          Dolphin; (2)

    10.6  1998 QLT Incentive Stock Option Plan; (21)

    10.7  Form of Employment Agreement; (23)

    10.8* 2000 QLT Incentive Stock Option Plan (as amended in 2002); (23) (formerly numbered 10.70)

    10.9* Employment Agreement dated December 18, 2001 between QLT Inc. and Paul J. Hastings; (26)

   10.10* Employment Agreement dated October 9, 2001  between QLT Inc. and Michael J. Doty; (26)

   10.11* Employment Agreement dated as of June 10, 2002 between QLT Inc. and William J. Newell; (26)

   10.12* Employment Agreement dated May 19, 2000 between QLT Inc. and Alain Curaudeau; (26)

   10.13  Employment Agreement dated as of February 20, 2003 between QLT Inc. and Dr. Mohammad Azab.(27)

   10.14* Amended and Restated Performance Stock Option Plan of Atrix Laboratories, Inc. (29)

   10.15* Non-Qualified Stock Option Plan of Atrix Laboratories, Inc. (29)

   10.16* Non-Employee Director Stock Incentive Plan of Atrix Laboratories, Inc. (31)

   10.17* 2000 Stock Option Plan of Atrix Laboratories, Inc. (32)

   10.18  Photodynamic Therapy Product Development, Manufacturing and Distribution Agreement, dated July 1,
          1994, between Quadra Logic Technologies Inc. and CIBA Vision AG, Hettlingen (now Novartis Opthalmics,
          a division of Novartis Pharma AG); (12)
</TABLE>



                                      109

<PAGE>


<TABLE>
<CAPTION>
EXHIBIT

NUMBER                                       DESCRIPTION
--------  ------------------------------------------------------------------------------------------------
<S>       <C>
   10.19  BPD-MA Verteporfin Supply Agreement, dated March 12, 1999 between QLT PhotoTherapeutics Inc. and
          Parkedale Pharmaceuticals, Inc; (14)(21)

   10.20  BPD-MA Presome Supply Agreement, dated February 26, 1998, between QLT PhotoTherapeutics Inc. and
          Nippon Fine Chemical Co., Ltd.; (14)(21)_

   10.21  BPD-MA Supply Agreement, dated December 11, 1998, between QLT PhotoTherapeutics Inc. and Raylo
          Chemicals Limited; (14)(21)

   10.22  License Agreement, dated December 8, 1998, between QLT PhotoTherapeutics Inc. and The General Hospital
          Corporation; (14)(21)

   10.23  Amending Agreement to PDT Product Development, Manufacturing and Distribution Agreement dated as of
          July 23, 2001 between Novartis Ophthalmics AG and QLT Inc.;  (14) (25)

   10.24  Amending Agreement to PDT Product Development, Manufacturing and Distribution Agreement dated as of 
          July 22, 2003 between Novartis Ophthalmics AG (now Novartis Opthalmics, a division of Novartis Pharma 
          AG) and QLT Inc.; (28)
  
   10.25  Agreement and Plan of Merger by and among QLT Inc, Aspen Acquisition Corp. and Atrix Laboratories,
          Inc. dated as of June 14, 2004; (32)

   10.26  License and Royalty Agreement, dates as of August 8, 2000 between Atrix Laboratories, Inc. and Pfizer
          Inc. (33)

   10.27  Collaboration, Development and Supply Agreement dated as of August 28, 2000 between Atrix
          Laboratories, Inc. and Sandoz, Inc.(34)

   10.28  Collaboration, License and Supply Agreement dated as of December 8, 2000 between Atrix Laboratories,
          Inc. and Sanofi-Synthelabo Inc.(35)

   10.29  License Agreement between Atrix Laboratories, Inc. and CollaGenex Pharmaceuticals, Inc. dated as of
          August 24, 2001.  (36)

   10.30  Collaboration, License and Supply Agreement by and between Atrix Laboratories, Inc. and Fujisawa
          Healthcare, Inc., dated October 15, 2001.  (36)

   10.31  Collaboration, License and Supply Agreement, dated as of April 4, 2001, between Atrix Laboratories,
          Inc. and MediGene.  (37)

      11  Statement re: computation of per share earnings; (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: Paul J. Hastings, 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: Michael J. Doty, Senior Vice President 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: Paul J. Hastings, 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: Michael J. Doty, Senior Vice President and Chief Financial Officer; (filed
          herewith)
</TABLE>



                                      110

<PAGE>

NOTES:

* Denotes executive compensation plans or arrangements.

