Table ofContents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C.  20549**

 

**FORM 20-F**

 

| **o**  | ** ** | **Registration Statement Pursuant to  Section 12(b) or 12(g) of The Securities Exchange Act of 1934**                                  |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                  |
| **OR** |
|   |       |                                                                                                                                                  |
| **x**  | ** ** | **Annual Report Pursuant to Section 13 or  15(d) of The Securities Exchange Act of 1934 for the fiscal year ended  December 31, 2008** |
|   |       |                                                                                                                                                  |
| **OR** |
|   |       |                                                                                                                                                  |
| **o**  | ** ** | **Transition Report Pursuant to Section 13 or  15(d) of The Securities Exchange Act of 1934**                                               |
|   |       |                                                                                                                                                  |
| **OR** |
|   |       |                                                                                                                                                  |
| **o**  | ** ** | **Shell Company Report Pursuant to Section 13  or 15(d) of The Securities Exchange Act of 1934**                                            |

 

**Commissionfile number 0-30752**

 

**ÆTERNA ZENTARIS INC.**

(Exact Name of Registrant as Specified in its Charter)

 

**Not Applicable**(Translation ofRegistrant’s Name into English)

 

**Canada** (Jurisdiction of Incorporation)

** **

**1405 du Parc-Technologique Blvd.Québec, Quebec Canada, G1P 4P5**

**Dennis Turpin**

**Telephone: (418)-652-8525**

**E-mail: dturpin@aezsinc.com**

 

Securities registered or to be registered pursuant toSection 12(b) of the Act:

 

| **Title of Each Class** | ** ** | **Name of Each Exchange on Which Registered** |
|-------------------------|------------|-----------------------------------------------|
| Common  Shares          |       | NASDAQ  Global Market                         |
|                    |       | Toronto  Stock Exchange                       |

 

Securities registered or to be registered pursuant toSection 12(g) of the Act:  **NONE**

 

Securities for which there is a reporting obligationpursuant to Section 15(d) of the ACT: **NONE**

 

Indicate the number of outstanding shares of each ofthe issuer’s classes of capital or common stock as of the close of the periodcovered by the annual report:  53,187,470common shares as of December 31, 2008.

 

Indicate by check mark whether the registrant is awell-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct.  Yes  o      No  x

 

If this report is an annual or transition report, indicateby check mark if the registrant is not required to file reports pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934.  Yes  o      No  x

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  x      No  o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of the registrant’s knowledge, in a definitiveproxy or information statements incorporated by reference in Part III ofthis Form 20-F or any amendment to this Form 20-F.  o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or, or a non-acceleratedfiler.  See definitions of “acceleratedfiler” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

 

|  Large accelerated  filer       o |   | Accelerated filer       x |   | Non-accelerated filer       o |
|---------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|------------------------------------------------------------------|

 

Indicate by checkmark which basis of accounting theregistrant has used to prepare the financial statements included in thisfiling:

 

| U.S.  GAAP       o |   | International  Financial Reporting Standards as issued by the International Accounting  Standards Board       o |   | Other       x |
|-------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|

 

If “Other” has been checked in response to the previousquestion, indicate by check mark which financial statement item the registranthas elected to follow.  Item 17  o    Item 18 x

 

If this is an annual report, indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes  o      No  x

 

 

 

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**Basis of Presentation**

 

General

 

Except where the context otherwise requires, allreferences in this annual report on Form 20-F (“Form 20-F”) to the “Company”,“Æterna Zentaris Inc.”, “we”, “us”, “our” or similar words or phrases are toÆterna Zentaris Inc. and its subsidiaries, taken together.  In this annual report, references to “$” and “US$”are to United States dollars and references to “CAN$” are to Canadiandollars.  Unless otherwise indicated, thestatistical and financial data contained in this annual report are presented asat December 31, 2008.

 

**Forward-Looking Statements**

 

This annual report contains forward-looking statements made pursuant to the safe harbor provisions of the U.S. Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which could cause the Company’s actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, among others, the availability of funds and resources to pursue R&D projects, the successful and timely completion of clinical studies, the ability of the Company to take advantage of business opportunities in the pharmaceutical industry, uncertainties related to the regulatory process and general changes in economic conditions. Investors should consult the Company’s quarterly and annual filings with the Canadian and U.S. securities commissions for additional information on risks and uncertainties relating to the forward-looking statements. Investors are cautioned not to rely on these forward-looking statements. The Company does not undertake to update these forward-looking statements and we disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments except if we are requested to do so by a governmental authority or applicable law.

 

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Table ofContents

 

**TABLE OF CONTENTS**

 

**GENERALINFORMATION**

 
|            |       |                                                   |                                                     | **Page** |
|-----------------|------------|--------------------------------------------------------|----------------------------------------------------------|----------|
| **PART I** | ** ** |                                                   |                                                     | **1**    |
| ** **      | ** ** |                                                   |                                                     |     |
|            | Item 1.    | Identity of Directors, Senior Management and  Advisers | 1                                                        |
|            |       | A.                                                     | Directors and senior management                          | 1        |
|            |       | B.                                                     | Advisers                                                 | 1        |
|            |       | C.                                                     | Auditors                                                 | 1        |
|            | Item 2.    | Offer Statistics and Expected Timetable                | 1                                                        |
|            |       | A.                                                     | Offer statistics                                         | 1        |
|            |       | B.                                                     | Method and expected timetable                            | 1        |
|            | Item 3.    | Key Information                                        | 1                                                        |
|            |       | A.                                                     | Selected financial  data                                 | 1        |
|            |       | B.                                                     | Capitalization and indebtedness                          | 4        |
|            |       | C.                                                     | Reasons for the offer and use of proceeds                | 4        |
|            |       | D.                                                     | Risk factors                                             | 4        |
|            | Item 4.    | Information on the  Company                            | 15                                                       |
|            |       | A.                                                     | History and  development of the Company                  | 15       |
|            |       | B.                                                     | Business overview                                        | 17       |
|            |       | C.                                                     | Organizational  structure                                | 41       |
|            |       | D.                                                     | Property, plants  and equipment                          | 42       |
|            | Item 4A.   | Unresolved Staff  Comments                             | 42                                                       |
|            | Item 5.    | Operating and  Financial Review and Prospects          | 42                                                       |
|            | Item 6.    | Directors, Senior  Management and Employees            | 75                                                       |
|            |       | A.                                                     | Directors and  senior management                         | 75       |
|            |       | B.                                                     | Compensation                                             | 78       |
|            |       | C.                                                     | Board practices                                          | 91       |
|            |       | D.                                                     | Employees                                                | 92       |
|            |       | E.                                                     | Share ownership                                          | 93       |
|            | Item 7.    | Major Shareholders  and Related Party Transactions     | 93                                                       |
|            |       | A.                                                     | Major shareholders                                       | 93       |
|            |       | B.                                                     | Related party  transactions                              | 94       |
|            |       | C.                                                     | Interests of  experts and counsel                        | 94       |
|            | Item 8.    | Financial  Information                                 | 94                                                       |
|            |       | A.                                                     | Consolidated  statements and other financial information | 94       |
|            |       | B.                                                     | Significant changes                                      | 95       |
|            | Item 9.    | The Offering and  Listing                              | 95                                                       |
|            |       | A.                                                     | Offer and listing  details                               | 95       |
|            |       | B.                                                     | Plan of distribution                                     | 95       |
|            |       | C.                                                     | Markets                                                  | 95       |
|            |       | D.                                                     | Selling shareholders                                     | 95       |
|            |       | E.                                                     | Dilution                                                 | 96       |
|            |       | F.                                                     | Expenses of the issuer                                   | 96       |
|            | Item 10.   | Additional  Information                                | 96                                                       |
|            |       | A.                                                     | Share capital                                            | 96       |
|            |       | B.                                                     | Memorandum and  articles of association                  | 96       |
|            |       | C.                                                     | Material contracts                                       | 104      |
|            |       | D.                                                     | Exchange controls                                        | 105      |
|            |       | E.                                                     | Taxation                                                 | 105      |
|            |       | F.                                                     | Dividends and  paying agents                             | 110      |
|            |       | G.                                                     | Statement by experts                                     | 110      |

 

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|              |       | H.                                                                           | Documents on display                                  | 110     |
|-------------------|------------|------------------------------------------------------------------------------|-------------------------------------------------------|---------|
|              |       | I.                                                                           | Subsidiary  information                               | 111     |
|              | Item  11.  | Quantitative  and Qualitative Disclosures About Market Risk                  | 111                                                   |
|              | Item  12.  | Description  of Securities Other than Equity Securities                      | 111                                                   |
|              |       | A.                                                                           | Debt securities                                       | 111     |
|              |       | B.                                                                           | Warrants and rights                                   | 111     |
|              |       | C.                                                                           | Other securities                                      | 111     |
|              |       | D.                                                                           | American  depositary shares                           | 111     |
|              |       |                                                                         |                                                  |    |
| **PART II**  |       |                                                                         |                                                  | **111** |
| ** **        |       |                                                                         |                                                  |    |
|              | Item  13.  | Defaults,  Dividend Arrearages and Delinquencies                             | 111                                                   |
|              | Item  14.  | Material  Modification to the Rights of Security Holders and Use of Proceeds | 111                                                   |
|              | Item  15.  | Controls and  Procedures                                                     | 112                                                   |
|              | Item 16.   | [Reserved]                                                                   | 113                                                   |
|              | Item  16A. | Audit  Committee Financial Expert                                            | 113                                                   |
|              | Item 16B.  | Code of Ethics                                                               | 113                                                   |
|              | Item  16C. | Principal  Accountant Fees and Services                                      | 113                                                   |
|              |       | A.                                                                           | Audit  Fees                                           | 113     |
|              |       | B.                                                                           | Audit-related Fees                                    | 114     |
|              |       | C.                                                                           | Tax  Fees                                             | 114     |
|              |       | D.                                                                           | All Other Fees                                        | 114     |
|              |       | E.                                                                           | Audit  Committee Pre-Approval Policies and Procedures | 114     |
|              | Item  16D. | Exemptions  from the Listing Standards for Audit Committees                  | 114                                                   |
|              | Item  16E. | Purchases of  Equity Securities by the Issuer and Affiliated Purchasers      | 114                                                   |
|              | Item  16F. | Changes in  Registrant’s Certifying Accountant                          | 114                                                   |
|              | Item  16G. | Corporate  Governance                                                        | 114                                                   |
|              |       |                                                                         |                                                  |
| **PART III** |       |                                                                         |                                                  | **115** |
| ** **        |       |                                                                         |                                                  |    |
|              | Item 17.   | Financial  Statements                                                        | 115                                                   |
|              | Item 18.   | Financial  Statements                                                        | 115                                                   |
|              | Item 19.   | Exhibits                                                                     | 174                                                   |

 

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**Table of Contents**

** **

**PART I**

** **

## ***Item 1.    Identity of Directors, Senior Management andAdvisers***

## *** ***

### ***A.            Directors and senior management***

### ** **

Not applicable.

 

### ***B.            Advisers***

### ** **

Not applicable.

 

### ***C.            Auditors***

### ** **

Not applicable.

 

## ***Item 2.    Offer Statistics and Expected Timetable***

## *** ***

### ***A.            Offer statistics***

### ** **

Not applicable.

 

### ***B.            Method and expected timetable***

### ** **

Not applicable.

 

## ***Item 3.    Key Information***

## *** ***

### ***A.            Selected financial data***

### ** **

The selected financial data should be read inconjunction with our audited consolidated financial statements and the relatednotes included elsewhere in this annual report, and “Item 5. Operating andFinancial Review and Prospects” of this annual report.

 

1

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**Consolidated Statements of EarningsData:**

***Amounts under CanadianGAAP***

*(inthousands of US dollars, except share and per share data)*

 
| ** **                                                      | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                      | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                                    |       | 38,478                                      |       | 42,068 |   | 38,799 |   | 44,813 |   | 42,972 |   |
| **Operating  expenses**                                         |       |                                        |       |   |   |   |   |   |   |   |   |
| Cost of sales                                                   |       | 19,278                                      |       | 12,930 |   | 11,270 |   | 8,250 |   | 7,992 |   |
| Selling, general and administrative                             |       | 17,325                                      |       | 20,403 |   | 16,478 |   | 14,403 |   | 13,137 |   |
| Research and development costs                                  |       | 57,448                                      |       | 39,248 |   | 27,422 |   | 25,544 |   | 23,431 |   |
| Research and development tax credits and grants                 |       | (343                                        | )          | (2,060 | ) | (1,564 | ) | (317 | ) | (845 | ) |
| Depreciation and amortization                                   |       |                                        |       |   |   |   |   |   |   |   |   |
| Property, plant and equipment                                   |       | 1,515                                       |       | 1,562 |   | 2,816 |   | 1,665 |   | 1,958 |   |
| Intangible assets                                               |       | 5,639                                       |       | 4,004 |   | 6,148 |   | 4,279 |   | 4,178 |   |
| Impairment of long-lived asset held for sale                    |       | —                                      |       | 735 |   | — |   | — |   | — |   |
|                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
|                                                            |       | 100,862                                     |       | 76,822 |   | 62,570 |   | 53,824 |   | 49,851 |   |
|                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| **Loss  from operations**                                       |       | (62,384                                     | )          | (34,754 | ) | (23,771 | ) | (9,011 | ) | (6,879 | ) |
|                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| **Other  income (expenses)**                                    | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest income**                                             |       | 868                                         |       | 1,904 |   | 1,441 |   | 1,235 |   | 1,286 |   |
| Interest expense                                                |       |                                        |       |   |   |   |   |   |   |   |   |
| Long-term debt and convertible term loans                       |       | —                                      |       | (85 | ) | (1,270 | ) | (6,979 | ) | (4,150 | ) |
| Other                                                           |       | (118                                        | )          | — |   | (163 | ) | (31 | ) | (69 | ) |
| Foreign exchange (loss) gain                                    |       | 3,071                                       |       | (1,035 | ) | 319 |   | (87 | ) | (491 | ) |
| Loss on disposal of long-lived assets held for sale             |       | (35                                         | )          | — |   | — |   | — |   | — |   |
| Loss on disposal of equipment                                   |       | (44                                         | )          | (28 | ) | — |   | — |   | — |   |
| Gain on disposal of a long-term investment                      |       | —                                      |       | — |   | 409 |   | — |   | — |   |
|                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
|                                                            |       | 3,742                                       |       | 756 |   | 736 |   | (5,862 | ) | (3,424 | ) |
| ** **                                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Share  in the results of an affiliated company**              |       | —                                      |       | — |   | 1,575 |   | — |   | — |   |
|                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| **Loss  before income taxes from continuing operations**        |       | (58,642                                     | )          | (33,998 | ) | (21,460 | ) | (14,873 | ) | (10,303 | ) |
|                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| **Income  tax (expense) recovery**                              |       | (1,175                                      | )          | 1,961 |   | 29,037 |   | (609 | ) | (273 | ) |
|                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| **Net  (loss) earnings from continuing operations**             |       | (59,817                                     | )          | (32,037 | ) | 7,577 |   | (15,482 | ) | (10,576 | ) |
| ** **                                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  (loss) earnings from discontinued operations**           |       | —                                      |       | (259 | ) | 25,813 |   | 26,053 |   | 6,151 |   |
|                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| **Net  (loss) earnings for the year**                           |       | (59,817                                     | )          | (32,296 | ) | 33,390 |   | 10,571 |   | (4,425 | ) |
|                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| **Net  (loss) earnings per share from continuing operations**   |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                           |       | (1.12                                       | )          | (0.61 | ) | 0.14 |   | (0.34 | ) | (0.23 | ) |
| Diluted                                                         |       | (1.12                                       | )          | (0.61 | ) | 0.14 |   | (0.34 | ) | (0.23 | ) |
|                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| **Net  (loss) earnings per share from discontinued operations** |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                           |       | —                                      |       | — |   | 0.50 |   | 0.57 |   | 0.13 |   |
| Diluted                                                         |       | —                                      |       | — |   | 0.48 |   | 0.57 |   | 0.13 |   |
| ** **                                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  (loss) earnings per share**                              | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                           |       | (1.12                                       | )          | (0.61 | ) | 0.64 |   | 0.23 |   | (0.10 | ) |
| Diluted                                                         |       | (1.12                                       | )          | (0.61 | ) | 0.62 |   | 0.23 |   | (0.10 | ) |
|                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| **Weighted  average number of shares**                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                           |       | 53,187,470                                  |       | 53,182,803 |   | 52,099,290 |   | 46,139,814 |   | 45,569,176 |   |
|                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| Diluted                                                         |       | 53,187,470                                  |       | 53,182,803 |   | 52,549,260 |   | 46,139,814 |   | 45,569,176 |   |

 

2

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*Amounts under U.S. GAAP*

** **
| ** **                                                      | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                      | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  (loss) earnings for the year**                           |       | (56,070                                     | )          | (37,428 | ) | 34,262 |   | 15,970 |   | (2,082 | ) |
| **Out  of which:**                                              |       |                                        |       |   |   |   |   |   |   |   |   |
| **Net  (loss) earnings from:**                                  |       |                                        |       |   |   |   |   |   |   |   |   |
| **continuing  operations**                                      |       | (56,070                                     | )          | (36,415 | ) | 8,449 |   | (10,083 | ) | (8,158 | ) |
| **discontinued  operations**                                    |       | —                                      |       | (1,013 | ) | 25,813 |   | 26,053 |   | 6,076 |   |
| ** **                                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  (loss) earnings per share from continuing operations**   |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                           |       | (1.05                                       | )          | (0.68 | ) | 0.16 |   | (0.22 | ) | (0.18 | ) |
| Diluted                                                         |       | (1.05                                       | )          | (0.68 | ) | 0.16 |   | (0.22 | ) | (0.18 | ) |
|                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| **Net  (loss) earnings per share from discontinued operations** |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                           |       | —                                      |       | (0.02 | ) | 0.50 |   | 0.56 |   | 0.13 |   |
| Diluted                                                         |       | —                                      |       | (0.02 | ) | 0.49 |   | 0.56 |   | 0.13 |   |
| ** **                                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  (loss) earnings per share**                              | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                           |       | (1.05                                       | )          | (0.70 | ) | 0.66 |   | 0.34 |   | (0.05 | ) |
| Diluted                                                         |       | (1.05                                       | )          | (0.70 | ) | 0.65 |   | 0.34 |   | (0.05 | ) |
|                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| **Weighted  average number of shares**                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                           |       | 53,187,470                                  |       | 53,182,803 |   | 52,099,290 |   | 46,139,814 |   | 45,569,176 |   |
|                                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| Diluted                                                         |       | 53,187,470                                  |       | 53,182,803 |   | 52,549,260 |   | 46,139,814 |   | 45,569,176 |   |

 

**Consolidated Balance Sheet Data:**

*Amounts under Canadian GAAP*

 
| ** **                 | ** ** | **As at December 31,** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **$**                                 | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                 | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents  |       | 49,226                                |       | 10,272 |   | 8,939 |   | 12,234 |   | 13,568 |   |
| Short-term investments     |       | 493                                   |       | 31,115 |   | 51,550 |   | 22,370 |   | 22,477 |   |
| Working capital            |       | 39,554                                |       | 37,325 |   | 85,413 |   | 99,502 |   | 60,291 |   |
| Total assets               |       | 108,342                               |       | 123,363 |   | 223,491 |   | 419,785 |   | 290,539 |   |
| Long-term debt and payable |       | 172                                   |       | — |   | 687 |   | 29,866 |   | 17,398 |   |
| Share capital              |       | 30,566                                |       | 30,566 |   | 168,466 |   | 130,344 |   | 127,585 |   |
| Shareholder’s equity  |       | 21,475                                |       | 88,591 |   | 178,879 |   | 109,531 |   | 100,076 |   |

 

*Amounts under U.S. GAAP*

 
| ** **                 | ** ** | **As at December 31,** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **$**                                 | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                 | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents  |       | 49,226                                |       | 10,272 |   | 8,939 |   | 12,234 |   | 13,568 |   |
| Short-term investments     |       | 493                                   |       | 31,115 |   | 51,550 |   | 22,370 |   | 22,477 |   |
| Working capital            |       | 39,554                                |       | 37,325 |   | 85,413 |   | 99,502 |   | 60,291 |   |
| Total assets               |       | 100,001                               |       | 109,182 |   | 209,143 |   | 404,587 |   | 271,440 |   |
| Long-term debt and payable |       | 172                                   |       | — |   | 687 |   | 30,858 |   | 19,986 |   |
| Share capital              |       | 22,589                                |       | 22,589 |   | 160,489 |   | 129,750 |   | 126,991 |   |
| Shareholder’s equity  |       | 13,134                                |       | 74,410 |   | 169,704 |   | 99,797 |   | 86,659 |   |

 

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### ***B.            Capitalization and indebtedness***

### ** **

Not applicable.

 

### ***C.            Reasons for the offer and use ofproceeds***

### ** **

Not applicable.

 

### ***D.            Risk factors***

### ** **

**Risksrelated to us and our business**

 

***Investments in biopharmaceutical companies are generallyconsidered to be******speculative.***

 

The prospects for companiesoperating in the biopharmaceutical industry may generally be considered to beuncertain, given the very nature of the industry and, accordingly, investmentsin biopharmaceutical companies should be considered to be speculative.

 

***We have a history of operating losses and we may neverachieve or maintain operating******profitability.***

 

Our product candidates remainat the development stage and we have incurred substantial expenses in ourefforts to develop products. Consequently, we have incurred recurrent operatinglosses and, as of December 31, 2008, we had an accumulated deficit of$102.8 million. Our operating losses have adversely impacted, and willcontinue to adversely impact, our working capital, total assets and shareholders’equity. We do not expect to reach operating profitability in the immediatefuture, and our expenses are likely to increase as we continue to expand ourresearch and development (“R&D”) and clinical study programs and our salesand marketing activities and seek regulatory approval for our productcandidates. Even if we succeed in developing new commercial products, we expectto incur additional operating losses for at least the next several years. If wedo not ultimately generate sufficient revenue from commercialized products andachieve or maintain operating profitability, an investment in our securitiescould result in a significant or total loss.

 

***We do not have the required regulatory approvals to marketcertain of our product******candidates, and we do not know if we will ever receivesuch approvals.***

 

With the exception ofCetrotide® (cetrorelix) for the treatment of infertility,none of our product candidates has to date received regulatory approval for itsintended commercial sale. We cannot market a pharmaceutical product in anyjurisdiction until it has completed rigorous preclinical testing and clinicaltrials and passed such jurisdiction’s extensive regulatory approval process. Ingeneral, significant research and development and clinical studies are requiredto demonstrate the safety and efficacy of our product candidates before we cansubmit regulatory applications. Preparing, submitting and advancingapplications for regulatory approval is complex, expensive and time-consumingand entails significant uncertainty. Even if a product candidate is approved bythe Food and Drug Administration (“FDA”), the Canadian Therapeutic ProductsDirectorate or any other regulatory authority, we may not obtain approval foran indication whose market is large enough to recoup our investment in thatproduct candidate. In addition, there can be no assurance that we will everobtain all or any required regulatory approvals for any of our productcandidates.

 

We are currently developingour product candidates based on R&D activities, preclinical testing andclinical trials conducted to date, and we may not be successful in developingor introducing to the market these or any other new products or technology. Ifwe fail to develop and deploy new products successfully and on a timely basis,we may become non-competitive and unable to recoup the R&D and otherexpenses we incur to develop and test new products.

 

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***Our clinical trials may not yield results which will enableus to obtain regulatory******approval for our products, and a setback in any of ourclinical trials would likely******cause a drop in our share price.***

 

We will only receive regulatoryapproval for a product candidate if we can demonstrate in carefully designedand conducted clinical trials that the product candidate is both safe andeffective. We do not know whether our pending or any future clinical trialswill demonstrate sufficient safety and efficacy to obtain the requisiteregulatory approvals or will result in marketable products. Unfavorable datafrom those studies could result in the withdrawal of marketing approval forapproved products or an extension of the review period for developmentalproducts. Clinical trials are inherently lengthy, complex, expensive anduncertain processes. It typically takes many years to complete testing, andfailure can occur at any stage of testing. Results attained in preclinicaltesting and early clinical studies, or trials, may not be indicative of resultsthat are obtained in later studies.

 

We may suffer significantsetbacks in advanced clinical trials, even after promising results in earlierstudies. Based on results at any stage of clinical trials, we may decide torepeat or redesign a trial or discontinue development of one or more of ourproduct candidates. Further, actual results may vary once the final andquality-controlled verification of data and analyses has been completed. If wefail to adequately demonstrate the safety and efficacy of our products underdevelopment, we will not be able to obtain the required regulatory approvals tocommercialize our product candidates.

 

Clinical trials are subject tocontinuing oversight by governmental regulatory authorities and institutionalreview boards and:

 

·                  mustmeet the requirements of these authorities;

 

·                  mustmeet requirements for informed consent; and

 

·                  mustmeet requirements for good clinical practices.

 

We may not be able to complywith these requirements in respect of one or more of our product candidates.

 

In addition, we rely on thirdparties, including Contract Research Organizations (“CROs”) and outsideconsultants, to assist us in managing and monitoring clinical trials. Ourreliance on these third parties may result in delays in completing, or infailing to complete, these trials if one or more third parties fails to performwith the speed and level of competence we expect.

 

A failure in the developmentof any one of our programs or product candidates could have a negative impacton the development of the others. Setbacks in any phase of the clinicaldevelopment of our product candidates would have an adverse financial impact(including with respect to any agreements and partnerships that may existbetween us and other entities), could jeopardize regulatory approval and wouldlikely cause a drop in our share price.

 

***If we encounter difficulties enrolling patients in ourclinical trials, our trials******could be delayed or otherwise adversely affected.***

 

Clinical trials for ourproduct candidates require that we or third parties identify and enroll aspecific number of patients. We or such third parties may not be able to enrolla sufficient number of patients to complete our clinical trials in a timelymanner. Patient enrollment is a function of many factors including:

 

·                  designof the protocol;

 

·                  thesize of the patient population;

 

·                  eligibilitycriteria for the study in question;

 

·                  perceivedrisks and benefits of the drug under study and of the control drug, if any;

 

·                  availabilityof competing therapies already approved;

 

·                  numberof competing clinical trials ongoing in the same indication;

 

·                  effortsto facilitate timely enrollment in clinical trials;

 

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·                  patientreferral practices of physicians; and

 

·                  availabilityof clinical trial sites.

 

If we or any third party havedifficulty enrolling a sufficient number of patients to conduct our clinicaltrials as planned, we may need to delay or terminate ongoing clinical trials.

 

***Even if we obtain regulatory approvals for our productcandidates, we will be subject******to stringent ongoing governmentregulation.***

 

Even if regulatory authoritiesapprove any of our product candidates, the manufacture, marketing and sale ofsuch products will be subject to strict and ongoing regulation. Compliance withsuch regulation will be expensive and consume substantial financial andmanagement resources. For example, an approval for a product may be conditionedon our agreement to conduct costly post-marketing follow-up studies to monitorthe safety or efficacy of the products. In addition, as a clinical experiencewith a drug expands after approval because the drug is used by a greater numberand more diverse group of patients than during clinical trials, side effects orother problems may be observed after approval that were not observed oranticipated during pre-approval clinical trials.  In such a case, a regulatory authority couldrestrict the indications for which the product may be sold or revoke theproduct’s regulatory approval.

 

We and our contractmanufacturers will be required to comply with applicable current GoodManufacturing Practice (“cGMP”) regulations for the manufacture of ourproducts. These regulations include requirements relating to quality assurance,as well as the corresponding maintenance of rigorous records and documentation.Manufacturing facilities must be approved before we can use them in thecommercial manufacturing of our products and are subject to subsequent periodicinspection by regulatory authorities. In addition, material changes in themethods of manufacturing or changes in the suppliers of raw materials aresubject to further regulatory review and approval.

 

If we, or any future marketingcollaborators or contract manufacturers, fail to comply with applicableregulatory requirements, we may be subject to sanctions including fines,product recalls or seizures and related publicity requirements, injunctions,total or partial suspension of production, civil penalties, suspension orwithdrawals of previously granted regulatory approvals, warning or untitledletters, refusal to approve pending applications for marketing approval of newproducts or of supplements to approved applications, import or export bans orrestrictions, and criminal prosecution and penalties. Any of these penaltiescould delay or prevent the promotion, marketing or sale of our products.

 

***If our products do not gain market acceptance, we may beunable to generate******significant revenues.***

 

Even if our products areapproved for commercialization, they may not be successful in the marketplace.Market acceptance of any of our products will depend on a number of factorsincluding, but not limited to:

 

·                  demonstrationof clinical efficacy and safety;

 

·                  theprevalence and severity of any adverse side effects;

 

·                  limitationsor warnings contained in the product’s approved labeling;

 

·                  availabilityof alternative treatments for the indications we target;

 

·                  theadvantages and disadvantages of our products relative to current or alternativetreatments;

 

·                  theavailability of acceptable pricing and adequate third-party reimbursement; and

 

·                  theeffectiveness of marketing and distribution methods for the products.

 

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If our products do not gainmarket acceptance among physicians, patients, healthcare payers and others inthe medical community, which may not accept or utilize our products, ourability to generate significant revenues from our products would be limited andour financial conditions will be materially adversely affected. In addition, ifwe fail to further penetrate our core markets and existing geographic markets orsuccessfully expand our business into new markets, the growth in sales of ourproducts, along with our operating results, could be negatively impacted.

 

Our ability to furtherpenetrate our core markets and existing geographic markets in which we competeor to successfully expand our business into additional countries in Europe,Asia or elsewhere is subject to numerous factors, many of which are beyond ourcontrol. Our products, if successfully developed, may compete with a number ofdrugs and therapies currently manufactured and marketed by major pharmaceuticaland other biotechnology companies. Our products may also compete with newproducts currently under development by others or with products which may beless expensive than our products. We cannot assure you that our efforts toincrease market penetration in our core markets and existing geographic marketswill be successful. Our failure to do so could have an adverse effect on ouroperating results and would likely cause a drop in our share price.

 

***We may not achieve our projected development goals in thetime-frames we announce and******expect.***

 

We set goals and make publicstatements regarding the timing of the accomplishment of objectives material toour success, such as the commencement, enrollment and completion of clinicaltrials, anticipated regulatory submission and approval dates and time ofproduct launch. The actual timing of these events can vary dramatically due tofactors such as delays or failures in our clinical trials, the uncertainties inherentin the regulatory approval process and delays in achieving manufacturing ormarketing arrangements sufficient to commercialize our products. There can beno assurance that our clinical trials will be completed, that we will makeregulatory submissions or receive regulatory approvals as planned or that wewill be able to adhere to our current schedule for the launch of any of ourproducts. If we fail to achieve one or more of these milestones as planned, ourshare price would likely decline.

 

***If we fail to obtain acceptable prices or adequatereimbursement for our products,******our ability to generate revenueswill be diminished.***

 

The ability for us and/or ourpartners to successfully commercialize our products will depend significantlyon our ability to obtain acceptable prices and the availability ofreimbursement to the patient from third-party payers, such as governmental andprivate insurance plans. These third-party payers frequently require companiesto provide predetermined discounts from list prices, and they are increasinglychallenging the prices charged for pharmaceuticals and other medical products.Our products may not be considered cost-effective, and reimbursement to thepatient may not be available or sufficient to allow us or our partners to sellour products on a competitive basis. It may not be possible to negotiatefavorable reimbursement rates for our products.

 

In addition, the continuingefforts of third-party payers to contain or reduce the costs of healthcarethrough various means may limit our commercial opportunity and reduce anyassociated revenue and profits. We expect proposals to implement similargovernment control to continue. In addition, increasing emphasis on managedcare will continue to put pressure on the pricing of pharmaceutical andbiopharmaceutical products. Cost control initiatives could decrease the pricethat we or any current or potential collaborators could receive for any of ourproducts and could adversely affect our profitability. In addition, in theUnited States, in Canada and in many other countries, pricing and/orprofitability of some or all prescription pharmaceuticals andbiopharmaceuticals are subject to government control.

 

If we fail to obtainacceptable prices or an adequate level of reimbursement for our products, thesales of our products would be adversely affected or there may be nocommercially viable market for our products.

 

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***Competition in our targeted markets is intense, anddevelopment by other companies******could render our products ortechnologies non-competitive.***

 

The biomedical field is highlycompetitive. New products developed by other companies in the industry couldrender our products or technologies non-competitive. Competitors are developingand testing products and technologies that would compete with the products thatwe are developing. Some of these products may be more effective or have an entirelydifferent approach or means of accomplishing the desired effect than ourproducts. We expect competition from biopharmaceutical and pharmaceuticalcompanies and academic research institutions to increase over time. Many of ourcompetitors and potential competitors have substantially greater productdevelopment capabilities and financial, scientific, marketing and humanresources than we do. Our competitors may succeed in developing productsearlier and in obtaining regulatory approvals and patent protection for suchproducts more rapidly than we can or at a lower price.

 

***We may not obtain adequate protection for our productsthrough our intellectual******property.***

 

We rely heavily on ourproprietary information in developing and manufacturing our product candidates.Our success depends, in large part, on our ability to protect our competitiveposition through patents, trade secrets, trademarks and other intellectualproperty rights. The patent positions of pharmaceutical and biopharmaceuticalfirms, including Æterna Zentaris, are uncertain and involve complex questionsof law and fact for which important legal issues remain unresolved.Applications for patents and trademarks in Canada, the United States and inother foreign territories have been filed and are being actively pursued by us.Pending patent applications may not result in the issuance of patents and wemay not be able to obtain additional issued patents relating to our technologyor products. Even if issued, patents to us or our licensors may be challenged,narrowed, invalidated, held to be unenforceable or circumvented, which couldlimit our ability to stop competitors from marketing similar products or limitthe length of term of patent protection we may have for our products. Changesin either patent laws or in interpretations of patent laws in the United Statesand other countries may diminish the value of our intellectual property ornarrow the scope of our patent protection. The patents issued or to be issuedto us may not provide us with any competitive advantage or protect us againstcompetitors with similar technology. In addition, it is possible that thirdparties with products that are very similar to ours will circumvent our patentsby means of alternate designs or processes. We may have to rely on method ofuse and new formulation protection for our compounds in development, and anyresulting products, which may not confer the same protection as claims tocompounds *per se.*

 

In addition, our patents maybe challenged by third parties in patent litigation, which is becomingwidespread in the biopharmaceutical industry. There may be prior art of whichwe are not aware that may affect the validity or enforceability of a patentclaim. There also may be prior art of which we are aware, but which we do notbelieve affects the validity or enforceability of a claim, which may,nonetheless, ultimately be found to affect the validity or enforceability of aclaim. No assurance can be given that our patents would, if challenged, be heldby a court to be valid or enforceable or that a competitor’s technology orproduct would be found by a court to infringe our patents.  Our granted patents could also be challengedand revoked in opposition or nullity proceedings in certain countries outsidethe United States. In addition, we may be required to disclaim part of the termof certain patents.

 

Patent applications relatingto or affecting our business have been filed by a number of pharmaceutical andbiopharmaceutical companies and academic institutions. A number of thetechnologies in these applications or patents may conflict with ourtechnologies, patents or patent applications, and any such conflict couldreduce the scope of patent protection which we could otherwise obtain. Becausepatent applications in the United States and many other jurisdictions aretypically not published until eighteen months after their first effectivefiling date, or in some cases not at all, and because publications ofdiscoveries in the scientific literature often lag behind actual discoveries,neither we nor our licensors can be certain that we or they were the first tomake the inventions claimed in our or their issued patents or pending patentapplications, or that we or they were the first to file for protection of theinventions set forth in these patent applications. If a third party has alsofiled a patent application in the United States covering our product candidatesor a similar invention, we may have to participate in an adversarialproceeding, known as an interference, declared by the United States Patent andTrademark Office (the “USPTO”) to determine priority of invention in the UnitedStates. The costs of these proceedings could be substantial and it is possiblethat our efforts could be unsuccessful, resulting in a loss of our U.S. patentposition.

 

In addition to patents, werely on trade secrets and proprietary know-how to protect our intellectualproperty. If we are unable to protect the confidentiality of our proprietaryinformation and know-how, the value of our technology and products could beadversely affected. We seek to protect our unpatented proprietary informationin part by requiring our employees, consultants, outside scientificcollaborators and sponsored researchers and other advisors to enter into confidentialityagreements. These agreements provide that all confidential informationdeveloped or made known to the individual during the course of the individual’srelationship with us is to be kept confidential and not disclosed to thirdparties except in specific circumstances. In the case of our employees, theagreements provide that all of the technology which is conceived by 

 

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the individual during thecourse of employment is our exclusive property. These agreements may notprovide meaningful protection or adequate remedies in the event of unauthorizeduse or disclosure of our proprietary information. In addition, it is possiblethat third parties could independently develop proprietary information andtechniques substantially similar to ours or otherwise gain access to our tradesecrets. If we are unable to protect the confidentiality of our proprietaryinformation and know-how, competitors may be able to use this information todevelop products that compete with our products and technologies, which couldadversely impact our business.

 

We currently have the right touse certain technology under license agreements with third parties. Our failureto comply with the requirements of material license agreements could result inthe termination of such agreements, which could cause us to terminate therelated development program and cause a complete loss of our investment in thatprogram.

 

As a result of the foregoingfactors, we may not be able to rely on our intellectual property to protect ourproducts in the marketplace.

 

***We may infringe the intellectual property rights of others.***

 

Our commercial success dependssignificantly on our ability to operate without infringing the patents andother intellectual property rights of third parties. There could be issuedpatents of which we are not aware that our products or methods may be found toinfringe, or patents of which we are aware and believe we do not infringe butwhich we may ultimately be found to infringe. Moreover, patent applications andtheir underlying discoveries are in some cases maintained in secrecy untilpatents are issued. Because patents can take many years to issue, there may becurrently pending applications of which we are unaware that may later result inissued patents that our products or methods are found to infringe. Moreover,there may be published pending applications that do not currently include aclaim covering our products or methods but which nonetheless provide supportfor a later drafted claim that, if issued, our products or methods could befound to infringe.

 

If we infringe or are allegedto infringe intellectual property rights of third parties, it will adverselyaffect our business. Our research, development and commercializationactivities, as well as any product candidates or products resulting from theseactivities, may infringe or be accused of infringing one or more claims of anissued patent or may fall within the scope of one or more claims in a publishedpatent application that may subsequently issue and to which we do not hold alicense or other rights. Third parties may own or control these patents orpatent applications in the United States and abroad. These third parties couldbring claims against us or our collaborators that would cause us to incursubstantial expenses and, if successful against us, could cause us to paysubstantial damages. Further, if a patent infringement suit were broughtagainst us or our collaborators, we or they could be forced to stop or delayresearch, development, manufacturing or sales of the product or productcandidate that is the subject of the suit.

 

The biopharmaceutical industryhas produced a proliferation of patents, and it is not always clear to industryparticipants, including us, which patents cover various types of products. Thecoverage of patents is subject to interpretation by the courts, and theinterpretation is not always uniform. In the event of infringement or violationof another party’s patent or other intellectual property rights, we may not beable to enter into licensing arrangements or make other arrangements at areasonable cost. Any inability to secure licenses or alternative technologycould result in delays in the introduction of our products or lead toprohibition of the manufacture or sale of products by us or our partners andcollaborators.

 

***Patent litigation is costly and time consuming and maysubject us to liabilities.***

 

Our involvement in any patentlitigation, interference, opposition or other administrative proceedings willlikely cause us to incur substantial expenses, and the efforts of our technicaland management personnel will be significantly diverted. In addition, anadverse determination in litigation could subject us to significantliabilities.

 

***We may not obtain trademark registrations.***

 

We have filed applications fortrademark registrations in connection with our product candidates in variousjurisdictions, including the United States. We intend to file furtherapplications for other possible trademarks for our product candidates. Noassurance can be given that any of our trademark applications will beregistered in the United States or elsewhere, or that the use of any registeredor unregistered trademarks will confer a competitive advantage in themarketplace. Furthermore, even if we are successful in our trademarkregistrations, the FDA and regulatory authorities in other countries have theirown process for drug nomenclature and their own views concerning appropriateproprietary names. The FDA and other regulatory authorities also have thepower, even after granting market approval, to request a company to reconsiderthe name for a product because of evidence of confusion in the marketplace. Noassurance can be given that the FDA or any other regulatory authority willapprove of any of our trademarks or will not request reconsideration of one ofour trademarks at some time in 

 

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the future. The loss,abandonment, or cancellation of any of our trademarks or trademark applicationscould negatively affect the success of the product candidates to which theyrelate.

 

***We may require significant additional financing, and we maynot have access to******sufficient capital.***

 

We may require additionalcapital to pursue planned clinical trials, regulatory approvals, as well asfurther R&D and marketing efforts for our product candidates and potentialproducts. Except as expressly described in this annual report, we do notanticipate generating significant revenues from operations in the near future,and we have no other committed sources of capital.

 

We may attempt to raiseadditional funds through public or private financings, collaborations withother pharmaceutical companies or financing from other sources. Additionalfunding may not be available on terms which are acceptable to us. If adequatefunding is not available to us on reasonable terms, we may need to delay,reduce or eliminate one or more of our product development programs or obtainfunds on terms less favorable than we would otherwise accept. To the extentthat additional capital is raised through the sale of equity securities orsecurities convertible into or exchangeable for equity securities, the issuanceof those securities could result in dilution to our shareholders. Moreover, theincurrence of debt financing could result in a substantial portion of ourfuture operating cash flow, if any, being dedicated to the payment of principaland interest on such indebtedness and could impose restrictions on ouroperations. This could render us more vulnerable to competitive pressures andeconomic downturns.

 

We anticipate that ourexisting working capital, including anticipated revenues, will be sufficient tofund our development programs, clinical trials and other operating expenses forthe foreseeable future. However, our future capital requirements aresubstantial and may increase beyond our current expectations depending on manyfactors including:

 

·                  theduration and results of our clinical trials for cetrorelix, ozarelix andperifosine, as well as other product candidates going forward;

 

·                  unexpecteddelays or developments in seeking regulatory approvals;

 

·                  thetime and cost in preparing, filing, prosecuting, maintaining and enforcingpatent claims;

 

·                  otherunexpected developments encountered in implementing our business developmentand commercialization strategies;

 

·                  theoutcome of litigation, if any; and

 

·                  furtherarrangements, if any, with collaborators.

 

In addition, the currentrecessionary global market and economic conditions as well as the continuingdifficulties in the credit and capital markets may make it even more difficultfor us to raise additional financing in the future.

 

***Our revenues and expenses may fluctuate significantly, andany failure to meet******financial expectations may disappoint securitiesanalysts or investors and result in******a decline in our share price.***

 

We have a history of operatinglosses. Our revenues and expenses have fluctuated in the past and are likely todo so in the future. These fluctuations could cause our share price to decline.Some of the factors that could cause our revenues and expenses to fluctuateinclude but are not limited to:

 

·                  theinability to complete product development in a timely manner that results in afailure or delay in receiving the required regulatory approvals tocommercialize our product candidates;

 

·                  thetiming of regulatory submissions and approvals;

 

·                  thetiming and willingness of any current or future collaborators to invest theresources necessary to commercialize our product candidates;

 

·                  therevenue available from royalties derived from our strategic partners;

 

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·                  licensingfees revenues;

 

·                  taxcredits and grants (R&D);

 

·                  theoutcome of litigation, if any;

 

·                  changesin foreign currency fluctuations;

 

·                  thetiming of achievement and the receipt of milestone payments from current orfuture collaborators; and

 

·                  failureto enter into new or the expiration or termination of current agreements withcollaborators.

 

Due to fluctuations in ourrevenues and expenses, we believe that period-to-period comparisons of ourresults of operations are not necessarily indicative of our future performance.It is possible that in some future quarter or quarters, our revenues andexpenses will be above or below the expectations of securities analysts orinvestors. In this case, our share price could fluctuate significantly ordecline.

 

***We will not be able to successfully commercialize ourproduct candidates if we are******unable to make adequate arrangementswith third parties for such purposes.***

 

We currently have a lean salesand marketing staff. In order to commercialize our product candidatessuccessfully, we need to make arrangements with third parties to perform someor all of these services in certain territories.

 

We contract with third partiesfor the sales and marketing of our products. Our revenues will depend upon theefforts of these third parties, whose efforts may not be successful. If we failto establish successful marketing and sales capabilities or to makearrangements with third parties for such purposes, our business, financialcondition and results of operations will be materially adversely affected.

 

If we had to resort todeveloping a sales force internally, the cost of establishing and maintaining asales force would be substantial and may exceed its cost effectiveness. Inaddition, in marketing our products, we would likely compete with manycompanies that currently have extensive and well-funded marketing and salesoperations. Despite our marketing and sales efforts, we may be unable to competesuccessfully against these companies.

 

***We are currently dependent on strategic partners and mayenter into future******collaborations for the research, development andcommercialization of our product******candidates. Our arrangements with these strategicpartners may not provide us with******the benefits we expect and may expose us to a number ofrisks.***

 

We are dependent on, and relyupon, strategic partners to perform various functions related to our business,including, but not limited to, the research, development and commercializationof some of our product candidates. Our reliance on these relationships poses anumber of risks.

 

We may not realize thecontemplated benefits of such agreements nor can we be certain that any ofthese parties will fulfill their obligations in a manner which maximizes ourrevenue. These arrangements may also require us to transfer certain materialrights or issue our equity or voting securities to corporate partners,licensees and others. Any license or sublicense of our commercial rights mayreduce our product revenue.

 

These agreements also createcertain risks. The occurrence of any of the following or other events may delayproduct development or impair commercialization of our products:

 

·                  notall of our strategic partners are contractually prohibited from developing orcommercializing, either alone or with others, products and services that aresimilar to or competitive with our product candidates, and, with respect to ourstrategic partnership agreements that do contain such contractual prohibitionsor restrictions, prohibitions or restrictions do not always apply to ourpartners’ affiliates and they may elect to pursue the development of anyadditional product candidates and pursue technologies or products either ontheir own or in collaboration with other parties, including our competitors,whose technologies or products may be competitive with ours;

 

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·                  ourstrategic partners may under-fund or fail to commit sufficient resources tomarketing, distribution or other development of our products;

 

·                  we maynot be able to renew such agreements;

 

·                  ourstrategic partners may not properly maintain or defend certain intellectualproperty rights that may be important to the commercialization of our products;

 

·                  ourstrategic partners may encounter conflicts of interest, changes in businessstrategy or other issues which could adversely affect their willingness orability to fulfill their obligations to us (for example, pharmaceuticalcompanies historically have re-evaluated their priorities following mergers andconsolidations, which have been common in recent years in this industry);

 

·                  delaysin, or failures to achieve, scale-up to commercial quantities, or changes tocurrent raw material suppliers or product manufacturers (whether the change isattributable to us or the supplier or manufacturer) could delay clinicalstudies, regulatory submissions and commercialization of our productcandidates; and

 

·                  disputesmay arise between us and our strategic partners that could result in the delayor termination of the development or commercialization of our productcandidates, resulting in litigation or arbitration that could be time-consumingand expensive, or causing our strategic partners to act in their ownself-interest and not in our interest or those of our shareholders or otherstakeholders.

 

In addition, our strategicpartners can terminate our agreements with them for a number of reasons basedon the terms of the individual agreements that we have entered into with them.If one or more of these agreements were to be terminated, we would be requiredto devote additional resources to developing and commercializing our productcandidates, seek a new partner or abandon this product candidate which wouldlikely cause a drop in our share price.

 

We have entered into importantstrategic partnership agreements relating to cetrorelix, ozarelix andperifosine for various indications. Detailed information on our research andcollaboration agreements is available in Notes 26 and 27 to our annual auditedconsolidated financial statements as of and for the year ended December 31,2008 included elsewhere in this annual report.

 

We have also entered into avariety of collaborative licensing agreements with various universities andinstitutes under which we are obligated to support some of the researchexpenses incurred by the university laboratories and pay royalties on futuresales of the products. In turn, we have retained exclusive rights for theworldwide exploitation of results generated during the collaborations.

 

In particular, we have enteredinto an agreement with Tulane University (“Tulane”), which provides for thepayment by us of single-digit royalties on future worldwide net sales for allindications, except in the BPH indication, where it provides the payment of lowsingle-digit royalties. Tulane is also entitled to receive a low double-digitroyalty on any lump sum, periodic or other cash payments received by us fromsub-licensees (see Note 27 to our annual audited consolidated financialstatements as of and for year ended December 31, 2008 included elsewherein this annual report).

 

***We rely on third parties to conduct, supervise and monitorour clinical trials, and******those third parties may not perform satisfactorily.***

 

We rely on third parties suchas CROs, medical institutions and clinical investigators to enroll qualifiedpatients and conduct, supervise and monitor our clinical trials. Our relianceon these third parties for clinical development activities reduces our controlover these activities. Our reliance on these third parties, however, does notrelieve us of our regulatory responsibilities, including ensuring that ourclinical trials are conducted in accordance with cGCP guidelines and theinvestigational plan and protocols contained in an Investigational New Drugapplication (“IND”), or comparable foreign regulatory submission. Furthermore,these third parties may also have relationships with other entities, some ofwhich may be our competitors. In addition, they may not complete activities onschedule, or may not conduct our preclinical studies or clinical trials inaccordance with regulatory requirements or our trial design. If these thirdparties do not successfully carry out their contractual duties or meet expecteddeadlines, our efforts to obtain regulatory approvals for, and commercialize,our product candidates may be delayed or prevented.

 

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***In carrying out our operations, we are dependent on a stableand consistent supply of******ingredients and raw materials.***

 

There can be no assurance thatwe, our contract manufacturers or our partners, will be able, in the future, tocontinue to purchase products from our current suppliers or any other supplieron terms similar to current terms or at all. An interruption in theavailability of certain raw materials or ingredients, or significant increasesin the prices paid by us for them, could have a material adverse effect on ourbusiness, financial condition, liquidity and operating results.

 

***We are subject to intense competition for our skilledpersonnel, and the loss of key******personnel or the inability toattract additional personnel could impair our ability******to conduct our operations.***

 

We are highly dependent on ourmanagement and our clinical, regulatory and scientific staff, the loss of whoseservices might adversely impact our ability to achieve our objectives.Recruiting and retaining qualified management and clinical, scientific andregulatory personnel is critical to our success. Competition for skilledpersonnel is intense, and our ability to attract and retain qualified personnelmay be affected by such competition.

 

***Our strategic partners’ manufacturing capabilities may notbe adequate to effectively******commercialize our product candidates.***

 

Our manufacturing experienceto date with respect to our product candidates consists of producing drugsubstance for clinical studies. To be successful, these product candidates haveto be manufactured in commercial quantities in compliance with regulatoryrequirements and at acceptable costs. Our strategic partners’ current manufacturingfacilities have the capacity to produce projected product requirements for theforeseeable future, but we will need to increase capacity if sales continue togrow. Our strategic partners may not be able to expand capacity or to produceadditional product requirements on favorable terms. Moreover, delays associatedwith securing additional manufacturing capacity may reduce our revenues andadversely affect our business and financial position. There can be no assurancethat we will be able to meet increased demand over time.

 

***We are subject to the risk of product liability claims, forwhich we may not have or******be able to obtain adequate insurance coverage.***

 

The sale and use of ourproducts, in particular our biopharmaceutical products, involve the risk ofproduct liability claims and associated adverse publicity. Our risks relate tohuman participants in our clinical trials, who may suffer unintendedconsequences, as well as products on the market whereby claims might be madedirectly by patients, healthcare providers or pharmaceutical companies orothers selling, buying or using our products. We manage our liability risks bymeans of insurance. We maintain liability insurance covering our liability forour preclinical and clinical studies and for our pharmaceutical productsalready marketed. However, we may not have or be able to obtain or maintainsufficient and affordable insurance coverage, including coverage forpotentially very significant legal expenses, and without sufficient coverageany claim brought against us could have a materially adverse effect on ourbusiness, financial condition or results of operations.

 

***Our business involves the use of hazardous materials whichrequires us to comply with******environmental and occupational safety laws regulatingthe use of such materials.  If we violatethese laws, we could be subject to significant fines, liabilities or otheradverse consequences.***

 

Our discovery and developmentprocesses involve the controlled use of hazardous and radioactive materials. Weare subject to federal, provincial and local laws and regulations governing theuse, manufacture, storage, handling and disposal of such materials and certainwaste products. The risk of accidental contamination or injury from thesematerials cannot be completely eliminated. In the event of an accident or afailure to comply with environmental or occupational safety laws, we could beheld liable for any damages that result, and any such liability could exceedour resources. We may not be adequately insured against this type of liability.We may be required to incur significant costs to comply with environmental lawsand regulations in the future, and our operations, business or assets may bematerially adversely affected by current or future environmental laws orregulations.

 

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***Legislative actions, new accounting pronouncements andhigher insurance costs are******likely to impact our future financial position orresults of operations.***

 

Changes in financialaccounting standards or implementation of accounting standards may causeadverse, unexpected revenue or expense fluctuations and affect our financialposition or results of operations. New pronouncements and varyinginterpretations of pronouncements have occurred with greater frequency and areexpected to occur in the future, and we may make or be required to make changesin our accounting policies in the future. Compliance with changing regulationsof corporate governance and public disclosure, notably with respect to internalcontrols over financial reporting, may result in additional expenses. Changinglaws, regulations and standards relating to corporate governance and publicdisclosure are creating uncertainty for companies such as ours, and insurancecosts are increasing as a result of this uncertainty.

 

***We may incur losses associated with foreign currencyfluctuations.***

 

Our operations are in manyinstances conducted in currencies other than the U.S. dollar (principallyEuros), and fluctuations in the value of foreign currencies could cause us toincur currency exchange losses. We do not currently employ a hedgingstrategy against exchange rate risk. We cannot say with any assurance that wewill not suffer losses as a result of unfavorable fluctuations in the exchangerates between the United States dollar, the euro, the Canadian dollar and othercurrencies.

 

***We may not be able to successfully integrate acquiredbusinesses.***

 

Future acquisitions may not besuccessfully integrated. The failure to successfully integrate the personneland operations of businesses which we may acquire in the future with ours couldhave a material adverse effect on our operations and results.

 

**Risksrelated to our shares**

 

***Our share price isvolatile, which may result from factors outside of our control.  If we experience low trading volume or if oursecurities are delisted from the TSX or NASDAQ, you may have difficulty sellingyour shares.***

 

During 2008, the closingprice of our shares ranged from CAN$0.44 to CAN$1.85 per share on the TorontoStock Exchange (“TSX”), and from $0.40 to $1.80 on the NASDAQ Global Market (“NASDAQ”).  Our share price may be affected bydevelopments directly affecting our business and by developments out of ourcontrol or unrelated to us.  Thebiopharmaceutical sector in particular, and the stock market generally, arevulnerable to abrupt changes in investor sentiment.  Prices of shares and trading volume ofcompanies in the biopharmaceutical industry can swing dramatically in waysunrelated to, or that bear a disproportionate relationship to, operatingperformance.  Our share price and tradingvolume may fluctuate based on a number of factors including, but not limitedto:

 

·                  clinicaland regulatory developments regarding our product candidates;

 

·                  delaysin our anticipated development or commercialization timelines;

 

·                  developmentsregarding current or future third-party collaborators;

 

·                  otherannouncements by us regarding technological, product development or othermatters;

 

·                  arrivalsor departures of key personnel;

 

·                  governmentalor regulatory action affecting our product candidates and our competitors’products in the United States, Canada and other countries;

 

·                  developmentsor disputes concerning patent or proprietary rights;

 

·                  actualor anticipated fluctuations in our revenues or expenses;

 

·                  generalmarket conditions and fluctuations for the emerging growth andbiopharmaceutical market sectors; and

 

·                  economicconditions in the United States, Canada or abroad.

 

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Our listing on both the TSXand NASDAQ may increase price volatility due to various factors including:different ability to buy or sell our shares; different market conditions indifferent capital markets; and different trading volumes.  In addition, low trading volume may increasethe price volatility of our shares.  Athin trading market could cause the price of our shares to fluctuatesignificantly more than the stock market as a whole.

 

In the past, following periodsof large price declines in the public market price of a company’s securities,securities class action litigation has often been initiated against thatcompany. Litigation of this type could result in substantial costs anddiversion of management’s attention and resources, which would adversely affectour business. Any adverse determination in litigation could also subject us tosignificant liabilities.

 

We must meet continuinglisting requirements to maintain the listing of our shares on the TSX andNASDAQ.  For continued listing, NASDAQrequires, among other things, that listed securities maintain a minimum closingbid price of not less than $1.00 per share. During the latter half of 2008 and for part of 2009, our shares haveclosed below the $1.00 per share minimum for several consecutive days on theNASDAQ.  If the closing bid price fallsbelow the $1.00 minimum for more than 30 consecutive trading days, we wouldhave 180 days to satisfy the $1.00 minimum bid price, which must be maintainedfor a period of at least ten trading days in order to regain compliance.  If our shares continue to close below $1.00per share during the initial 180 day period following a notice of noncompliancefrom NASDAQ, we could transfer from the NASDAQ Global Market to the NASDAQCapital Market.  Transferring from theNASDAQ Global Market to the NASDAQ Capital Market would provide us with anadditional 180-day calendar day compliance period to regain compliance with theNASDAQ minimum bid price rule. On October 24, 2008, we announced that we had received anotification from NASDAQ regarding the failure by us to comply with NASDAQ’sminimum bid price requirements. Although NASDAQ has temporarily suspendedenforcement of its minimum bid price requirements, such requirements will bereinstated on April 19, 2009, or pending approval by the Securities andExchange Commission of NASDAQ’s proposed rule change, July 19, 2009.If we fail to meet any of NASDAQ’s continued listing requirements and NASDAQattempts to enforce compliance with its rules, our common shares may bedelisted from NASDAQ. If ourshares were delisted from TSX or NASDAQ, you may have difficulty in disposingof your shares.

 

***Our largest shareholders have influence over our businessand corporate matters,******including those requiring shareholder approval. Thiscould delay or prevent a change******in control. Sales of common shares by such shareholderscould have an impact on our share price.***

 

Our two largest shareholders,which held 18.33% and 16.57% of our outstanding shares as of December 31,2008, have influence over our business and corporate matters, including thoserequiring shareholder approval. This could delay or prevent a change incontrol. Sales of common shares by such shareholders could have an impact onour share price.

 

***We do not intend to pay dividends in the near future.***

 

To date, we have not declaredor paid any dividends on our common shares. We currently intend to retain ourfuture earnings, if any, to finance further research and the expansion of ourbusiness. As a result, the return on an investment in our shares will, for theforeseeable future, depend upon any future appreciation in value. There is noguarantee that our shares will appreciate in value or even maintain the priceat which shareholders have purchased their shares.

 

## ***Item 4.    Information on the Company***

## *** ***

### ***A.            History and development of theCompany***

### ** **

Æterna Zentaris Inc. is aglobal biopharmaceutical company focused on endocrine therapy and oncology withexpertise in drug discovery, development and commercialization.

 

We were incorporated on September 12,1990 under the laws of Canada. Our registered office is located at 1405 duParc-Technologique Blvd., Québec, Quebec, Canada G1P 4P5, our telephonenumber is (418) 652-8525 and our website is www.aezsinc.com. None of thedocuments or information found on our website shall be deemed to be included inor incorporated into this annual report.

 

On December 30, 2002, we acquired Zentaris AG, a biopharmaceuticalcompany based in Frankfurt, Germany. Zentaris was a spin-off of Degussa AG andAsta Medica GmbH, a former pharmaceutical company. With this acquisition, theCompany changed its risk profile and inherited an extensive and robust productpipeline with capabilities from drug discovery to commercialization with aparticular focus on endocrine therapy and oncology. As part of the acquisition,we also inherited a very experienced pharmaceutical team along with a networkof strategic pharmaceutical partners. The total consideration paid 

 

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for the acquisition of Zentaris was $51.9 million, net of cash and cashequivalents acquired of $2.3 million, of which an amount of $26.7 million waspaid cash and the remaining amount of $25.2 million as balance of purchaseprice.

 

In May 2004, we changed our name to Æterna Zentaris Inc and on May 11,2007, Zentaris GmbH was renamed Æterna Zentaris GmbH. Æterna Zentaris GmbH isour principal operating subsidiary.

 

On April 6, 2005, our former subsidiary Atrium Biotechnologies Inc.(now Atrium Innovations Inc.) (“Atrium”), completed its initial public offeringin Canada and began trading on the TSX under the ticker symbol “ATB.”

 

Throughout 2006, as part of athorough, strategic planning process, our management and Board of Directors(the “Board”) made the decision to spin off Atrium in two phases. On September 19,2006, we initiated the first phase, a secondary offering to sell 3,485,000Subordinate Voting Shares of Atrium at a price of CAN$15.80 per share. Thissecondary offering closed on October 18, 2006, generating net proceeds ofnearly $45 million to Æterna Zentaris. With this transaction closed, ourremaining interest in Atrium was 11,052,996 Subordinate Voting Sharesrepresenting 36.1% of its issued and outstanding shares. Therefore, we nolonger had a controlling interest in Atrium as of October 18, 2006.

 

The second phase was todistribute our remaining interest in Atrium to our Shareholders concurrentlywith a reduction of the stated capital of our common shares.

 

On December 15, 2006, ourshareholders approved a reduction of the stated capital of our common shares inan amount equal to the fair market value of our remaining interest in Atrium byway of a special distribution in kind to all our shareholders. This specialdistribution was completed on January 2, 2007. For each common share heldas of the record date of December 29, 2006, our shareholders received0.2078824 Subordinate Voting Shares of Atrium. In May 2007, we opened anoffice in the United States, located at 20 Independence Boulevard, Warren,New Jersey 07059-2731.

 

We currently have threewholly-owned direct and indirect subsidiaries, Æterna Zentaris GmbH (“AEZSGermany”), based in Frankfurt, Germany, Æterna Zentaris, Inc., basedin Warren, New Jersey in the United States, and Zentaris IVF GmbH, adirect wholly-owned subsidiary of AEZS Germany based in Frankfurt, Germany.

 

 

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Fromthe formation of Atrium as our subsidiary in 1999 until the distribution of ourremaining interest in Atrium on January 2, 2007, Atrium did not declare orpay any dividends to its shareholders. Since the disposition of our entireinterest in Atrium, we have not had access to the liquidity or cash flowsgenerated by Atrium, nor will we in ensuing years. During the last three years,we have advanced our product development pipeline with a specific focus on ourlead product candidates cetrorelix and AEZS-108 along with our partneredlate-stage programs, ozarelix and perifosine, as well as our targetedearlier-stage programs, as depicted in the chart reproduced under theheading, “Our Product Pipeline” on page 21.

 

Ourcommon shares are listed for trading on the TSX under the trading symbol “AEZ”and on the NASDAQ under the trading symbol “AEZS.”

 

### ***B.            Business overview***

### ** **

Recent Developments

 

*Corporate Transactions*

 

***Sale of Impavido******®***

 

On March 1, 2008, weentered into a definitive purchase and sales agreement with respect to allrights related to the manufacturing, production, distribution, marketing, saleand/or use of Impavido® (miltefosine) with Paladin Labs Inc. for anaggregate cash purchase price of approximately $9.2 million. Thetransaction closed on March 31, 2008.

 

***Sale of building and land***

 

On June 26, 2008, wesold our Québec building and land for a gross amount of $7.1 million thatwas paid entirely in cash. The net proceeds received amounted to$6.5 million, resulting in an additional loss on sale of$0.8 million. In connection with this sale, we entered into a long-termlease agreement with the principal tenant of the building.

 

***Sale of Cetrotide******®****** royalty stream***

 

In November 2008, weentered into a purchase and sales agreement (the “Monetization Agreement”) withCowen Healthcare Royalty Partners L.P. (“CHRP”) relating to our rights toroyalties on future sales of Cetrotide® covered by our license agreement withMerck-Serono.

 

In connection with thetransactions contemplated by the Monetization Agreement, which was effective onOctober 1, 2008 and closed in December 2008, we received$52.5 million from CHRP, less transaction costs of $1.0 million thathad been advanced by CHRP to certain third-party firms and institutions on ourbehalf, resulting in net proceeds of $51.5 million. Under the terms of theMonetization Agreement, we are entitled to receive an additional payment of$2.5 million contingent on 2010 net sales of Cetrotide® reaching a specified level.

 

Under the terms of theMonetization Agreement, if cetrorelix, the active substance in Cetrotide®, isapproved for sale by the European regulatory authorities in an indication otherthan *in vitro* fertilization, we have agreedto make a one-time cash payment to CHRP in an amount ranging from$5.0 million up to a maximum of $15.0 million. The amount which maybe due to CHRP will be higher in proportion to the timing of the product’sreceiving European regulatory approval; that is, the earlier the productreceives regulatory approval, the higher the amount payable to CHRP will be.

 

***Partnership for cetrorelixin BPH***

 

On March 5, 2009, we entered into adevelopment, commercialization and license agreement with sanofi-aventis forthe development, registration and marketing of cetrorelix in BPH for the USmarket. Under the terms of the agreement, sanofi-aventis made an initialupfront payment to us of $30.0 million, and we will be entitled to receivea total of $135.0 million in payments upon achieving certainpre-established regulatory and commercial milestones. Furthermore, we will beentitled to receive escalating double-digit royalties on future net sales ofcetrorelix for BPH in the United States, while retaining the option toco-promote the product in that territory.

 

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***Changes to our Management Team andBoard of Directors***

 

On April 11,2008, Juergen Ernst, Chairman of the Board of Æterna Zentaris at the time, was,appointed our interim President and Chief Executive Officer following theresignation of the former President and Chief Executive Officer.

 

On September 1,2008, Prof. Juergen Engel, Ph.D., who was Executive Vice President and ChiefScientific Officer of Æterna Zentaris at the time, was appointed our Presidentand Chief Executive Officer. He succeeded Juergen Ernst, who became ExecutiveChairman of the Board, also as of September 1, 2008.

 

In December 2008,Matthias Seeber was appointed our Senior Vice President, Administration andLegal Affairs.

 

***Pipeline developments***

 

*Cetrorelix:*

 

On March 22, 2007, our partner Shionogi announced positive resultsfor a Phase 2a Japanese trial that was initiated in 2005. This trial wasdesigned to evaluate primarily pharmacokinetics and safety (systemic and localtolerability) in Japanese subjects, whereas evaluation of efficacy was onlyexploratory. A total of 50 patients were included in five dosing groupscorresponding to single administration of 30 mg, 60 mg or 90 mg of cetrorelixand multiple administration of 60 mg and 90 mg, three times eight weeks apart.The observation period was up to 32 weeks in the multiple administration dosinggroups. The Japanese patients responded to cetrorelix with a transientreduction of testosterone concentration in blood, which did not reach or remainat the castration level. Intramuscular (“IM”) injection of cetrorelix pamoatewas safe and well tolerated at all dosages tested. None of the dosage regimenstested caused a suppression of prostate specific antigen (“PSA”) levels.Results also showed that the bioavailability of cetrorelix in Japanese patientsis similar to what is observed in non-Japanese patients. The sizes per dosagegroup were too small to evaluate efficacy trends for statistical significance.On the basis of this study, Shionogi initiated a 300-patient Phase 2b study toassess primarily the efficacy of cetrorelix in BPH in Japanese patients with adifferent treatment regimen than the one used in Europe and North America.  Phase 2b results were subsequently announcedby Shionogi in November 2008. Results indicated an improvement of theInternational Prostate Symptom Score (“IPSS”) in the treatment group in adose-dependent manner, although it was not statistically significant comparedto the placebo group due to a high placebo response. A statisticallysignificant reduction of prostate volume was observed between treatment and placebogroups. Shionogi also announced that a new Japanese study including higher dosedivided into two doses with a two-week interval, according to the regimen usedin our Phase 3 program, was in preparation.

 

In April 2008,we reported completion of patient recruitment for the first efficacy study ofour Phase 3 program in BPH with cetrorelix. This one year placebo-controlledstudy, involving 667 patients located mainly in North America, is assessing anintermittent dosage regimen of cetrorelix as a potential safe and tolerabletreatment providing prolonged improvement in BPH-related signs and symptoms.Results of this trial are expected in the third quarter of 2009.

 

In July 2008,we signed a license and cooperation agreement for the commercialization of cetrorelixin BPH with Handok Pharmaceuticals Co., Ltd. (“Handok”) for the Korean market.

 

In October 2008,we reported the completion of patient recruitment for the second efficacy trialof the Phase 3 program with cetrorelix in BPH. This trial, during which dosinghad commenced in March 2008, has a similar design to the first efficacytrial and involves 420 patients located in Europe. Results of this trial areexpected in the fourth quarter of 2009.

 

In December 2008,we reported completion of patient recruitment for the safety trial of the Phase3 program with cetrorelix in BPH. Results of this study, involving 529 patientslocated in North America, as well as those of a QTc study, are expected by theend of 2009.

 

On March 5, 2009, we entered into adevelopment, commercialization and license agreement with sanofi-aventis forthe development, registration and marketing of cetrorelix in BPH for the USmarket. Under the terms of the agreement, sanofi-aventis made an initialupfront payment to us of $30.0 million, and we will be entitled to receivea total of $135.0 million in payments upon achieving certainpre-established regulatory and commercial milestones. Furthermore, we will beentitled to receive escalating double-digit royalties on future net sales of cetrorelixfor BPH in the United States, while retaining the option to co-promote theproduct in that territory. Sanofi-aventis may perform future Phase 3b and 4clinical trials, while we will have access to all corresponding data for otherterritories.

 

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*AEZS-108*:

 

In February 2008,we reported that a first group of patients had been treated with our cytotoxicconjugate compound linked to doxorubicin, AEZS-108, for a European open-label,non-comparative multi-center Phase 2 trial in advanced ovarian and endometrialcancers.

 

In October 2008,we announced that we had entered the second stage of patient recruitment forour Phase 2 trial in ovarian cancer, after first stage data had shown twopartial responses. In November 2008, we reported that we had entered thesecond stage of patient recruitment for our Phase 2 trial in endometrial cancerwith AEZS-108. The decision to enter the second stage of patient recruitmentwas made following recent first stage data reporting one complete response andtwo partial responses among 14 patients with a diagnosis of disseminatedendometrial cancer. The open-label, non-comparative multi-center Phase 2program will treat up to 82 women with LHRH-receptor positive ovarian andendometrial cancerous tumors. The trial is being conducted in 15 centers inEurope. We expect to disclose Phase 2 results in the fourth quarter of 2009.

 

*Ozarelix:*

 

Ourpartner, Spectrum Pharmaceuticals, Inc. (“Spectrum”) released the resultsof a North American Phase 2 trial with ozarelix, a fourth generation LHRHantagonist in BPH. Spectrum indicated that ozarelix demonstrated sufficientclinical activity to justify its continued development. In early 2009, Spectruminitiated a North American multi-center, randomized, double-blind,placebo-controlled study in lower urinary tract symptoms due to BPH that willinvolve over 800 patients.

 

Duringthe third quarter of 2008, we signed an agreement with Handok for thecommercialization of ozarelix in BPH for the Korean and other Asian markets.

 

*Perifosine:*

 

Perifosine, the first-in-class AKT inhibitor in multiple Phase 2studies, is being developed as an orally active radio-enhancer and anti-canceragent.

 

Weare currently conducting a randomized, double-blind, placebo-controlledEuropean multi-center Phase 2 trial with perifosine (an oral signaltransduction inhibitor), combined with radiotherapy in 160 patients with inoperableStage III non-small cell lung cancer to prove its activity asradio-enhancer. We expect to disclose results related to this trial in thesecond quarter of 2009.

 

During2008, our partner, Keryx Biopharmaceuticals, Inc. (“Keryx”), continued thedevelopment of perifosine with multiple Phase 1 and Phase 2 studies in NorthAmerica in various cancers. Keryx has announced that it intends to moveperifosine into Phase 3 in at least one indication in North America in 2009.

 

*AEZS-112:*

 

AEZS-112 is currently in aPhase 1 trial in patients with solid tumors and lymphoma. We are sponsoring andconducting this open-label, dose-escalation, multi-center, intermittenttreatment trial in the United States. The trial will include up to 50 patientswho have either failed standard therapy or for whom no alternative therapyexists. The primary endpoints of the trial will focus on determining the safetyand tolerability of AEZS-112 as well as establishing the recommended Phase2 dose and regimen. We expect progressionof this trial in 2009 to identify maximum tolerated dose of AEZS-112. We alsoexpect to report first resultsat the Annual meeting of the American Association for Cancer Research (AACR) inDenver in late April 2009.

 

AEZS-112is the first anti-cancer drug in development involving three mechanisms ofaction such as tubulin and topoisomerase II inhibition. AEZS-112 expressesdifferent actions, such as pro-apoptotic and antiangiogenic properties.

 

*AEZS-130:*

 

Duringthe third quarter of 2008, we recovered worldwide rights from Ardana BioscienceLtd. (“Ardana”) for the Growth Hormone Secretagogue compound, AEZS-130. We arecurrently evaluating future development options for the use of this compound ingrowth hormone deficiencies.

 

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**Our business strategy**

 

Ourstrategy is to advance our product development pipeline with a clear focus onour flagship product candidate, cetrorelix for the BPH indication, andAEZS-108, our lead program in oncology for the treatment of endometrial andovarian cancer.

 

Our foremostpriority is cetrorelix for the BPH indication. Based on various third-partysources, BPH affects more than 20 million men in the United States alone andrepresents a market of approximately $3 billion in the 7 major markets.Additionally, it is estimated that approximately 5.6 million men will betreated in the United States for Lower Urinary Tract Symptoms (“LUTS”)associated with BPH. The prevalence of BPH in the United States is expected toincrease to 26.8 million in 2020, and the LUTS treated population toapproximately 8 million men in 2020. The potential forbase case peak annual sales of cetrorelix is over $500 million in the UnitedStates market alone. Weintend to continue to diligently advance the cetrorelix Phase 3 program withthe objective of filing a New Drug Application (“NDA”). We also have the intentto file in Europe a Marketing Authorization Application (“MAA”).

 

Ourlead oncology product candidate, AEZS-108, currently in Phase 2 clinicaltrials, is our second priority.  AEZS-108is currently dosing patients with advanced endometrial and ovarian cancer in amulti-center trial in Europe with the expectation of reporting results fromthis trial in the fourth quarter of 2009.

 

We intend to continue developing ourearlier-stage high-potential product candidate, AEZS-112, currently in Phase 1clinical trial in patients with solid tumors and lymphoma.

 

Additionally,we are advancing several preclinical programs with targeted potentialdevelopment candidates. Among the targets for which we expect to proposeclinical development candidates in the coming years are: ghrelin receptorligands, PI3K/Erk inhibitors, LHRH peptidomimetics and erucylphosphocholinederivatives.

 

Wealso continue to perform targeted drug discovery activities from which we areable to derive pre-clinical candidates. This drug discovery includes highthroughput screening systems and a library of more than 120,000 compounds.

 

Weare currently in a phase in which our products and product candidates are beingfurther developed or marketed jointly with strategic partners. We expect wewill continue to engage strategic partnerships in the future as we move torealize our vision of becoming a fully integrated specialty biopharmaceuticalcompany.

 

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**Our product pipeline**

 

**Pipeline table**

 

**Status of our drug pipeline as atMarch 20, 2009**

 
| **Discovery**              | ** ** | **Preclinical**                                                                                                                                                                                                                                                                                                             | ** ** | **Phase 1**                                                | ** ** | **Phase 2**                                                                                                                                                                                                                                                                          | ** ** | **Phase 3**                                                                         | ** ** | **Commercial**                                                                             |
|----------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|
| 120,000   compound library |       | AEZS-115

Non-peptide luteinizing  hormone-releasing hormone (“LHRH”) antagonists (endometriosis & urology)

 

AEZS-120   (oncology vaccine)

 

AEZS-126  Erk & PI3K  Inhibitors (oncology)

 

AEZS-127

ErPC   (oncology)

 

Ghrelin receptor ligands  (endocrinology) |       | AEZS-112  (oncology)

 

AEZS-130  (endocrinology)

  |       | AEZS-108  (endometrial and ovarian cancers)

 

Cetrorelix  (endometriosis)

(BPH in Japan)

 

Ozarelix   (BPH, prostate cancer)

 

Perifosine  (multiple cancers)

                                                                                                |       | Cetrorelix  (BPH)

                                                                 |       | Cetrotide® (*in vitro* fertilization)

                                          |
| **Partners**               |       |                                                                                                                                                                                                                                                                                                                        |       |                                                            |       |                                                                                                                                                                                                                                                                                      |       |                                                                                     |       |                                                                                       |
|                       |       |                                                                                                                                                                                                                                                                                                                        |       |                                                            |       | Cetrorelix:

**Shionogi** in  Japan

 

Ozarelix:**Spectrum** in North America and India, **Nippon Kayaku** in Japan (oncology)

 

Ozarelix (BPH):

**Handok** in  Korea, Indonesia, Malaysia, the Philippines and Singapore

 

Perifosine:

**Keryx** in  North America |       | Cetrorelix (BPH):

**sanofi-aventis** in the  United States

 

**Handok** in Korea |       | Cetrotide®:**Merck Serono** (World ex-Japan)

**Shionogi  and Nippon Kayaku** (Japan) |

 

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**LHRH ANTAGONISTS**

 

**Cetrorelix**

 

Cetrorelix is a peptide-based activesubstance which was developed in cooperation with Nobel Laureate ProfessorAndrew Schally presently of the United States Veterans Administration-Miami,University of Miami, and formerly of Tulane University in New Orleans. Thiscompound is a luteinising hormone releasing hormone (LHRH, also known as GnRH)antagonist that blocks the pituitary LHRH receptors resulting in a rapiddecrease of sexual hormone levels. Moreover, cetrorelix allows the LHRHreceptors on the pituitary gland to be blocked gradually. Conversely, the sideeffects usually associated with the use of agonists and resulting from totalhormone withdrawal can be avoided in conditions that do not require acastrating degree of hormone withdrawal. Therefore, in contrast to treatment withagonists, LHRH antagonists permit dose-dependent hormone suppression which isof critical importance for the tolerability of hormonal therapy.

 

***The mode of action of cetrorelix and thedistinction between LHRH antagonists and LHRH agonists***

 

LHRH is released by the hypothalamus in thebrain and controls the production of sex hormones (i.e. testosterone in thetestes and estrogen and progesterone in ovaries) via the activation of LHRHreceptors located on the pituitary gland (hypophysis).

 

When using LHRH agonists, the LHRH receptorson the pituitary gland are stimulated leading to an initial increased secretionof the hormones luteinizing hormone (“LH”) and follicle stimulating hormone (“FSH”),which in turn regulates the formation of testosterone and estrogen. Theincrease or surge of hormonal levels induces a “flare-up” effect that can last upto three weeks until the pituitary markedly decreases the release of LH and FSHby desensitization and depletion of LHRH receptors (i.e. down-regulation)resulting in a considerable drop in testosterone and estrogen levels. Thoughthe initial flare-up effect is limited in time, it can sometimes cause,depending on the nature and stage of the particular disorder, considerableadditional symptoms or even life-threatening complications, which in turnrequire additional therapeutic intervention. By simultaneous administration ofanti-androgens, the flare-up effect can be attenuated. However, this additionaltreatment also bears the risk of certain side effects, e.g. disturbances of thefunction of the stomach, intestines and liver.

 

During full hormone suppression, LHRHagonists reduce the male sex hormones to ranges below castration level. Inwomen, the hormone levels are far below the ranges observed after the end ofthe climacteric. Treatment with an LHRH agonist, therefore, is regularlyassociated with side effects such as hot flashes, depression, muscle weakness,loss of libido and, particularly in women, osteoporosis and ovarian cysts. Atthe end of treatment, it takes several weeks for the hormone function to returnto normal ranges. At the same time, an excessive rebound effect can lead torenewed deterioration of the symptoms.

 

 

We believe that cetrorelix, an LHRH antagonist, because of its differentmode of action, can avoid the side effects associated with the administrationof LHRH agonists. Since LHRH antagonists have a rapid onset of action, thetreatment time to response with cetrorelix can be much shorter than withagonists. Moreover, in various clinical studies, the effect of cetrorelixtherapy lasted much longer than that of hormone suppression, which consequentlyconfirms the new therapeutic principle of intermittent treatment. Periods withmoderate and well-tolerated hormonal suppression can be followed by intervalswithout treatment during which side effects are avoided and quality of life isrestored. Since there is no necessity for long-term

 

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therapy and the overall treatment time is much shorter, the risk of sideeffects is also reduced. In particular, we also believe that the risk ofdeveloping osteoporosis in patients taking the cetrorelix therapy regimen is diminished.

 

Cetrorelix might therefore be useful in a variety of malignant andnon-malignant indications in which a suppression of the pituitary-gonadal axisis desired. The degree of suppression of gonadotrophins and sex steroidsrequired is dependent on the clinical circumstances and disease treated. Forexample, in patients undergoing controlled ovarian stimulation for assistedreproductive techniques, endogenous gonadotrophin secretion has to becontrolled, whereas development of the follicle must not be adversely affected.

 

***Cetrorelix in in vitrofertilization (COS/ART)***

 

Cetrorelix is the first LHRH antagonist which was approved fortherapeutic use as part of fertilization programs in Europe and was launched onthe market under the trade name Cetrotide® (cetrorelix acetate) in 1999. In women whoundergo controlled ovarian stimulation for recovery of ovocytes for subsequentfertilization, Cetrotide® helps prevent prematureovulation. LHRH is a naturally occurring hormone produced by the brain tocontrol the secretion of LH and, therefore, final egg maturation and ovulation.Cetrotide® is designed to prevent LH production by thepituitary gland and to delay the hormonal event, known as the “LH surge” whichcould cause eggs to be released too early in the cycle, thereby reducing theopportunity to retrieve the eggs for the assisted reproductive techniquesprocedure.

 

In comparison with LHRH agonists that require a much longerpre-treatment, the use of our LHRH antagonist, Cetrotide®, permits the physician to interferein the hormone regulation of the women undergoing treatment much moreselectively and within a shorter time.

 

The effectiveness of Cetrotide® has beenexamined in five clinical trials (two Phase 2 and three Phase 3 trials). Twodose regimens were investigated in these trials: either a single dose pertreatment cycle or multiple dosing. In the Phase 2 studies, a single dose of 3mg was established as the minimal effective dose for the inhibition ofpremature LH surges with a protection period of at least four days. WhenCetrotide® is administered in a multi-dose regimen, 0.25mg was established as the minimal effective dose. The extent and duration of LHsuppression was found to be dose dependent. In the Phase 3 program, efficacy ofthe single 3 mg dose regimen and the multiple 0.25 mg dose regimen wasestablished separately in two controlled studies utilizing active comparators.A third non-comparative study evaluated only the multiple 0.25 mg dose regimenof Cetrotide®.In the five Phase 2 and Phase 3 trials, 184 pregnancies were reported out of atotal of 732 patients (including 21 pregnancies following the replacement offrozen-thawed embryos). In these studies, drug-related side effects werelimited to a low incidence of injected site reactions; however, none of themwas serious — such as an allergic type of reaction —  or required withdrawal from treatment. Inaddition, no drug-related allergic reactions were reported from these clinicalstudies.