(1)   Filed as an exhibit to the Company's Registration Statement on Form F-1
      (File No. 33-31222 filed on September 25, 1989).

(2)   Filed as an exhibit to Amendment No. 1 to the Registration Statement on
      Form F-1 dated November 6, 1989.

(4)   Filed as an exhibit to Amendment No. 3 to the Registration Statement on
      Form F-1 dated November 22, 1989.

(6)   Filed as an exhibit to the Company's Annual Report on Form 20-F dated July
      31, 1989.

(10)  Filed as an exhibit to the Company's Annual Report on Form 10-K dated
      March 20, 1992.

(11)  Filed as an exhibit to the Company's Annual Report on Form 10-K dated
      March 15, 1993.

(14)  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.

(17)  Filed as an exhibit to the Company's Annual Report for the period ended
      December 31, 1995.

(21)  Filed as an exhibit to the Company's Annual Report on Form 10-K dated
      March 29, 1999.

(22)  Filed as an exhibit to the Company's Annual Report on Form 10-K dated
      March 22, 2001.

(23)  Filed as an exhibit to the Company's Form S-8 filed on September 20, 2002.

(24)  Filed as an exhibit to the Company's Quarterly Report on Form 10-Q dated
      November 12, 2002.

(25)  Filed as an exhibit to the Company's Annual Report on Form 10-K dated
      March 27, 2003.

(26)  Filed as an exhibit to the Company's Quarterly Report on Form 10-Q dated
      May 13, 2003.

(27)  Filed as an exhibit to the Company's Quarterly Report on Form 10-Q dated
      August 14, 2003.

(28)  Filed as an exhibit to the Annual Report on Form 10-K of Atrix
      Laboratories, Inc. for the year ended December 31, 1998.

(29)  Filed as an exhibit to the Annual Report on Form 10-K of Atrix
      Laboratories, Inc. for the year ended December 31, 1999.

(30)  Filed as an exhibit to the Annual Report on Form 10-K of Atrix
      Laboratories, Inc., for the year ended December 31, 2000.

(31)  Filed as an exhibit to the Joint Proxy Statement/Prospectus on Form S-4
      dated October 14, 2004.


(32)  Filed as an exhibit to the Current Report on Form 8-K of Atrix
      Laboratories, Inc., dated August 8, 2000.

(33)  Filed as an exhibit to the Quarterly Report on Form 10-Q of Atrix
      Laboratories, Inc., for the quarter ended September 30, 2000.

(34)  Filed as an exhibit to the Current Report on Form 8-K of Atrix
      Laboratories, Inc., dated February 23, 2001.


                                      111

<PAGE>

(35)  Filed as an exhibit to the Quarterly Report on Form 10-Q of Atrix
      Laboratories, Inc., for the quarter ended September 30, 2001.

(36)  Filed as an exhibit to the Current Report on Form 8-K of Atrix
      Laboratories, Inc., dated April 4, 2001.


                                      112

<PAGE>


                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

      Dated: March 15, 2005

          QLT INC.

          By:          /s/ Paul J. Hastings
              ------------------------------------------------------------------
              Paul J. Hastings, President and Chief Executive Officer

          By:          /s/ Michael J. Doty
              ------------------------------------------------------------------
              Michael J. Doty, Senior Vice President and Chief Financial Officer
              (Principal Financial and Accounting Officer)


                                      113

<PAGE>

                                POWER OF ATTORNEY

      KNOW ALL PERSONS BY THESE PRESENTS:

      That the undersigned officers and directors of QLT Inc. do hereby
constitute and appoint Paul J. Hastings and Michael J. Doty, and each of them,
the lawful attorney and agent or attorneys and agents with power and authority
to do any and all acts and things and to execute all instruments which said
attorneys and agents, or either of them, determine may be necessary or advisable
or required to enable QLT Inc. to comply with the Securities Exchange Act of
1934, as amended, and any rules or regulations or requirements of the Securities
and Exchange Commission in connection with this Form 10-K Annual Report. Without
limiting the generality of the foregoing power and authority, the powers granted
include the power and authority to sign the names of the undersigned officers
and directors in the capacities indicated below to this Form 10-K or amendments
or supplements thereto, and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents or either of them, shall do or cause to be
done by virtue hereof. This Power of Attorney may be signed in several
counterparts.

      IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney on behalf of the Registrant and in the capacities and on the dates
indicated.


<TABLE>
<CAPTION>
    SIGNATURES                           TITLE                                DATE
    ----------                           -----                                ----
<S>                   <C>                                                 <C>
___________________   President, Chief Executive Officer and Director     March 15, 2005
 Paul J. Hastings     (Principal Executive Officer)

___________________   Senior Vice President and Chief Financial Officer   March 15, 2005
  Michael J. Doty     (Principal Financial and Accounting Officer)

___________________   Chairman of the Board of Directors and Director     March 15, 2005
   E. Duff Scott

___________________   Director                                            March 15, 2005
  C. Boyd Clarke

___________________   Director                                            March 15, 2005
Peter A. Crossgrove

___________________   Director                                            March 15, 2005
Ronald D. Henriksen

___________________   Director                                            March 15, 2005
   Julia G. Levy

___________________   Director                                            March 15, 2005
 Alan C. Mendelson

___________________   Director                                            March 15, 2005
 Richard R. Vietor

___________________   Director                                            March 15, 2005
 George J. Vuturo

___________________   Director                                            March 15 , 2005
   Jack L. Wood
</TABLE>



                                      114



<PAGE>

                                                                      EXHIBIT 11

                        COMPUTATION OF PER SHARE EARNINGS

      Basic net income per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income per
common share is computed in accordance with the treasury stock method and the
"if converted" method, which uses the weighted average number of common shares
outstanding during the period and also includes the dilutive effect of
potentially issuable common stock from outstanding stock options, warrants, and
convertible debt. The effect of approximately 9,692,637 shares related to the
assumed conversion of the $ 172.5 million 3% convertible senior notes has been
included in the computation of diluted earnings per share for the years ended
December 31, 2004 and 2003. Common shares issuable upon exercise of certain
options and warrants are not used in the calculation for the years ended
December 31, 2000 to 2004, as the effect would be anti-dilutive.


<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                            ------------------------------------------------------------
                                                               2004         2003        2002         2001        2000
                                                            -----------   ---------   ---------   ---------   ----------
                                                             (In thousands of U.S. dollars except per share information)
<S>                                                         <C>           <C>         <C>         <C>         <C>
Net (loss) income before extraordinary gain..............   $  (178,226)  $  44,817   $  13,595   $  71,512   $    4,399
Extraordinary gain.......................................        12,517           -           -           -            -
Net (loss) income available to
 common shareholders.......   $  (165,709)  $  44,817   $  13,595   $  71,512   $    4,399
Basic net (loss) income per common share
   (Loss) income before extraordinary gain ..............   $     (2.43)  $    0.65   $    0.20   $    1.05   $     0.07
   Extraordinary gain ...................................          0.17           -           -           -            -
   Net (loss) income.....................................   $     (2.26)  $    0.65   $    0.20   $    1.05   $     0.07
Diluted net (loss) income per common share
   (Loss) income before extraordinary gain ..............   $     (2.43)  $    0.59   $    0.20   $    1.04   $     0.06
   Extraordinary gain ...................................          0.17           -           -           -            -
   Net (loss) income.....................................   $     (2.26)  $    0.59   $    0.20   $    1.04   $     0.06
Weighted average number of common shares outstanding
   (in thousands)........................................        73,240      68,733      68,228      67,832       66,875
Diluted weighted average number of common shares
   outstanding (in thousands)............................        73,240      78,665      68,432      68,548       68,739

</TABLE>



                                      115

<PAGE>

                                                                      EXHIBIT 23

             CONSENT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

We consent to the incorporation by reference in the Registration Statement No.
333-110306 of QLT Inc. on Form S-3 and Registration Statement Nos. 333-2488,
333-12422, 333-100070 and 333-120657 of QLT Inc. on Form S-8 of our reports
dated March 14, 2005, relating to the financial statements of QLT Inc. and
management's report on the effectiveness of internal control over financial
reporting appearing in and incorporated by reference in the Annual Report on
Form 10-K of QLT Inc. for the year ended December 31, 2004.