 

Cetrotide® is the only LHRH antagonist that is availablein two dosing regimens. With an immediate onset of action, Cetrotide® permits precise control — a single dose (3mg), which controls the LH surge for up to four days, or a daily dose (0.25 mg)given over a short period of time (usually five to seven days). The treatmentwith Cetrotide® can be accomplished during a one-month cyclewith a simplified, more convenient and shorter treatment requiring fewerinjections than LHRH agonists.

 

Cetrotide® is marketed in a 3 mg and a 0.25 mgsubcutaneous injection as cetrorelix acetate by Merck Serono in the UnitedStates and Europe. Approval for Cetrotide® in Japan was gained in April 2006. In September 2006,we announced the launch of Cetrotide® in Japanfor *in vitro* fertilization. Cetrotide® is marketed in Japan by our partner Shionogi.We receive revenue from the supply of Cetrotide® to our Japanese partners. The marketcompetitor is ganirelix (AntagonTM/Orgalutran®) from Schering-Plough (Organon)indicated for the inhibition of premature LH surges in women undergoingcontrolled ovarian hyperstimulation.

 

***Partners for Cetrotide®***

 

In August 2000,we entered into a commercialization agreement with Merck Serono for Cetrotide®. Under theterms of this agreement, we granted an exclusive license to Merck Serono tocommercialize Cetrotide® for IVF/COS/ART worldwideex-Japan and we are entitled to receive fixed and sales royalties from MerckSerono. The Japanese rights for this indication are held by Shionogi whereby,according to a commercialization agreement, we received transfer pricing fromShionogi.

 

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In December 2008,we sold our royalties on future sales of Cetrotideâ covered by our license agreement with MerckSerono for $52.5 million to CHRP less transaction costs of $1.0 millionresulting in initial net proceeds to us of $51.5 million. In addition,contingent on 2010 net sales of Cetrotideâ reaching a specified level, we may receive anadditional payment of $2.5 million from CHRP. Under the terms of the agreement,we agreed to make a one-time cash payment to CHRP in an amount ranging from $5million up to a maximum of $15 million in the event cetrorelix is approved forsale by the European regulatory authorities in an indication other than *in vitro* fertilization. The amount which would be due toCHRP will be higher the earlier the product receives European regulatoryapproval.

 

***Clinical development overviewof cetrorelix in BPH, endometriosis and uterine myoma***

 

*Cetrorelix in BPH*

 

BPH is a hormone-driven enlargement of the male prostate gland. Theprostate is located directly at the vesicle outlet in the male surrounding thefirst part of the urethra. The enlargement puts pressure on the urethra,causing difficulty in urinating. BPH is classified into three stages accordingto symptoms: 1) the irritant phase, where the patient suffers dysuria (painwhen urinating) and nocturia (the urge to urinate during the night); 2) residualurine occurring in the bladder thus increasing problems during urinating; and3) overflow of the bladder. These can result in formation of bladder stones,congestion of urine and engorged kidneys which can in turn lead tolife-threatening kidney damage.

 

Because LHRH agonists decrease testosterone to castration levels,treatment of BPH with LHRH agonists is not convenient and therefore not thebest approach. Drug therapy with plant-based drugs, alpha-blockers oralpha-reductase inhibitors (“5-ARIs”) is possible but the plant-based drugs andalpha-blockers cannot delay further prostate growth, they merely improve thesymptoms in 50% of patients. Treatment with alpha-reductase inhibitorsdecreases the size of the prostate; however, this form of therapy is successfulonly in patients with a greatly increased prostate volume and only after atreatment period of at least six months. In contrast, clinical studies suggestthat cetrorelix improves the symptoms of BPH and reduces the size of theprostate after a short treatment period without chemical castration. Theeffects are independent of the prostate volume and are maintained for a longperiod following treatment withdrawal.

 

BPH clinical trials

 

In October 2004, cetrorelix completed an extensive program of sevenPhase 2 trials in urology, a significant part of which was sponsored by ourpartner at the time, Solvay.AllPhase 2 studies performed so far in patients with symptomatic BPH revealed thatcetrorelix is therapeutically active in this indication as demonstrated by animprovement in symptoms as assessed primarily by the IPSS as well as anincrease in urinary peak flow rate and a reduction in prostate volume.

 

On January 30, 2006, we announced that we had regained ourworldwide rights (ex-Japan) from our partner Solvay to develop and potentiallymarket cetrorelix in BPH. The ongoing development of cetrorelix inendometriosis was pursued by Solvay until we regained the rights for thatindication in May 2007.

 

Our Phase 3 program began in January 2007.The Phase 3 program consists of two placebo-controlled efficacy studies, anopen label safety study and a “Thorough QT/QTc Study” consistent with the ICHE14 Guideline.

 

The two placebo-controlled studies each comparetwo intermittently administered dose regimes with placebo in patients with BPHwho are then assessed one year after beginning therapy. The primary end-pointin each trial is the change in IPSS between the beginning of treatment to theend of follow-up after 52 weeks. The IPSS has been used successfully as theprimary endpoint in a number of other drug development programs for BPH. Someof the other measures that are evaluated in these studies include urine flow,general aspects of safety and quality of life issues, which are particularlyrelevant to males aged 50 and over who suffer from BPH. On April 15, 2008, we announcedcompletion of recruitment of 670 patients for the first efficacy trialconducted mainly in North America. Recruitment for the second study conducted in Europe was opened in March 2008and was closed with 420 patients enrolled on October 1, 2008.

 

The third study in the Phase 3 program is anopen-label study of the dose regime we are planning to market and includesapproximately 500 patients. It is more focused on aspects of general safety,quality of life and tolerability of cetrorelix, although the effects ofcetrorelix on the patients’ symptoms are also being evaluated. First patientdosing was announced on May 14, 2008 and we announced completion ofrecruitment of 527 patients on December 11, 2008. The final component ofthe Phase 3 program, the Thorough QT/QTc Study, is being designed with inputfrom the FDA in order to ensure that we meet the regulatory guidance on thistopic for novel drugs under development.

 

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On March 22, 2007, our partner Shionogi announced positive resultsfor a Phase 2a Japanese trial that was initiated in 2005. This trial wasdesigned to evaluate primarily pharmacokinetics and safety (systemic and localtolerability) in Japanese subjects, whereas evaluation of efficacy was onlyexploratory. A total of 50 patients were included in five dosing groupscorresponding to single administration of 30 mg, 60 mg or 90 mg cetrorelix andmultiple administration of 60 mg and 90 mg, three times eight weeks apart. Theobservation period was up to 32 weeks in the multiple administration dosinggroups. The Japanese patients responded to cetrorelix with a transientreduction of testosterone concentration in blood, which did not reach or remainat the castration level. IM injection of cetrorelix pamoate was safe and welltolerated at all dosages tested. None of the dosage regimens tested caused asuppression of PSA levels. Results also showed that the bioavailability ofcetrorelix in Japanese patients is similar to what is observed in non-Japanesepatients. The sizes per dosage group were too small to evaluate efficacy trendsfor statistical significance. On the basis of this study, Shionogi initiated a300-patient Phase 2b study to assess primarily the efficacy of cetrorelix inBPH in Japanese patients with a different treatment regimen than the one usedin Europe and North America.  Phase 2bresults were announced by Shionogi in November 2008. Results indicated animprovement of IPSS in the treatment group in a dose-dependent manner, althoughit was not statistically significant compared to the placebo group due to ahigh placebo response. A statistically significant reduction of prostate volumewas observed between treatment and placebo groups. Shionogi also announced thata new Japanese study including higher dose divided into two doses with two-weekinterval, according to the regimen used in our Phase 3 program, was inpreparation.

 

In May 2008,we presented results for the cetrorelix mode of action in BPH. In this study,we investigated the presence and characteristics of LHRH receptors in 35specimens of human BPH tissues. Results showed that the expression of mRNA forLHRH receptors was detected in 33 of 35 (94%) BPH specimens. LHRH antagonistcetrorelix showed high affinity binding to LHRH receptors expressed in BPHtissues. The LHRH receptor epitope identified by the monoclonal antibody waspresent in the basal cell layer of normal and hyperplasic prostate glands inall cases. The expression of specific receptor proteins for LHRH in human BPHprovides a rationale for improvement in methods of therapy for clinical BPH.The demonstration of the high incidence of LHRH receptors in human BPH tissuessuggests the possibility of rapid and long lasting improvement of symptoms inBPH patients treated with cetrorelix.

 

In connection with our strategic review, we announced on October 2,2007 that we had decided to seek a commercialization partner for cetrorelix inthe BPH indication and, subject to favorable Phase 3 clinical results andregulatory approval, we expect to launch cetrorelix in this indication in thesecond half of 2011.

 

Regarding the potential market of cetrorelix in BPH, based on variousthird-party sources, such as BPH, Urologic Diseases in America 2004; NIHPublication 04-5512:43-67; The American Journal of Managed Care, the prevalenceof BPH in 2007 in the United States is estimated to be 20 million individualsas defined by International Prostate Symptom Score (IPSS) >7. Additionally,it is estimated that approximately 12.2 million men have been diagnosed and 5.6million men treated for BPH. As population demographics shift toward an elderlypopulation, BPH treated population in the United States is expected to grow by41% between 2007 and 2025, exceeding 8 million. The potential for base case peak annual sales of cetrorelix is over $500million in the United States market alone.

 

*Cetrorelix in endometriosis*

 

Endometriosis is the estrogen-driven displacement of endometrium-liketissue (tissue from the mucous membranes of the uterus) to other organs outsidethe womb. In the abdomen, the tissue can spread to the fallopian tubes, theovaries, the bladder, the small and large intestines, the stomach, the lungs orthe legs. Estrogen-dependent diseases often regress when estrogen production isreduced (endometriosis, and the pelvic pain associated with it, improves whenestrogen production is reduced). Excessive and prolonged reduction of estrogenproduction, however, is typically associated with adverse side effects, such asvasomotor symptoms and bone loss.

 

A similar, very low estrogen level can be induced by oophorectomy(surgical removal of the ovaries) and by chronic LHRH agonist treatment. Inboth cases, estrogen replacement treatment is necessary to reduce thehypo-estrogenic effects (e.g. bone loss, climacteric symptoms) associated withthese therapeutic approaches. Administration of LHRH agonists can initiallylead to a deterioration of symptoms due initially to the flare-up effect, then,due to the complete suppression of estrogen below castration level values formany months. These symptoms can further deteriorate upon withdrawal of hormonalreplacement. The longer the treatment period with traditional LHRH agonists is,the higher the risk of developing osteoporosis. Its use is therefore restrictedto six months and can be extended only if estrogens and progesterones areadministered concomitantly.

 

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We believe that the side effects could be avoided with our LHRHantagonist cetrorelix due to the absence of flare-up effects and to thepossibility of controlling estrogen levels at values comparable to the onesobserved at the beginning of the regular monthly cycle. Since the controlledhormone withdrawal is achieved in a very short period of time, complaints frommonthly bleeding are reduced while inflammatory *foci*of endometriosis are depleted of their basis. Therefore, we believe thattreatment time can be reduced. Initial experiences show that the effect oftherapy persists for many months. Since the effect of cetrorelix starts withina short period of time and the risk of developing osteoporosis is low, webelieve that cetrorelix therapy can be repeated in several cycles.

 

Endometriosis clinical trials

 

In earlier Phase 2 clinical trials, cetrorelix was given at a rate of 3mg per week over a period of eight weeks. All patients were free of pain duringthe course of treatment. A second laparoscopy (direct visualization of the peritonealcavity, ovaries, outside of the tubes and uterus) was performedafter eight weeks and an improvement of the disease was shown in 60% of thecases. The efficacy was comparable to agonists but with the benefit of analmost complete absence of side effects. Cetrorelix allowed targeted control ofthe hormone level to show rapid effects, while avoiding the problems ofmenopause and risks (e.g. osteoporosis) associated with an otherwise completeand long-term withdrawal of hormones. We believe that the rapid onset of actionwould be ideal for intermittent therapies, allowing for treatment-freeintervals with re-dosing at the time when the therapeutic effect starts tofade.

 

On April 29, 2004, we announced the results of Phase 2placebo-controlled studies demonstrating that cetrorelix use was associatedwith a rapid and durable therapeutic response, namely improvement ofendometriosis-related symptoms, such as pelvic pain, extending up to severalmonths following only two IM injections of cetrorelix with a one-monthinterval.

 

On March 16, 2005, we announced that our worldwide (ex-Japan)exclusive development and marketing partner, Solvay, initiated a fulldevelopment program for the potential treatment of endometriosis withcetrorelix. On May 8, 2007, we and Solvay announced the termination of thelicense and cooperation agreement for cetrorelix for all remaining indications,including endometriosis, effective on that date, as a result of which weregained exclusive worldwide (ex-Japan) rights for cetrorelix in allindications without any financial compensation payable to Solvay. The move by Solvay out of the women’shealth field resulted from a change in their strategic focus to newly definedtherapeutic areas following the acquisition of the Fournier group in France.

 

In connection with our strategic review, we announced on October 2,2007 that, after optimization of formulation and trial design, we planned tomove into Phase 2b with cetrorelix in the endometriosis indication. Thedecision to proceed with development was made based on the proven safety andefficacy of Cetrotide®, the overall database from preclinical and clinical studies inendometriosis and the large unmet medical needs and commercial opportunity inthe area of endometriosis. In 2008, we performed a technical review ofcetrorelix in endometriosis with the support of medical experts in this field.On that basis, we are now evaluating different options to resume thedevelopment of the program.

 

*Cetrorelix in uterine myoma*

 

As part of the seven Phase 2 programs, cetrorelix was also evaluated forthe indication of uterine myoma. A uterus myoma is a benign tumor of theuterine muscles. If the entire uterine wall is penetrated by myoma, one refersto uterus myomatosus. Depending upon the length and the direction, it is eitherreferred to as a subserous myoma, which is located below the peritonealcovering of the uterus and grows towards the intestinal cavity, or a submucousmyoma, which is located below the mucous membrane and grows into the uterinecavity. The most frequent form, however, is the intramural myoma bound in themuscular layer of the uterus. Intramural myoma leads to pain in the lowerabdomen and in some cases to prolonged or severe monthly bleeding outside thenormal cycle. This can cause severe blood loss leading to anemia. Infertilityand pregnancy problems such as miscarriage or premature delivery are alsofrequent consequences. When the myoma puts pressure on the intestine or thebladder, the result can be constipation, bladder pain or a desire to urinate.If the myoma exerts pressure on nerves leaving the spinal cord, the result canbe back and neuralgic pain in the legs.

 

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Uterine myoma clinical trials

 

On April 29, 2004, we disclosed positive Phase 2 results from adouble-blind, placebo-controlled, multi-center trial evaluating thesubcutaneous formulation of cetrorelix, administered weekly for four weeks, asa pre-surgical treatment to 109 women with uterine myomas. In addition toevaluating the safety and tolerability of different doses of the newformulation, the trial also evaluated whether cetrorelix use could lead to thereduction of myoma and uterine volumes within a shorter treatment period thanthat normally required for LHRH agonists. Data from this trial demonstratedthat cetrorelix use led to a reduction of myoma and uterine volumes after aone-month treatment period, which is significantly shorter than the two- tosix-month treatment period typically required for LHRH agonists. The bestresponse rate was obtained at a dose of 10 mg of cetrorelix per week.Cetrorelix use did not lead to castration-like symptoms. We have not yetpursued the development of cetrorelix for this indication.

 

***Partners for cetrorelix***

 

We previously licensed cetrorelix to Solvay worldwide (ex-Japan) for allindications with the exception of IVF/COS/ART, which rights belong to MerckSerono and Japanese rights are held by Shionogi. In the BPH indication, forwhich we regained exclusive worldwide (ex-Japan) rights, Japanese rights areheld by Shionogi. On May 8, 2007, we and Solvay announced the terminationof the license and cooperation agreement for cetrorelix for all remainingindications, including endometriosis, effective on that date, as a result ofwhich we regained exclusive worldwide (ex-Japan) rights for cetrorelix in allindications without any financial compensation payable to Solvay.

 

On March 22, 2007, we announced that Nippon Kayaku had terminatedits development agreement pertaining to cetrorelix pamoate to focus solely inoncology.

 

We signed a license and cooperation agreement for the commercializationof cetrorelix (BPH indication) with Handok for the Korean market during thethird quarter of 2008.

 

On March 5, 2009, we entered into adevelopment, commercialization and license agreement with sanofi-aventis forthe development, registration and marketing of cetrorelix in BPH for the USmarket. Under the terms of the agreement, sanofi-aventis made an initialupfront payment to us of $30.0 million, and we will be entitled to receivea total of $135.0 million in payments upon achieving certainpre-established regulatory and commercial milestones. Furthermore, we will beentitled to receive escalating double-digit royalties on future net sales ofcetrorelix for BPH in the United States, while retaining the option toco-promote the product in that territory. Sanofi-aventis may performfuture Phase 3b and Phase 4 clinical trials, while we will have access to allcorresponding data for other territories.

 

***Competition for cetrorelix***

 

The market leaders in the indication of BPH arePfizer, Astellas/Boehringer Ingelheim, sanofi-aventis and Abbott with alpha-blockers and Merck and GlaxoSmithKline with alpha-reductaseinhibitors.RapafloTM (Silodosin), a selective alpha-blockerdeveloped by Watson Pharmaceutical (North America), Recordati S.p.A. (Europeand the Middle East), Kissei Pharmaceutical (Japan) and Daiichi Pharmaceutical(China) for the treatment of BPH was approved by the FDA in October 2008,while Recordati announced in November 2008 the filing of a MAA in Europe. Silodosin was launched in 2006 in Japanfor the treatment of dysuria associated with BPH as Uriefâ 2mg and 4mg capsules by Kissei Pharmaceuticaland Daiichi Pharmaceutical.

 

Worldwide, there are four LHRH agonists for the treatment ofendometriosis, including those of TAP Pharmaceutical Products (Abbott andTakeda), Astra Zeneca, Pfizer and sanofi-aventis.

 

Concerning the class of LHRH antagonists, the compound degarelix fromFerring Pharmaceuticals obtained, in December 2008, a marketing approvalfrom the regulatory agencies in the United States and the European Union forthe treatment of advanced prostate cancer. Although the indication is differentfrom the one targeted by cetrorelix, this is an important recognition of theclass of LHRH antagonists with a third approved class member after cetrorelixand ganirelix. In particular, all studies of degarelix have found the drug tobe well tolerated with no evidence of systemic allergic reactions.

 

**Ozarelix**

 

Ozarelix is a modified LHRH antagonist which is a linear decapeptidesequence. Ozarelixis a fourth-generation LHRH antagonist aiming at extended suppression oftestosterone levels that does not require a sophisticated depot formulation for

 

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long-lastingactivity. The aim of this project is to identify an activesubstance with superior properties for the development of longer-actingformulations that we believe are particularly suitable for tumor therapy.

 

Single doses of ozarelix depot were tested in healthy male volunteers.Ozarelix was well tolerated and produced a dose-dependent suppression oftestosterone. An immediate decrease in testosterone plasma levels was observedin all dose groups reaching levels below 1 ng/ml within the first 12 hoursafter application. Duration of suppression was dose-dependent and at thehighest dose of 60 mg caused testosterone suppression for one month.

 

On August 12, 2004, we entered into a licensing and collaborationagreement with Spectrum for ozarelix and its potential to treathormone-dependent cancers as well as benign proliferative disorders, such asBPH and endometriosis. Under the terms of the agreement, we granted anexclusive license to Spectrum to develop and commercialize ozarelix for allpotential indications in North America (including Canada and Mexico) and Indiawhile keeping the rights for the rest of the world. In addition, Spectrum isentitled to receive 50% of upfront and milestone payments and royaltiesreceived from our Japanese partner, Nippon Kayaku,****thatare generated in the Japanese market for oncological indications.

 

During the third quarter of 2008, we entered into a commercializationagreement with Handok for ozarelix (BPH indication) for the Korean market.

 

***BPH clinical trials***

 

In October 2006, we announced positive and highly statisticallysignificant Phase 2 results for ozarelix in BPH. The multi-center double-blind,randomized, placebo-controlled dose-ranging Phase 2 trial included 144 patientswho received different IM dosage regimens of ozarelix, or a placebo, to assessits safety and efficacy. Ozarelix was administered on day 1 or days 1 and 15.The primary efficacy endpoint of improving clinical symptoms of BPH at week 12,as measured by significant changes in IPSS, was achieved at all dosageregimens. However, the best results in terms of the most important decrease ofthe IPSS score were obtained with a dose of 15 mg administered on days 1 and15. The observed mean decrease of the IPSS score at week 12 was minus 8.6(-8.6), it peaked at minus 9.4 (-9.4) at week 20 and was still at minus 8.7(-8.7) as of week 28. Testosterone suppression levels were maintained abovecastration levels at all times. Secondary efficacy parameters such as uroflow,residual urinary volume, quality of life and circulating testosterone levelswere also measured and showed good results. The outcome of the trialdemonstrated an excellent safety profile with ozarelix as patients had noserious side effects. The erectile function was also not affected at any doseregimens.

 

On January 3, 2007, Spectrum announced the FDA’s acceptance of anIND for ozarelix in BPH. Spectrum initiated a Phase 2b study in January 2007.Dr. Claus Roehrborn from the UT Southwestern Medical Center in Dallas,Department of Urology, served as the lead investigator. The Phase 2b study wasa randomized placebo-controlled trial of ozarelix and involved approximately 70patients. Patients were dosed with 15 mg of ozarelix (administered IM) orplacebo on days 1 and 15 and were followed for nine months. The primaryendpoint for the study was the improvement in lower urinary tract symptoms (“LUTS”)secondary to BPH as measured by the IPSS score for ozarelix 15 mg compared toplacebo at 12 weeks. Secondary endpoints included measurements in peak urineflow (Qmax), erectile function, quality of life measures as well as safety andtolerability. The study further assessed the safety and efficacy of this dosingregimen at time points up to 24 weeks and the durability of the IPSS responseup to 36 weeks.

 

OnMay 23, 2007 and September 5, 2007, Spectrum disclosed detailed Phase2 results for ozarelix in BPH at two medical conferences. Results indicate thatozarelix was well tolerated and demonstrated statistically significant as wellas clinically meaningful efficacy in the treatment of LUTS secondary to BPH.The effect developed rapidly, with noticeable activity at four weeks fromstarting treatment, were maximal at 12-16 weeks, and persisted for thesix-month observation period. At week 12, all ozarelix-treated groups showedimprovement with the greatest improvement in the 15mg + 15mg group. Change frombaseline in IPSS score was 8.6 (p<0.001); change from baseline in urine flowwas 4.7 (p=0.002); testosterone levels declined transiently and returned tobaseline in most patients by four weeks and in all patients by six weeksfollowing dosing. Results also showed no statistically significant impact on qualityof life or erectile function. Serious adverse events were reported in fourpatients on ozarelix (myocardial infarction, pneumonitis, hypotension, renalcolic) but were not considered treatment-related. No systemic allergicreactions were seen and the injections were well tolerated.

 

Complete results of the 9-monthPhase 2b trial were released by Spectrum on April 22, 2008.  A total of 76patients were enrolled in the trial to meet the target of 68 evaluablepatients. Two patients withdrew consent prior to randomization, resulting in anIntent-to-Treat population (ITT) of 74 patients, of which 57 completed allstudy visits. Spectrum’s monitoring of the conduct of the study revealed majorprotocol violations at four of the 15 sites. Violations included: inaccuratediagnosis, concomitant use of other drugs effective in BPH, and patientparticipation in multiple trials at the same time. One of these sites wasclosed early due to irregularities in data collection and was reported to theFDA. Because of these major 

 

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protocol violations, an analysis excludingthese four sites was performed. All 44 patients at the other 11 sites metprotocol inclusion criteria and were included in a per-protocol populationanalysis. Because randomization was within site, balance between treatmentgroups was maintained. In the ITT population, ozarelix demonstrated a numericalimprovement in peak urine flow (2.5mL/sec) compared to placebo (1.3mL/sec) at12 weeks, but did not reach statistical significance (p=0.41). The improvementin IPSS at 12 weeks was 4.4 in placebo group and 2.9 in the ozarelix group anddid not reach statistical significance (p=0.37). In the per-protocol analysis,ozarelix demonstrated a clinically meaningful improvement in IPSS of 6.0compared to 3.0 for placebo. This improvement in IPSS was observed as early as8 weeks, approached statistical significance (p=0.09) and the effect wasobserved out to 36 weeks. Ozarelix demonstrated a numerical improvement in peakurine flow (1.6mL/sec) as early as four weeks, compared to no change in placebo(0.0mL/sec), (p=0.14), although this difference was not consistently seen atlater time points. In both the ITT and the per-protocol populations, ozarelixwas well tolerated, allergic reactions were not seen, and there was no reportedadverse effect on erectile function as measured by the International Index ofErectile Function (IIEF-EF). Based on these results, Spectrum initiated in September 2008the recruitment of 860 patients for a new BPH study, as mentioned on thewww.clinicaltrials.gov website.

 

***Prostate cancer clinical trials***

 

In August 2006,we announced positive Phase 2 result for ozarelix in hormone-dependent inoperableprostate cancer. This open-label, randomized-controlled dose-finding trialenrolled 64 patients receiving different IM dosage regimens of ozarelix toassess its safety and efficacy. The study achieved its primary endpoint ofdefining a tolerable dosage regimen of ozarelix that would ensure continuoussuppression of testosterone at castration level for a three-month test period.A secondary efficacy endpoint aimed at assessing tumor response as determinedby a 50% or greater reduction of serum PSA level, compared to baseline, wasalso achieved. The best results regarding the primary endpoint of continuoussuppression were obtained with a dose of 130 mg per cycle where all patientsremained suppressed to castration until at least day 85. In patients with continuoustestosterone suppression below castration level, tumor response as measured byPSA levels was 97%. Following these results, we, in collaboration withSpectrum, initiated an additional Phase 2 study in European centers to verifyand optimize the findings derived from the cohort of patients having received130 mg of ozarelix per cycle.

 

On August 3,2006, we announced a licensing and collaboration agreement with Nippon Kayakufor ozarelix. Under the terms of the agreement, we granted Nippon Kayaku anexclusive license to develop and market ozarelix for all potential oncologicalindications in Japan. In return, we received an upfront payment upon signatureand are eligible to receive payments upon achievement of certain developmentand regulatory milestones, in addition to low double-digit royalties onpotential net sales. Spectrum is entitled to receive 50% of the upfront,milestone payments and royalties received from Nippon Kayaku.

 

**Non-peptide LHRH antagonists**

 

As outlined above, the LHRH receptor plays an important role in a numberof benign and malignant tumors. Our drug discovery unit searches for small,non-peptide molecules which have the same effect on the receptor. Theiradvantage lies in the potential for oral administration.

 

AEZS-115 is a new orally bioavailable LHRH antagonist with LHRH-receptorbinding affinity in the nanomolar range which is developed for hormone therapyof endocrinological disorder and of benign and malignant tumors. The compounddemonstrates excellent selectivity to LHRH-receptor and has advanced to apreclinical stage where the *in vivo*activity has been confirmed. Major advantages are the dose-dependent reductionof sexual hormones without flare-up effect whereas no decrease down tocastration level is necessary and therefore side effects are reduced.

 

In January 2006, we regained the exclusive worldwide rights todevelop and commercialize AEZS-115 from Solvay. Attractive *in vivo* activity of this orally availablepeptidomimetic LHRH-antagonist was demonstrated with a single, oraladministration (20mg/kg) in rats which led to efficient and revocablesuppression of plasma testosterone levels for up to 12 hours. Furthermore, arepeat of the dosing of AEZS-115 increased the suppression time withoutaccumulation in the plasma.

 

In 2007, an oral formulation was selected and pharmacokinetic data wereobtained.

 

First preclinical results were presented at the 2008 San Antonio BreastCancer Symposium on December 12, 2008 and showed substantial anti-tumor activity ofAEZS-115 in human ovarian and breast cancer cell lines, as evidenced byexposure of human cell lines SKOV3, Ovcar 3 (human ovarian cancer cell lines)and MDA-MB 468 (human breast cancer cell line) to increasing concentrations ofAEZS-115, peptidicGnRH-antagonist cetrorelix and GnRH-agonist Triptorelin (1, 10, and 100 μM)for 48 days. Thenumber of viable cells was determined by crystal violet staining as well as byATP-dependent luminometric assays. Results showed that both GnRH-antagonistsdose-dependently inhibited growth of all three cell lines, 

 

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whileGnRH-agonist Triptorelin showed marginal growth inhibition.  Cell growth was inhibited by40-60% following exposure to a concentration of 10 μM of AEZS-115 and by 60-80% when cellswere exposed to 100 μM. Inhibition with cetrorelix at 100 μM ranged from 20-40%, while onlyminor effects on cell growth were seen at 10μM. Optimization is ongoing.

 

**SIGNAL TRANSDUCTION INHIBITORS**

 

**Perifosine**

 

Perifosine is an alkylphosphocholine compound with structural similarityto phospholipids, which are the main constituents of cellular membranes, and itis an active ingredient with anti-tumor capacities. In tumor cells, perifosinehas demonstrated interactions with vital signal transduction mechanisms andinduction of programmed cell death (apoptosis).

 

 

Perifosine exerts a marked cytotoxic effect in animal and human tumorcell lines. The most sensitive cancer cell lines were larynx carcinoma, breast,small cell lung, prostate and colon. Based on the *in vitro*trials, the mode of action of perifosine appears to be fundamentally differentfrom that of currently available cytotoxics. Pharmacodynamic data havedemonstrated that perifosine possesses anti-tumor activity, including tumormodels that are resistant to currently available agents for cancer therapy.This activity is based on a direct and relatively specific action on tumors.

 

In preclinical and clinical Phase 1 trials (solid tumors), this orallyadministered agent has been found to have good tolerability. Five Phase 1trials have been conducted on perifosine, including one trial of perifosine incombination with radiotherapy.

 

Based on findings in various tumor models, the U.S. National CancerInstitute, along with our North American partner, Keryx, investigatedadditional dosage regimens of perifosine in oncology patients. A number ofscreening Phase 2 studies examined perifosine as a single agent or incombination in several tumor types. Encouraging results lead to furtherdevelopment in specific indications.

 

Perifosine, the first-in-class AKT inhibitor in multiple Phase 2studies, is being developed as an orally active radio-enhancer and anti-canceragent.

 

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***Perifosine******—******Radio-enhancer***

 

A proof-of-concept Phase 1 study of perifosine in combination withradiotherapy conducted by the National Cancer Institute of the Netherlands wascompleted in 2004. Results from this trial were presented at ASCO 2004. A totalof 21 radiotherapy-naïve patients, of whom 17 had advanced non-small cell lungcancer (NSCLC) and 14 had become refractory to prior chemotherapy, receivedoral perifosine doses ranging from 50 mg to 200 mg/day concurrently withstandard doses of radiotherapy. The trial data demonstrated an acceptablesafety and tolerability profile, with 150 mg/day established as the doserecommended for use in subsequent clinical trials. Also demonstrated waspreliminary evidence of anti-tumor activity at all dosage levels, includingcomplete or partial responses (complete disappearance and decreased tumor size,respectively), or stable disease, with a median follow-up for responders of eightmonths. Importantly, in the cohort of 10 patients who were treated with 150mg/day, the established dose recommended for use in subsequent clinical trials,there were three complete responses, three partial responses and four patientswith stable disease.

 

On September 22,2005, we announced the initiation of a multi-center Phase 2 randomized,double-blind, placebo-controlled trial with perifosine in combination withradiotherapy for NSCLC.  Patientsreceived perifosine 150 mg daily for five to six weeks and are followed for atleast 12 months. The primary endpoint of this trial is the extent and durationof local control, i.e. the absence of tumor recurrence or progression in thearea that has been irradiated. The trial is being conducted in collaborationwith the Netherlands Cancer Institute. The lead investigator is Marcel Verheij,M.D., Ph.D., of the Department of Radiation Oncology / Division of CellularBiochemistry, at the Netherlands Cancer Institute in Amsterdam.  We announced completion of recruitment of 160patients with inoperable Stage III NSCLC on November 14, 2007. As thepatients are followed for a one-year period after receiving treatment, weexpect to announce top-line results in early 2009.

 

***Perifosine— Anti-cancer agent***

 

Perifosine —Multiple myoloma (“MM”)

 

In June and December 2007,Keryx announced preliminary positive Phase 1 and Phase 2 data on perifosine inpatients with relapsed/refractory MM. Data demonstrated clinical activity ofperifosine in combination with bortezomib and dexamethasone, and withlenalidomide plus dexamethasone.

 

InDecember 2008, Keryx presented final results of the Phase 1 clinical trialin which patients with relapsed or refractory MM were administered acombination of perifosine + lenalidomide and dexamethasone. Fourcohorts  of > 6 patients each wereenrolled and perifosine dose was 50 or 100 mg (daily), lenalidomide dose was 15or 25 mg for days 1 to 21 and dexamethasone dose was 20 mg (for days 1-4; 9-12;and 17-20 for 4 cycles, followed by 20 mg for days 1-4) in 28-day cycles. Tolimit dexamethasone-related toxicities, the protocol was amended to use weeklydexamethasone (40 mg), applying to cohorts 3, 4, and the Maximal Tolerated Dose(MTD) cohort.  Dose Limiting Toxicity (DLT) was defined as grade (G) 3non-hematologic toxicity, G4 neutropenia for 5 days and/or neutropenic fever,or platelets <25,000/mm3 on >1occasion despite transfusion. Response was assessed by modified EBMT criteria.To be enrolled, patients had to have received at least one but no more thanfour prior therapies. Patients refractory to lenalidomide/dexamethasone wereexcluded.  32 patients (17 men and 15 women, median age 61 years old,range 37-80) were enrolled; 6 patients in cohort 1 (Perifosine 50 mg,lenalidomide 15 mg, Dexamethasone 20 mg); 6 patients in cohort 2 (Perifosine 50mg, lenalidomide 25 mg, Dexamethasone 20 mg); 8 patients in cohort 3(Perifosine 100 mg, lenalidomide 15 mg, Dexamethasone 40mg/week); 6 patients incohort 4 (Perifosine 100 mg, lenalidomide 25 mg, Dexamethasone 40 mg/week) and6 patients at MTD (Cohort 4). Median prior lines of treatment was 2 (range1-4).  Prior therapy included dexamethasone (94%), thalidomide (83%),bortezomib (47%), and stem cell transplant (47%).  37% of patients hadprogressed on prior Thalidomide/Dexamethasone.  Two patients did notcomplete one full cycle (non-compliance and adverse event not related to studydrugs — both in cohort 3) and were not included in the safety and efficacyanalysis.  Of the 30 patients evaluable for safety, the most common (> 10%) grade 1 / 2events included nausea (13%); diarrhea (17%); weight loss (17%); upperrespiratory infection (23%); fatigue (30%); thrombocytopenia (20%); neutropenia(20%); hypophosphatemia (23%); increased creatinine (23%); anemia (36%);hypercalcemia (47%).  Grade 3 / 4 adverse events > 5% includedneutropenia (20%); hypophosphatemia (17%); thrombocytopenia (13%); anemia(10%), fatigue (7%).  There was one reported DLT in cohort 3(nausea).  Lenalidomide was reduced in 8 patients, Perifosine reduced in 8patients and Dexamethasone reduced in 6 patients.  All 30 patients in theanalysis were evaluable for response, with best response as follows:

 

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| **Response:  N = 30**       | ** ** | **N (%)** | ** ** | **Duration (wks)**   | ** ** | **ORR (****>****PR)** | ** ** |
|-------------------------------------------------|------------|----------------|------------|---------------------------|------------|-------------------------------|------------|
| Near  Complete Response (nCR)                   |       | 2 (7%)         |       | 79+, 15+                  |       |                          |       |
| Very Good Partial Response (VGPR)               |       | 3 (10%)        |       | 62+, 34, 17               |       | 15 (50%)                      |       |
| Partial  Response (PR)                          |       | 10 (33%)       |       | 26+ (range 11 – 54+) |       |                          |       |
| Minimal  Response (MR)                          |       | 6 (20%)        |       | 17+ (range 9 - 30+)       |       |                          |       |
| Stable  Disease (SD)                            |       | 7 (23%)        |       | 14+ (range 8 – 19)   |       |                          |       |
| Progression (PD)                                |       | 2 (7%)         |       | 8, 4                      |       |                          |       |
| stable disease: < 25% reduction in M-protein |       |

 

Patients have tolerated the treatment regimenof Perifosine + Lenalidomide + Dexamethasone well with manageable toxicity, andwith encouraging clinical activity demonstrated by an overall response rate (“ORR”)(> PR) of50%.

 

Also in December 2008 during the meeting of the American Societyof Hematology, Keryx presented results of a Phase 1/2 multicenter trial ofperifosine + bortezomib in patients with relapsed or relapsed/refractory MM whowere previously relapsed from or refractory to bortezomib ± dexamethasone. The PhaseI stage of the study enrolled a total of 18 patients in 4 cohorts of 3 pts eachwith dosing of Perifosine 50 mg or 100 mg (daily) and bortezomib 1.0 or 1.3mg/m2 (on day 1, 4, 8, 11) in 21-day cycles. Theselected dose for Phase 2 was perifosine 50 mg once daily + bortezomib 1.3 mg/m2 (onday 1, 4, 8, 11) in 21-day cycles, with a planned enrollment of 64 patients.Dexamethasone 20 mg (on day of and after each bortezomib dose) could be addedin patients with progressive disease (PD). For the Phase 1 portion, Doselimiting toxicity (DLT) was defined as any grade (G) 3 non-hematologictoxicity, G4 neutropenia for 5 day and/or neutropenic fever, or platelets<10,000/mm3 on more than one occasion despitetransfusion. Response was assessed by modified EBMT and Uniform criteria. Atotal of 76 patients have been enrolled (18 patients in Phase 1 and 58 patientsin Phase 2) comprised of 45 men and 31 women, median age 63 years old, (range41-89). 84% of patients had relapsed/refractory MM, with a median of 6 lines ofprior treatment (range 2-13).  Prior therapy included bortezomib (100%),dexamethasone (95%), thalidomide (79%), lenalidomide (71%) and stem celltransplant (57%).  63 patients have completed at least one cycle and wereevaluable for safety (13 patients are currently not evaluable; 3 were removedin cycle 1 and 10 are too early in their treatment). Most common (>10%) grade 1 / 2 events were nausea, diarrhea,fatigue and myelosuppression, which were manageable with supportive care andgrowth factors. Grade 3 / 4 adverse events >5% included thrombocytopenia (40%); lymphopenia (36%);neutropenia (21%); anemia (14%); hyponatremia (13%); leukopenia (11%);proteinuria (8%), and upper respiratory infection (6%).  No deep vein thrombosis (DVT) has beenseen, and only one worsening peripheral neuropathy from grade 1 to 3 has beenreported to date.  Two patients had perifosine reduced to 50 mg (nausea,fatigue) in the Phase 1 cohort, and 7 patients had bortezomib dose reductionsprimarily due to hematologic toxicity.  57 patients have completed atleast 2 cycles and are evaluable for response, with best response to perifosine+ bortezomib (+/- dexamethasone) as follows:

 
| ** **                      | ** ** | ** ** | ** ** | **CR** | ** ** | **PR** | ** ** | **MR** | ** ** | **ORR** | ** ** | **SD** | ** ** |
|---------------------------------|------------|------------|------------|--------|------------|--------|------------|--------|------------|---------|------------|--------|------------|
| **All Patients: Best Response** | ** ** | **N=57**   | ** ** | **2**  | ** ** | **4**% | ** ** | **7**  | ** ** | **12**% | ** ** | **14** | ** ** | **25%** | ** ** | **23** | ** ** | **40**% | ** ** | **23** | ** ** | **40%** | ** ** |
| perifosine + bortezomib         |       | 57         |       | 1      |       | 2%     |       | 5      |       | 9%      |       | 8      |       | 14% |   | 14 |   | 24% |   | 17 |   | 30% |   |
| With dexamethasone added*       |       | 31         |       | 1      |       | 2%     |       | 2      |       | 3%      |       | 6      |       | 11% |   | 9 |   | 16% |   | 6 |   | 11% |   |

 

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(* as a subsetof the evaluable population)

 

9 of 76 patients (12%) rapidly progressedwithout response or stable disease, including 6 patients in whom dexamethasonewas also added.  As of August 2008, the median time to progression(TTP) for patients achieving > PR is 34 weeks, and for all patients achieving > MR is 33 weeks.Perifosine in combination with bortezomib (+/- dexamethasone) was generallywell tolerated and is remarkably active in a heavily pre-treatedBortezomib-exposed patient population, with an ORR of 40%, including an ORR of37% and a median TTP of 9.25 months in responding but previouslybortezomib-refractory patients. Further trials, including randomized studies inrelapsed disease, are planned.

 

Perifosine —Waldenstrom’s Macroglubulinemia

 

Results of aPhase 2 study on perifosine in patients with Waldenstrom’s Macroglubulinemia (“WM”)were presented by Keryx in June 2008 at ASCO and in December 2008during the ASH meeting. Perifosine showed clinical activity as a single 

 

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agent in patientswith relapsed/refractory WM, with an ORR (partial response [PR] + minimalresponse [MR]) of 36%. PR occurred in 2 (6%) patients, with a median durationof response of 9+ and 18+ months, MR occurred in 11 (30%) patients, with amedian duration of response of 7 months (2-21+ months). Stable disease [SD]occurred in 21 (58%) patients and progressive disease [PD] in 2 (6%) patientsat 2 and 4 months. The most common adverse events were GI toxicities (nausea,vomiting and diarrhea) with grade 1 and 2 in 36% of the patients. Grade 3 and 4events included anemia (9%) and leucopenia (9%). Grade 3 arthritis occurred in9% of the patients; was considered likely related to therapy, (especially inrapidly responding patients), and reversed with symptomatic treatment as wellas dose reduction. Dose reductions to 100 mg occurred in a total of 36% of thepatients and were otherwise due to GI toxicity or cytopenias. Perifosinemonotherapy induces a prolonged time to progression in relapsed or refractoryWM, with a promising response rate of 36%, stabilization of disease in 58% ofpatients, and manageable toxicity, as well as the convenience of oraladministration. Future clinical trials in combination with rituximab areplanned.

 

Perifosine —Renal Cell Carcinoma

 

 In June 2006, we announced positive dataof perifosine in patients with advanced renal cell carcinoma (“RCC”). Keryxdisclosed results from an interim analysis performed at the end of the firstyear of accrual, from a Phase 2, multi-center trial of perifosine that includedmultiple types of tumor and the results of the RCC group met protocolrequirements for expansion of this cohort. Of the 13 patients with RCC, sevenwere evaluable for response. Three of them (43%) had a partial response and anadditional two patients (29%) achieved long-term stable disease. Two patients(29%) had progressive disease. Results of a Phase 1 multicenter trial ofperifosine in combination with sorafenib or in combination with sunitinib forpatients with advanced cancers including RCC were disclosed by Keryx in June 2007during the ASCO meeting and in November 2007.  The trial was designed toaccrue 3-6 patients in each of four cohorts. Response by RECIST criteria was asecondary endpoint. Perifosine was escalated from 50 mg once per day to 50 mgthree times per day; sorafenib dose was escalated from 400 mg once per day to400 mg twice per day; and sunitinib dose was escalated from 25 mg to 50 mg onceper day for 4 weeks of treatment out of 6. Dose limiting toxicity (“DLT”) wasdefined as grade (G) 3 non-hematologic or G4 hematologic toxicity. Maximaltolerated dose (“MTD”) was the dose below that at which 2 out of 6 patientsexperienced a DLT.

 

For thecombination perifosine + sorafenib, twenty (20) patients were enrolled (12males / 8 females, median age 64 (range 44-87)) with a median number of 2 priortherapies (range 1-4). Three patients were inevaluable due to rapid diseaseprogression. Diagnosis was as follows; RCC (11 pts), sarcoma (5), colorectal(2), hepatocellular (1) and neuroendocrine (1). 17 patients were evaluablefor toxicity: no drug related Grade 4 adverse events (AE) were seen. SuspectedDLT of hand-foot syndrome was seen in cohort 4 and additional patients wereenrolled. There was no increase in hand-foot syndrome compared to sorafenibalone. Of interest, 6/9 evaluable RCC patients (67%) had stable disease (SD)>12 weeks (median 26 weeks, range 12-62+). One hepatocellular patient had SDfor 36 weeks. The combination of perifosine + sorafenib was well tolerated withno increased hand-foot syndrome compared to sorafenib alone. Six out of 9 RCCpatients (67%) achieved SD up to 62+ weeks. Future studies are currently indevelopment.

 

For thecombination perifosine + sunitinib, fourteen patients (8 males / 6 females;media range 62 years old, range 28-81) were enrolled. Disease type was as follows: RCC (3), Sarcoma(3), Other (8).  Six patients wereevaluable for response. After 2 treatment cycles, one patient had a partialresponse (PR), 3 patients showed a SD and 2 patients had disease progression(PD). In the sub-group RCC, three out of three patients were evaluable forresponse: one patient had a PR, 1 patient showed a SD and 1 patient had a PD.Results indicated that patients to date have well tolerated the treatmentcombination of perifosine + sunitinib with no unexpected toxicities andclinical activity has been noted within the first 3 cohorts with 4 of 6 (67%)evaluable patients with advanced cancer achieving at least SD for more than 6months.

 

Perifosine —Sarcoma

 

InJune 2007, our partner Keryx presented results of Phase 1 and 2 studiesfor the treatment of patients with advanced sarcoma at the ASCO meeting. Thedose schedules in the Phase 1 trials were weekly 100-800mg or loading dose300-1800mg on Day 1 followed by 50-150 mg daily for Days 2-21 every 28 days orloading dose 400-900 mg and daily 50-100 mg continuously. In the Phase 2 trial,doses were loading dose 900 mg on Day 1 and 150mg daily for days 2-21 every 28days; loading dose 900 mg and 100 mg daily continuously; 50 mg dailycontinuously without a loading dose; and 900-1500 mg weekly. 145 patients withsarcoma were entered into studies and were assessed for clinical benefit rate (“CBR”).Partial responses were seen, in one patient each, with chondrosarcoma,extra-skeletal myxoid chondrosarcoma, leiomyosarcoma and a desmoid tumor. Atlower doses with 52 patients fully evaluable for CBR, the CBR was 52% with fourpartial responses and 23 stable disease at > 4 months. At higherdoses with 30 patients fully evaluable for CBR, CBR was 53% with 16 stabledisease at > 4 months. Toxicities were mainly gastrointestinal and/orfatigue. The percentage of patients with grade 0 nausea, vomiting, diarrhea andfatigue for lower dose perifosine (76 patients) was 46%, 49%, 38% and 55%respectively compared to 26%, 32%, 20%, and 58% for higher dose perifosine (69patients). The proportion of patients with grade 2+ nausea, 

 

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vomiting,diarrhea and fatigue was 20%, 13%, 15%, and 21% for lower doseperifosine and 49%, 35%, 42%, and 25% for higher dose perifosine.

 

In November 2007,Keryx announced positive preliminary Phase 2 data of perifosine in patientswith chemo-insensitive sarcoma. Data demonstrated the tolerability and clinicalactivity of perifosine as a single agent with an overall clinical benefit of40% (stable disease > 3 months) in patients with refractory rare sarcomas.Perifosine was well tolerated with the most common grade 1 & 2 adverseevents reported as nausea, vomiting, diarrhea and fatigue.

 

Perifosine —Gliomas

 

In November 2007,Keryx announced early results of a Phase 2 trial of perifosine as a singleagent for the treatment of recurrent malignant gliomas (malignant glioblastomaand malignant anaplastic gliomas). Twenty-five patients with advanced malignantgliomas were treated with a loading dose of 600 mg (150 mg x4) followed by a100 mg daily dose of perifosine. The median progression free survival andoverall survival in the anaplastic glioma group was nine weeks (range 2-50weeks) and 49 weeks respectively. Toxicity was minimal with the followingreported events: one grade 1 nausea, one grade 1 diarrhea, one grade 2 pain,and one grade 4 gout exarcebation. The study was designed to enroll at least 12evaluable malignant glioblastoma patients and at least 10 evaluable malignantanaplastic gliomas patients. If at least one patient achieves six monthprogression free survival, the study would continue to enrol an additionalsubset of patients. Therefore, the malignant glioblastoma arm has been haltedand the malignant anaplastic gliomas arm will continue to enroll.

 

Perifosine —Other indications

 

On March 2,2006, our North American partner, Keryx, announced the initiation of acorporate-sponsored Phase 2 trial, multi-cancer, clinical program to evaluateperifosine as a treatment for leukemia. Dr. Frank Giles, Professor,Department of Leukemia, at the MD Anderson Cancer Center in Houston, TX, is theprincipal investigator. This Phase 2 trial will assess the objective responserate and evaluate the pharmacokinetics and safety and tolerability ofperifosine as a single agent in relapsed or refractory acute myeloid leukemia,acute lymphocytic leukemia, chronic lymphocytic leukemia, high-riskmyelodysplastic syndrome and chronic myeloid leukemia in the blastic phase.

 

In November 2006, Keryx presented intermediary results of thePhase 2 study of imatinib plus perifosine in patients with imatinib-resistantgastrointestinal stromal tumor (“GIST”). The primary endpoint of this study isto evaluate the efficacy and toxicity of the combination imatinib andperifosine in patients with imatinib-resistant GIST. To date, 16 patients havebeen enrolled in the current study. Of the 12 patients with evaluable disease,there were two partial responses by Choi criteria (17% objective response rate(ORR)) and one partial response by RECIST criteria (8% objective responserate). Grade 3 and 4 adverse events were rare and included fatigue, myalgias,ocular toxicity and nausea/emesis. The early data from the current studysuggest that the addition of perifosine to imatinib is well-tolerated and mayhave efficacy in the treatment of patients with imatinib-resistant GIST.

 

***Partners for perifosine***

 

A Cooperative Research and Development Agreement (CRADA) was put inplace with the National Institute of Health/the National CancerInstitute in May 2000. A cooperation and license agreement was signed in September 2002with Access Oncology, Inc. (“AOI”), for the use of perifosine as ananti-cancer agent covering the United States, Canada and Mexico. In January 2004,AOI was acquired by Keryx, which is pursuing the clinical development ofperifosine under the same conditions as AOI. The agreement, in particular,provides us free access to all data from Keryx and its partner’s studies, aswell as milestone payments and scale-up royalties to be paid to us on futurenet sales of perifosine in North America. We own rest of the world rights toperifosine.

 

**AEZS-127 erucylphosphocholine**

 

On January 6, 2005, we announced the initiation of preclinicaldevelopment of erucylphosphocholine (AEZS-127), an analog of perifosine whichis suitable for intravenous administration. Like perifosine, AEZS-127 belongsto a new class of compounds based on alkylphosphocholines. AEZS-127 possessesdistinctive reduced haemolytic activity thus allowing for intravenousinjection.

 

On January 6, 2005, we also licensed to Keryx certain rights todevelop and market AEZS-127 in North America, South Africa, Israel, Australiaand New Zealand while keeping rights for the rest of the world. According tothe agreement with Keryx, the preclinical development costs of AEZS-127 areshared between Keryx (50%) and us (50%). In Q4 2008, we retrieved all rightsfor AEZS-127 from Keryx.

 

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In 2006, studies for acute toxicity and dose range finding oferucylphosphocholine were actively pursued. The 4-week toxicity studies in ratsand dogs as well as the safety pharmacology package was completed in 2007.These preclinical data are a prerequisite for the performance of a Phase 1clinical study.

 

**Erk/PI3K inhibitors and dual kinaseinhibitors**

 

In addition to our activities with alkylphosphocholines, we arescreening small molecules for activity as agonists and antagonists tolipid-protein signaling interactions, which are seen as new and potentiallyimportant therapeutic targets.

 

We are focusing our efforts on single and dual inhibitors ofRas-Raf-Mek-Erk and PI3K-Akt pathways. The Ras-Raf-Mek-Erk and the PI3K-Aktpathways are constitutively activated in many cancer types, and influence bothtumor development and progression.

 

Both signaling pathways represent promisingtherapeutic targets for the treatment of tumors. We have now identified a newcompound class with inhibitory activity against both the Erk and PI3K kinases.These small molecules inhibit the kinases at nanomolar concentrations in adose-dependent manner by competing directly at the ATP binding site. In a broadkinase panel, the molecules are very selective against other kinases. Incellular experiments the compounds inhibit the activation of downstream targetsAkt and Rsk1, and can stop the proliferation of various human cancer celllines. Moreover, a new generation of aniline-substituted pyridopyrazine-ureaderivative show highly selective PI3K inhibition. We are currently performing *in vivo* studies with front-runner compounds in four mouse xenograft models(HCT116, U87, A549 and PC3) as well as pharmacokinetic studies in rodents usingan oral pre-formulation. On the basis of these studies, AEZS-126 was selectedas a preclinical development candidate for in vivo pharmacology andpharmacokinetic studies.

 

***Competitor for Erk/PI3Kinhibitor***

 

Novartis PI3K inhibitor NVP-BEZ 235, which is currently beinginvestigated in a clinical Phase 1, was used as a reference compound for theevaluation of our candidate compounds.

 

**TUMOR TARGETING CYTOTOXIC CONJUGATES ANDCYTOTOXICS**

 

**Cytotoxic conjugates**

 

In view of the non-specific toxicity of most chemotherapeutic agentsagainst normal cells, targeting such drugs to cancerous tissue offers apotential benefit for patients with advanced or metastatic tumors. Targetedcytotoxic peptide conjugates are hybrid molecules composed of a cytotoxicmoiety linked to a peptide carrier which binds to receptors on tumors.Cytotoxic conjugates are designed to achieve differential delivery, ortargeting, of the cytotoxic agent to cancer vs. normal cells.

 

Our cytotoxic conjugates represent a novel oncological strategy tocontrol and reduce toxicity and improve the effectiveness of cytotoxic drugs.The development strategy was to create targeted conjugates with high cytotoxicactivity based on doxorubicin, an approved and commercialized product or 2-pyrrolino-doxorubicinwhich is 500 to 1,000 times more active than the parent compound. We areexploring several candidates in which doxorubicin or 2-pyrrolino-doxorubicinare coupled to the peptide carriers targeting LHRH (AEZS-108 &AN-207), somatostatin (AN-238 & AN-162) or bombesin (AN-215)receptors. These conjugates are less toxic and more effective *in vivo* than the respective radicals ininhibiting tumor growth in LHRH receptor positive models of human ovarian,mammary or prostatic cancer.

 

 

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In AEZS-108, the most advanced of the cytotoxic conjugates, doxorubicinis chemically linked to an LHRH agonist, a modified natural hormone withaffinity for the LHRH receptor. This design allows for the specific binding andselective uptake of the cytotoxic conjugate by LHRH receptor positive tumors.Potential benefits of this targeted approach include a more favorable safetyprofile with lower incidence and severity of side effects, as normal tissuesare spared from toxic effects of doxorubicin. In addition, the targetedapproach may enable treatment of LHRH receptor positive cancers that havebecome refractory to doxorubicin which has been administered in itsnon-targeted form.

 

In preclinical studies conducted to date in several animal models ofLHRH receptor positive human cancer cell lines, AEZS-108 anti-tumor activityand tolerability were shown to be superior to that of doxorubicin. As would beexpected, AEZS-108 was not active or was significantly less active thandoxorubicin in LHRH receptor negative cancer cell lines. On January 18,2005, we announced the initiation of a company-sponsored Phase 1 dose-rangingstudy with this targeted anti-cancer agent AEZS-108.

 

In June 2006, we announced positive Phase 1 results for AEZS-108 inpatients with gynaecological and breast cancers which showed that the compoundhas a good safety profile and no dose-limiting toxicities. Eight patientsreceived AEZS-108 by intravenous infusion. Infusion was well tolerated at alldosages, without supportive treatment. Pharmacokinetic analyses showeddose-dependent plasma levels of AEZS-108 and only minor (10-20%) release ofdoxorubicin. Stabilization of disease was observed in one out of eight patientsin the ongoing Phase 1 study.

 

On November 27, 2006, we disclosed additional positive Phase 1results regarding AEZS-108 in patients with gynaecological and breast cancers.Further data showed the compound’s good safety profile and established themaximum tolerated dose at 267 mg/m2, which is equimolar to a doxorubicin dose of 77mg/m2.This dose will be the recommended dose for a Phase 2 trial. The Phase 1open-label, multi-center, dose-escalation, safety and pharmacokinetic studyconducted in Europe included 17 patients suffering from breast, endometrial andovarian cancers with proven LHRH receptor status. Evidence of anti-tumoractivity was found at 160 mg/m2 and 267 mg/m2 doses of AEZS-108 where 7 out of13 patients showed signs of tumor response, including 3 patients with completeor partial responses. The Phase 2 trials will focus on advanced or recurrentovarian and endometrial cancers, two forms of cancer where LHRH receptors arehighly expressed. Recommended dose will be 267 mg/m2 given once every three weeks.

 

In 2007, a Phase 2 open-label, non-comparative, multicenter twoindication trial stratified with two stage Simon Design was prepared, where 82patients are planned for this trial with up to 41 patients with either adiagnosis of platinum-resistant ovarian cancer (stratum A) or disseminatedendometrial cancer (stratum B). On February 12, 2008, we reported that thetreatment of first patients had commenced in this Phase 2 trial.  In October 2008, we announced that wehave entered the second stage of patient recruitment for the Phase 2 trial inplatinum-resistant ovarian cancer indication. This decision was taken followingthe report of two partial responses among patients with a diagnosis ofplatinum-resistant ovarian cancer.  Thesecond stage of patient recruitment for the endometrial cancer indication wasreached in November 2008 and was based on the report of one completeresponse and two partial responses among 14 patients with a diagnosis ofdisseminated endometrial cancer. Further results of this trial are expected inthe first half of 2009.

 

**AEZS-105 - Lobaplatin**

 

Lobaplatin is a platinum derivative that has demonstrated lower toxicityin preclinical studies compared with cisplatinum, specifically renal toxicity,and incomplete cross-resistance with other platinum derivatives suggestingpotential therapeutic use even in tumor indications not routinely treated withplatinum derivatives.

 

Clinically, lobaplatin was well tolerated at recommended dosages.Treatment was not associated with typical side effects often seen withcisplatinum, such as nephrotoxocity (impairment of kidney function), otoxicity(loss of hearing capacity), and neurotoxicity (effects on sensory function). Inaddition, vomiting was less severe than published data from both cisplatinumand carboplatinum. Characteristic toxicity of lobaplatin is a short-lasting,spontaneously reversible drop in thrombocyte count (blood platelets).

 

In a Phase 2 study conducted in China that included 284 patients with abroad range of solid and non-solid tumors, safety and particularly goodtherapeutic efficacy were demonstrated in patients with breast cancer, smallcell lung cancer (“SCLC”), and chronic myeloid leukemia (“CML”) (a cancer ofthe hematopoietic system). The primary endpoint in solid tumor patients was theremission rate according to WHO criteria, while response in CML was assessedaccording to the disease-specific criteria of Talpaz. The favorable results ofthis study were the basis for approval of Lobaplatin bythe Chinese health authorities for the treatment of inoperable, advanced breastcancer, SCLC and CML.

 

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In December 2002,we signed a contract with Hainan Chang An Pharmaceuticals Ltd. for themarketing in China of lobaplatin. The contract includes the worldwide manufacturingrights of lobaplatin by Hainan Chang An Pharmaceuticals. The technologytransfer agreement provided us with a first payment upon signature and a latermanufacturing-related payment.

 

In 2007, lobaplatin was licensed to Atani for the territory of Japan.Atani is performing preclinical studies and is planning to conduct a Phase Iclinical trial.

 

**TUBULIN INHIBITORS / VASCULAR TARGETINGAGENTS**

 

**AEZS-112 - Development of a low molecularweight tubulin inhibitor with anti-angiogenic properties**

 

Tubulin is a protein found in all cells that plays an important roleduring cell division, in that it helps to transmit genetic information to thedaughter cells. Inhibition of this process leads to the death of the affectedcell. The anti-tumor agents taxol and vincristine, which are widely used incancer therapy, are based on this principle. Both compounds are expensivenatural substances and cause severe side effects when used in humans.

 

We are currently identifying and developing novel tubulin inhibitors which,compared with currently used products, exhibit in animal models improvedefficacy, have a more acceptable side effect profile, an incomplete or nocross-resistance and are administered orally.

 

AEZS-112 is a drug development candidate with an excellent tolerabilityprofile showing excellent *in vivo*activity in various tumor models including mammary, colon, melanoma andleukemia cancers after oral administration. This compound acts through threemechanisms of action. Strong anti-cancer activity is combined withpro-apoptotic and anti-angiogenic properties. AEZS-112 inhibits thepolymerization of cancer tubulin rather than bovine brain tubulin, it destroysthe mitotic spindel of the cancer cells and it inhibits topoisomerase IIactivity. AEZS-112 arrests the cancer cells in the G2M phaseat a nanomolar concentration and induced apoptosis. AEZS-112 is notcross-resistant to cisplatin, vincristine and doxorubicine in cell linesresistant to these drugs. Given orally once weekly, AEZS-112 proved to be apotent inhibitor of*in vivo* tumorgrowth in melanoma, mammary, colon, lung, renal as well as in leukemia cancersat acceptable and very well tolerated doses. Furthermore AEZS-112 showedfavorable safety and toxicity profiles. No findings with respect to cardiotoxicityand neurotoxicology parameters could be observed during the toxicologicalevaluation in mice, rats and dogs. With this profile of activity, AEZS-112 is apromising candidate for further clinical development.

 

On January 8, 2007, we announced the initiation of a Phase 1 trialfor AEZS-112 in patients with solid tumors and lymphoma. This open-label,dose-escalation, multi-center, intermittent treatment Phase 1 trial is beingconducted in the United States with Daniel D. Von Hoff, MD, Senior Investigatorat the Translational Genomics Research Institute in Phoenix, AZ, as the leadinvestigator. The trial includes up to 50 patients who have either failedstandard therapy or for whom no standard therapy exists. Primary endpoint ofthe Phase 1 trial focuses on determining the safety and tolerability ofAEZS-112 as well as establishing the recommended Phase 2 dose and regimen.Secondary endpoints are aimed at establishing the pharmacokinetics anddetermining the efficacy based on standard response criteria.

 

As of December 2008, 35 patients haveentered this Phase 1 dose escalating clinical trial.  To date no Maximum Tolerated Dose (“MTD”) hasbeen achieved and no clinical relevant drug-related adverse events have beenencountered. We also expect to report first results at the Annual Meeting of the American Association forCancer Research (AACR) in Denver in late April 2009.

 

**Growth hormone secretagogue**

 

Ghrelin ligandAEZS-130 (“ghrelin agonist”)

 

Growth hormone secretagogues (“GHS”) represent a new class of pharmacologicalagents that directly stimulate growth hormone (“GH”) secretion from thepituitary gland without the involvement of growth hormone-releasing hormoneGH-RH or somatostatin. We believe that there is currently no GHS on thepharmaceutical market. Since GH is a potent regulator of lipid, sugar andprotein metabolism, the potential clinical uses of GHS are numerous. They include growth retardation in children and treatmentof cachexia in AIDS patients, which are currently the only approved uses of therapyof GH. The administration of GH, which has to be injected every day, iscumbersome. Therefore, we believe that there would be a demand for new orallyactive drugs like GHS.

 

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As part of our university collaboration, we accessed new peptidomimeticcompounds with GH secretagogue properties. The lead development candidate,AEZS-130 (EP-1572), is a novel peptidomimetic GHS with potent and selectiveGH-releasing activity in humans. AEZS-130 underwent limited clinicalpharmacology tests that demonstrated a potent stimulation of the GH secretionafter oral administration in human volunteers. This product has been licensedto Ardana Bioscience Ltd. (“Ardana”) (ARD-07), which initiated an open,randomized, placebo-controlled Phase 1 dose-ranging study in April 2004.Thirty-six healthy subjects were included in this study to receive either thereference hormone GH-RH by intravenous route or one of the following doselevels of AEZS-130: 0.005, 0.05 or 0.5 mg/kg by oral route. AEZS-130 at thedose of 0.5 mg/kg orally caused an increase in growth hormone releaseequivalent to that induced by GH-RH intravenously. The compound was welltolerated and no other hormones showed a significant modification after anydose of AEZS-130.

 

In June 2006, Ardana presented results regarding AEZS-130 at the2006 Endo Convention. These results referred to the Phase 1 trial regarding thestimulating effects of AEZS-130 on growth hormone following both oral andintra-duodenal administration in healthy males. This study showed that AEZS-130was well tolerated by the 36 volunteers enrolled and no adverse events werereported. Administration of AEZS-130 either orally or via intra-duodenalinfusion results in increased levels of growth hormone in the blood. Thisstimulation of growth hormone appears to be selective as no otherhormones/analytes that were measured (cortisol, ghrelin, prolactin, insulin,glucose and ACTH (adrenocorticotropic hormone)) were affected in a dose-dependent orstatistically significant way by administration of AEZS-130 either orally or viaintra-duodenal infusion.

 

In May 2007,Ardana gained orphan drug status for AEZS-130, which it is developing as adiagnostic for growth hormone deficiency in adults. The clinical developmentand toxicology programs are ongoing and, subject to clinical outcome, Ardanaannounced the commencement in the United States of the planned pivotal registrationstudy and the enrolment of the first patient in August 2007.

 

In June 2008,Ardana announced that the company stopped its operations and entered intovoluntary administration. Consequently, the clinical study of AEZS-130 wassuspended.

 

We announced therecovery of worldwide rights from Ardana for the compound AEZS-130 in the thirdquarter of 2008. Future development options are currently being evaluated forthe use of this compound in growth hormone deficiencies.

 

**Ghrelin receptor ligands**

 

Ghrelin is a peptide predominantly produced by thestomach.  Apart from a potentGH-releasing action, ghrelin has other activities including stimulation oflactotroph and corticotroph function, influence on the pituitary gonadal axis,stimulation of appetite, control of energy balance, influence on sleep andbehavior, control of gastric motility and acid secretion, and influence onpancreatic exocrine and endocrine function as well as on glucose metabolism.The recent discovery of ghrelin and its receptors opens up new opportunitiesfor the development of drugs that will treat metabolic disorders. There isindeed a possibility that ghrelin analogs, acting as either agonists orantagonists, might have clinical impact without affecting GH level.  The use of ghrelin antagonists as appetitesuppressants or inhibitors of lipogenesis could open up new opportunities forthe treatment of obesity and associated diseases (e.g. diabetes, cardiovasculardiseases).  The use of ghrelin agonistscould have therapeutic benefits which are expected to offer hope for cachexicor anorexic patients.

 

In 2004, we established a research and licensecollaboration agreement with Le Centre National de la Recherche Scientifiqueand University Montpellier I and II, France, acting in their own names, as wellas in the name and on behalf of the Laboratoire des Aminoacides, Peptides etProtéines (LAPP) (UMR 5810), directed by Dr. Jean Martinez, for thesynthesis and characterization of new chemical entities acting as ghrelinreceptor ligands.  According to theagreement, we have the worldwide rights to develop and exploit the newcompounds for any indication. Compounds with the most potent affinity for theghrelin receptors will be investigated further through an international networkof academic investigators with expertise in the field of endocrinology in orderto identify clinical development candidates.

 

Additionally, we also established a researchcontract with the Department of Experimental and Environmental Medicine of theUniversity of Milan, Italy, under the direction of Prof. Vittorio Locatelli,for the pharmacological characterization of potentially ghrelin receptorligands.

 

In August 2005, we filed a first patentapplication to protect a series of new chemical entities characterized asghrelin receptor ligands.

 

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In May 2006, we established a research projectagreement with the University of Montreal. This research project will focus onthe characterization of ghrelin receptor ligands on fat tissue. This project isled by Huy Ong, Professor at the Faculty of Pharmacy, at the University ofMontreal.

 

In August 2006, we also initiated a researchcollaboration with the Hôpital Laval (Québec) under the direction of Dr. DenisRichard. This research collaboration will focus on the pharmacologicalcharacterization of ghrelin receptor ligands *in vivo*(e.g.the effects in diet-induced obesity models).

 

In October 2006, we presented for the firsttime our *in vivo* data on the capacity of ghrelinantagonists of selectively inhibiting food intake. This study, using a ratmodel, outlined the capacity of ghrelin antagonists’ ability to inhibitappetite without affecting growth hormone secretion and represents evidencethat ghrelin antagonist compounds can selectively inhibit food intake. Itfurther supports the hope that ghrelin antagonist compounds have the potentialto be useful for the treatment of obesity.

 

In 2007 and 2008, we presented at scientificmeetings preclinical candidates having the interesting property to decreasebody weight gain and fat accumulation in diet induced obesity models. Theongoing work will focus on the improvement of oral bioavailability.

 

**IMMUNOTHERAPY / VACCINES**

 

Cellular proteins expressed by oncogenes havebeen recognized as a major cause of tumor development. One of the centraloncoproteins involved in cancer formation are the Raf proteins. Based on theseproteins, new unique therapeutic strategies, new predictive animal models andnew development products have been generated to efficiently combat cancer.These consist of virulence attenuated, genetically modified bacteria expressingtumor antigens, including oncoproteins or enzymes. Such bacteria are used forvaccination as well as tumor targeting and delivery of antitumoral compoundstowards the tumor tissues. Therefore, this new vaccine approach, exploits theability of bacteria to induce potent immune responses as well as direct theseresponses against malignancies. The immunogenicity of the vaccine will befurther enhanced by the capacity of bacteria to colonize tumor tissues. Thisproperty will be used to transport substances, e.g. proteins, into the tumortissue, which are capable of converting non-toxic pro-drugs into active drugs.The use of bacterial carriers for therapeutic vaccination against tumors andthe concept of bacterial tumor targeting will be further developed with theJulius-Maximilians-University of Würzburg, including the highly recognizedresearchers Prof. Dr. Ulf R. Rapp, who is a member of our ScientificAdvisory Board, and Prof. Dr. Werner Goebel. Prof. Rapp is a known expertin the field of cell and tumor biology and Prof. Goebel is a pioneer in thefield of vaccines based on recombinant bacteria.

 

The preclinical proof of principle has alreadybeen shown in a transgenic animal model and is supported by several patentapplications that we have filed. The most advanced products are bacterial tumorvaccines which are based on the approved human vaccine strain *Salmonella typhi* Ty21a. The principle of these recombinantvaccine strains is the secretion of the tumor antigen using a so-called Type Isecretion machinery derived from *Escherichia coli*.To date, two different vaccine strains have been generated up to GMP scaleproduction — a melanoma vaccine encompassing a mutated form of the oncogeneB-Raf, which is present in more than 65% of melanomas, and a prostate cancervaccine strain expressing and secreting PSA. For both vaccines, the preclinicalproof of principle has been demonstrated in distinct animal models and theimmunogenicity could be further enhanced compared to our already publishedstrains (patent application filed in November 2006).

 

In 2007, the PSA vaccine (AEZS-120) wasselected as the first preclinical development candidate of an anti-tumorvaccine. In September, scientific advice from the Paul Ehrlich Institute, theGerman health authority for vaccines, was sought and the preclinical developmentprogram presented by us was in principle accepted.

 

A grant application was filed in Germany andwas approved in 2008. In accordance with this grant, 50% of our preclinicaldevelopment costs and 100% of those of our university partner will bereimbursed by the German Ministry of Science and Education. The preclinicaldevelopment and manufacture of material for clinical trial was initiated in2008.

 

**DRUG DISCOVERY**

 

There is an increasing demand on the world market for active substances.Our internal drug discovery unit provides an important prerequisite for theprovision of new patented active substances, which can then be developedfurther or licensed to third parties.

 

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Our drug discovery unit concentrates on the search for active substancesfor innovative targets which open the door to the introduction of newtherapeutic approaches. Further, this unit searches for new active substanceshaving improved properties for clinically validated targets for which drugs arealready being used in humans and which produce inadequate effects, cause severeside effects, are not economical or are not available in a patient-friendlyform.

 

To this end, we possess an original substance library for the discoveryof active compounds with a comprehensive range of promising natural substanceswhich can serve as models for the construction of synthetic molecules. Theinitial tests involve 120,000 samples from our internal substance library inthe form of high-throughput screening. The hits, i.e. the first activecompounds found in the library, are tested further and built up specificallyinto potential lead structures. Based on two to three lead structures, they arethen optimized in a further step to potential development candidates.

 

**INTELLECTUALPROPERTY — PATENTS**

 

We believe that we have a solid intellectualproperty portfolio that covers compounds, manufacturing processes, compositionsand methods of medical use for our lead drugs and drug candidates. Our patentportfolio consists of more than 60 own and in licensed patent families (issued,granted or pending in the United States, Europe and other jurisdictions).

 

Of the issued or granted patents, the eightdescribed below form the core of our patent portfolio with regard to our leaddrugs and drug candidates.

 

Cetrorelix:

 

·                  U.S. patent 5,198,533 provides protection inthe United States for the compound cetrorelix and other LHRH antagonists. This U.S.patent will expire in October 2010 pursuant to a granted request forpatent term extension.

 

·                  U.S. patent 6,828,415 protects a method forpreparing sterile lyophilizate formulations of cetrorelix. It specificallyprotects the lyophilization process used to manufacture cetrorelix. This U.S.patent will expire in December 2021.

 

·                  U.S. patent 5,773,032 covers a long-actingformulation of cetrorelix consisting of poorly soluble particles of 5 μm to 200μm in size. The patent not only protects cetrorelix pamoate as a long-actingformulation but also prevents the development of other LHRH antagonist drugsthat are based on this drug-delivery system. This U.S. patent will expire inNovember 2014. A patent term extension of up to five years may be possibleand will be requested upon marketing approval of cetrorelix pamoate.

 

·                  U.S. patent 6,054,432 is a method-of-use patentcovering a therapeutic regimen for treating BPH, where cetrorelix isadministered at a dosage of about 0.5 mg per day over time without effectingtestosterone castration. The U.S. patent will expire in August, 2017.

 

·                  U.S. patent 7,005,418 is a method-of-use patentcovering the therapeutic management of extrauterine proliferation ofendometrial tissue (endometriosis), chronic pelvic pain and/or fallopian tubeobstruction by administering an LHRH antagonist in the form of a short-terminduction treatment for a period of about 4 to 12 weeks. The U.S. patent willexpire in August 2022.

 

Perifosine:

 

·                  U.S. patent 6,172,050 provides protection inthe United States for the compound perifosine and other related alkylphospholipid derivatives, pharmaceutical compositions comprising the compoundsas well as their medical use for the treatment of tumors. This U.S. patentexpires in July 2013. A patent term extension of up to five years may bepossible and will be requested upon receiving marketing approval of perifosine.

 

Ozarelix:

 

·                  U.S. patent 6,627,609 provides protection inthe United States for the compound ozarelix and related third-generation LHRHantagonists and pharmaceutical compositions comprising them. This U.S. patentwill expire in March 2020. A patent term extension of up to five years maybe possible and will be requested upon marketing approval of ozarelix.

 

AEZS-108:

 

·                  U.S.patent 5,843,903 provides protection in the United States for the compoundAN-152 and other related targeted cytotoxic anthracycline analogs, pharmaceuticalcompositions comprising the compounds as well as their medical use for thetreatment of tumors. This U.S. patent expires in November, 2015.  A patent term extension of up to five yearsmay be possible and will be requested upon receiving marketing approval ofAEZS-108.

 

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The table below lists some of our issued orgranted patents in the United States and Europe:

 
| **Patent No** | ** ** | **Title**                                                                                                            | ** ** | **Country**                                              | ** ** | **Expiry Date** |
|--------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------|
| ** **         | ** ** | ** **                                                                                                           | ** ** | ** **                                               | ** ** | ** **           |
| **Cetrorelix**     | ** ** | ** **                                                                                                           | ** ** | ** **                                               | ** ** | ** **           |
| EP 0 299 402  |       | LHRH antagonists                                                                                                     |       | Germany,  United Kingdom, France, Switzerland and others |       | 2013-07-10           |
| U.S.  5,198,533    |       | LHRH antagonists                                                                                                     |       | United States                                            |       | 2010-10-24           |
| EP 0 611 572  |       | Process  to prepare a cetrorelix lyophilised composition                                                             |       | Germany,  United Kingdom, France, Switzerland and others |       | 2014-02-04           |
| U.S.  6,828,415    |       | Oliogopeptide  lyophilisate, their preparation and use                                                               |       | United States                                            |       | 2021-12-07           |
| U.S.  6,716,817    |       | Method  of treatment of female infertility                                                                           |       | United States                                            |       | 2014-02-22           |
| U.S.  6,863,891    |       | Oligopeptide  lyophilisate, their preparation and use                                                                |       | United States                                            |       | 2014-02-22           |
| U.S.  6,867,191    |       | Preparation  and use of oligopeptide lyophilisate for gonad protection                                               |       | United States                                            |       | 2014-02-22           |
| EP 1 150 717       |       | Sustained  release salts of pharmaceutically active peptides and their production                                    |       | Germany,  United Kingdom, France, Switzerland and others |       | 2020-01-29           |
| EP 1 309 607  |       | Method  for producing LHRH antagonists                                                                               |       | Germany,  United Kingdom, France, Switzerland and others |       | 2021-08-09           |
| U.S.  6,780,972    |       | Method  for the synthesis of peptide salts, their use and the pharmaceutical  preparations, containing peptide salts |       | United States                                            |       | 2021-08-24           |
| U.S.  5,773,032    |       | Long-acting  injection suspensions and a process for their preparation                                               |       | United States                                            |       | 2014-11-25           |

 

### ***C.            Organizational structure***

 

The following chart presents our corporatestructure, the jurisdiction of incorporation of our direct and indirectsubsidiaries and the percentage of shares that we held in those subsidiaries asof March 20, 2009.

 

 

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### ***D.            Property, plants and equipment***

 

Our corporate head office and facilities are locatedin Québec, Province of Quebec, Canada The following table sets forthinformation with respect to our main facilities as of March 20, 2009.

 
| **Location**                                                 | ** ** | **Use of space**                                                                 | ** ** | **Square Footage** | ** ** | **Type of interest** |
|--------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|--------------------|------------|----------------------|
|                                                         |       |                                                                             |       |               |       |                 |
| 1405 Parc Technologique Blvd.  Québec (Quebec), Canada  |       | Fully  occupied for management, R&D and administration                       |       | 4,400              |       | Leased               |
|                                                         |       |                                                                             |       |               |       |                 |
| 20  Independence Blvd  Warren, New Jersey, United States     |       | Partially  occupied for management, R&D and business development             |       | 10,741             |       | Leased               |
|                                                         |       |                                                                             |       |               |       |                 |
| Weismüllerstr.  50  D-60314  Frankfurt am Main, Germany |       | Fully  occupied for management, R&D, business development and administration |       | 46,465             |       | Leased               |

 

## ***Item 4A.         Unresolved Staff Comments***

## *** ***

None.

 

**Item 5.            Operatingand Financial Review and Prospects**

 

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# **Highlights**

# ** **

·                  In February 2008, we reportedthat a first group of patients had been treated with AEZS-108 for a Phase 2trial in advanced ovarian and endometrial cancers.

 

·                  In March 2008, we reported thatdosing had commenced with cetrorelix in the second efficacy study of our Phase3 program in benign prostatic hyperplasia (“BPH”).

 

·                  In March 2008, we completed thesale to Paladin Labs Inc. (“Paladin”) of our marketed product, Impavido® (miltefosine), for approximately$9.2 million.

 

·                  In April 2008, appointment ofJuergen Ernst, the Company’s Chairman of the Board at the time, as InterimPresident and Chief Executive Officer, following the departure of our formerPresident and Chief Executive Officer.

 

·                  In April 2008, we reported thecompletion of patient recruitment with cetrorelix, for the first efficacy studyof our Phase 3 program in BPH.

 

·                  In May 2008, we reported that afirst group of patients had been treated with cetrorelix for the safety trialof our Phase 3 program in BPH.

 

·                  In June 2008, we completed thesale of our Quebec City property for a purchase price of $7.1 million.

 

·                  In September 2008, JuergenEngel, Ph.D., was appointed as the Company’s President and Chief ExecutiveOfficer, succeeding Juergen Ernst who, at the same time, was appointed asExecutive Chairman of the Company.

 

·                  In October 2008, we reportedthe completion of patient recruitment for the second efficacy trial of ourPhase 3 program with cetrorelix in BPH.

 

·                  In October and November 2008,we reported that we had entered the second stage of patient recruitment for ourAEZS-108 trials in advanced ovarian and endometrial cancers, respectively.

 

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·                  In December 2008, we sold ourrights to royalties on future  sales ofCetrotide®, covered by our license agreement with Merck Serono, to Cowen Healthcare Royalty Partners L.P. (“Cowen”)for gross consideration of $52.5 million.

 

·                  In December 2008, we reportedthe completion of patient recruitment for the safety trial of our Phase 3program in BPH with cetrorelix.

 

·                  In December 2008, Matthias Seeber,MBA, was nominated Company Senior Vice President, Administration and LegalAffairs.

 

·                 Subsequent to year-end, we enteredinto a development, commercialization and license agreement with sanofi-aventisfor the development, registration and marketing of cetrorelix in BPH for theUnited States market. The agreement includes an initial upfront payment of$30.0 million and a total of $135.0 million in payments uponachieving certain pre-established regulatory and commercial milestones, as wellas escalating double-digit royalties on future net sales of cetrorelix for BPHin the United States.

 

# **Introduction**

 

The following analysis provides a review of the consolidated  results of operations, financial conditionand cash flows of Æterna Zentaris Inc. for the three-month period and full yearended December 31, 2008. In thisManagement’s Discussion and Analysis (“MD&A”), the “Company”, “we”, “us”,and “our” mean Æterna Zentaris Inc. and its subsidiaries. Thisdiscussion should be read in conjunction with the information contained in theCompany’s annual consolidated financial statements and related notes as at andfor the years ended December 31, 2008, 2007 and 2006. Our consolidated financialstatements, reported in United States dollars (“US dollars”), have beenprepared in accordance with Canadian Generally Accepted Accounting Principles (“CanadianGAAP”), which differ in certain respects from United States Generally AcceptedAccounting Principles (“US GAAP”), as discussed below.