/S/ DELOITTE & TOUCHE LLP

Independent Registered Chartered Accountants

Vancouver, Canada
March 14, 2005


                                      116



<PAGE>

                                                                    EXHIBIT 31.1

                                  CERTIFICATION

I, Paul J. Hastings, President and Chief Executive Officer of QLT Inc., or the
registrant, certify that:

1.    I have reviewed this annual report of Form 10-K of QLT Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement
      of a material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control
      over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
      15(d) - 15(f)) for the registrant and have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our

            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known
            to us by others within those entities, particularly during the
            period in which this report is being prepared;

      b)    Designed such internal control over financial reporting or caused
            such internal control over financial reporting to be designed under
            our supervision, to provide reasonable assurance regarding the
            reliability of financial reporting and the preparation of financial
            statements for external purposes in accordance with generally
            accepted accounting principles;

      c)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      d)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer(s) and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of the
      registrant's board of directors (or persons performing the equivalent
      functions):

      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

Date: March 15, 2005

/s/ Paul J. Hastings
-------------------------------------

Paul J. Hastings
President and Chief Executive Officer
(Principal Executive Officer)
QLT Inc.


                                      117

<PAGE>

                                                                    EXHIBIT 31.2

                                  CERTIFICATION

I, Michael J. Doty, Senior Vice-President and Chief Financial Officer of QLT
Inc., or the registrant, certify that:

1.    I have reviewed this annual report of Form 10-K of QLT Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement
      of a material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and the internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed
 under our
            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiaries, is made known
            to us by others within those entities, particularly during the
            period in which this report is being prepared;

      b)    Designed such internal control over financial reporting or caused
            such internal control over financial reporting to be designed under
            our supervision, to provide reasonable assurance regarding the
            reliability of financial reporting and the preparation of financial
            statements for external purposes in accordance with generally
            accepted accounting principles;

      c)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      d)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer(s) and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of the
      registrant's board of directors (or persons performing the equivalent
      functions):

      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

Date: March 15, 2005

/s/ Michael J. Doty
-------------------------------------------------
Michael J. Doty
Senior Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
QLT Inc.

118


<PAGE>

                                                                    EXHIBIT 32.1


CERTIFICATION PURSUANT TO

                             18 U.S.C. SECTION 1350,
                       AS ADOPTED PURSUANT TO SECTION 906
                        OF THE SARBANES-OXLEY ACT OF 2002

      In connection with the Annual Report of QLT Inc., or the Company, on Form
10-K for the period ended December 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof, or the Form 10-K, I, Paul J. Hastings,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:

            (1)   The Form 10-K fully complies with the requirements of Section
                  13(a) or 15(d) of the Securities Exchange Act of 1934 (15
                  U.S.C. 78m(a) or 78o(d)); and

            (2)   The information contained in the Form 10-K fairly presents, in
                  all material respects, the financial condition and results of
                  operations of the Company.

Dated: March 15, 2005

                                             /s/ Paul J. Hastings
                                             -----------------------------------
                                             Paul J. Hastings
                                             President & Chief Executive Officer
                                             (Principal Executive Officer)

                                             QLT Inc.

119



<PAGE>

                                                                    EXHIBIT 32.2


CERTIFICATION PURSUANT TO

                             18 U.S.C. SECTION 1350,
                       AS ADOPTED PURSUANT TO SECTION 906
                        OF THE SARBANES-OXLEY ACT OF 2002

      In connection with the Annual Report of QLT Inc., or the Company, on Form
10-K for the period ended December 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof, or the Form 10-K,. I, Michael J. Doty,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:

            (1)   The Form 10-K fully complies with the requirements of Section
                  13(a) or 15(d) of the Securities Exchange Act of 1934 (15
                  U.S.C. 78m(a) or 78o(d)); and

            (2)   The information contained in the Form 10- K fairly presents,
                  in all material respects, the financial condition and results
                  of operations of the Company.

Dated: March 15 , 2005

                                    /s/ Michael J. Doty
                                    ------------------------
                                    Michael J. Doty
                                    Senior Vice President &
                                    Chief Financial Officer
                                    (Principal Financial and Accounting Officer)
                                    QLT Inc.


120