 

All amountspresented in this MD&A are in US dollars, except where otherwise noted.

 

**About Forward-Looking Statements**

 

This document contains forward-looking statements, which reflect ourcurrent expectations regarding future events. Forward-looking statements mayinclude words such as anticipate, believe, could, expect, goal, guidance,intend, may, objective, outlook, plan, seek, should, strive, target and will.

 

Forward-looking statements involve risks and uncertainties, many ofwhich are discussed in this MD&A. Results or performances may differsignificantly from expectations. For example, the results of current clinicaltrials cannot be foreseen, nor can changes in policy or actions taken by suchregulatory authorities as the US Food 

 

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and Drug Administration, the Therapeutic Products Directorate of HealthCanada or any other organization responsible for enforcing regulations in thepharmaceutical industry.

 

Given these uncertainties and risk factors, readers are cautioned notto place undue reliance on such forward-looking statements. We disclaim anyobligation to update any such factors or to publicly announce the result of anyrevisions to any of the forward-looking statements contained herein to reflectfuture results, events or developments, unless requested to do so by agovernmental authority or applicable law.

 

**About Material Information**

 

This MD&A includes the information we believe to be material toinvestors after considering all circumstances, including potential marketsensitivity. We consider information and disclosures to be material if theyresult in, or would reasonably be expected to result in, a significant changein the market price or value of our shares, or where it is quite likely that areasonable investor would consider the information and disclosures to beimportant in making an investment decision.

 

The Company is areporting issuer under the securities legislation of all of the provinces ofCanada and is registered in the United States and is, therefore, required tofile continuous disclosure documents such as interim and annual financialstatements, an MD&A, a Proxy Circular, an Annual Report on Form 20-F,material change reports and press releases with the appropriate securitiesregulatory authorities. Copies of these documents may be obtained free ofcharge on request from the office of the Secretary of the Company or on theInternet at the following addresses: www.aezsinc.com, www.sedar.com andwww.sec.gov/edgar.shtml.

 

# **Company Overview**

 

ÆternaZentaris Inc. (TSX: AEZ, NASDAQ: AEZS) is a global biopharmaceutical companyfocused on endocrine therapy and oncology.

 

# **Our pipeline encompasses compounds at all stages ofdevelopment, from drug discovery through marketed products. The two highestpriorities in drug development are our Phase 3 program in BPH with our leadendocrinology compound, cetrorelix, and our Phase 2 program in advancedendometrial and ovarian cancers with our lead oncology compound, AEZS-108.**

 

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# **Key Developments for the Year Ended December 31, 2008**

 

# **Drug Development**

 

**Status of our Drug Pipeline as at March 30, 2009**

 
| **Discovery**                                                      | ** ** | **Preclinical**                                                                                                                                                                                                                                                                                                              | ** ** | **Phase 1**                                                | ** ** | **Phase 2**                                                                                                                                                                                                                                                                         | ** ** | **Phase 3**                                                                   | ** ** | **Commercial**                                                                             |
|--------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|
| 120,000 compound library                                           |       | AEZS-115

Non-peptide luteinizing  hormone-releasing hormone (“LHRH”) antagonists (endometriosis &  urology)

 

AEZS-120   (oncology vaccine)

 

AEZS-126  Erk & PI3K  Inhibitors (oncology)

 

AEZS-127

ErPC   (oncology)

 

Ghrelin receptor ligands  (endocrinology) |       | AEZS-112  (oncology)

 

AEZS-130  (endocrinology)

  |       | AEZS-108  (endometrial and ovarian cancers)

 

Cetrorelix  (endometriosis)

(BPH in  Japan)

 

Ozarelix   (BPH, prostate cancer)

 

Perifosine  (multiple cancers)

                                                                                              |       | Cetrorelix  (BPH)

                                                           |       | Cetrotide®(*in vitro* fertilization)

 

 

                           |
|                                                               |       |                                                                                                                                                                                                                                                                                                                         |       |                                                            |       |                                                                                                                                                                                                                                                                                     |       |                                                                               |       |                                                                                       |
| **Partners (as defined in subsequent sections  of this MD&A)** |       |                                                                                                                                                                                                                                                                                                                         |       |                                                            |
| ** **                                                         |       |                                                                                                                                                                                                                                                                                                                         |       |                                                            |       |                                                                                                                                                                                                                                                                                     |       |                                                                               |       |                                                                                       |
|                                                               |       |                                                                                                                                                                                                                                                                                                                         |       |                                                            |       | Cetrorelix:

**Shionogi** in Japan

 

Ozarelix:**Spectrum** in North-America and India, **Nippon Kayaku** in Japan (oncology)

 

Ozarelix (BPH):

**Handok** in  Korea, Indonesia, Malaysia, the Philippines and Singapore

 

Perifosine:

**Keryx** in  North America |       | Cetrorelix (BPH):

**Sanofi-aventis** in the  U.S.A. 

 

**Handok** in Korea |       | Cetrotide®:**Merck Serono** (World ex-Japan)

**Shionogi  and Nippon Kayaku** (Japan) |

 

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***Cetrorelix***

 

In April 2008, we reported completion of patient recruitment forthe first efficacy study of our Phase 3 program in BPH with cetrorelix. Thisone year placebo-controlled study, involving 667 patients located mainly inNorth America, is assessing an intermittent dosage regimen of cetrorelix as apotential safe and tolerable treatment providing prolonged improvement inBPH-related signs and symptoms. Results of this trial are expected in the thirdquarter of 2009.

 

In July 2008, we signed a license and cooperation agreement forthe commercialization of cetrorelix in BPH with Handok Pharmaceuticals Co.,Ltd., (“Handok”) for the Korean market.

 

In October 2008, we reported the completion of patient recruitmentfor the second efficacy trial of the Phase 3 program with cetrorelix in BPH.This trial, during which dosing had commenced in March 2008, has a similardesign to the first efficacy trial and involves 420 patients located in Europe.Results of this trial are expected in the fourth quarter of 2009.

 

In December 2008, we reported completion of patient recruitmentfor the safety trial of the Phase 3 program with cetrorelix in BPH. Resultsof this study, involving 529 patients located in North America, as well asthose of a QTc study, are expected by the end of 2009.

 

***Cetrotide******®***

 

In December 2008, as discussed below, we sold our rights to royalties on futuresalesof Cetrotide®, covered by our license agreement with Merck Serono, to Cowen for gross consideration of$52.5 million. Under the terms of the agreement with Cowen, theCompany is entitled to an additional payment of $2.5 million from Cowencontingent on 2010 net sales of Cetrotide® reachinga specified level.

 

***AEZS-108***

 

In February 2008,we reported that a first group of patients had been treated with our cytotoxicconjugate compound linked to doxorubicin, AEZS-108, for a European open-label,non-comparative multi-center Phase 2 trial in advanced ovarian and endometrialcancers.

 

In October 2008, we announced that wehad entered the second stage of patient recruitment for our Phase 2 trial inovarian cancer, after first stage data had shown two partial responses. In November 2008,we reported that we had entered the second stage of patient recruitment for ourPhase 2 trial in endometrial cancer with AEZS-108. The decision to enter thesecond stage of patient recruitment was made following recent first stage datareporting one complete response and two partial responses among 14 patientswith a diagnosis of disseminated endometrial cancer. The open-label, non-comparativemulti-center Phase 2 program will treat up to 82 women with LHRH-receptor

 

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positive ovarian and endometrial canceroustumors, and results of the trial are expected in the fourth quarter of 2009.

 

***AEZS-112***

 

AEZS-112 is currently in a Phase 1 trial inpatients with solid tumors and lymphoma. The Company is sponsoring andconducting this open-label, dose-escalation, multi-center, intermittenttreatment trial in the United States. The trial will include up to 50 patientswho have either failed standard therapy or for whom no alternative therapyexists. The primary endpoints of the trial will focus on determining the safetyand tolerability of AEZS-112 as well as establishing the recommended Phase2 dose and regimen. We expect progression of this trial in 2009 to identifymaximum tolerated dose of AEZS-112.

 

AEZS-112 is the first anticancer drug indevelopment involving two mechanisms of action, tubulin and topoisomerase IIinhibition. AEZS-112 expresses different actions, such as pro-apoptotic andantiangiogenic properties.

 

***Ozarelix***

 

Our partner, Spectrum Pharmaceuticals, Inc. (“Spectrum”) releasedthe results of a North American Phase 2 trial with ozarelix, a fourthgeneration LHRH antagonist in BPH. Spectrum indicated that ozarelixdemonstrated sufficient clinical activity to justify its continued development.In early 2009, Spectrum initiated a North American multi-center,randomized, double-blind, placebo-controlled study in lower urinary tractsymptoms due to BPH that will involve over 800 patients.

 

During the third quarter of 2008, we signed an agreement with Handokfor the commercialization of ozarelix in BPH for the Korean and other Asianmarkets.

 

***Perifosine***

 

We are currently conducting arandomized, double-blind, placebo-controlled European multi-center Phase 2trial with perifosine, an oral signal transduction inhibitor, combined withradiotherapy, in 160 patients with inoperable Stage III non-small celllung cancer. We expect to disclose results related to this trial in the secondquarter of 2009.

 

During 2008, our partner, KeryxBiopharmaceuticals, Inc. (“Keryx”), continued the development ofperifosine with multiple Phase 1 and Phase 2 studies in North America invarious cancers. Keryx expects to move perifosine into Phase 3 in at least oneindication in North America in 2009.

 

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***AEZS-130***

 

During thethird quarter of 2008, we recovered worldwide rights from Ardana BioscienceLtd. (“Ardana”) for the Growth Hormone Secretagogue compound, AEZS-130. Futuredevelopment options are currently being evaluated for the use of this compoundin growth hormone deficiencies.

 

**Corporate Developments**

** **

***Sale of Impavido******®***

 

On March 1,2008, we entered into a definitive purchase and sale agreement with respect toall rights related to the manufacture, production, distribution, marketing,sale and/or use of Impavido® (miltefosine) with Paladin for an aggregatepurchase price of approximately $9.2 million, payable in cash, subject tocertain post-closing purchase price adjustments. The transaction, which closedon March 31, 2008, generated net cash proceeds of $8.3 million,resulting in a gain of $0.8 million.

** **

***Sale of Building and Land***

 

On June 26,2008, we sold our Quebec City building and land for a gross amount of$7.1 million, payable in cash. The net proceeds received amounted to$6.5 million, resulting in an additional loss on sale of$0.8 million. In connection with this sale, we entered into a long-termlease agreement with the principal tenant of the building, agreeing to pay theprincipal tenant CAN$300,000 (approximately $246,305) as an incentive andservice fee. This fee is included in the additional loss on sale, and theresulting payable is non interest-bearing and is due in bi-annual instalmentsof CAN$30,000 (approximately $24,630) over the next five years.

 

***Sale of Cetrotide******®****** Royalty Stream***

 

In June 2003,we amended certain sections of our license and supply agreement with ARESTrading S.A. (“Merck Serono”) in which the latter was granted worldwidemarketing, distribution and selling rights, except in Japan, for Cetrotide®, a compound used for *in vitro* fertilization (referred to as the License Agreement).Under the License Agreement, Merck Serono agreed to pay to us certain lump sum payments each calendar yearup to and including December 31, 2010, as well as certain variableroyalties through the expiry date of the Company’s underlying patent rights.

 

In November 2008,we entered into a purchase and sales agreement (“PSA”) with Cowen relating toour rights to royalties on future sales of Cetrotide® covered by the License Agreement.

 

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In connectionwith the PSA, which was effective on October 1, 2008 and finalized in December 2008,we received $52.5 million from Cowen, less certain transaction costs of$1.0 million that had been advanced by Cowen to certain third-party firmsand institutions on our behalf, resulting in net proceeds of$51.5 million. Under the terms of the PSA, we are entitled to anadditional payment of $2.5 million contingent on 2010 net sales ofCetrotide® reachinga specified level.

 

Per the PSA,if cetrorelix, the active substance in Cetrotide®, is approved for sale by Europeanregulatory authorities in an indication other than *in vitro*fertilization, we have agreed to make a one-time cash payment to Cowen in anamount ranging from $5.0 million up to a maximum of $15.0 million.The amount which may be due to Cowen will be higher in proportion to the timingof the product’s receiving European regulatory approval; that is, the earlierthe product receives regulatory approval, the higher the amount payable toCowen will be.

 

Also per thePSA, for each calendar quarter in which a royalty rate reduction—defined as theactual reduction by Merck Serono, for any calendar quarter(s), of the rateapplied in calculating variable royalties under the License Agreement, toamounts less than pre-established percentages—has occurred or is continuing, wewill pay Cowen a quarterly make-whole payment in an amount equal to the lesserof (i) the variable royalties in respect of such quarter that would havebeen received by Cowen if the aforementioned royalty rate reduction had notoccurred or been continuing, and (ii) the difference of $15.0 millionless Cowen’s net reduction payments, as defined.

 

Pursuant tothe aforementioned transactions, we have certain obligations in the royaltyagreement, including the supply of Cetrotide® to Merck Serono, the payment of royaltiesunder the License Agreement, overseeing Merck Serono’s compliance with theLicense Agreement, cooperation in handling any adverse claims or litigationinvolving the License Agreement and monitoring and defending any patent ortrademark infringement.

 

We haverecorded the proceeds as deferred revenues, which are recognizable as royaltyrevenues over the life of the License Agreement under the “units-of-revenue”method. Under that method, periodic royalty revenues are calculated bymultiplying the ratio of the remaining deferred revenue amount to the totalestimated remaining royalties that Merck Serono is expected to pay to Cowenover the term of the underlying arrangement by the royalty payments due toCowen for the period.

 

We incurred a total ofapproximately $4.8 million in financial advisor, legal and othertransaction costs associated with the negotiation and finalization of the PSA.These costs have been capitalized in our consolidated balance sheet and areamortizable as part of selling, general and administrative (“SG&A”)expenses in the same manner and over the same period in which the relateddeferred revenues are recognized as royalty revenues.

 

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In thisMD&A, the events and transactions associated with this sale arecollectively referred to as the Cowen Transaction.

 

***Subsequent Event:***

*** ***

***Cetrorelix Development, Commercialization andLicensing Agreement***

 

On March 5, 2009, we entered into adevelopment, commercialization and license agreement with sanofi-aventis forthe development, registration and marketing of cetrorelix in BPH for the USmarket. Under the terms of the agreement, sanofi-aventis made an initialupfront payment to us of $30.0 million on March 18, 2009. Also per theagreement, we will be entitled to receive a total of $135.0 million inpayments upon achieving certain pre-established regulatory and commercialmilestones. Furthermore, we will be entitled to receive escalating double-digitroyalties on future net sales of cetrorelix for BPH in the United States, whileretaining the option to co-promote the product in that territory.

 

**Consolidated Results of Operations**

 

**Quarterly Summary Consolidated Results of Operations Information(unaudited)**

 
| ** **                                                     | ** ** | **Quarters ended**     | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|
| **(in thousands, except per  share data)** | ** ** | **December 31,  2008** | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** | **March 31,  2008** | ** ** |
| ** **                                                     | ** ** | **$**                       | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
|                                                           |       |                        | ** ** |   |   |   |   |   |   |
| Revenues                                                       | ** ** | **7,244**                   | ** ** | 11,029 |   | 10,457 |   | 9,748 |   |
| Loss from  operations                                          | ** ** | **(16,315**                 | **)**      | (12,386 | ) | (19,525 | ) | (14,158 | ) |
| Net loss                                                       | ** ** | **(14,493**                 | **)**      | (13,879 | ) | (20,579 | ) | (10,866 | ) |
| Net loss per  share                                            | ** ** | ** **                  | ** ** |   |   |   |   |   |   |
| Basic and  diluted                                             | ** ** | **(0.27**                   | **)**      | (0.26 | ) | (0.39 | ) | (0.20 | ) |
|                                                           | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **Quarters ended**     | ** ** |
| ** **                                                     | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** | **March 31,  2007** | ** ** |
| ** **                                                     | ** ** | **$**                       | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
|                                                           |       |                        | ** ** |   |   |   |   |   |   |
| Revenues                                                       | ** ** | **10,240**                  | ** ** | 11,044 |   | 11,551 |   | 9,233 |   |
| Loss from  operations                                          | ** ** | **(11,664**                 | **)**      | (9,461 | ) | (5,326 | ) | (8,303 | ) |
| Net loss  from continuing operations                           | ** ** | **(13,854**                 | **)**      | (8,112 | ) | (4,928 | ) | (5,143 | ) |
| Net loss                                                       | ** ** | **(13,636**                 | **)**      | (8,704 | ) | (4,846 | ) | (5,110 | ) |
| Net loss per  share from continuing operations                 | ** ** | ** **                  | ** ** |   |   |   |   |   |   |
| Basic and  diluted                                             | ** ** | **(0.26**                   | **)**      | (0.16 | ) | (0.09 | ) | (0.10 | ) |
| Net loss per  share                                            | ** ** | ** **                  | ** ** |   |   |   |   |   |   |
| Basic and  diluted                                             | ** ** | **(0.26**                   | **)**      | (0.16 | ) | (0.09 | ) | (0.10 | ) |

 

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**FourthQuarter 2008 Results**

 

**Consolidated revenues** were $7.2 million for thequarter ended December 31, 2008, compared to $10.2 million for thesame quarter in 2007. The decrease in revenues is primarily due to lowerquarter-over-quarter royalties related to our license agreement with MerckSerono. Subsequent to the Cowen Transaction, which was effective for royaltydetermination purposes on October 1, 2008, our periodic amortization ofthe gross proceeds received from Cowen, while still recognized as royaltyrevenues, have been lower than the royalty revenues recognized in the past, asreceivable directly from Merck Serono. Additionally, quarter-over-quarter salesand royalties decreased due to the absence of sales of Impavido® in the fourth quarter of 2008, while licenserevenues witnessed a decrease due to the non-recurrence in 2008 of milestonepayments received from Keryx, related to the perifosine Phase 2 trials.

 

**Consolidated SG&A expenses**were $3.0 million for thequarter ended December 31, 2008, compared to $5.1 million for thesame quarter in 2007. The decrease in SG&A expenses is mainly related tothe continued results of cost-saving measures that were implemented beginningin the second quarter of 2008.

** **

**Consolidated research and development (“R&D”) expenses** were $12.3 million for thequarter ended December 31, 2008, compared to $13.6 million for thesame quarter in 2007. The decrease in R&D expenses primarily relates to thecomparative reduction in expenses incurred in connection with ourPhase 3 program with cetrorelix in BPH, which by the fourth quarter of 2008was fully enrolled and less subject to larger front-end expenditures that werenecessary in the earlier, fourth quarter 2007 stage of the program.

 

**Consolidated net loss** was $14.5 million or $0.27 perbasic and diluted share for the quarter ended December 31, 2008, comparedto $13.6 million, or $0.26 per basic and diluted share, for the samequarter in 2007. The increase in the consolidated net loss is largelyattributable to a combination of lower sales and royalties, lower license feerevenues, lower manufacturing margins on Cetrotide® due in part to a $0.7 million write-downto net realizable value of certain components of inventory, as well as tohigher amortization expense due to the impairment of teverelix, as discussedbelow, partly offset by lower quarter-over-quarter SG&A expenses, highernet foreign exchange gains and lower income tax expense.

 

We expect that the consolidatednet loss for the first quarter of 2009, excluding any impact of foreignexchange gains or losses, will be similar to the last quarter of 2008.

 

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**Annual Consolidated Statements of Earnings**

 
| ** **                                                         | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                         | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| **Revenues**                                                       | ** ** | ** **                                  | ** ** |   |   |   |   |
| Sales and  royalties                                               | ** ** | **29,462**                                  | ** ** | 28,825 |   | 25,123 |   |
| License fees                                                       | ** ** | **8,504**                                   | ** ** | 12,843 |   | 13,652 |   |
| Other                                                              | ** ** | **512**                                     | ** ** | 400 |   | 24 |   |
| ** **                                                         | ** ** | **38,478**                                  | ** ** | 42,068 |   | 38,799 |   |
| ** **                                                         | ** ** | ** **                                  | ** ** |   |   |   |   |
| **Operating  expenses**                                            | ** ** | ** **                                  | ** ** |   |   |   |   |
| Cost of  sales                                                     | ** ** | **19,278**                                  | ** ** | 12,930 |   | 11,270 |   |
| Selling,  general and administrative expenses                      | ** ** | **17,325**                                  | ** ** | 20,403 |   | 16,478 |   |
| Research and  development costs                                    | ** ** | **57,448**                                  | ** ** | 39,248 |   | 27,422 |   |
| R&D tax  credits and grants                                    | ** ** | **(343**                                    | **)**      | (2,060 | ) | (1,564 | ) |
| Depreciation  and amortization                                     | ** ** | ** **                                  | ** ** |   |   |   |   |
| Property,  plant and equipment                                     | ** ** | **1,515**                                   | ** ** | 1,562 |   | 2,816 |   |
| Intangible  assets                                                 | ** ** | **5,639**                                   | ** ** | 4,004 |   | 6,148 |   |
| Impairment  of long-lived asset held for sale                      | ** ** | **—**                                  | ** ** | 735 |   | — |   |
| ** **                                                         | ** ** | **100,862**                                 | ** ** | 76,822 |   | 62,570 |   |
| **Loss  from operations**                                          | ** ** | **(62,384**                                 | **)**      | (34,754 | ) | (23,771 | ) |
| ** **                                                         | ** ** | ** **                                  | ** ** |   |   |   |   |
| **Other  income (expenses)**                                       | ** ** | ** **                                  | ** ** |   |   |   |   |
| Interest  income                                                   | ** ** | **868**                                     | ** ** | 1,904 |   | 1,441 |   |
| Interest  expense                                                  | ** ** | **(118**                                    | **)**      | (85 | ) | (1,433 | ) |
| Foreign  exchange gain (loss)                                      | ** ** | **3,071**                                   | ** ** | (1,035 | ) | 319 |   |
| Other                                                              | ** ** | **(79**                                     | **)**      | (28 | ) | 409 |   |
| ** **                                                         | ** ** | **3,742**                                   | ** ** | 756 |   | 736 |   |
| **Share in  the results of an affiliated company**                 | ** ** | **—**                                  | ** ** | — |   | 1,575 |   |
| ** **                                                         | ** ** | ** **                                  | ** ** |   |   |   |   |
| **Loss  before income taxes from continuing operations**           | ** ** | **(58,642**                                 | **)**      | (33,998 | ) | (21,460 | ) |
| **Income  tax (expense) recovery**                                 | ** ** | **(1,175**                                  | **)**      | 1,961 |   | 29,037 |   |
| **Net  (loss) earnings from continuing operations**                | ** ** | **(59,817**                                 | **)**      | (32,037 | ) | 7,577 |   |
| **Net  (loss) earnings from discontinued operations**              | ** ** | **—**                                  | ** ** | (259 | ) | 25,813 |   |
| **Net  (loss) earnings for the year**                              | ** ** | **(59,817**                                 | **)**      | (32,296 | ) | 33,390 |   |
| ** **                                                         | ** ** | ** **                                  | ** ** |   |   |   |   |
| **Net  (loss) earnings per share from continuing operations**      | ** ** | ** **                                  | ** ** |   |   |   |   |
| **Basic**                                                          | ** ** | **(1.12**                                   | **)**      | (0.61 | ) | 0.14 |   |
| **Diluted**                                                        | ** ** | **(1.12**                                   | **)**      | (0.61 | ) | 0.14 |   |
| **Net  (loss) earnings per share from discontinued operations**    | ** ** | ** **                                  | ** ** |   |   |   |   |
| **Basic**                                                          | ** ** | **—**                                  | ** ** | — |   | 0.50 |   |
| **Diluted**                                                        | ** ** | **—**                                  | ** ** | — |   | 0.48 |   |
| **Net  (loss) earnings per share**                                 | ** ** | ** **                                  | ** ** |   |   |   |   |
| **Basic**                                                          | ** ** | **(1.12**                                   | **)**      | (0.61 | ) | 0.64 |   |
| **Diluted**                                                        | ** ** | **(1.12**                                   | **)**      | (0.61 | ) | 0.62 |   |

 

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**Consolidated Revenues**

 

**Consolidated revenues** are derived from sales androyalties as well as from license fees. Sales are derived from Cetrotide® (cetrorelix acetate solution for injection),marketed for reproductive health assistance for *in vitro*fertilization and, prior to March 2008, Impavido® (miltefosine), marketed for the treatment ofleishmaniasis, as well as from active pharmaceutical ingredients. Royalties arederived from Cetrotide® and,prior to the Cowen Transaction, payable by our partner, Merck Serono. EffectiveOctober 1, 2008, royalty revenues have been and will continue to berecognized as the deferred gross proceeds received from Cowen, and are amortizedunder the “units-of-revenue” method, as discussed above.

 

License fees are derived fromnon-periodic milestone payments, R&D contract fees and amortization ofupfront payments received from our different licensing partners.

 

Consolidated sales and royalties increased to $29.5 million forthe year ended December 31, 2008, compared to $28.8 million and$25.1 million for each of the years ended December 31, 2007 and 2006,respectively. The increase in consolidated sales and royalties from 2007 to2008 is mainly attributable to a large increase in sales of Cetrotide®, partly offset by lower salesof Impavido®.

 

The increase in consolidated sales and royalties from 2006 to 2007 isrelated to new sales of Cetrotide®, following the September 2006product launch in the Japanese market, as well as year-over-year increasedsales of Impavido®.

 

Consolidated sales and royalties are expected to decrease in 2009, dueto lower royalty revenues expected to be recognized from the amortization ofthe deferred revenues received in connection with the Cowen Transaction.

 

Consolidated license fee revenues decreased to $8.5 million forthe year ended December 31, 2008, compared to $12.8 million and$13.7 million for each of the years ended December 31, 2007 and 2006,respectively. The decrease in consolidated license fee revenues from 2007 to2008 is mainly attributable to non-recurring milestone payments received in2007 from Ardana and from Keryx. Also, the decrease is related to thetermination of our licensing agreement with Solvay Pharmaceuticals BV (“Solvay”)in 2007. We regained the worldwide ex-Japan rights for endometriosis fromSolvay during 2007.

 

The decrease in consolidated license fee revenues from 2006 to 2007 ismainly attributable to a reduction in revenues related to services renderedthrough our collaboration with Solvay. We regained the worldwide ex-Japanrights for cetrorelix in BPH from Solvay during 2006.

 

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Consolidated license fee revenues are expected to increase in 2009, duein part to the amortization of the upfront payment to be received in connectionwith the cetrorelix development, commercialization and licensing agreemententered into in March 2009 with sanofi-aventis, as discussed above.

 

**Consolidated Operating Expenses**

 

**Consolidated cost of sales**  increasedto $19.3 million for the year ended December 31, 2008, compared to$12.9 million and $11.3 million for each of the years ended December 31,2007 and 2006, respectively. The year-over-year increases in the cost of sales are directly relatedto additional generated sales and royalties.

 

The higher percentage of cost of sales in 2008 compared to 2007 and2006 is largely related to the product mix, which includes a high concentrationof sales related to Cetrotide®, a product that is more expensive toproduce. In addition, we wrote down certain elements of our inventory to theirnet realizable value at the end of 2008, which contributed approximately$0.7 million to the increase in consolidated cost of sales compared to2007.

 

We expect cost of sales as a percentage of consolidated sales androyalties to increase to approximately 75% in 2009, given the continuedincreased sales expectations relating to Cetrotide®.

 

**Consolidated SG&A expenses** decreasedto $17.3 million for the year ended December 31, 2008, compared to$20.4 million and $16.5 million for each of the years ended December 31,2007 and 2006, respectively. The decrease in SG&A expenses in 2008 compared to2007 is primarily related to the organizational changes and cost-savingmeasures that were implemented beginning in the second quarter of 2008.

 

The increase in SG&A expenses for the year 2007 compared to 2006 isprimarily due to non-recurring corporate expenses of nearly $2.7 millionrelated to the appointment of David J. Mazzo, Ph.D., as the Presidentand CEO of the Company, as well as Juergen Ernst as Chairman of theBoard, the departure of the former CEO, Gilles Gagnon, as well as the departureof the founder and former Executive Chairman, Éric Dupont, Ph.D. The increase in SG&A is also attributable to increased royalties andcommissions expenses directly related to sales and royalties of Cetrotide®.

 

We expect our SGA expenses to decrease in 2009 due to continuingcost-saving measures and despite additional royalty expense, which is payablerelated to proceeds received in connection with our recently signeddevelopment, commercialization and license agreement with sanofi-aventis, asdiscussed above.

 

**Consolidated R&D costs**were$57.4 million for the year ended December 31, 2008, compared to$39.2 million and $27.4 million for each of the years ended December 31,2007 and 2006, respectively. The increase in consolidated R&D costs for theyear 2008 compared to 2007 is mainly attributable to the advancement of ourPhase 3 program with our lead compound, cetrorelix, in BPH.

 

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AdditionalR&D expenses of $11.8 million spent in 2007 compared to 2006 are mainly related to theadvancement of our lead product cetrorelix, our LHRH antagonist in Phase 3for BPH; as well as to further advancement of targeted, earlier-stagedevelopment programs including AEZS-108, our cytotoxic conjugate and AEZS-112,our tubulin inhibitor, both of which are in oncology.

 

The following table summarizesthird-party R&D costs, by product, incurred by the Company during the yearended December 31, 2008.

 

(in thousands, except percentages)

 
| **Product**               | ** ** | **Status**       | ** ** | **Indication**                   | ** ** | **Net R&D  costs  (unaudited)  $** | ** ** | **%**      | ** ** |
|---------------------------|------------|------------------|------------|----------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                | ** ** | ** **       | ** ** | ** **                       | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Cetrorelix                |       | Phase 3  Phase 2 |       | BPH and  endometriosis           |       | 25,697                                      |       | 71.1       |       |
|                      |       |             |       |                             |       |                                        |       |       |       |
| AEZS-108                  |       | Phase 2          |       | Endometrial  and ovarian cancers |       | 1,259                                       |       | 3.5        |       |
|                      |       |             |       |                             |       |                                        |       |       |       |
| Perifosine                |       | Phase 2          |       | Oncology                         |       | 2,425                                       |       | 6.7        |       |
|                      |       |             |       |                             |       |                                        |       |       |       |
| Ozarelix                  |       | Phase 2          |       | BPH and  prostate cancer         |       | 253                                         |       | 0.7        |       |
|                      |       |             |       |                             |       |                                        |       |       |       |
| AEZS-112                  |       | Phase 1          |       | Cancer                           |       | 981                                         |       | 2.7        |       |
|                      |       |             |       |                             |       |                                        |       |       |       |
| AEZS-126/  Erk PI3K  |       | Preclinical      |       | Cancer                           |       | 1,609                                       |       | 4.5        |       |
|                      |       |             |       |                             |       |                                        |       |       |       |
| Ghrelin  receptor         |       | Preclinical      |       | Endocrinology  and oncology      |       | 1,154                                       |       | 3.2        |       |
|                      |       |             |       |                             |       |                                        |       |       |       |
| AEZS-115/LHRH  antagonist |       | Preclinical      |       | Endocrinology  and oncology      |       | 843                                         |       | 2.3        |       |
|                      |       |             |       |                             |       |                                        |       |       |       |
| Other                     |       | Preclinical      |       | Multiple                         |       | 1,913                                       |       | 5.3        |       |
|                      |       |             |       |                             |       | 36,134                                      |       | 100.0      |       |

 

We expect R&D investments todecrease by between $4.0 million and $6.0 million in 2009. Thisdecrease will be related to the finalization of our three studies in ourPhase 3 program for our lead compound, cetrorelix, in BPH, expected tooccur in the third and fourth quarters of 2009, despite the continuingexpenditures that will be required in connection with the filing of a New DrugAdmission with the U.S. Food and Drug Administration and corresponding Europeanagencies.

 

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R&D investments in AEZS-108are expected to increase slightly in 2009 in connection with our Phase 2trials in advanced ovarian and endometrial cancers.

 

Our other programs willrepresent a lower portion of our investment in R&D for 2009, as our focusis on advancing our later-stage lead compounds cetrorelix in BPH and AEZS-108in advanced ovarian and endometrial cancers.

 

**R&D tax credits and grants**were $0.3 million for the year ended December 31, 2008, compared to$2.1 million and $1.6 million for each of the years ended December 31,2007 and 2006, respectively. The decrease of R&D tax credits and grants in 2008 compared to 2007is attributable to our having utilized only Quebec provincial tax credits in2008, while in 2007, we also reduced our income tax payable by more than$1.6 million, following the elimination of income taxes related to thedistributions made to our shareholders in connection with our disposal ofAtrium.

 

Theincrease from 2006 to 2007 is related to non-recurring R&D tax creditswhich were used in 2007 and 2006 to reduce estimated income taxes that wouldotherwise have been payable on the gain on disposal of our former subsidiaryAtrium through a secondary transaction in October 2006 and thedistribution of our remaining interest in 2007.

 

Weexpect the utilization of R&D tax credits and grants to decrease slightlyin 2009.

 

**Consolidated depreciation and amortization**increasedto $7.2 million for the year ended December 31, 2008, compared to5.6 million and $9.0 million for each of the years ended December 31,2007 and 2006, respectively.

 

The increase from 2007 to 2008 was primarilyrelated to a non-recurring impairment charge of approximately$2.4 million, recorded as amortization expense, taken in the fourthquarter of 2008 and related to teverelix, which had been deemed impairedfollowing Ardana’s entering into voluntary administration. Ardana is party toan assignment agreement on which the cash recoverability of teverelix depends,and, as such, this customer’s entering into voluntary administration hastriggered the likelihood that no future cash flows will be received by theCompany in connection with the aforementioned license agreement. This increasein amortization expense was partially offset by reductions in depreciation andamortization expenses related to long-lived assets held for sale, including theQuebec City building and land, and Impavido®, on which depreciation and amortizationceased during the final months of 2007. The underlying assets were sold in2008, as discussed above.

 

Thedecrease in 2007 is primarily due to an impairment loss of $2.9 million takenin 2006 on manufacturing equipment, patents and trademarks related to thetermination of non-core pharmaceutical development projects.

 

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**Impairment of long-lived asset held for sale**amounted to $0.7 million for theyear ended December 31, 2007. This impairment was related to the buildingand land held for sale for which the estimated fair value had been based onoffers received by third parties.

 

**Consolidated loss from operations**increased to $62.4 million forthe year ended December 31, 2008, compared to $34.8 million and$23.8 million for each of the years ended December 31, 2007 and 2006,respectively. The increase inconsolidated loss from operations in 2008 as compared to 2007 is largelyattributable to a combination of lower license fee revenues, lowermanufacturing margins, higher depreciation and amortization and higher R&Dcosts, partly offset by lower SG&A expenses.

 

The increase in loss fromoperations in 2007 as compared to 2006 is attributable to a combination oflower license revenues, increase in non-recurring G&A corporate expensesand additional R&D expenses mainly related to the advancement of ourPhase 3 program with cetrorelix in BPH. This increase in loss fromoperations in 2007 was partly offset by increased sales and royalties, as wellas lower depreciation and amortization expenses.

 

We expect our consolidated lossfrom operations to decrease in 2009, mainly due to an expected increase inlicense fee revenues combined with continued decreasing SG&A and R&Dexpenses.

 

**Consolidated other income (expenses)**

 

**Consolidated interest income**amounted to$0.9 million for the year ended December 31, 2008, compared to$1.9 million and $1.4 million for each of the years ended December 31,2007 and 2006, respectively. Interest income is derived from our cash, cashequivalents and short-term investments, which totaled $49.7 million as at December 31,2008, $41.4 million as at December 31, 2007 and $60.5 million asat December 31, 2006. The decrease in consolidated interest income from2007 to 2008 is due to the fact that less cash had been invested during 2008,with the exception of a large portion of the proceeds received in connectionwith the Cowen Transaction, though only in December 2008. The increase inconsolidated interest income from 2006 to 2007 is directly related to theadditional investment of net proceeds of $45.0 million received inconnection with the disposal of approximately 3.5 million shares of AtriumInnovations Inc. (“Atrium”), aformer subsidiary of which we disposed in October 2006.

 

**Consolidated interest expense** amounted to $0.1 million forthe year ended December 31, 2008, compared to $0.1 million and$1.4 million for each of the years ended December 31, 2007 and 2006,respectively. The decrease from 2006 to 2007 is directly related to the fullconversion of term loans into common shares completed in February 2006.Our long-term debt related to a non-interest bearing loan from the Canadian andQuebec Governments, for which the balance was paid in full in 2008.

 

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**Consolidated foreign exchange gain (loss)** amounted to $3.1 million forthe year ended December 31, 2008, compared to ($1.0 million) and $0.3million for each of the years ended December 31, 2007 and 2006,respectively. The increase in foreign exchange gains in 2008 is mainlyattributable to advances to our German subsidiary, denominated in Euro, andwith our US-based subsidiary, denominated in US dollars, and the correspondingstrengthening of the Euro and the US dollar compared to the Canadian dollar.

 

The decrease from 2006 to 2007is mainly related to advances, made in Euro, to our German subsidiary and thecorresponding weakness of the Euro compared to the Canadian dollar.

 

The year-end conversion ratesfrom the Euro and Canadian dollar to the US dollar can be summarized asfollows:

 
| ** **                                         | ** ** | **As at December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| **1 US dollar equivalent to:** | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **$**                                 | ** ** | **$** | ** ** | **$** | ** ** |
| Euro                                               | ** ** | **0.7145**                            |       | 0.6870 |   | 0.7579 |   |
| Canadian  dollar                                   | ** ** | **1.2180**                            |       | 0.9913 |   | 1.1654 |   |

 

**Share in the results of an affiliated company** of $1.6 million for the periodended December 31, 2006 relates to the investment in Atrium, recordedunder the equity method, for the period from October 18 to December 31,2006. As of January 2, 2007, the Company distributed its remaininginterest in Atrium to our shareholders as a return of capital.

 

**C****onsolidated income tax(expense) recovery**was($1.2 million) for the year ended December 31, 2008, compared to $2.0 million and$29.0 million for each of the years ended December 31, 2007 and 2006,respectively. The increase in income tax expense from 2007 to 2008 is largelyattributable to a minimum tax that is payable in Germany due to the taxaccounting ramifications of transactions effected in connection with the CowenTransaction and to the utilization, in 2007, of some of our future income taxassets following the non-recurring taxable capital gain realized in connectionwith the spin-off of Atrium.

 

Thedecrease in income tax recovery from 2006 to 2007 was related to thesignificant decrease in the valuation allowance with respect to the utilizationof some of our future income tax assets against future tax liabilities relatedto the taxable capital gains that were realized by the Company in connectionwith the sale of Atrium shares in 2006 and the special distribution of our remaininginterest at the beginning of 2007.

 

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In2009, we do not expect to record any significant income tax recovery or expensein our foreign or domestic entities.

 

**Consolidated net (loss) earnings fromcontinuing operations**was ($59.8 million) for the year ended December 31,2008, compared to ($32.0 million) and $7.6 million for each of the yearsended December 31, 2007 and 2006, respectively. The increase in net lossfrom 2007 to 2008 is largely attributable to a combination of lower license feerevenues, the increase in R&D costs related to the advancement of our Phase3 program with cetrorelix in BPH, lower manufacturing margins, higherdepreciation and amortization and higher income tax expense in 2008, partlyoffset by lower SG&A expenses and higher net foreign exchange gains.

 

The increased consolidated netloss from continuing operations in 2007 is directly related to the increasedloss from operations of nearly $10.0 million, a one-time share in theresults of Atrium of nearly $1.6 million recorded in 2006 and anon-recurring future income tax recovery of nearly $25.0 million recordedin 2006 related to the sale of Atrium shares and the special distribution ofour remaining interest in January 2007.

 

**Consolidated net (loss) earnings fromdiscontinued operations** amounted to ($0.3 million) for the yearended December 31, 2007, compared to $25.8 million for the year ended December 31,2006. The year-over-year variation relates almost exclusively to the divesture,in October 2006, of our interest in Atrium, whose results of operationswere reported as discontinued operations for the year ended December 31,2006 and detailed as follows:

 
| **(in thousands)**                        | ** ** | **$**   | ** ** |
|------------------------------------------------|------------|---------|------------|
| **Revenues**                                   |       | 239,535 |       |
|                                           |       |    |       |
| **Earnings  before the following items**       |       | 28,360  |       |
|                                           |       |    |       |
| Gain on  disposal of Atrium shares             |       | 29,248  |       |
| Income tax  expense                            |       | (19,923 | )          |
| Loss on  dilution of investments               |       | (628    | )          |
|                                           |       |    |       |
| **Earnings  before non-controlling interest**  |       | 37,057  |       |
| **Non-controlling  interest**                  |       | (10,967 | )          |
|                                           |       |    |       |
| **Net  earnings from discontinued operations** |       | 26,090  |       |

 

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Also impacting consolidated netloss from discontinued operations were the results of operations related toEchelon Biosciences, Inc. (“Echelon”), which we disposed of in November 2007and whose results were included in our consolidated statements of earnings(loss) for the year ended December 31, 2007, as follows:

 
| ** **                                                                    | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands)**                                                       | ** ** | **2007**                                    | ** ** | **2006** | ** ** |
| ** **                                                                    | ** ** | **$**                                       | ** ** | **$** | ** ** |
| **Revenues**                                                                  | ** ** | **2,358**                                   | ** ** | 2,593 |   |
|                                                                          |       |                                        | ** ** |   |   |
| **Loss  before the following items**                                          | ** ** | **(206**                                    | **)**      | (369 | ) |
|                                                                          |       |                                        | ** ** |   |   |
| Goodwill  impairment                                                          | ** ** | **(500**                                    | **)**      | — |   |
| Loss on  disposal of Echelon shares, net of cumulative translation adjustment | ** ** | **(44**                                     | **)**      | — |   |
| Income tax  recovery                                                          | ** ** | **491**                                     | ** ** | 92 |   |
|                                                                          |       |                                        | ** ** |   |   |
| **Net loss  from discontinued operations**                                    | ** ** | **(259**                                    | **)**      | (277 | ) |

 

The year-over-year decrease in revenues from discontinued operations****related to Echelon from 2006 to 2007 isdue to the fact that 2007 revenues represent eleven months compared totwelve months for the year 2006.

 

**Consolidated net loss**was $59.8 million, or $1.12 perbasic and diluted share, for the year ended December 31, 2008, compared to$32.3 million, or $0.61 per basic and diluted share, for the year ended December 31,2007. The increase inconsolidated net loss in 2008 as compared to 2007 is attributable to acombination of lower license fee revenues, lower manufacturing margins, higherdepreciation and amortization, higher income tax expense and higher R&Dcosts, partly offset by lower SG&A expenses and higher net foreign exchangegains.

 

The increased net loss in 2007is related to a higher loss from operations of nearly $10.0 million, lowerincome tax recovery of nearly $27.0 million related to the recognition offuture income tax assets mainly attributable to the sale of Atrium shares in2006 and the special distribution of our remaining interest in January 2007,as well as lower net earnings from discontinued operations of Atrium of nearly$26.0 million.

 

We expect that the consolidatednet loss for the year 2009 will decrease, mainly due to increased license feerevenues, to be recognized in connection with the cetrorelix development,commercialization and licensing agreement entered into with sanofi-aventis, andwith the expected continued reduction of R&D and SG&A expenses.

 

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The weighted average number ofshares outstanding used to calculate basic net earnings (loss) per share forboth of the years ended December 31, 2008 and 2007 was 53.2 millionshares, compared to 52.1 million shares for the year ended December 31,2006. For diluted net earnings (loss) per share, the weighted average number ofshares outstanding used for this calculation was 53.2 million shares forboth of the years ended December 31, 2008 and 2007, compared to52.5 million shares for the year ended December 31, 2006.

 

**ConsolidatedBalance Sheet Information**

*(Unaudited)*

 
| ** **                                           | ** ** | **As at December 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|
| **(in thousands)**                              | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **$**                                 | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                           | ** ** | ** **                            |       |   |   |   |   |
| Cash and  cash equivalents                           | ** ** | **49,226**                            |       | 10,272 |   | 8,939 |   |
| Short-term  investments                              | ** ** | **493**                               |       | 31,115 |   | 51,550 |   |
| Accounts  receivable and other current assets        | ** ** | **12,005**                            |       | 18,193 |   | 41,234 |   |
| Property,  plant and equipment, net                  | ** ** | **6,682**                             |       | 7,460 |   | 13,001 |   |
| Other  long-term assets                              | ** ** | **39,936**                            |       | 56,323 |   | 108,767 |   |
| **Total  assets**                                    | ** ** | **108,342**                           |       | 123,363 |   | 223,491 |   |
| ** **                                           | ** ** | ** **                            |       |   |   |   |   |
| Accounts  payable and other current liabilities      | ** ** | **22,121**                            |       | 21,480 |   | 15,624 |   |
| Current  portion of long-term debt and payable       | ** ** | **49**                                |       | 775 |   | 686 |   |
| Long-term  debt and payable                          | ** ** | **172**                               |       | - |   | 687 |   |
| Non-financial  long-term liabilities                 | ** ** | **64,525**                            |       | 12,517 |   | 27,615 |   |
| **Total  liabilities**                               | ** ** | **86,867**                            |       | 34,772 |   | 44,612 |   |
| **Shareholders’  equity**                       | ** ** | **21,475**                            |       | 88,591 |   | 178,879 |   |
| **Total  liabilities and shareholders’ equity** | ** ** | **108,342**                           |       | 123,363 |   | 223,491 |   |

 

The increase in cash and cash equivalents andthe decrease in short-term investments from 2007 to 2008 are discussed in moredetail below. The decrease in accounts receivable and other current assets from2007 to 2008 is largely attributable to lower customer billings in December 2008compared to the same period in 2007, lower grants receivable at the end of 2008and the write-down to net realizable value of certain components of inventoryin December 2008, as discussed above.

 

The decrease in other long-term assets isprimarily due to the disposal, in 2008, of the long-lived assets which had beenreported as held for sale as at December 31, 2007, as discussed above andthe impairment charge that was taken relative to teverelix in the fourthquarter of 2008, partially offset by a net increase in deferred charges, duemainly to the capitalization of financial advisor, legal and other costsincurred in connection with the Cowen Transaction. The increase in non-financiallong-term liabilities is primarily attributable to the increase in deferredrevenues following the receipt of proceeds from the Cowen Transaction, as wellas an increase in employee future benefits related mainly to employees in ourGerman subsidiary.

 

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The decrease in shareholders’ equity from2007 to 2008 is almost entirely attributable to the increase in consolidateddeficit due to the current year net loss and the decrease of accumulated othercomprehensive income, which in turn is largely made up of cumulativetranslation adjustments.

 

The increase in cash and cash equivalents andthe decrease in short-term investments from 2006 to 2007 are discussed in moredetail below. The decrease in accounts receivable and other current assets from2006 to 2007 is mainly attributable to the utilization of future tax assetsfollowing the taxable capital gain realized in connection with the spin-off ofAtrium, as well as the reduction of current assets of discontinued operationsrelated to Echelon. The decrease in net property, plant and equipment from 2006to 2007 is primarily the result of the reclassification of long-lived assetsheld for sale to other long-term assets, which resulted in an increase in 2007to the latter, offset by a significant decrease due to the disposal of Atrium,which had been carried in the balance sheet as of December 31, 2006 underthe equity method at a value of $57.1 million.

 

Accounts payable and other currentliabilities increased from 2006 to 2007 largely as a result of an increasedvolume of supplier invoices in December 2007 compared to the same periodin 2006, while the decrease in non-financial long-term liabilities was mainlyattributable to the decrease in long-term deferred tax liabilities and adecrease in the long-term portion of deferred revenues not yet amortized atyear-end.

 

The overall decrease in shareholders’ equityfrom 2006 to 2007 relates to the reduction of share capital in the amount of$137.9 million as a result of the distribution to our shareholders of ourremaining interest in Atrium. This decrease was offset by an increase in othercapital to adjust for the effects of the corresponding difference between thefair value and the book value of Atrium, net of income taxes and cumulativetranslation adjustment, of $71.1 million. Also contributing to thereduction in shareholders’ equity from 2006 to 2007 was the contribution of theannual net loss to the consolidated deficit as well as an increase in thecumulative translation adjustment.

 

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**FinancialLiabilities, Obligations and Commitments**

 

We have certain contractualobligations and commercial commitments. Commercial commitments mainly includeR&D services and manufacturing agreements related to the execution of ourPhase 3 program with cetrorelix in BPH. The following table summarizes futurecash requirements with respect to these obligations.

 
| ** **                  | ** ** | **Payments due in** | ** ** |
|-----------------------------|------------|-------------------------------|------------|
| **(in thousands)**     | ** ** | **Carrying  amount**          | ** ** | **2009** | ** ** | **2010-2011** | ** ** | **2012-2013** | ** ** | **After 2013** | ** ** |
| ** **                  | ** ** | **$**                         | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| **Long-term  payable**      |       | 221                           |       | 49 |   | 98 |   | 74 |   | — |   |
| **Operating  leases**       |       | 10,366                        |       | 2,191 |   | 4,241 |   | 2,503 |   | 1,431 |   |
| **Commercial  commitments** |       | 20,528                        |       | 15,743 |   | 3,974 |   | 811 |   | — |   |
| **Total**                   |       | 31,115                        |       | 17,983 |   | 8,313 |   | 3,388 |   | 1,431 |   |

 

**OutstandingShare Data**

 

As at March 9, 2009, therewere 53,187,470 common shares issued and outstanding, and there were 4,667,428stock options outstanding.

 

It is important to note thathistorical patterns of expenditures cannot be taken as an indication of futureexpenditures. The amount and timing of expenditures and availability of capitalresources vary substantially from period to period, depending on the level ofresearch and development activity being undertaken at any one time and on theavailability of funding from investors and prospective commercial partners.

 

**Capitaldisclosures**

 

Our objective in managing capital composed ofshareholders’ equity is to ensure a sufficient liquidity position to financeour R&D activities, SG&A expenses, working capital and overall capitalexpenditures. We make every effort to manage our liquidity to minimize dilutionto our shareholders.

 

Initially, we had funded our activitiesthrough public offerings of common shares and convertible term loans. Morerecently, however, we have tried to optimize our liquidity needs bynon-dilutive sources, including the sale of non-core assets and future rightsto royalties, investment tax credits and grants, interest income, licensing,service and royalties.

 

During 2008, we fulfilled our obligation onthe loan from the federal and provincial governments with a nominal value ofCAN$800,000.

 

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In connectionwith the sale of the Quebec City building and land discussed above, we enteredinto a long-term lease agreement with the principal tenant of the building. Aspart of the agreement, we agreed to pay the principal tenant CAN$300,000(approximately $246,305) as an incentive and service fee.  The resulting payable is non-interest bearingand is due in bi-annual installments of CAN$30,000 (approximately $24,630) overthe next five years.

 

Our capital management objective remains thesame as that of previous years. The policy on dividends is to retain cash tokeep funds available to finance the activities required to advance our productdevelopment pipeline, prioritizing our lead product candidate, cetrorelix, inPhase 3 for BPH.

 

We are not subject to any capitalrequirements imposed by any regulators or any other external source.

 

**Liquidity, CashFlows and Capital Resources**

 

Our operations and capitalexpenditures are mainly financed through cash flows from operating activities,selling of non-core assets and other non-dilutive activities.

 

Our cash, cash equivalents andshort-term investments amounted to $49.7 million as at December 31,2008, compared to $41.4 million as at December 31, 2007. Possibleadditional operating losses and/or possible investments in the acquisition ofcomplementary businesses or products may require additional financing. As at December 31,2008, cash, cash equivalents and short-term investments of the Company includedCAN$3.8 million and EUR32.8 million.

 

Short-term investments do notinclude asset-backed commercial paper affected by liquidity issues.

 

Based on our assessment, which takes into account the proceeds receivedin connection with the Cowen Transaction, the signing of the development,commercialization and license agreement with sanofi-aventis, as well as ourstrategic plan and corresponding budgets and forecasts, we believe that we havesufficient liquidity and financial resources to fund planned expenditures andother working capital needs for at least the next 12-month period following thebalance sheet date of December 31, 2008.

 

We may endeavour to secure additional financing, as required, throughstrategic alliance arrangements, the issuance of new share capital, as well asthrough other non-dilutive activities.

 

The variation of our liquidityby activity is explained below, not considering any cash flows used in orprovided by discontinued operations.

 

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**OperatingActivities**

 

Cash flows used in our continuing operatingactivities amounted to $1.3 million for the year ended December 31,2008, compared to $25.7 million and $15.9 million for each of theyears ended December 31, 2007 and 2006, respectively. The significantdecrease in cash used in operating activities from 2007 to 2008 relates inlarge proportion to the net cash proceeds received in connection with the CowenTransaction, in addition to higher upfront payments received from certaincustomers and higher cash collections of trade accounts receivable. These cashinflows were partially offset by increased cash expenditures that contributedto the increase in our net loss, as well as by payments made, which were mainlyrelated to financial advisor, legal and other costs incurred in connection withthe Cowen Transaction, as well as to a higher volume of trade accounts payablesettlements.

 

The increase in net cash used in 2007compared to 2006 is primarily attributable to lower license revenues, increasednon-recurring corporate expenses, additional investments in R&D related tothe initiation of our Phase 3 program in BPH for cetrorelix, as well as to thefurther advancement of targeted, earlier-stage development programs.

 

We expect net cash used incontinuing operating activities to increase in 2009 due to the absence of cashroyalty receipts that were payable in connection with the License Agreementwith Merck Serono prior to the Cowen Transaction and as we continue our Phase 3clinical program with cetrorelix in BPH and further advance our targeted,earlier-stage development programs. These cash outflows will be partiallyoffset by the receipt of the upfront payment from sanofi-aventis in connectionwith the cetrorelix development, commercialization and licensing agreement, asdiscussed above.

 

**FinancingActivities**

 

Net cash used in continuing financingactivities was $1.2 million for the year ended December 31, 2008,compared to $1.1 million and $0.7 million for each of the years endedDecember 31, 2007 and 2006, respectively. These funds were used mainly forthe repayments of our long-term debt and payable, as well as in connection withthe filing of a shelf prospectus.

 

**InvestingActivities**

 

Cash provided by continuing investingactivities (excluding the changes in short-term investments) amounted to$13.6 million for the year ended December 31, 2008, while cash flowsused in continuing investing activities (excluding the changes in short-terminvestments) was $3.0 million for the year ended December 31, 2007,compared to $0.5 million for the year ended December 31, 2006. Theincrease in cash provided by investing activities from 2007 to 2008 relatesprimarily to the disposals of the Quebec City building and land and of Impavido®, both of which had been reported aslong-lived assets held for sale as at December 31, 2007.

 

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The increase in net cash used in continuinginvesting activities in 2007 compared to 2006 is mainly related to theacquisition of equipment that is necessary to support clinical trials.

 

We expect that cash provided by investingactivities (excluding the changes in short-term investments) will decrease in2009, mainly due to the expected non-recurrence of cash proceeds received inconnection with the disposal of long-lived assets held for sale.

 

**Critical Accounting Policies and Estimates**

 

Our financialstatements are prepared in accordance with Canadian GAAP. A summary ofsignificant and pertinent measurement and disclosure differences betweenCanadian and US GAAP is provided in note 27 to our 2008 annualconsolidated financial statements. The preparation of financial statements inaccordance with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosures of contingent assets and liabilities at thedate of the financial statements, as well as the reported amounts of revenuesand expenses during the reporting years. Significant estimates are generallymade in connection with the calculation of revenues, research and developmentexpenses, stock-based compensation expense, as well as in determining theallowance for doubtful accounts, inventory and provisions for obsoleteinventory, future income tax assets and liabilities, the useful lives ofproperty, plant and equipment and intangible assets with finite lives, thevaluation of intangible assets and goodwill, the fair value of stock optionsgranted, employee future benefits and certain accrued liabilities. We base ourestimates on historical experience, where relevant, and on various otherassumptions that we believe to be reasonable under the circumstances. Actualresults could differ from those estimates.

 

The followingsummarizes our critical accounting policies and other policies that require themost significant judgment and estimates in the preparation of our consolidatedfinancial statements.

 

**Revenue Recognitionand Deferred Revenues**

 

The Companyis currently in a phase in which potential products are being further developedor marketed jointly with strategic partners. Existing licensing agreementsusually foresee one-time payments (upfront payments), payments for research anddevelopment services in the form of cost reimbursements, milestone payments androyalty receipts for licensing and marketing product candidates. Revenuesassociated with those multiple-element arrangements are allocated to thevarious elements based on their relative fair value.

 

Agreementscontaining multiple elements are divided into separate units of accounting ifcertain criteria are met, including whether the delivered element hasstand-alone value 

 

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to thecustomer and whether there is objective and reliable evidence of the fair valueof the undelivered obligation(s). The consideration received is allocated amongthe separate units based on each unit’s fair value or using the residualmethod, and the applicable revenue recognition criteria are applied to each ofthe separate units.

 

License feesrepresenting non-refundable payments received upon the execution of licenseagreements are recognized as revenue upon execution of the license agreementswhen we have no significant future performance obligations and whencollectibility of the fees is assured. Upfront payments received at thebeginning of licensing agreements are not recorded as revenue when received butare amortized based on the progress to the related research and developmentwork. This progress is based on estimates of total expected time or duration tocomplete the work, which is compared to the period of time incurred to date inorder to arrive at an estimate of the percentage of revenue earned to date.

 

Milestonepayments, which are generally based on developmental or regulatory events, arerecognized as revenue when the milestones are achieved, collectibility isassured, and when there are no significant future performance obligations inconnection with the milestones.

 

In thoseinstances where we have collected upfront or milestone payments but haveongoing future obligations related to the development of the drug product, weconsider the milestone payments and the remaining obligations under thecontract as a single unit of accounting. In those circumstances where thecollaboration does not require specific deliverables at specific times or atthe end of the contract term, but rather our obligations are satisfied over aperiod of time, revenue recognition is deferred and amortized over the periodof its future obligations.

 

Royaltyrevenue, based on a percentage of sales of certain declared products sold bythird parties, is recorded when we have fulfilled the terms in accordance withthe contractual agreement and have no future obligations, the amount of theroyalty fee is determinable and collection is reasonably assured.

 

Proceeds received in connection with theCowen Transaction are deferred and recognized over the life of the licenseagreement pursuant to the “units-of-revenue” method, as discussed above.

 

Revenuesfrom sales of products are recognized, net of estimated sales allowances andrebates, when title passes to customers, which is at the time goods areshipped, when there are no future performance obligations, when the purchaseprice is fixed and determinable, and collection is reasonably assured.

 

**Research andDevelopment Costs**

 

Research costs are expensed as incurred. Developmentcosts are expensed as incurred except for those which meet generally acceptedcriteria for deferral, which are 

 

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capitalized and amortized against operations over theestimated period of benefit. To date, no costs have been deferred.

 

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**Impairment ofLong-Lived Assets and Goodwill**

 

Property, plant and equipment and intangible assets withfinite lives are reviewed for impairment when events or circumstances indicatethat carrying values may not be recoverable. Impairment exists when thecarrying value of the asset is greater than the undiscounted future cash flowsexpected to be provided by the asset. The amount of impairment loss, if any, isthe excess of its carrying value over its fair value, which in turn isdetermined based upon discounted cash flows or appraised values, depending ofthe nature of assets.

 

Goodwill, which represents the excess of the purchase price over thefair values of the net assets of entities acquired at the respective dates ofacquisition, is tested for impairment annually or more frequently if events orchanges in circumstances indicate that it might be impaired. Testing forimpairment is accomplished mainly by determining whether the fair value of areporting unit exceeds the net carrying amount of that reporting unit as of theassessment date. If the fair value is greater than the carrying amount, noimpairment is necessary. In the event that the carrying amount of a reportingunit exceeds its fair value, an impairment loss is recognized in an amountequal to the excess. Fair value of goodwill is estimated in the same way asgoodwill is determined at the date of the acquisition in a businesscombination, that is, the excess of the fair value of the reporting unit overthe fair value of the identifiable net assets of the reporting unit.

 

**Income Taxes**

 

We operate in multiple jurisdictions, and our earnings are taxedpursuant to the tax laws of these jurisdictions. Our effective tax rate may beaffected by the changes in, or interpretations of, tax laws in any givenjurisdiction, utilization of net operating losses and tax creditcarry-forwards, changes in geographical mix of income and expense, and changesin management’s assessment of matters, such as the ability to realize futuretax assets. As a result of these considerations, we must estimate our incometaxes in each of the jurisdictions in which we operate. This process involvesestimating our actual current tax exposure, together with assessing temporarydifferences resulting from differing treatment of items for tax and accountingpurposes. These differences result in future tax assets and liabilities, whichare included in our consolidated balance sheet. We must then assess thelikelihood that our future tax assets will be recovered from future taxableincome and establish a valuation allowance if, based on available information,it is more likely than not that some or all of the future income tax assetswill not be realized. Establishing or increasing a valuation allowanceincreases our income tax expense.

 

Significant management judgment is required in determining ourprovision for income taxes, our income tax assets and liabilities, and anyvaluation allowance recorded against our net income tax assets. The valuationallowance is based on our estimates of taxable income by jurisdiction in whichwe operate and the period over which our income tax assets will be recoverable.In the event that actual results differ from these estimates or we adjust theseestimates in future periods, we may need to amend our valuation allowance,which could materially impact our financial position and results of operations.

 

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**Stock-Based Compensation Costs**

 

We account forall forms of employee stock-based compensation using the fair value-basedmethod. This method requires that we make estimates about the risk-freeinterest rate, the expected volatility of our shares and the expected life ofthe awards.

 

**New Accounting Standards**

 

***Impact of accounting standardsadopted in 2008***

 

On January 1, 2008, we adopted theCanadian Institute of Chartered Accountants, (“CICA”) Handbook Section 1535,*Capital Disclosures*(“Section 1535”); Section 3862,*Financial Instruments — Disclosures*(“Section 3862”); Section 3863,*Financial Instruments — Presentation*(“Section 3863”); and Section 3031,*Inventories*(“Section 3031”).

 

Section 1535**establishes guidelines for disclosure of informationregarding an entity’s capital which will enable users of its financialstatements to evaluate an entity’s objectives, policies and processes formanaging capital, including disclosures of any externally imposed capitalrequirements and the consequences of non-compliance.

 

Section 3862 and Section 3863,which replace Section 3861, *FinancialInstruments — Disclosure and Presentation*, require thedisclosure of additional details of financial asset and liability categories aswell as a detailed discussion on the risks associated with our financialinstruments. The presentation requirements are carried forward unchanged

 

The CICA issued Section 3031, which replaced Section 3030 ofthe same title. This standard requires that inventories be measured at thelower of cost and net realizable value and includes guidance on thedetermination of cost, including allocation of overheads and other costs.  The standard also requires that similarinventories within a consolidated group be measured using the same method. Section 3031also requires the reversal of previous write-downs to net realizable value whenthere is a subsequent increase in the value of inventories. We have adoptedthis standard effective January 1, 2008, and there has been no impact onthe consolidated financial statements.

 

***Impact of accountingpronouncements not yet adopted***

 

In February 2008, the CICA issuedHandbook Section 3064, *Goodwill andIntangible Assets*. This standard provides guidance on therecognition of intangible assets and the criteria for asset recognition,clarifying the applications of the concept of matching revenues and expenses,whether these assets are separately acquired or are developed internally. Thestandard will apply to our interim and annual financial statements for periodsbeginning on January 1, 2009. We do not expect that adoption of thisstandard will have a significant impact on the consolidated financialstatements.

 

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In January 2009, the CICA issuedHandbook Section 1582, Business Combinations, which replaces the existingstandards. This section establishes the standards for the accounting ofbusiness combinations and states that all assets and liabilities of an acquiredbusiness will be recorded at fair value. Obligations for contingentconsiderations and contingencies will also be recorded at fair value at theacquisition date. The standard also states that acquisition-related costs willbe expensed as incurred and that restructuring charges will be expensed in theperiods after the acquisition date. This standard is applied prospectively to businesscombinations with acquisition dates on or after January 1, 2011. Earlieradoption is permitted. We are currently evaluating the impact, if any, thatadopting this standard will have on our consolidated financial statements.

 

In January 2009, the CICA issuedHandbook Section 1601, *Consolidated FinancialStatements*, which replaces the existing standards and establishesthe standards for preparing consolidated financial statements and is effectivefor 2011. Earlier adoption is permitted. We are currently evaluating theimpact, if any, that adopting this standard will have on our consolidatedfinancial statements.

 

In January 2009, the CICA issuedHandbook Section 1602, *Non-controlling Interests*,which establishes standards for the accounting of non-controlling interests ofa subsidiary in the preparation of consolidated financial statements subsequentto a business combination. This standard is effective for 2011. Earlieradoption is permitted. We are currently evaluating the impact, if any, thatadopting this standard will have on our consolidated financial statements.

 

In January 2009, the CICA’s Emerging Issue Committee (“EIC”)issued Abstract EIC-173, *Credit Risk and the Fair Value of Financial**Assets and Liabilities*,which requires entities to take both counterparty credit risk and their owncredit risk into account when measuring the fair value of financial assets andliabilities, including derivatives. EIC-173 will be effective for interim andannual periods beginning on or after January 1, 2009. We do not expectthat adoption of this guidance will have a significant impact on ourconsolidated financial statements.

 

**International Financial Reporting Standards (“IFRS”)**

 

We arecurrently evaluating the potential impact that could result from preparing ourconsolidated financial statements in accordance with IFRS, given that theCanadian Accounting Standards Board confirmed that IFRS will replace currentCanadian standards and interpretations as Canadian GAAP for publiclyaccountable enterprises. The adoption of IFRS will have an impact on ourconsolidated financial statements, as well as on a wide range of operationaland performance measures, beginning on January 1, 2011.

 

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To date, wehave performed a high-level diagnostic that has identified pertinentdifferences between IFRS and current accounting policies and procedures thatconform to Canadian GAAP. We have also developed a formal plan for IFRSconversion and the related transition from current standards. Activities underthat plan will include, among other things, the identification anddocumentation of pertinent accounting and reporting differences between IFRSand Canadian GAAP; the choice of IFRS accounting policies, includingconsideration of elections available under IFRS 1, *First-time Adoption of International FinancialReporting Standards*; determination of the impact of conversion oninternal controls, accounting systems and other business solutions andprocesses; and the development of training to assist appropriate employees inthe transition to and ongoing compliance with IFRS.

 

Activities inconnection with our IFRS implementation plan will continue throughout 2009, andwe will provide required disclosures regarding the status of our plan.

 

**Outlook for 2009**

 

We expect to disclose first efficacy results of our Phase 3 program inBPH with our lead endocrinology compound, cetrorelix, in the third quarter of2009. Results for the second efficacy trial of this same program are expectedin the fourth quarter of 2009. Results for the safety trial and the QTc trialare expected by the end of 2009.

 

In Q4 2009, we expect to disclose Phase 2 results with AEZS-108 inadvanced ovarian and endometrial cancers.

 

We will continue to seek business development opportunities from ourextensive product pipeline.

 

As pertaining to liquidity, ourexpectation is that cash flows from operations will not proceed linearly throughoutthe year, but will instead be positively impacted in the first half of 2009 dueto the receipt of the $30.0 million upfront payment from sanofi-aventis,as discussed above, partly offset by payments expected to be made in connectionwith the pivotal long-term safety trial and the thorough QTc trial forcetrorelix in BPH.

 

**Financial and Other Instruments**

 

**ForeignCurrency Risk**

 

Since we operate on aninternational scale, we are exposed to currency risks as a result of potentialexchange rate fluctuations. For the year ended December 31, 2008, we werenot a party to any forward-exchange contracts, and no forward-exchangecontracts were outstanding as at March 9, 2009.

 

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Beginning on January 1,2009, due to changes in facts and circumstances, the Company and all itssubsidiaries will use the euro as their functional currency. As such, allforeign currency exposure risk on inter-company transactions will beeliminated.

 

**Credit Risk**

 

Financial instruments, whichpotentially subject the Company to concentrations of credit risk, consistprimarily of cash and cash equivalents, short-term investments and accountsreceivable. Cash and cash equivalents are maintained with high-credit qualityfinancial institutions. Short-term investments consist primarily of bonds andnotes issued by high-credit quality corporations and institutions.Consequently, management considers the risk of non-performance related to cashand cash equivalents and investments to be minimal.

 

Generally, we do not requirecollateral or other security from customers for trade accounts receivable;however, credit is extended following an evaluation of creditworthiness. Inaddition, we perform ongoing credit reviews of all our customers and establishan allowance for doubtful accounts when accounts are determined to beuncollectible.

 

**InterestRate Risk**

 

We are exposed to market risk relating to changes in interest rateswith regard to our short-term investments.

 

**RelatedParty Transactions and Off-Balance Sheet Arrangements**

 

We did not enter intotransactions with any related parties during the year ended December 31,2008.

 

Asat December 31, 2008, we did not have any interest in variable interestentities or any other off-balance sheet arrangements.

 

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## ***Item 6.            Directors,Senior Management and Employees***

 

### ***A.            Directorsand senior management***

 

The following table setsforth information about our directors and senior officers as at March 20,2009.

 
| **Name and Place of Residence** | ** ** | **Position  with Aeterna Zentaris**                       |
|---------------------------------|------------|-----------------------------------------------------------|
|                            |       |                                                      |
| Marcel Aubut                    |       | Director                                                  |
| Quebec, Canada                  |       |                                                      |
|                            |       |                                                      |
| Paul Blake                      |       | Senior Vice President and  Chief Medical Officer          |
| Pennsylvania, United  States    |       |                                                      |
|                            |       |                                                      |
| Martha Byorum                   |       | Director                                                  |
| New York, United States         |       |                                                      |
|                            |       |                                                      |
| José  P. Dorais            |       | Director                                                  |
| Quebec,  Canada                 |       |                                                      |
|                            |       |                                                      |
| Juergen Engel                   |       | President and Chief  Executive Officer and Board Director |
| Alzenau, Germany                |       |                                                      |
|                            |       |                                                      |
| Juergen Ernst                   |       | Executive Chairman of the  Board and Director             |
| Brussels,  Belgium              |       |                                                      |
|                            |       |                                                      |
| Pierre  Laurin                  |       | Director                                                  |
| Quebec,  Canada                 |       |                                                      |
|                            |       |                                                      |
| Gérard Limoges             |       | Director                                                  |
| Quebec, Canada                  |       |                                                      |
|                            |       |                                                      |
| Pierre MacDonald                |       | Director                                                  |
| Quebec, Canada                  |       |                                                      |
|                            |       |                                                      |
| Gerald J. Martin                |       | Director                                                  |
| California, United States       |       |                                                      |
|                            |       |                                                      |
| Nicholas Pelliccione            |       | Senior Vice President,  Regulatory Affairs and            |
| New York, United States         |       | Quality Assurance                                         |
|                            |       |                                                      |
| Matthias Seeber                 |       | Senior Vice  President, Administration and Legal Affairs  |
| Frankfurt, Germany              |       |                                                      |
|                            |       |                                                      |
| Dennis Turpin                   |       | Senior Vice President and  Chief Financial Officer        |
| Quebec, Canada                  |       |                                                      |
|                            |       |                                                      |
| Claude Vadboncoeur              |       | Corporate  Secretary                                      |
| Quebec, Canada                  |       |                                                      |

 

The following is a brief biography of each of ourdirectors and senior officers.

 

*Marcel Aubut*has served as a director on our Board since1996. A key figure in Canadian business and an icon inthe world of sports, Marcel Aubut, O.C., O.Q., Q.C. ADE, has been a corporate andlitigation lawyer for more than thirty years. A partner with Heenan BlaikieAubut, he is a member of the firm’s National Management Committee and itsExecutive Committee. In 1983, Mr. Aubut founded the firm of Aubut Chabot.He was President and Chief Executive Officer of *Le Club deHockey Les Nordiques de Québec*,as well as founding president and chief executive officer of *Parc technologique du Québec métropolitain*.Many companies have called on Mr. Aubut to be a director, including suchhigh-profile ones as Boralex Power Income Fund, Boralex Inc., Atomic EnergyCanada, Cinar, Hydro-Québec, The Laurentian Group, Investors Group of MutualFunds, Sodic 

 

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Québec Inc., International Continental InsurersLtd, the National Hockey League Pension Society, Olybro Inc. (previously knownas Olymel), TransForce Inc., La Fondation Nordiques and Purolator.

 

*Paul Blake*wasappointed our Senior Vice President and Chief Medical Officer on August 5,2007. Prior to joining us, Dr. Blake was Chief Medical Officer ofAvigenics, Inc. since January 2007. In 2005, he was Senior VicePresident, Clinical Research and Regulatory Affairs at Cephalon, Inc.before being promoted to Executive Vice President, Worldwide Medical &Regulatory Operations. From 1992 to 1998, he held the position of Senior VicePresident and Medical Director, Clinical Research and Development at SmithKlineBeecham Pharmaceuticals (now GSK). Dr. Blake earned a medical degree fromthe London University, Royal Free Hospital. He was elected Fellow of theAmerican College of Clinical Pharmacology, Fellow of the Faculty ofPharmaceutical Medicine, Royal College of Physicians in the UK, and he is aFellow of the Royal College of Physicians in the UK.

 

*Martha Byorum* hasserved as a director on our Board since 2001. Ms. Byorum is currentlySenior Managing Director of Stephens Cori Capital Advisors, a division ofStephens, Inc., a U.S.-based investment bank and financial servicescompany. Before 1996, Ms. Byorum held various positions at Citicorp. Ms. Byorumis a member of the board of director of Northwest Natural Gas Company andM&F Worldwide Corp. Ms. Byorum holds a Master’s of BusinessAdministration (MBA) degree from the University of Pennsylvania.

 

*José P. Dorais*has served as adirector on our Board since 2006. Mr. Dorais is a partner of MillerThomson Pouliot LLP where he mainly practices administrative, corporate,business and international trade law. Over his 35-year career, he has worked inboth the private and public sectors; in the latter he acted as Secretary to theMinister of Justice and as Secretary of the consulting committee on the FreeTrade Agreement for the Quebec Provincial Government. Mr. Dorais has beena member of numerous boards of directors, including the Société des Alcools duQuébec, Biochem Pharma and St-Luc Hospital in Montreal. He is now a member ofthe Board of Alliance Films, the Société Générale de Financement and Chairmanof the Board of Recyc-Québec. He holds a law degree from the University ofOttawa and is a member of the Quebec Bar.

 

*Juergen Engel* was appointedPresident and Chief Executive Officer, effective September 1, 2008, afterhaving up to such time served as our Executive Vice President and ChiefScientific Officer. He became a director on our Board in 2003.  Dr. Engel has been managing Director ofAEZS Germany, the Corporation’s principal subsidiary, since the beginning of2001. Before that, he was in charge of all research and development activitiesof ASTA Medica AG.

 

*Juergen Ernst*wasappointed Executive Chairman of the Board, effective September 1, 2008,after having served as Chairman of the Board from August 13, 2007 until April 10,2008 and as Interim President and Chief Executive Officer from April 11,2008 until August 31, 2008. He has served as a director on our Board since2005. A seasoned executive with more than 20 years of pharmaceutical industryexpertise mainly in the field of corporate development and pharmaceuticalproduct marketing, Mr. Ernst was worldwide General Manager, PharmaceuticalSector of Solvay S.A., before retiring in 2004. He is now a member of the Boardof Directors of Solvay S.A.

 

*PierreLaurin*has served as a director on our Boardsince 1998, Mr. Laurin hasbeen Director of the Hautes Études Commerciales Business School in Montreal (HEC Montréal) since January 1999. He was elected Chairman of the Board of Directors of our former subsidiary,Atrium, in February 2001.  From 1969 to 1982, Mr. Laurin heldsuccessively the positions of teacher and Dean with the Hautes ÉtudesCommerciales.  Since then, he has acted as Vice President, GeneralManager, Planning and Administration for Alcan. During this term, he was thefounding President and CEO of Soccrent, a venture capital firm inSaguenay-Lac-St-Jean.  He has also spent 13 years as Vice Chairman of theBoard and President for Quebec of Merrill Lynch.  Mr. Laurin is amember of several boards of directors of corporations including Quebecor Inc.,Microcell Telecommunications Inc., Æterna Zentaris and the Fondation J.-ArmandBombardier.  Mr. Laurin holds a Ph.D. degree in business from HarvardUniversity, a Licence ès Sciences Commerciales from the Hautes ÉtudesCommerciales Business School, and Bachelor’s degree ès Art from the Séminairede Philosophie de Montréal.  He also holds a Doctorate Honoris Causa fromConcordia University. He is an officer of the Order of Canada, and holds “L’ordredu Mérite” of the Republic of France.

 

*Gérard Limoges* hasserved as a director on our Board since 2004. Mr. Limoges served as theDeputy Chairman of Ernst & Young LLP Canada until his retirement in September 1999.After a career of 37 years with Ernst & Young, Mr. Limoges hasbeen devoting his time as a director of a number of companies. Mr. Limogesbegan his career with Ernst & Young in Montreal in 1962. Aftergraduating from the Management Faculty of Université de Montréal (HEC Montréal)in 1966, he became a chartered accountant and partner of Ernst & Youngin 1971. Mr. Limoges is a board member and chairman of the auditcommittees of the following public companies: Æterna Zentaris Inc. (Nasdaq andTSX), Atrium Innovations Inc. (TSX), Hart Stores Inc. (TSX), Hartco IncomeTrust (TSX) and he is a board member, chairman of the governance committee andmember of the audit committee of Noranda Income Fund (TSX). He is also a boardmember of various private companies and charities. 

 

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*Pierre MacDonald*—Mr. MacDonaldis President and CEO of MacDConsult Inc., a management consulting firm in international finance andmarketing, based in Montreal. He is also Chairman of the Board of EurocopterCanada Ltd. and a director of Invesco Trimark (Canada), a funds managementfirm. He served as the Senior Vice President for Eastern Canada for Bank ofMontreal, a position which involved the review and evaluation of the financialstatements and creditworthiness of borrowers in a wide variety of industries.In December 1995, he was elected to the National Assembly of Quebec andbecame Minister of International Trade and Technology. He was also named ViceChairman of the Treasury Board of the Government of Quebec. He also served asthe Chairman of the Audit Committee of Teleglobe Inc. for six years. Mr. MacDonaldreceived Bachelor of Arts, Bachelor of Commerce and Master of Commerce degreesfrom Laval University in Québec.

 

*Gerald J. Martin*has served as a director on our Board since2006. Former Vice President, Corporate Licensing andTechnology Alliances at Abbott Laboratories, Mr. Martin is currently BoardMember of Life Sciences Information Technology Global Institute, anot-for-profit public benefit corporation chartered to identify and developGood Informatics Practices (GIP) with a focus on the establishment of GIP in drugdevelopment. Until recently, he was Chairman of the Board of MilkahausLaboratory based in Providence, Rhode Island, a biotechnology companyspecialized mainly in male health. During his career in the biopharmaceuticaland pharmaceutical sectors, Mr. Martin, in addition to his generalmanagement functions, developed a strong expertise in sales and marketing,business development, as well as in clinical development.

 

*Nicholas J. Pelliccione*was appointed our Senior Vice President, Regulatory Affairs and QualityAssurance on May 7, 2007. Dr. Pelliccione has demonstrated theability to be a multi-faceted leader in the areas of global Regulatory Affairs,Quality Assurance and Pharmaceutical Development for more than 20 years. Inprevious roles, Dr. Pelliccione has been responsible for theclinical/preclinical and CMC regulatory aspects of new drugs in the oncology,anti-infectives, cytokines and cardiovascular therapy areas, leading to severalapprovals. He also served as Senior Vice President, Regulatory and PharmaceuticalSciences at Chugai Pharma United States Prior to his experience at Chugai, Dr. Pelliccionespent more than 15 years at Schering Plough Corporation holding positions withincreasing responsibility from Manager of Regulatory Affairs, Oncology to,prior to his departure, Vice President, Global Regulatory Affairs, Chemistry,Manufacturing and Controls. Dr. Pelliccione holds a Ph.D. in Biochemistryfrom Mount Sinai School of Medicine, New York and a BS in Chemistry fromPolytechnic University.

 

*Matthias Seeber*was appointed our Senior Vice President, Administration and Legal Affairs on December 9,2008. Mr. Seeber has served as Managing Director of AEZS Germany since July 2003up to his most recent appointment. Prior to that, he had assumed the positionof Investor Relations Manager of Altana AG, following several years in thebanking industry with Deka Investment Management and Dresdner Bank AG. Mr. Seeber is a member of the DeutscheVereinigung für Finanzanalyse und Asset Management (DVFA/CEFA). He obtained hisM.B.A. from George Mason University Graduate School of Business Administrationin the United States.

 

*Dennis Turpin*wasappointed our Senior Vice President and Chief Financial Officer on August 16,2007. Prior to that, he served as our Vice President and Chief FinancialOfficer since June 1999. Mr. Turpin joined Æterna Zentaris in August 1996as Director of Finance. Prior to that, he was Director in the tax department atCoopers Lybrand, now PricewaterhouseCoopers, from 1988 to 1996 and worked as anauditor from 1985 to 1988. Mr. Turpin earned his Bachelor’s degree inAccounting from Laval University in Québec. He obtained his license inaccounting in 1985 and became a chartered accountant in 1987.

 

*Claude Vadboncoeur* was appointed our Corporate Secretary on May 6, 2008. In the past5 years, Mr. Vadboncoeur has acted as consultant mainly for publiccompanies. Prior to that, he was Vice President Legal and Corporate Secretaryof Æterna Zentaris to which he brought a broad experience in commercial andbusiness law, having served as Vice President Legal and Corporate Secretary ofvarious large Canadian companies. Mr. Vadboncoeur earned his law degreefrom Université de Montréal and has been a member of the Quebec Bar since 1973.

 

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### ***B.            Compensation***

 

A.            Compensation ofOutside Directors

 

The compensation paid to theCorporation’s directors is designed to (i) attract and retain the mostqualified people to serve on the Board and its committees, (ii) align theinterests of the Corporation’s directors with those of its shareholders, and (iii) provideappropriate compensation for the risks and responsibilities related to being aneffective director. This compensation is recommended to the Board by theGovernance Committee. During the most recently completed financial year, theGovernance Committee was composed of four (4) directors, all of whom areindependent directors, namely Messrs. Pierre MacDonald, José P. Dorais,Juergen Ernst and Pierre Laurin. One of the members of the GovernanceCommittee, namely Juergen Ernst, is an executive officer of the Corporation.

 

The Board has adopted aformal mandate for the Governance Committee, which is available on our websiteat www.aezsinc.com. The mandate of the Governance Committee provides that it isresponsible for (i) assistingthe Board in developing our approach to corporate governance issues, (ii) proposingnew Board nominees, (iii) assessing the effectiveness of the Board and itscommittees, their respective chairs and individual directors and (iv) makingrecommendations to the Board with respect to directors’ compensation.

 

In2007, the Governance Committee retained Aon Consulting and Radford Surveys andConsulting (“AON”) as consultants. AON was retained to assist the GovernanceCommittee with our compensation programs, particularly our executive short-termand long-term incentive programs and the remuneration of members of the Board.AON analyzed our past practices and defined a peer group of companies in orderto understand the competitive compensation practices and to propose a programdesigned to deliver both cash and equity compensation components of ourdirectors and officers. Ourdirector compensation structure was benchmarked against market compensationdata gathered from U.S. biopharmaceutical organizations of comparable size.

 

Based on the results of thebenchmarking study, and taking into consideration that the structure ofdirectors’ compensation in the market has undergone considerable change amidthe growing demands and risks of serving as a corporate steward in today’scomplex business and governance environment, the Governance Committeerecommended, and the Board approved, an adjustment to the compensation of boththe Executive Chairman and the Vice Chairman of the Board corresponding to aredefinition of the functions associated with such positions.

 

Wedid not employ the services of any external compensation consultant during thefinancial year ended December 31, 2008.

 

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**Annual Retainers and Attendance Fees**

 

Annual retainers andattendance fees are paid on a quarterly basis to the members of the Board whoare not employees of the Company or its subsidiaries (“Outside Directors”) as described in the table below. Directors arepaid in their home country’s currency. Amounts have been converted from certaindirectors’ home country currency to US dollars based on the following averageexchange rates for the financial year ended December 31, 2008: €1.00 =US$1.464; and CAN$1.00 = US$0.937.

 
| **Type of compensation**               | ** ** | **Annual compensation  for the year 2008********($)** | ** ** | **Annual compensation  starting January 1, 2009********($)** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| Executive  Chairman’s Retainer(1) |       |                                                  |       |                                                              |       |
|  - European  resident member      |       | 109,800                                               |       | 109,800                                                           |       |
| Vice  Chairman Retainer(2)             |       |                                                  |       |                                                              |       |
|  - Canadian  resident member      |       | 23,425                                                |       | 23,425                                                            |       |
| Board  Retainer                        |       |                                                  |       |                                                              |       |
|  - US  resident members           |       | 25,000                                                |       | 25,000                                                            |       |
|  - Canadian  resident members     |       | 23,425                                                |       | 23,425                                                            |       |
|  - European  resident member      |       | 36,600                                                |       | 36,600                                                            |       |
| Committee  Chair Retainer              |       |                                                  |       |                                                              |       |
|  - Audit  Committee               |       |                                                  |       |                                                              |       |
| - Canadian resident member             |       | 18,740                                                |       | 18,740                                                            |       |
|  - Governance  Committee          |       |                                                  |       |                                                              |       |
|  - Canadian  resident member      |       | 14,055                                                |       | 14,055                                                            |       |
| Committee  Member Retainer             |       |                                                  |       |                                                              |       |
|  - Audit  Committee               |       |                                                  |       |                                                              |       |
|  - US  resident member            |       | 5,000                                                 |       | 5,000                                                             |       |
|  - Canadian  resident members     |       | 4,685                                                 |       | 4,685                                                             |       |
|  - Governance  Committee          |       |                                                  |       |                                                              |       |
|  - Canadian  resident members     |       | 2,343                                                 |       | 2,343                                                             |       |
|  - European  resident member      |       | 3,660                                                 |       | 3,660                                                             |       |
| Meeting  Attendance Fees(3)            |       |                                                  |       |                                                              |       |
|  - Board  meeting                 |       |                                                  |       |                                                              |       |
|  - US  resident members           |       | 2,000                                                 |       | 2,000                                                             |       |
|  - Canadian  resident members     |       | 1,874                                                 |       | 1,874                                                             |       |
|  - European  resident member      |       | 2,928                                                 |       | 2,928                                                             |       |
|  - Committee  meeting             |       |                                                  |       |                                                              |       |
|  - US  resident member            |       | 2,000                                                 |       | 2,000                                                             |       |
|  - Canadian  resident members     |       | 1,874                                                 |       | 1,874                                                             |       |
|  - European  resident member      |       | 2,928                                                 |       | 2,928                                                             |       |

 

----

| (1) | The Executive Chairman’s  retainer was increased from $73,200 to $109,800 effective September 1, 2008  as a result of the incumbent’s appointment as Executive Chairman of the  Board. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The Vice Chairman’s  retainer was increased from $14,055 to $23,425 as of August 12, 2008 due  to increased responsibilities.                                                               |
| (3) | Attendance fees are reduced  by 50% per meeting attended telephonically.                                                                                                                              |

 

The President and ChiefExecutive Officer is the only member of the Board who is not an OutsideDirector. Therefore, he is not compensated in his capacity as a director. TheExecutive Chairman is an Outside Director and is compensated as such. OutsideDirectors are reimbursed for travel and other out-of-pocket expenses incurredin attending Board or committee meetings.

 

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**OutstandingOption-Based Awards and Share-Based Awards**

 

The following table showsall awards outstanding to each Outside Director up to the end of the financialyear ending December 31, 2008:

 
| ** **            | ** **         | **Option-based Awards** | ** ** | **Share-based Awards**                                                    | ** ** |
|-----------------------|--------------------|------------------------------|------------|--------------------------------------------------------------------------------|------------|
| **Name**              | ** **         | **Issuance   Date**     | ** ** | **Number of  Securities  Underlying  Unexercised   Options(1)  (#)** | ** ** | **Option  Exercise   Price   (CAN$)** | ** ** | **Option   Expiration   Date** | ** ** | **Value of   Unexercised  In-the-  money  Options(2)  (CAN$)** | ** ** | **Issuance  Date** | ** ** | **Number of  Shares or  Units of shares  that have Not  Vested   (#)** | ** ** | **Market or Payout  Value of Share-  based   Awards that have  Not Vested   ($)** | ** ** |
| Marcel Aubut          |               | Dec. 4, 01              |       | 5,000                                                                          |       | 6.18 |   | Dec. 31, 11 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 16,  02  |                         | 15,000     |                                                                           | 3.68       |   | Dec. 15, 12 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 11,  03  |                         | 30,000     |                                                                           | 1.74       |   | Dec. 10, 13 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 14,  04  |                         | 15,000     |                                                                           | 5.83       |   | Dec. 13, 14 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 13,  05  |                         | 15,000     |                                                                           | 3.53       |   | Dec. 12, 15 |   | — |   | — |   | — |   | — |   |
|                  | Jan. 4,  07   |                         | 5,000      |                                                                           | 4.65       |   | Jan. 3, 17 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 11,  07  |                         | 25,000     |                                                                           | 1.82       |   | Dec. 10, 17 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 8,  08   |                         | 15,000     |                                                                           | 0.55       |   | Dec. 8, 18 |   | 450.00 |   | — |   | — |   | — |   |
|                  |               |                         |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Martha Byorum         |               | Dec. 4, 01              |       | 5,000                                                                          |       | 6.18 |   | Dec. 31, 11 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 16,  02  |                         | 15,000     |                                                                           | 3.68       |   | Dec. 15, 12 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 11,  03  |                         | 30,000     |                                                                           | 1.74       |   | Dec. 10, 13 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 14,  04  |                         | 15,000     |                                                                           | 5.83       |   | Dec. 13, 14 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 13,  05  |                         | 15,000     |                                                                           | 3.53       |   | Dec. 12, 15 |   | — |   | — |   | — |   | — |   |
|                  | Jan. 4,  07   |                         | 5,000      |                                                                           | 4.65       |   | Jan. 3, 17 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 11,  07  |                         | 25,000     |                                                                           | 1.82       |   | Dec. 10, 17 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 8,  08   |                         | 15,000     |                                                                           | 0.55       |   | Dec. 8, 18 |   | 450.00 |   | — |   | — |   | — |   |
|                  |               |                         |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| José P. Dorais   |               | —                       |       | —                                                                         |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                  |               |                         |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Juergen Ernst         |               | Feb. 25, 05             |       | 15,000                                                                         |       | 5.09 |   | Feb.  24, 15 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 13,  05  |                         | 15,000     |                                                                           | 3.53       |   | Dec. 12, 15 |   | — |   | — |   | — |   | — |   |
|                  | Jan. 4,  07   |                         | 5,000      |                                                                           | 4.65       |   | Jan. 3, 17 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 11,  07  |                         | 25,000     |                                                                           | 1.82       |   | Dec. 10, 17 |   | — |   | — |   | — |   | — |   |
|                  | Nov. 14,  08  |                         | 100,000    |                                                                           | 0.65       |   | Nov. 13, 18 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 8,  08   |                         | 15,000     |                                                                           | 0.55       |   | Dec. 8, 18 |   | 450.00 |   | — |   | — |   | — |   |
|                  |               |                         |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Pierre Laurin         |               | Dec. 4, 01              |       | 5,000                                                                          |       | 6.18 |   | Dec. 31, 11 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 16,  02  |                         | 24,000     |                                                                           | 3.68       |   | Dec. 15, 12 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 11,  03  |                         | 30,000     |                                                                           | 1.74       |   | Dec. 10, 13 |   | — |   | — |   | — |   | — |   |
|                  | March 29,  04 |                         | 3,000      |                                                                           | 6.26       |   | March 28, 14 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 14,  04  |                         | 15,000     |                                                                           | 5.83       |   | Dec. 13, 14 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 13,  05  |                         | 15,000     |                                                                           | 3.53       |   | Dec. 12, 15 |   | — |   | — |   | — |   | — |   |
|                  | Jan. 4,  07   |                         | 5,000      |                                                                           | 4.65       |   | Jan.  3, 17 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 11,  07  |                         | 25,000     |                                                                           | 1.82       |   | Dec. 10, 17 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 8,  08   |                         | 15,000     |                                                                           | 0.55       |   | Dec. 8, 18 |   | 450.00 |   | — |   | — |   | — |   |
|                  |               |                         |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gérard Limoges   |               | Dec. 14, 04             |       | 15,000                                                                         |       | 5.83 |   | Dec. 13, 14 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 13,  05  |                         | 15,000     |                                                                           | 3.53       |   | Dec. 12, 15 |   | — |   | — |   | — |   | — |   |
|                  | Jan. 4,  07   |                         | 5,000      |                                                                           | 4.65       |   | Jan. 3, 17 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 11,  07  |                         | 25,000     |                                                                           | 1.82       |   | Dec. 10, 17 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 8,  08   |                         | 15,000     |                                                                           | 0.55       |   | Dec. 8, 18 |   | 450.00 |   | — |   | — |   | — |   |
|                  |               |                         |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Pierre MacDonald      |               | Dec. 4, 01              |       | 5,000                                                                          |       | 6.18 |   | Dec. 31, 11 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 16,  02  |                         | 24,000     |                                                                           | 3.68       |   | Dec. 15, 12 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 11,  03  |                         | 30,000     |                                                                           | 1.74       |   | Dec. 10, 13 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 14,  04  |                         | 15,000     |                                                                           | 5.83       |   | Dec. 13, 14 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 13,  05  |                         | 15,000     |                                                                           | 3.53       |   | Dec. 12, 15 |   | — |   | — |   | — |   | — |   |
|                  | Jan. 4,  07   |                         | 5,000      |                                                                           | 4.65       |   | Jan. 3, 17 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 11,  07  |                         | 25,000     |                                                                           | 1.82       |   | Dec. 10, 17 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 8,  08   |                         | 15,000     |                                                                           | 0.55       |   | Dec. 8, 18 |   | 450.00 |   | — |   | — |   | — |   |
|                  |               |                         |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gérald J. Martin |               | Jan. 25, 06             |       | 15,000                                                                         |       | 5.04 |   | Dec. 12, 15 |   | — |   | — |   | — |   | — |   |
|                  | Jan. 4,  07   |                         | 5,000      |                                                                           | 4.65       |   | Jan. 3, 17 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 11,  07  |                         | 25,000     |                                                                           | 1.82       |   | Dec. 10, 17 |   | — |   | — |   | — |   | — |   |
|                  | Dec. 8,  08   |                         | 15,000     |                                                                           | 0.55       |   | Dec. 8, 18 |   | 450.00 |   | — |   | — |   | — |   |

 

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(1)          The number of securities underlyingunexercised options that have not vested represent all awards outstanding as atDecember 31, 2008, including awards granted before the first day of themost recently completed financial year.

 

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(2)          “Value of unexercised in-the-money options” atfinancial year-end is calculated based on the difference between the closingprice of our common chares on the TSX on the last trading day prior to fiscalyear-end (December 31, 2008) of CAN$0.58 and the exercise price of theoptions, multiplied by the number of unexercised options.

 

**Total Compensation of Outside Directors**

 

The table below summarizesthe total compensation earned by the Outside Directors during the financialyear ended December 31, 2008 (all amounts are in US dollars):

 
| ** **               | ** ** | ** **                 | ** ** | ** **        | ** ** | ** **       | ** ** | ** **              | ** ** | ** **        | ** ** | ** **          | ** ** | ** **      | ** ** | ** ** | ** ** |
|--------------------------|------------|----------------------------|------------|-------------------|------------|------------------|------------|-------------------------|------------|-------------------|------------|---------------------|------------|-----------------|------------|------------|------------|
| ** **               | ** ** | ** **                 | ** ** | ** **        | ** ** | **Share-**       | ** ** | **Option-**             | ** ** | **Non-Equity**    | ** ** | ** **          | ** ** | ** **      | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Fees earned ** | ** ** | **based **   | ** ** | **based **  | ** ** | **Incentive Plan** | ** ** | **Pension ** | ** ** | **All Other**  | ** ** | ** **      | ** ** |
| ** **               | ** ** | **($)**                    | ** ** | **Awards **  | ** ** | **Awards ** | ** ** | **Compensation**        | ** ** | **Value **   | ** ** | **Compensation(2)** | ** ** | **Total ** | ** ** |
| **Name**                 | ** ** | **Retainer(1)**            | ** ** | **Attendance(1)** | ** ** | **($)**          | ** ** | **($)**                 | ** ** | **($)**           | ** ** | **($)**             | ** ** | **($)**         | ** ** | **($)**    | ** ** |
| Marcel Aubut             |       | 23,427                     |       | 12,182            |       | —           |       | —                  |       | —            |       | —              |       | 1,406           |       | 37,015     |       |
| Martha Byorum, MBA       |       | 30,000                     |       | 21,000            |       | —           |       | —                  |       | —            |       | —              |       | —          |       | 51,000     |       |
| José P. Dorais      |       | 24,599                     |       | 19,679            |       | —           |       | —                  |       | —            |       | —              |       | 2,811           |       | 47,089     |       |
| Juergen Ernst, MBA       |       | 115,083                    |       | 30,705            |       | —           |       | —                  |       | —            |       | —              |       | 4,387           |       | 150,175    |       |
| Pierre Laurin, PhD  |       | 25,770                     |       | 19,679            |       | —           |       | —                  |       | —            |       | —              |       | 2,811           |       | 48,260     |       |
| Gérard Limoges, FCA |       | 42,170                     |       | 22,490            |       | —           |       | —                  |       | —            |       | —              |       | 2,811           |       | 67,471     |       |
| Pierre MacDonald         |       | 50,942                     |       | 26,239            |       | —           |       | —                  |       | —            |       | —              |       | 9,839           |       | 87,020     |       |
| Gerald J. Martin         |       | 25,000                     |       | 16,000            |       | —           |       | —                  |       | —            |       | —              |       | —          |       | 41,000     |       |

 

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| (1) | These amounts represent the  portion paid in cash to the Outside Directors and are paid in each director’s  home country’s currency. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | These amounts represent  fees paid in cash for special tasks and are also paid in each director’s home  country’s currency.          |

 

Duringthe financial year ended December 31, 2008, the Corporation paid anaggregate amount of $529,030 to all of its Outside Directors for servicesrendered, excluding reimbursement of out-of-pocket expenses. Outside Directorsare paid in their home country’s currency and are reimbursed for travel andother out-of-pocket expenses incurred while attending Board or committeemeetings.

 

B.            Compensation ofExecutive Officers

 

Themandate of the Governance Committee provides that it is responsible for takingall reasonable measures to ensure that appropriate human resources systems andprocedures, such as hiring policies, competency profiles, training policies andcompensation structures are in place so that we can attract, motivate andretain the quality of personnel required to meet our business objectives.

 

The Governance Committeealso assists the Board in discharging its responsibilities relating toexecutive and other human resources hiring, assessment, compensation andsuccession planning matters.

 

Thus,the Governance Committee recommends the appointment of senior officers,including the terms and conditions of their appointment and termination, andreviews the evaluation of the performance of our senior officers, includingrecommending their compensation. The Board, which includes the members of theGovernance Committee, reviews the Chief Executive Officer’s corporate goals andobjectives and evaluates his or her performance and compensation in light ofsuch goals and objectives.

 

*CompensationConsultant*

 

The Governance Committeeengages its own independent consultant to advise it with respect to executivecompensation matters. During the financial year ended December 31, 2007,the Corporation retained the services of AON to provide advice on thecompetitiveness and appropriateness of compensation programs for the ChiefExecutive Officer and our other senior executive officers.

 

The fees paid to AON forcompensation consulting services provided to the Governance Committee and tothe Corporation with respect to services provided for the financial year ended December 31,2007 were $81,550. The Governance Committee did not employ the services of anyexternal compensation consultant with respect to the financial year ended December 31,2008.

 

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While the GovernanceCommittee may rely on external information and advice, all of the decisionswith respect to executive compensation are made by the Board upon therecommendations of the Governance Committee and may reflect factors andconsiderations other than, or that may differ from, the information andrecommendations provided by any external compensation consultants that may beretained.

 

**Compensation Discussion & Analysis**

 

***CompensationPhilosophy and Objectives***

 

The Corporation’s executivecompensation program is designed to attract, motivate and retain highperforming senior executives, encourage and reward superior performance andalign the executives’ interests with those of our shareholders by:

 

·                  providing the opportunity for an executive toearn compensation that is competitive with the compensation received byexecutives employed by a group of comparable North American companies;

 

·                  providing executives with an equity-basedincentive plan, namely a stock option plan;

 

·                  aligning employee compensation with companycorporate objectives; and

 

·                  attracting and retaining highly qualifiedindividuals in key positions.

 

***Benchmarking***

 

In order to meet ourobjectives of providing market competitive compensation opportunities, ourexecutive compensation plan, based on a study provided by AON, is benchmarkedagainst market compensation data gathered from organizations of comparable sizeand other companies with which we compete for executive talent (the “Reference Group”). The composition ofthe Reference Group is reviewed by the Governance Committee for its ongoingbusiness relevance to the Company. An overview of the characteristics of theReference Group is provided in the following table:

 

*(Inmillions)*

 
| ** **                                             | ** ** | **Æterna Zentaris   ($)** | ** ** | **Survey Reference Group   ($)** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------------|------------|
| **Location**                                           |       | Canada                                   |       | North America                                   |       |
| **Industries**                                         |       | Biopharmaceutical                        |       | Biopharmaceutical                               |       |
| **Revenues**

Last fiscal year                         | ** ** | 38.80(2)                                 |       | 64.10(1)                                        |       |
| **Market Capitalization**

As at October 16, 2007 |       | 99.46                                    |       | 442.00                                          |       |
| **Net (Loss) earning**

Last fiscal year               | ** ** | 33.40(2)                                 |       | (39.50)(1)                                      |       |

 

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| (1) |   | The Reference Group for the  financial year ended December 31, 2008 was selected in October 2007  and these data are based on their last fiscal year at that time. |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | As of December 31,  2006.                                                                                                                                               |

 

The Reference Group used inrespect of the financial year ended December 31, 2008 was composed of thefollowing companies: Acadia Pharmaceuticals Inc.; Acorda Therapeutics Inc.;Array Biopharma Inc.; Bradley Pharmaceutical; Caraco Pharmaceutical Labs; CellGenesys Inc.; Cell Therapeutics Inc.; Enzon Pharmaceuticals Inc.; GenomicHealth Inc.; Indevus Pharmaceuticals Inc.; Ista Pharmaceuticals Inc.; LigandPharmaceutical, Monogram Biosciences Inc.; Nastech Pharmaceutical; NeurocrineBiosciences Inc.; Nps Pharmaceuticals Inc.; Omrix Biopharmaceuticals; SalixPharmaceuticals Ltd; Savient Pharmaceuticals Inc.; Viacell Inc.; and Xoma Ltd.

 

*Positioning*

 

The Corporation’scompensation policy is for executive compensation to be generally aligned withthe 50th percentile of the Reference Group. TheGovernance Committee uses discretion and judgment when determining compensationlevels as they apply to a specific executive officer. Individual compensationmay be positioned above or below median, based on individual experience andperformance or other criteria deemed important by the Governance Committee. Thetotal cash target payment for our executive officers generally falls within themarket 50th percentile competitive range.

 

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*CompensationElements*

 

Anexecutive compensation policy has been established to acknowledge and rewardthe contributions of the executive officers to our success and to ensurecompetitive compensation, in order that we may benefit from the expertiserequired to pursue our objectives.

 

Our executive compensationpolicy is comprised of both fixed and variable components. The variablecomponents include equity and non-equity incentive plans. Each compensationcomponent has a different function, but all elements are intended to work inconcert to maximize company and individual performance by establishingspecific, competitive operational and financial goals and by providingfinancial incentives to employees based on their level of attainment of thesegoals.

 

Our current executivecompensation program is comprised of the following four basic components:

 

(i)                         base salary;

 

(ii)                      non-equity incentives –****consisting of a cash bonus linked to bothindividual and corporate performance;

 

(iii)                   long-term compensation – consisting of ourstock option plan established for the benefit of our directors, executiveofficers and employees (the “Stock Option Plan”); and

 

(iv)                  other elements of compensation –****consisting of benefits, perquisites andretirement benefits.

 

*BaseSalary*

 

Salariesof our executive officers are established based on a comparison withcompetitive benchmark positions. The starting point to determine executive basesalaries is the median of executive salaries in the Reference Group. They arereviewed annually by the Governance Committee.

 

In determining individualbase salaries, the Governance Committee takes into consideration individualcircumstances that may include the scope of an executive’s position, theexecutive’s relevant competencies or experience and retention risk. TheGovernance Committee also takes into consideration the fulfillment of ourcorporate objectives as well as the individual performance of the executive.

 

*Short-TermNon-Equity Incentive Compensation*

 

Theshort-term non-equity incentive compensation plan sets out the allocation ofincentive awards based on the financial results and the advancement of ourproduct development and strategic objectives. These objectives are set at thebeginning of each financial year as part of the annual review of corporatestrategies.

 

Inthe case of executive officers, a program is designed to maximize corporate andindividual performance by establishing specific operational and financial goalsand to provide financial incentives to executive officers based on their levelof attainment of these goals. The granting of cash incentives require theapproval of both the Governance Committee and the Board and are based upon anassessment of each individual’s performance, as well as the performance of theCompany.

 

Forthe financial year ended December 31, 2008, cash bonuses paid to all ofour executive officers under our short-term non-equity incentive compensationplan represented 96.93% of the target payout established by the GovernanceCommittee under such plan. The bonus payout level for 2008 was relatively highsince it included non-budgeted bonus payments made to two of our executiveofficers, namely Juergen Engel and Matthias Seeber, our President and ChiefExecutive Officer and Senior Vice President, Administration and Legal Affairs,respectively, for special work performed by such officers in connection withthe negotiation, management and successful completion of two importanttransactions in 2008. See notes 5 and 8 to the Summary Compensation Table setforth below. Excluding the aforementioned special bonuses that amounted to anaggregate of $117,094, the ratio of cash bonusespaid to the target payout would have been 81.73%. In addition, the 96.93% ratio of cashbonuses paid to the target payout excludes an aggregate amount of $50,000 paid to our executive officers in March 2008 as aspecial bonus to have been applied exclusively for the purchase of our commonshares on the market in order to encourage greater share ownership by seniormanagement.

 

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*Long-termEquity Compensation Plan of Executive Officers*

 

Thelong-term component of the compensation of our executive officers is basedexclusively on the Stock Option Plan, which permits the award of a number ofoptions that varies in accordance with the contribution of the officers andtheir responsibilities. To encourage retention and focus management ondeveloping and successfully implementing the continuing growth strategy of theCompany, stock options generally vest over a period of three years. Stockoptions are usually granted to executive officers in December ofeach year.

 

***Summaryof the Stock Option Plan***

 

We established the StockOption Plan in order to attract and retain directors, executive officers andemployees, who will be motivated to work towards ensuring the success of theCompany. The Board has full and complete authority to interpret the StockOption Plan, to establish applicable rules and regulations applying to itand to make all other determinations it deems necessary or useful for theadministration of the Stock Option Plan, provided that such interpretations,rules, regulations and determinations are consistent with the rules of allstock exchanges and quotation systems on which our securities are then tradedand with all relevant securities legislation. Individuals eligible toparticipate under the Stock Option Plan will be determined by either the Boardor the Governance Committee.

 

Options granted under theStock Option Plan may be exercised at any time within a maximum period of tenyears following the date of their grant (the “Outside Expiry Date”). The Boardor the Governance Committee, as the case may be, designates, at its discretion,the individuals to whom stock options are granted under the Stock Option Planand determines the number of common shares covered by each of such options, thegrant date, the exercise price of each option, the expiry date, the vestingschedule and any other matter relating thereto, in each case in accordance withthe applicable rules and regulations of the regulatory authorities. Theprice at which the common shares may be purchased may not be lower than thegreater of the closing prices of the common shares on the TSX and the NASDAQ onthe last trading day preceding the date of grant of the option. Options grantedunder the Stock Option Plan generally vest in equal tranches over a three-yearperiod (one-third each year, starting on the first anniversary of the grantdate) or as otherwise determined by the Board or the Governance Committee, asthe case may be.

 

Unless the Board or the Governance Committee decides otherwise, optionholders cease to be entitled to exercise their options under the Stock OptionPlan: (i) immediately, in the event an option holder who is an officer oremployee resigns or voluntarily leaves his or her employment with the Companyor one of its subsidiaries or the employment with the Company or one of itssubsidiaries is terminated with cause and, in the case of an optionee who is anon-employee director of the Company or one of its subsidiaries, the date on which such optioneeceases to be a member of the relevant board of directors; (ii) six monthsfollowing the date on which employment is terminated as a result of the deathof an option holder who is an officer or employee and, in the case of an optioneewho is a non-employee director of the Company or one of its subsidiaries, sixmonths following the date on which such optionee ceases to be a member of therelevant board of directors by reason of death; (iii) 30 days followingthe date on which an option holder’s employment with the Company or any of its subsidiaries isterminated for a reason other than those mentioned in (i) or (ii) aboveincluding, without limitation, upon the disability, long-term illness,retirement or early retirement of the option holder; and (iv) where theoption holder is a service supplier, 30 days following the date on which suchoption holder ceases to act as such, for any cause or reason; (each, an “EarlyExpiry Date”).

 

The Stock Option Plan also provides that, if the expiry date of an option(s) (whetheran Early Expiry Date or an Outside Expiry Date) occurs during a “blackoutperiod” or within the seven business days immediately after a blackout periodimposed by the Company, the expiry date will be automatically extended to thedate that is seven business days after the last day of the blackout period. Forthe purposes of the foregoing, “blackout period” means the period during whichtrading in the Company’s securities is restricted in accordance with itscorporate policies.

 

Option holdersmay not assign their options (nor any interest therein) other than by will orin accordance with the applicable laws of estates and succession.

 

In the eventthat, at any time, an offer to purchase is made to holders of all our commonshares, notice of such offer shall be given by the Company to each optionee andall unexercised options will become exercisable immediately at their respectiveexercise prices, but only to the extent necessary to enable optionees to tendertheir common shares in response to such offer.

 

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The Stock OptionPlan currently provides that the following amendments may be made to the StockOption Plan upon approval of each of the Board our shareholders as well asreceipt of all required regulatory approvals:

 

·                  any amendment to Section 3.2 of the StockOption Plan (which sets forth the limit on the number of options that may begranted to insiders) that would have the effect of permitting, without havingto obtain shareholder approval on a “disinterested vote” at a duly convenedshareholders’ meeting, the grant of any option(s) under the Stock OptionPlan otherwise prohibited by Section 3.2;

 

·                  any amendment to the number of securitiesissuable under the Stock Option Plan (except for certain permitted adjustments,such as in the case of stock splits, consolidations or reclassifications);

 

·                  any amendment which would permit any optiongranted under the Stock Option Plan to be transferable or assignable other thanby will or in accordance with the applicable laws of estates and succession;

 

·                  theaddition of a cashless exercise feature, payable in cash or securities, whichdoes not provide for a full deduction of the number of underlying securitiesfrom the Stock Option Plan reserve;

 

·                  theaddition of a deferred or restricted share unit or any other provision whichresults in employees receiving securities while no cash consideration isreceived by the Company;

 

·                  withrespect to any option holder whether or not such option holder is an “insider”:

 

·                  any reduction in the exercise price of anyoption after the option has been granted, or

 

·                  any cancellation of an option and the re-grantof that option under different terms;

 

·                  except inrespect of certain permitted adjustments, such as in the case of stock splits,consolidations or reclassifications:

 

·                  any extension to the term of an option beyondits Outside Expiry Date to an option holder who is an “insider” (except forextensions made in the context of a “blackout period”);

 

·                  any amendment to the method of determining theexercise price of an option granted pursuant to the Stock Option Plan;

 

·                  the addition of any form of financialassistance or any amendment to a financial assistance provision which is morefavourable to employees; and

 

·                  any amendment to the foregoing amendingprovisions requiring Board, shareholder and regulatory approvals.

 

The Stock Option Plan further currentlyprovides that the following amendments may be made to the Stock Option Planupon approval of the Board and upon receipt of all required regulatoryapprovals, but without shareholder approval:

 

·                  amendmentsof a “housekeeping” or clerical nature or to clarify the provisions of the Stock Option Plan;

 

·                  amendmentsregarding any vesting period of an option;

 

·                  amendmentsregarding the extension of an option beyond an Early Expiry Date in respect ofany option holder, or the extension of an option beyond the Outside Expiry Datein respect of any option holder who is a “non-insider” of the Company;

 

·                  adjustmentsto the number of issuable common shares underlying, or the exercise price of,outstanding options resulting from a split or a consolidation of the commonshares, a reclassification, the payment of a stock dividend, the payment of aspecial cash or non-cash distribution to our shareholders on a *pro rata*basis provided such distribution is approved by ourshareholders in accordance with applicable law, a recapitalization, areorganization or any other event which necessitates an equitable adjustment tothe outstanding options in proportion with corresponding adjustments made toall outstanding common shares;

 

·                  discontinuingor terminating the Stock Option Plan; and

 

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·                  any otheramendment which does not require shareholder approval under the terms of theStock Option Plan.

 

The maximumnumber of common shares issuable under the Stock Option Plan is fixed at 11.4%of the issued and outstanding common shares at any given time, which, as at March 10,2009, represented 6,063,372 common shares. There are currently 4,667,428options outstanding under the Stock Option Plan representing 8.8% of all issuedand outstanding common shares. Under the Stock Option Plan, (i) the numberof securities issued to insiders, at any time, or issuable within any one-yearperiod, under all of our security-based compensation arrangements, cannotexceed 10% of our issued and outstanding securities and (ii) no singleoption holder may hold options to purchase, from time to time, more than 5% ofour issued and outstanding common shares.

 

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***Outstanding Option-Based Awards and Share-Based Awards***

 

The following table showsall awards outstanding to each of our President and Chief Executive Officer,Executive Chairman (and former Interim President and Chief Executive Officer),former President and Chief Executive Officer, the Chief Financial Officer andour three (3) other most highly compensated executive officers during themost recently completed financial year (collectively, the “Named Executive Officers”) as of December 31,2008:

 
| ** **              | ** **        | **Option-based Awards** | ** ** | **Share-based Awards**                                                                     | ** ** |
|-------------------------|-------------------|-------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| **Name**                | ** **        | **Issuance Date**  | ** ** | **Number of  Securities   Underlying   Unexercised  Options(1)   (#)** | ** ** | **Option  Exercise  Price  (CAN$)** | ** ** | **Option   Expiration   Date** | ** ** | **Value of  Unexercised  In-the-money  Options(2)  (CAN$)** | ** ** | **Issuance  Date** | ** ** | **Number of  Shares or   Units of   shares   that have Not   Vested   (#)** | ** ** | **Market or  Payout   Value of   Share-based  Awards that  have Not  Vested   ($)** | ** ** |
| Juergen Engel (3)       |              | Feb. 20, 03        |       | 60,000                                                                                     |       | 2.43 |   | Dec. 31, 12 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 11,  03 |                    | 60,000     |                                                                                       | 1.74       |   | Dec. 10, 13 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 14,  04 |                    | 100,000    |                                                                                       | 5.83       |   | Dec. 13, 14 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 13,  05 |                    | 50,000     |                                                                                       | 3.53       |   | Dec. 12, 15 |   | — |   | — |   | — |   | — |   |
|                    | Jan. 4,  07  |                    | 50,000     |                                                                                       | 4.65       |   | Jan. 3, 17 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 11,  07 |                    | 50,000     |                                                                                       | 1.82       |   | Dec. 10, 17 |   | — |   | — |   | — |   | — |   |
|                    | Nov. 14,  08 |                    | 200,000    |                                                                                       | 0.65       |   | Nov. 13, 18 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 8,  08  |                    | 75,000     |                                                                                       | 0.55       |   | Dec. 8, 18 |   | 2,250.00 |   | — |   | — |   | — |   |
|                    |              |                    |       |                                                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Juergen Ernst (3)       |              | Feb. 25, 05        |       | 15,000                                                                                     |       | 5.09 |   | Feb. 24, 15 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 13,  05 |                    | 15,000     |                                                                                       | 3.53       |   | Dec. 12, 15 |   | — |   | — |   | — |   | — |   |
|                    | Jan. 4,  07  |                    | 5,000      |                                                                                       | 4.65       |   | Jan. 3, 17 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 11,  07 |                    | 25,000     |                                                                                       | 1.82       |   | Dec. 10, 17 |   | — |   | — |   | — |   | — |   |
|                    | Nov. 14,  08 |                    | 100,000    |                                                                                       | 0.65       |   | Nov. 13, 18 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 8,  08  |                    | 15,000     |                                                                                       | 0.55       |   | Dec. 8, 18 |   | 450.00 |   | — |   | — |   | — |   |
|                    |              |                    |       |                                                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| David J. Mazzo (3)      |              | March 23, 07       |       | 100,000                                                                                    |       | 3.54 | (4) | March 22, 17 |   | — |   | — |   | — |   | — |   |
|                    |              |                    |       |                                                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Dennis Turpin           |              | Dec. 4, 01         |       | 30,000                                                                                     |       | 6.18 |   | Dec. 4, 11 |   | — |   | — |   | — |   | — |   |
|                    | Nov. 1,  02  |                    | 90,000     |                                                                                       | 3.94       |   | Oct. 31, 12 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 16,  02 |                    | 50,000     |                                                                                       | 3.68       |   | Dec. 15, 12 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 11,  03 |                    | 60,000     |                                                                                       | 1.74       |   | Dec. 10, 13 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 14,  04 |                    | 90,000     |                                                                                       | 5.83       |   | Dec. 13, 14 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 13,  05 |                    | 50,000     |                                                                                       | 3.53       |   | Dec. 12, 15 |   | — |   | — |   | — |   | — |   |
|                    | Jan. 4,  07  |                    | 50,000     |                                                                                       | 4.65       |   | Jav. 3, 17 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 11,  07 |                    | 50,000     |                                                                                       | 1.82       |   | Dec. 10, 17 |   | — |   | — |   | — |   | — |   |
|                    |              |                    |       |                                                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Paul Blake              |              | Jul. 27, 07        |       | 45,000                                                                                     |       | 3.05 | (4) | July 26, 17 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 11,  07 |                    | 50,000     |                                                                                       | 1.82       | (4) | Dec. 10,17 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 8,  08  |                    | 50,000     |                                                                                       | 0.55       |   | Dec. 8, 18 |   | 1,500.00 |   | — |   | — |   | — |   |
|                    |              |                    |       |                                                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Matthias Seeber (5)     |              | Feb. 20, 03        |       | 15,000                                                                                     |       | 2.43 |   | Dec. 31, 12 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 11,  03 |                    | 45,000     |                                                                                       | 1.74       |   | Dec. 10, 13 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 14,  04 |                    | 50,000     |                                                                                       | 5.83       |   | Dec. 13, 14 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 13,  05 |                    | 40,000     |                                                                                       | 3.53       |   | Dec. 12, 15 |   | — |   | — |   | — |   | — |   |
|                    | Jan. 4,  07  |                    | 30,000     |                                                                                       | 4.65       |   | Jan. 3, 17 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 11,  07 |                    | 25,000     |                                                                                       | 1.82       |   | Dec. 10, 17 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 8,  08  |                    | 30,000     |                                                                                       | 0.55       |   | Dec. 8, 18 |   | 900.00 |   | — |   | — |   | — |   |
|                    |              |                    |       |                                                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Nicholas J. Pelliccione |              | May 7, 07          |       | 25,000                                                                                     |       | 3.96 | (4) | May 6, 17 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 11,  07 |                    | 50,000     |                                                                                       | 1.82       | (4) | Dec. 10, 17 |   | — |   | — |   | — |   | — |   |
|                    | Dec. 8,  08  |                    | 20,000     |                                                                                       | 0.55       |   | Dec. 8, 18 |   | 600.00 |   | — |   | — |   | — |   |

 

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| (1) | The number of securities  underlying unexercised options that have not vested represents all awards  outstanding at December 31, 2008, including awards granted before the  first day of the most recently completed financial year.                                                                                                               |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | “Value of unexercised  in-the-money options” at financial year-end is calculated based on the  difference between the closing price of our common shares on the TSX on the  last trading day prior to year-end (December 31, 2008) of CAN$0.58 and  the exercise price of the options, multiplied by the number of unexercised  options. |
| (3) | David J. Mazzo served as  President and Chief Executive Officer up until April 11, 2008, on which  date Juergen Ernst was appointed Interim President and CEO. Juergen Engel was  appointed President and Chief Executive Officer effective September 1,  2008.                                                                               |
| (4) | These amounts are expressed  in US dollars.                                                                                                                                                                                                                                                                                                             |
| (5) | Mr. Seeber serves as  Managing Director of AEZS Germany, our principal subsidiary. On December 9,  2008, he was also appointed Senior Vice President, Administration and Legal  Affairs of Æterna Zentaris.                                                                                                                              |

 

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**Incentive plan awards - Value vested or earned during the year**

 

The following table showsthe incentive plan awards value vested or earned for each Named ExecutiveOfficer for the financial year ending December 31, 2008.

* *
| **Name**                | ** ** | **Option-based awards -  Value   vested during the year(1)  ($)** | ** ** | **Share-based awards -  Value   vested during the year   ($)** | ** ** | **Non-equity incentive plan  compensation - Value  earned   during the year   ($)** | ** **            |
|-------------------------|------------|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|-----------------------|
| Juergen Engel           |       | —                                                                                          |       | —                                                                                            |       | 248,093                                                                                                                     | (2) (3) (4) |
| Juergen Ernst           |       | —                                                                                          |       | —                                                                                            |       | 182,962                                                                                                                     | (5)                   |
| David J. Mazzo          |       | —                                                                                          |       | —                                                                                            |       | 10,000                                                                                                                      | (3)                   |
| Dennis Turpin           |       | —                                                                                          |       | —                                                                                            |       | 30,000                                                                                                                      | (3)                   |
| Paul Blake              |       | —                                                                                          |       | —                                                                                            |       | 135,000                                                                                                                     | (3)                   |
| Matthias Seeber         |       | —                                                                                          |       | —                                                                                            |       | 120,755                                                                                                                     | (4)                   |
| Nicholas J. Pelliccione |       | —                                                                                          |       | —                                                                                            |       | 70,000                                                                                                                      | (3)                   |

 

----

| (1) | The amount represents the  aggregate dollar value that would have been realized if the options had been  exercised on the vesting date, based on the difference between the closing  price of our common shares on the TSX and the exercise price on such vesting  date.                                                                                                                       |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | This amount paid to  Dr. Engel includes his annualized bonus as Executive Vice President and  Chief Scientific Officer for the first eight months and as President and  Chief Executive Officer for the last four months of 2008.                                                                                                                                                         |
| (3) | Includes a one-time cash  payment, which amounted to $10,000, that was awarded in March 2008 to  each of our Named Executive Officers with the exception of Messrs. Ernst  and Seeber. This award, to have been used solely to purchase our common  shares on the NASDAQ, was granted by the Board in order to encourage share  ownership of our common shares by senior management. |
| (4) | Amounts paid to  Messrs. Engel and Seeber include a special bonus awarded in connection  with the successful completion of two major commercial transactions in 2008  (Cetrotide® and  Impavido®).                                                                                                                                                                         |
| (5) | This amount paid to  Mr. Juergen Ernst represents entirely a bonus awarded in connection with  the successful completion of the monetization of Cetrotide® as scheduled.                                                                                                                                                                                                        |

 

**Other Forms of Compensation**

 

*Benefitsand Perquisites*

 

Our executive employeebenefits program also includes life, medical, dental and disability insurance.Perquisites consist of a car allowance and human resources counselling. Thesebenefits and perquisites are designed to be competitive overall with equivalentpositions in comparable North American organizations.

 

*PensionPlan*

 

Oneof our Named Executive Officers, namely Dr. Juergen Engel, the Presidentand Chief Executive Officer, participates in a non-contributory defined benefitpension plan. Benefits payable under this plan correspond to 40% of theexecutive officer’s average salary of the last twelve (12) months during thefirst five working years after initial participation in this plan and increaseby 0.4% for each additional year of employment.

 

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Thenormal retirement age is 65 years, but early retirement in accordance withGermany’s social pension insurance is possible without reduction (or “clawback”)of the benefit. The following table shows total annual pension benefits payableto Dr. Engel pursuant to this plan. Upon the death of a participant, thesurviving spouse and/or children of the participant will be entitled to abenefit equal to 60% of the benefits to which such participant was entitled.All benefits payable under this plan are in addition to German governmentalsocial security benefits. Only base salary is taken into consideration incalculating pension benefits.

 

**Pension Plan Table**

 
| ** **                    | ** ** | **Years of Service** | ** ** |
|-------------------------------|------------|----------------------|------------|
| **Average Remuneration ($)*** | ** ** | **15**               | ** ** | **20** | ** ** | **25** | ** ** | **30** | ** ** | **35** | ** ** |
| 200,000                       |       | $                    | 88,000     |   | $ | 92,000 |   | $ | 96,000 |   | $ | 100,000 |   | $ | 104,000 |   |
| 300,000                       |       | $                    | 132,000    |   | $ | 138,000 |   | $ | 144,000 |   | $ | 150,000 |   | $ | 156,000 |   |
| 400,000                       |       | $                    | 176,000    |   | $ | 184,000 |   | $ | 192,000 |   | $ | 200,000 |   | $ | 208,000 |   |
| 500,000                       |       | $                    | 220,000    |   | $ | 230,000 |   | $ | 240,000 |   | $ | 250,000 |   | $ | 260,000 |   |

 

----

* Remuneration refers to annual base salary.

 

Asat December 31, 2008, Dr. Engel had 32 years and 4 months of creditedservice in the aforementioned non-contributory defined benefit pension plan.

 

**Defined benefit plans table**

 
| ** **    | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **        | ** ** | ** **        | ** ** | ** **       | ** ** | ** **        | ** ** | ** **   | ** ** |
|---------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|-------------------|------------|--------------|------------|
| ** **    | ** ** | **Number**        | ** ** | ** **                  | ** ** | ** **        | ** ** | ** **        | ** ** | ** **       | ** ** | ** **        | ** ** | ** **   | ** ** |
| ** **    | ** ** | **of years** | ** ** | ** **                  | ** ** | ** **        | ** ** | **Accrued**       | ** ** | ** **       | ** ** | **Non-**          | ** ** | **Accrued**  | ** ** |
| ** **    | ** ** | **credited**      | ** ** | **Annual benefits payable** | ** ** | **obligation at** | ** ** | **Compensatory**  | ** ** | **compensatory** | ** ** | **obligation at** | ** ** |
| ** **    | ** ** | **service**       | ** ** | **At year end**             | ** ** | **At age 65**     | ** ** | **start of year** | ** ** | **change**       | ** ** | **change**        | ** ** | **year end** | ** ** |
| **Name**      | ** ** | **(#)**           | ** ** | **($)**                     | ** ** | **($)**           | ** ** | **($)**           | ** ** | **($)**          | ** ** | **($)**           | ** ** | **($)**      | ** ** |
| Juergen Engel |       | 32.33             |       | 186,680                     |       | 188,862           |       | 2,492,742         |       | 473,277          |       | 32,753            |       | 2,998,772    |       |

 

*EmployerContribution to Employees’ Retirement Plan*

 

In 2008, the Boardapproved a plan whereby we would contribute to our employees’ retirement plansboth in Canada (RRSP) and the United States (401(k)) to the extent of 50% ofthe employee’s contribution up to a maximum of $7,750 annually for employeesunder 50 years old and $10,250 for those over 50 years old. This plan wasimplemented in 2008. Employees based in Frankfurt, Germany already benefit fromcertain employer contributions into the employees’ pension funds (DUPK/RUK). Our executive officers, including the NamedExecutive Officers, are eligible to participate in the aforementionedemployer-contribution plans to the same extent and in the same manner as all ofour other employees.

 

*Summary Compensation Table*

 

The Summary CompensationTable set forth below shows compensation information for the Named ExecutiveOfficers for services rendered in all capacities during the financial yearended December 31, 2008. Our executive officers are generally paid intheir home country’s currency. All amounts in the Summary Compensation Tablebelow are in US dollars and have been converted from the Named Executive Officers’home country currencies to US dollars based on the following average exchangerates for the financial year ended December 31, 2008: €1.00 = US$1.464;and CAN$1.00 = US$0.937.

 

For compensation related toprevious years, please refer to our management information circulars filed withthe Canadian securities regulatory authorities and available at www.sedar.comand furnished to the U.S. Securities and Exchange Commission and available atwww.sec.gov.

 

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**SUMMARYCOMPENSATION TABLE**

 
| ** **                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                     | ** ** | ** **                               | ** ** | **Non-equity incentive  plan compensation** | ** ** | ** **                              | ** ** | ** **         | ** ** | ** **                                | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|--------------------------------|------------|------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------|------------|--------------------|------------|-------------------------------------------|------------|
| **Name and principal**                                                        | ** ** | ** ** | ** ** | **Salary** | ** ** | **Share  based   awards** | ** ** | **Option   based   awards(1)** | ** ** | **Annual   incentive   plan(2)**  | ** ** | **Long-  term   incentive  plans** | ** ** | **Pension  value** | ** ** | **All other   compensation(3)** | ** ** | **Total   compensation** | ** ** |
| **position**                                                                            | ** ** | **Year**   | ** ** | **($)**    | ** ** | **($)**                        | ** ** | **($)**                                  | ** ** | **($)**                                     | ** ** | **($)**                                 | ** ** | **($)**            | ** ** | **($)**                                   | ** ** | **($)** | ** ** |
| Juergen Engel  President and CEO                                                        |       | 2008       |       | 405,925    | (4)        | —                         |       | 67,777                                   |       | 248,093                                     | (5)        | —                                  |       | 473,277            |       | 3,366                                     | (6)        | 1,198,438 |   |
| Juergen Ernst  Executive Chairman of the Board and former Interim President and CEO     |       | 2008       |       | 152,465    | (7)        | —                         |       | 29,034                                   |       | 182,962                                     | (8)        | —                                  |       | —             |       | 150,175                                   | (9)        | 514,636 |   |
| David J. Mazzo  Former President and CEO                                                |       | 2008       |       | 135,000    | (10)       | —                         |       | —                                   |       | 10,000                                      | (11)       | —                                  |       | —             |       | 843,219                                   | (12)       | 988,219 |   |
| Dennis Turpin  Senior Vice President and CFO                                            |       | 2008       |       | 317,352    |       | —                         |       | —                                   |       | 30,000                                      |       | —                                  |       | —             |       | 95,780                                    | (13)       | 443,132 |   |
| Paul Blake  Senior Vice President and Chief Medical Officer                             |       | 2008       |       | 355,250    |       | —                         |       | 10,788                                   |       | 135,000                                     |       | —                                  |       | —             |       | 10,250                                    | (14)       | 511,288 |   |
| Matthias Seeber  Senior Vice President, Administration and Legal Affairs                |       | 2008       |       | 307,372    |       | —                         |       | 6,473                                    |       | 120,755                                     | (5)        | —                                  |       | —             |       | 61,881                                    | (6)        | 496,481 |   |
| Nicholas J. Pelliccione  Senior Vice President Regulatory Affairs and Quality Assurance |       | 2008       |       | 317,300    |       | —                         |       | 4,315                                    |       | 70,000                                      |       | —                                  |       | —             |       | 10,250                                    | (14)       | 401,865 |   |

 

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| (1)  | The value of the  option-based awards reflects the closing price of our common shares on the  TSX at the date of grant (CAN$0.55 for options granted on December 8, 2008  and CAN$0.65 for options granted on November 14, 2008) multiplied by the  Black-Scholes factor as at such date (41.82% for options granted on  December 8, 2008 and 42.31% for options granted on November 14,  2008) and the number of stock options granted in 2008.                                                                                          |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Includes a one-time cash  payment of $10,000 that was awarded in March 2008 to the Named Executive  Officers with the exception of Messrs. Ernst and Seeber. This award, to  have been used solely to purchase our common shares on the NASDAQ, was granted  by the Board in order to encourage share ownership of our common shares by  senior management.                                                                                                                                                                                         |
| (3)  | “All Other Compensation”  represents perquisites and other personal benefits which, in the aggregate,  amount to $50,000 or more, or are equivalent to 10% or more of a Named  Executive Officer’s total salary for the financial year ended  December 31, 2008. The type and amount of each perquisite, the value of  which exceeds 25% of the total value of perquisites, is separately disclosed  for each Named Executive officer, if applicable.                                                                                     |
| (4)  | Represents Dr. Engel’s  annual base salary as Executive Vice President and Chief Scientific Officer  that was paid to him up until September 1, 2008 plus an adjusted annual  base salary following his appointment as President and CEO between  September 1 and December 31, 2008.                                                                                                                                                                                                                                                 |
| (5)  | Includes  special bonuses paid to Dr. Engel and Mr. Seeber in connection with  the negotiation, management and successful completion of two important  transactions in 2008, namely the monetization of Cetrotide® and the sale of all rights  related to Impavido®.                                                                                                                                                                                                                                                                 |
| (6)  | Represents DUPK/RUK  (Germany) employer contributions to Dr. Engel’s and Mr. Seeber’s  retirement savings plans.                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (7)  | Represents salary paid to  Mr. Ernst as Interim President and CEO from April 11 to September 1,  2008.                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (8)  | Represents  in its entirety a special bonus paid to Mr. Ernst in connection with the  negotiation, management and successful completion of an important transaction  in 2008, namely the monetization of Cetrotide®.                                                                                                                                                                                                                                                                                                                                |
| (9)  | Represents amounts paid to  Mr. Ernst as an Outside Director.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (10) | Represents  the salary actually earned by and paid to Mr. Mazzo in his capacity as  President and Chief Executive Officer until his departure from the Company  effective April 11, 2008 based on an annual base salary in 2008 of  $468,000.                                                                                                                                                                                                                                                                                                       |
| (11) | Represents  in its entirety a one-time bonus paid to our executive officers in March 2008,  including Mr. Mazzo, to have been applied exclusively for the purchase  of our common shares on the NASDAQ in order to encourage greater share  ownership by senior management.                                                                                                                                                                                                                                                                         |
| (12) | Under  the terms of a termination agreement, Mr. Mazzo received a severance  package of $840,219, which included an amount equivalent to twelve months of  his annual base salary, an amount equivalent to the annual bonus received for  fiscal year 2007, an amount equivalent to twelve months of the cost of the  benefits that were in force at the time of his departure, an amount  representing the employer’s contribution to the employee’s  401(k) retirement savings and an amount equivalent to his vacation  payout and car |

 

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|   | allowance.  550,000 options granted to Mr. Mazzo in 2007 were cancelled as a  consequence of his departure from the Company. Mr. Mazzo was, however,  entitled to retain 100,000 options, all of which expire on or before  March 22, 2012. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (13)   | Represents $91,765 of  relocation costs and $4,015 in employer’s contribution to Mr. Turpin’s  401(k) retirement savings plan.                                                                                                                        |
| (14)   | Represents  401(k) employer contributions to Messrs. Blake’s and Pelliccione’s  retirement savings plans.                                                                                                                                             |

 

*Compensationof the Chief Executive Officer*

 

The compensation of thePresident and Chief Executive Officer is governed by our executive compensationpolicy described in Section 6.2, “Compensation of Executive Officers”, andthe President and Chief Executive Officer participates together with the otherNamed Executive Officers in all of our incentive plans.

 

Dr. Engel has been ourPresident and Chief Executive Officer since September 1, 2008. Under Dr. Engel’sleadership, we received an initial payment of $52.5 million (subject to certainclawbacks and less $1.0 million in transaction costs) from CHRP upon completionof a monetization transaction in which AEZS Germany assigned its rights toroyalties on future sales under its license agreement with Merck Serono.

 

While he was our ExecutiveVice President and Chief Scientific Officer, Dr. Engel earned $253,703during the first eight months of 2008 based on an annual base salary of $380,555. Effective September 1, 2008, when he wasappointed President and Chief Executive Officer, Dr. Engel’s annual basesalary was increased to $456,667, thus representing a 20% increase over his former salary.Consequently, Dr. Engel’s total earned salary for 2008 was $405,925. The President and Chief Executive Officer’ssalary for 2008 places him at approximately 18% below the 50th percentile in relation to thecompanies in the Reference Group of Radford’s Global Life Sciences ExecutiveCompensation Survey. He also received 100% of his target bonus of $164,910 for his performance in the context of ourcorporate objectives. Such bonus reflected the advancement of our product pipelineas well as our performance in relation to strategic objectives and businessdevelopment. He also received a $10,000 award which was used solely to purchaseour common shares on the market, which was granted by the Board to encourageshare ownership by senior management. Additionally, he received a special bonusof $73,183  as a reward for managing the successfulcompletion of the Cetrotide® monetization transaction as scheduled.

 

Priorto the appointment of Dr. Engel as President and Chief Executive Officer,we had appointed our Chairman of the Board, Mr. Juergen Ernst, as interimPresident and Chief Executive Officer, effective April 11, 2008 as aconsequence of the departure of David Mazzo. Mr. Ernst’s annual basesalary as interim President and Chief Executive Officer was $365,919 and anamount of $152,465 was actually paid to him during the interim period. Mr. Ernstalso received a special bonus of $182,962 for the successful completion of theCetrotide® monetization transaction as scheduled.

 

The Governance Committeeperiodically considers the advice of an independent compensation consultant indetermining the grants to be awarded to the President and Chief ExecutiveOfficer.

 

In conjunction with the LongTerm Equity Compensation Plan, the President and Chief Executive Officer wasawarded grants of 200,000 and 75,000 stock options on November 14 and December 8,2008, respectively. The stock options granted on November 14, 2008 wereawarded at an exercise price of CAN$0.65 and those granted on December 8,2008 were awarded at an exercise price of CAN$0.55. Those stock options willvest in accordance with the provisions of the Stock Option Plan.

 

### ***C.            Board practices***

 

OurArticles provide that our Board shall be composed of a minimum of five and amaximum of fifteen directors. Directors are elected annually by ourshareholders, but the directors may from time to time appoint one or moredirectors, provided that the total number of directors so appointed does notexceed one third of the number of directors elected at the last annual meetingof shareholders. Each elected director will remain in office until terminationof the next annual meeting of the shareholders or until his or her successor isduly elected or appointed, unless his or her post is vacated earlier.

 

Underthe terms of contractual agreements among the Company and SGF Santé Inc.concerning, among other matters, the election of directors, provided that SGFSanté Inc. holds at least 5% of our issued and outstanding voting shares, (a) wewill propose for election as a director, at each annual meeting of theshareholders, one candidate designated by SGF Santé Inc., provided that thecandidate receives a favourable recommendation from the Corporate Governance, Nominating and HumanResources Committee (the “Governance Committee”).

 

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**Committees of the Board ofDirectors**

 

Audit Committee

 

Our Board hasestablished an Audit Committee and the Governance Committee.

 

TheAudit Committee assists the Board in fulfilling its oversight responsibilities.The Audit Committee reviews the financial reporting process, the system ofinternal control, the audit process, and the Company’s process for monitoringcompliance with laws and regulations and with our Code of Ethical Conduct. Inperforming its duties, the Audit Committee will maintain effective workingrelationships with the Board, management, and the external auditors. To effectivelyperform his or her role, each committee member will obtain an understanding ofthe detailed responsibilities of committee membership as well as the Company’sbusiness, operations and risks.

 

The function of the Audit Committee isoversight and while it has the responsibilities and powers set forth in itscharter, it is neither the duty of the committee to plan or to conduct auditsor to determine that the company’s financial statements are complete, accurateand in accordance with generally accepted accounting principles, nor tomaintain internal controls and procedures.

 

The current members of the Audit Committee areMartha Byorum, Gérard Limoges and Pierre MacDonald.

 

Governance Committee

 

Themandate of the Governance Committee provides that it is responsible for takingall reasonable measures to ensure that appropriate human resources systems andprocedures, such as hiring policies, competency profiles, training policies andcompensation structures are in place so that the Company can attract, motivateand retain the quality of personnel required to meet its business objectives.

 

The GovernanceCommittee also assists the Board in discharging its responsibilities relatingto executive and other human resources hiring, assessment, compensation andsuccession planning matters.

 

Thus,the Governance Committee recommends the appointment of senior officers,including the terms and conditions of their appointment and termination, andreviews the evaluation of the performance of our senior officers, includingrecommending their compensation. The Board, which includes the members of theGovernance Committee, reviews the Chief Executive Officer’s corporate goals andobjectives and evaluates his or her performance and compensation in light ofsuch goals and objectives.

 

The current members of theGovernance Committee are Juergen Ernst, José P. Dorais, Pierre Laurin andPierre MacDonald.

 

### ***D.            Employees***

 

As of March 1, 2009, we had a total of 109employees, of which 88 are based in Frankfurt, Germany, 9 in New Jersey, UnitedStates, and 12 in Québec, Canada. 42 are involved in discovery, preclinical andpharmaceutical development, 37 are involved in medical and regulatory affairs,quality assurance and intellectual property, and 30 are involved in businessoperations, communications, finances, information technology, human resources,project management and legal affairs. We have agreements with all of ouremployees covering confidentiality and loyalty, non-competition, and assignmentto the Company of all intellectual property rights developed during theemployment period. Some of our employees based in Frankfurt, Germany arerepresented by the Chemical Union of Germany. As such, their compensation islargely driven by the outcome of the negotiations between the Chemical Unionand the Association of Employers for the chemical industry which is thenbinding for all German companies in the industry. The current collectivebargaining agreement (*Tarifvertrag*)that applies to all tariff-employees of AEZS Germany expires on March 31,2010. We have never experienceda work stoppage and we believe that relations with our employees as wellas with the works council representing our German employees are generally good.

 

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***E.******                                    Shareownership***

 

The information in the table below is providedas of March 20, 2009:

 
| **Name**                                             | ** ** | **No. of common shares  owned or held** | ** ** | **Percent** | ** ** | **No. of stock options  Held(1)** | ** ** | **No. of currently  exercisable options** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|
|                                                 |       |                                                             |       |        |       |                                             |       |                                                     |       |
| Marcel Aubut                                         |       | 57,500                                                           |       | *           |       | 125,000                                          |       | 95,001                                                   |       |
| Paul Blake                                           |       | 60,720                                                           |       | *           |       | 145,000                                          |       | 31,667                                                   |       |
| Martha Byorum                                        |       | 12,000                                                           |       | *           |       | 125,000                                          |       | 95,001                                                   |       |
| José P. Dorais                                  |       | —                                                           |       | *           |       |                                             |       |                                                     |       |
| Juergen Engel                                        |       | 79,779                                                           |       | *           |       | 645,000                                          |       | 320,001                                                  |       |
| Juergen Ernst                                        |       | 58,850                                                           |       | *           |       | 175,000                                          |       | 45,001                                                   |       |
| Pierre Laurin                                        |       | 50,200                                                           |       | *           |       | 137,000                                          |       | 107,001                                                  |       |
| Gérard Limoges                                  |       | 9,000                                                            |       | *           |       | 75,000                                           |       | 45,001                                                   |       |
| Pierre  MacDonald                                    |       | 26,500                                                           |       | *           |       | 134,000                                          |       | 104,001                                                  |       |
| Gerald J.  Martin                                    |       | 14,000                                                           |       | *           |       | 60,000                                           |       | 30,001                                                   |       |
|                                                 |       |                                                             |       |        |       |                                             |       |                                                     |       |
| Nicholas J.  Pelliccione                             |       | 25,000                                                           |       | *           |       | 95,000                                           |       | 25,001                                                   |       |
| Matthias Seeber                                      |       | —                                                           |       | *           |       | 235,000                                          |       | 178,334                                                  |       |
| Dennis Turpin                                        |       | 13,250                                                           |       | *           |       | 470,000                                          |       | 420,001                                                  |       |
|                                                 |       |                                                             |       |        |       |                                             |       |                                                     |       |
| All of our  directors and senior officers as a group |       | 389,799                                                          |       | 0.73        |       | 2,421,000                                        |       | 1,496,011                                                |       |

 

----

*: Less than 1%

(1)          Forinformation regarding option expiration dates and exercise price refer to thetables set forth on pages 80 and 87 of this annual report.

 

**Item 7.****          ****Major Shareholders andRelated Party Transactions**

 

***A.******                                   ******Major shareholders***

** **

We are not directly orindirectly owned or controlled by another corporation or by any foreigngovernment.

 

Based on filings with theSecurities and Exchange Commission and the Canadian securities regulatoryauthorities, as of February 17, 2009, set out below are the onlypersons/entities who beneficially owned, directly or indirectly, or exercisedcontrol or direction over our common shares carrying more than 5% of the votingrights attached to all our common shares. As used in the table below, “beneficial ownership” means sole or sharedpower to vote or direct the voting of the security, or the sole or sharedinvestment power with respect to a security (i.e., the power to dispose, ordirect a disposition, of a security). A person is deemed at any date to have “beneficialownership” of any security that the person has a right to acquire within 60days. More than one person may be deemed to have beneficial ownership of thesame group of securities.

 
| **Name of shareholder** | ** ** | **Common Shares** | ** ** | **Total Percentage  of Voting Rights** | ** ** |
|-----------------------------------|------------|------------------------|------------|-------------------------------------------------------|------------|
| ** **                        | ** ** | **(#)**                | ** ** | **(%)**                                               | ** ** |
| Solidarity  Fund (QFL)            |       | 9,752,069              |       | 18.33                                                 |       |
|                              |       |                   |       |                                                  |       |
| SGF Santé  Inc.              |       | 8,810,878              |       | 16.57                                                 |       |
|                              |       |                   |       |                                                  |       |
| Eric Dupont                       |       | 3,767,413              |       | 7.08                                                  |       |

 

None of the shareholders set out above has differentvoting rights from the other shareholders.

 

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**UnitedStates Shareholders**

 

As of December 31,2008, there were a total of 234holders of record of our common shares, of which seven were registeredwith addresses in the United States holding in the aggregate approximately2.08% of our outstanding common shares. We believe that the number ofbeneficial owners of our common shares is substantially greater than the numberof record holders, because a large portion of our common shares are held ofrecord in broker “street names.”

 

***B.******                                   ******Related party transactions***

** **

None

 

***C.******                                   ******Interests of experts andcounsel***

** **

Not applicable.

 

**Item 8.****          ****Financial Information**

*** ***

***A.******                                   ******Consolidated statementsand other financial information***

** **

The financial statements filed as part of thisannual report are presented under “Item 18. — Financial Statements.”

 

**Valuation and qualifying accounts are as follows (in thousands of USdollars):**

 

*Valuation allowance on future income tax assets*

 
| ** **                             | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                             | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance - Beginning of year            |       | $                                           | 23,289     |   | $ | 13,337 |   | $ | 35,719 |   |
| Change in valuation allowance          |       | 17,554                                      |       | 6,963 |   | (22,644 | ) |
| Foreign currency transation adjustment |       | (4,262                                      | )          | 2,989 |   | 262 |   |
|                                   |       |                                        |       |   |   |   |   |
| Balance - End of year                  |       | $                                           | 36,581     |   | $ | 23,289 |   | $ | 13,337 |   |

 

**Export Sales**

 

Export and domestic sales in thousands of USdollars and as percentage of total sales as follows:

 
| ** **     | ** ** | **Years ended December 31,** | ** ** |
|----------------|------------|---------------------------------------------|------------|
| ** **     | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Export Sales   |       | $                                           | 38,145     |   | 99.13 | % | $ | 41,668 |   | 99.05 | % | $ | 38,774 |   | 99.93 | % |
| Domestic Sales |       | $                                           | 333        |   | 0.87 | % | $ | 400 |   | 0.95 | % | $ | 25 |   | 0.07 | % |
|           |       | $                                           | 38,478     |   | 100.00 | % | $ | 42,068 |   | 100.00 | % | $ | 38,799 |   | 100.00 | % |

 

**Dividend Policy**

 

Since our incorporation, we have not paid anydividends and we do not anticipate paying any dividends in the foreseeablefuture.

 

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***B.******                                   ******Significant changes***

** **

No significant changes occurred since the date ofour annual consolidated financial statements included elsewhere in this annualreport.

 

**Item 9.****          ****The Offering and Listing**

*** ***

***A.******                                   ******Offer and listing details***

** **

Not Applicable, except for Item 9A(4)

 
| ** **          | ** ** | **NASDAQ (US$)** | ** ** | **TSX (CAN$)** | ** ** |
|---------------------|------------|-----------------------|------------|---------------------|------------|
| ** **          | ** ** | **High**              | ** ** | **Low**             | ** ** | **High** | ** ** | **Low** | ** ** |
|                |       |                  |       |                |       |   |   |   |   |
| 2008                |       | 1.85                  |       | 0.26                |       | 1.92 |   | 0.44 |   |
| 2007                |       | 4.40                  |       | 1.33                |       | 5.21 |   | 1.37 |   |
| 2006                |       | 7.55                  |       | 3.93                |       | 8.79 |   | 4.51 |   |
| 2005                |       | 6.47                  |       | 4.00                |       | 7.89 |   | 4.85 |   |
| 2004                |       | 8.42                  |       | 3.17                |       | 11.5 |   | 4.12 |   |
|                |       |                  |       |                |       |   |   |   |   |
| **2007**            |       |                  |       |                |       |   |   |   |   |
| Fourth quarter      |       | 2.73                  |       | 1.33                |       | 2.74 |   | 1.37 |   |
| Third quarter       |       | 3.65                  |       | 2.27                |       | 3.90 |   | 2.40 |   |
| Second quarter      |       | 4.18                  |       | 3.25                |       | 4.75 |   | 3.45 |   |
| First quarter       |       | 4.40                  |       | 2.90                |       | 5.21 |   | 3.41 |   |
|                |       |                  |       |                |       |   |   |   |   |
| **2008**            |       |                  |       |                |       |   |   |   |   |
| Fourth quarter      |       | 1.10                  |       | 0.26                |       | 0.83 |   | 0.44 |   |
| Third quarter       |       | 1.37                  |       | 0.58                |       | 1.44 |   | 0.60 |   |
| Second quarter      |       | 1.85                  |       | 0.97                |       | 1.92 |   | 0.98 |   |
| First quarter       |       | 1.80                  |       | 0.76                |       | 1.80 |   | 0.75 |   |
|                |       |                  |       |                |       |   |   |   |   |
| **Last six months** |       |                  |       |                |       |   |   |   |   |
| Feb-09              |       | 1.10                  |       | 0.60                |       | 1.15 |   | 0.72 |   |
| Jan-09              |       | 0.73                  |       | 0.46                |       | 0.88 |   | 0.57 |   |
| Dec-08              |       | 0.60                  |       | 0.26                |       | 0.72 |   | 0.44 |   |
| Nov-08              |       | 1.10                  |       | 0.44                |       | 0.74 |   | 0.54 |   |
| Oct-08              |       | 0.79                  |       | 0.35                |       | 0.83 |   | 0.44 |   |
| Sept-08             |       | 1.18                  |       | 0.58                |       | 1.27 |   | 0.60 |   |

 

***B.******                                   ******Plan of distribution***

 

Not applicable.

 

***C.******                                   ******Markets***

 

Our common shares are listed and posted for tradingon the TSX under the symbol “AEZ” and are quoted on the NASDAQ under the symbol“AEZS.” On October 24, 2008, we announced that we had received anotification from NASDAQ regarding the failure by the Company to comply withNASDAQ’s minimum bid price requirements. Although NASDAQ has temporarilysuspended enforcement of its minimum bid price requirements, such requirementswill be reinstated on April 19,2009, or pending approval by the Securities and Exchange Commission of NASDAQ’sproposed rule change, July 19, 2009. If we fail to meet any ofNASDAQ’s continued listing requirements and NASDAQ attempts to enforcecompliance with its rules, our common shares may be delisted from NASDAQ. If our shares were delisted from TSX orNASDAQ, investors may have difficulty in disposing of our common shares held bythem.

 

***D.******                                   ******Selling shareholders***

** **

Not applicable.

 

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***E.******                                   ******Dilution***

** **

Not applicable.

 

***F.******                                   ******Expenses of the issuer***

** **

Not applicable.

 

**Item 10.****   ****Additional Information**

*** ***

***A.******                                   ******Share capital***

 

Not applicable.

 

***B.******                                   ******Memorandum and articles ofassociation***

** **

TheCompany is governed by its restated articles of incorporation (the “RestatedArticles of Incorporation”) under the *CanadaBusiness Corporations Act*(the “CBCA”) and by its bylaws (the “bylaws”).The Company’s Restated Articles of Incorporation are on file with theCorporations Directorate of Industry Canada under Corporation Number 264271-9.The Restated Articles of Incorporation do not include a stated purpose and donot place any restrictions on the business that the Company may carry on.

 

**Inspection Rights of Shareholders**

 

Underthe CBCA, shareholders are entitled to be provided with a copy of the list ofregistered shareholders of the Company. In order to obtain the shareholderlist, the Company must be provided with an affidavit including, among otherthings, a statement that the list will only be used for the purposes permittedby the CBCA. These permitted purposes include an effort to influence the votingof shareholders of the Company, an offer to acquire securities of the Companyand any other matter relating to the affairs of the Company. The Company isentitled to charge a reasonable fee for the provision of the shareholder listand must deliver that list no more than ten days after receipt of the affidavitdescribed above.

 

Underthe CBCA, shareholders of the Company have the right to inspect certaincorporate records, including its Restated Articles of Incorporation and bylawsand minutes of meetings and resolutions of the shareholders. Shareholders haveno statutory right to inspect minutes of meetings and resolutions of directorsof the Company. Shareholders of the Company have the right to certain financialinformation respecting the Company. In addition to the annual and quarterlyfinancial statements required to be filed under applicable securities laws,under the CBCA the Company is required to place before every annual meeting ofshareholders its audited comparative annual financial statements. In addition,shareholders have the right to examine the financial statements of each of oursubsidiaries and any other corporate entity whose accounts are consolidated inthe financial statements of the Company.

 

**Directors**

 

Theminimum number of directors of the Company is five and the maximum number isfifteen. In accordance with the Company’s bylaws and the CBCA, a majority ofits directors must be residents of Canada. In order to serve as a director, aperson must be a natural person at least 18 years of age, of sound mind, notbankrupt, and must not be prohibited by any court from holding the office ofdirector. For as long as the Company is a company that publicly distributes itssecurities, at least two-thirds of its directors must not be officers oremployees of the Company or its subsidiaries. None of the Restated Articles ofIncorporation, the bylaws and the CBCA impose any mandatory retirementrequirements for directors.

 

Thedirectors are elected by a majority of the votes cast at the annual meeting atwhich an election of directors is required, to hold office until the electionof their successors except in the case of resignations or if their officesbecome vacant by death or otherwise. Subject to the provisions of the Company’sbylaws, all directors may, if still qualified to serve as directors, stand forre-election. The Board is not replaced at staggered intervals but is electedannually.

 

Underthe Company’s bylaws and the Restated Articles of Incorporation, a director ofthe Company need not be a shareholder.

 

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Thedirectors are entitled to remuneration as shall from time to time be determinedby the Board or by a committee to which the Board may delegate the power to doso. Under the mandate of the Company’s Governance Committee, such committee,comprised of a majority of independent directors, is tasked withmaking recommendations to the Board concerning director remuneration.

 

TheCompany’s bylaws provide that a director shall promptly disclose to the Companyany interest he or she has in any undertaking or association that is likely toplace him or her in a situation of conflict of interest, as well as the rightshe or she may assert against the Company, indicating, should such be the case,the nature and value thereof. Likewise, the CBCA and the Company’s bylawsprovide that a director who is a party to, or who is a director or officer of,or has a material interest in, any person who is a party to a material contractor transaction or proposed material contract or transaction with the Companymust disclose to the Company the nature and extent of his or her interest atthe time and in the manner provided by the CBCA, or request that same beentered in the minutes of the meetings of the Board, even if such contract, inconnection with the normal business activity of the Company, does not requirethe approval of either the directors or the shareholders. At the request of thepresident or any director, the director placed in a situation of conflict ofinterest must leave the meeting while the Board discusses the matter. The CBCAand the Company’s bylaws prohibit such a director from voting on any resolutionto approve the contract or transaction unless the contract or transaction:

 

·                  relates primarily to his or her remuneration asa director, officer, employee or agent of the Company or an affiliate;

 

·                  is for indemnity or insurance for director’sliability as permitted by the CBCA; or

 

·                  is with an affiliate of the Company.

 

TheCBCA provides that the Board may, on behalf of the Company and withoutauthorization of its shareholders:

 

·                  borrow money upon the credit of the Company;

 

·                  issue, reissue, sell or pledge debt obligationsof the Company;

 

·                  give a guarantee on behalf of the Company tosecure performance of an obligation of any person; and

 

·                  mortgage, hypothecate, pledge or otherwisecreate a security interest in all or any property of the Company, owned orsubsequently acquired, to secure any obligation of the Company.

 

Theshareholders have the ability to restrict such powers through the Company’sRestated Articles of Incorporation or bylaws (or through a unanimousshareholder agreement), but no such restrictions are in place.

 

Inaddition, the Company’s bylaws provide that the Board may:

 

·                  subject to the provisions of the Company’sRestated Articles of Incorporation, accept subscriptions, allot, issue all orpart of the unissued shares of the Company, grant options in respect of suchshares or otherwise dispose thereof to such persons, on such terms andconditions and for such consideration and in such manner not contrary to theCBCA or the Restated Articles of Incorporation of the Company as the directorsthink fit; and

 

·                  from time to time as it may deem advisable andto the extent permitted by the CBCA, declare and pay to the shareholders,according to their rights, dividends in money or property or in the form ofshares of the Company.

 

TheCBCA prohibits the giving of a guarantee to any shareholder, director, officeror employee of the Company or of an affiliated corporation or to an associateof any such person for any purpose or to any person for the purpose of or inconnection with a purchase of a share issued or to be issued by the Company orits affiliates, where there are reasonable grounds for believing that theCompany is or, after giving the guarantee, would be unable to pay itsliabilities as they become due, or the realizable value of the Company’s assetsin the form of assets pledged or encumbered to secure a guarantee, after givingthe guarantee, would be less than the aggregate of the Company’s liabilitiesand stated capital of all classes. These borrowing powers may be varied by theCompany’s bylaws or its Restated Articles of Incorporation. However, theCompany’s bylaws and Restated Articles of Incorporation do not contain anyrestrictions on or variations of these borrowing powers.

 

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Pursuantto the Company’s bylaws, the directors of the Company manage and administer thebusiness and affairs of the Company and exercise all such powers and authorityas the Company is authorized to exercise pursuant to the Act, the RestatedArticles of Incorporation and the bylaws. The general duties of a director orofficer of the Company under the CBCA are to act honestly and in good faithwith a view to the best interests of the Company and to exercise the care,diligence and skill that a reasonably prudent person would exercise incomparable circumstances. Any breach of these duties may lead to liability tothe Company and its shareholders for breach of fiduciary duty. In addition, abreach of certain provisions of the CBCA, including the improper payment ofdividends or the improper purchase or redemption of shares, will render thedirectors who authorized such action liable to account to the Company for anyamounts improperly paid or distributed.

 

TheCompany’s bylaws provide that the Board may, from time to time, appoint fromamongst their number committees of the Board, and delegate to any suchcommittee any of the powers of the Board except those which pursuant to theCBCA a committee of the Board has no authority to exercise. As such, the Boardhas two standing committees: the Audit Committee and the Corporate Governance,Nominating and Human Resources Committee.

 

Subjectto the limitations provided by the CBCA, the Company must indemnify a directoror an officer of the Company, a former director or officer of the Company or aperson who acts or acted at the Company’s request as a director or officer of abody corporate of which the Company is or was a shareholder or creditor, andhis or her heirs and legal representatives, against all costs, losses, chargesand expenses, including an amount paid to settle an action or satisfy ajudgment, reasonably incurred by him or her in respect of any civil, criminalor administrative action or proceeding to which he or she is made a party byreason of having been a director or officer of the Company or such bodycorporate, provided:

 

(a)          he or sheacted in good faith in the best interests of the Company; and

 

(b)         in thecase of a criminal or an administrative action or proceeding that is enforcedby a monetary penalty, he or she had reasonable grounds to believe that his orher conduct was lawful.

 

The directors of the Company are authorized toindemnify from time to time any director or other person who has assumed or isabout to assume in the normal course of business any liability for the Companyor for any corporation controlled by the Company, and to secure such directoror other person against any loss by the pledge of all or part of the movable orimmovable property of the Company through the creation of a hypothec or anyother real right in all or part of such property or in any other manner.

 

**Share Capitalization**

 

TheCompany’s Restated Articles of Incorporation authorize the issuance of anunlimited number of common shares and an unlimited number of Preferred Shares.All classes are without nominal or par value. The Restated Articles ofIncorporation do not authorize the issuance of any other class of shares. On March 20,2009, there were 53,187,470 common shares and no Preferred Shares issued andoutstanding.

 

*Common Shares*: The holders of thecommon shares are entitled to one vote for each common share held by them atall meetings of shareholders, except meetings at which only shareholders of aspecified class of shares are entitled to vote. In addition, the holders areentitled to receive dividends if, as and when declared by the Board on thecommon shares. Finally, the holders of the common shares are entitled toreceive the remaining property of the Company upon any liquidation, dissolutionor winding-up of the affairs of the Company, whether voluntary or involuntary.Shareholders have no liability to further capital calls as all shares issuedand outstanding are fully paid and non-assessable.

 

*Preferred Shares*: The First andSecond Preferred Shares are issuable in series with rights and privilegesspecific to each class. The holders of Preferred Shares are not entitled toreceive notice of or to attend or vote at meetings of shareholders. NoPreferred Shares of the Company have been issued to date.

 

Theholders of First Preferred Shares are entitled to preference and priority toany participation of holders of Second Preferred Shares, common shares orshares of any other class of shares of the share capital of the Company rankingjunior to the First Preferred Shares in regards to dividends and, in the eventof the liquidation of the Company, the distribution of its property upon itsdissolution or winding-up, or the distribution of all or part of its assetsamong the shareholders, to an amount equal to the value of the considerationpaid in respect of such shares outstanding, as credited to the issued andpaid-up share capital of the Company, on an equal basis, in proportion to theamount of their respective claims in regard to such shares held by them. Theholders of Second Preferred Shares are entitled to preference and priority toany participation of holders of common shares or shares of any other class ofshares of the share capital of the Company ranking junior to the

 

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SecondPreferred Shares with respect to dividends and, in the event of the liquidationof the Company, the distribution of its property upon its dissolution orwinding-up, or the distribution of all or part of its assets among theshareholders, to an amount equal to the value of the consideration paid inrespect of such shares outstanding, as credited to the issued and paid-up sharecapital of the Company, on an equal basis, in proportion to the amount of theirrespective claims in regard to such shares held by them.

 

TheBoard may, from time to time, provide for series of Preferred Shares to becreated and issued, but the issuance of any Preferred Share is subject to thegeneral duties of the directors under the CBCA to act honestly and in goodfaith with a view to the best interests of the Company and to exercise thecare, diligence and skill that a reasonably prudent person would exercise incomparable circumstances. The issuance of any Preferred Shares in the face of atake-over bid for the Company would be examined in light of these duties of thedirectors and other applicable case law.

 

**ShareholderActions**

 

TheCBCA provides that shareholders of the Company may, with leave of a court,bring an action in the name of and on behalf of the Company for the purpose ofprosecuting, defending or discontinuing an action on behalf of the Company. Inorder to grant leave to permit such an action, the CBCA provides that the courtmust be satisfied that the directors of the Company were given adequate noticeof the application, the shareholder is acting in good faith and that it appearsto be in the Company’s best interests that the action be brought.

 

**ShareholderRights Plan**

 

***Objectives and Background of theShareholder Rights Plan***

 

Thefundamental objectives of the Company’s Shareholder Rights Plan (the “RightsPlan”) are to provide adequate time for our Board and shareholders to assess anunsolicited take-over bid for the Company, to provide the Board with sufficienttime to explore and develop alternatives for maximizing shareholder value if atake-over bid is made, and to provide shareholders with an equal opportunity toparticipate in a take-over bid.

 

TheRights Plan encourages a potential acquiror who makes a take-over bid toproceed either by way of a “Permitted Bid”, which requires a take-over bid tosatisfy certain minimum standards designed to promote fairness, or with theconcurrence of the Company’s Board. If a take-over bid fails to meet theseminimum standards and the Rights Plan is not waived by the Board, the RightsPlan provides that holders of common shares, other than the potential acquiror,will be able to purchase additional common shares at a significant discount tomarket, thus exposing the potential acquiror of common shares to substantialdilution of its holdings.

 

***Summary of the Rights Plan***

 

Thefollowing is a summary of the principal terms of the Rights Plan, which summaryis qualified in its entirety by reference to the terms thereof. The Rights Planis filed as an exhibit to this annual report on Form 20-F.

 

***Operation of the Rights Plan***

 

Pursuantto the terms of the Rights Plan, one right was issued in respect of each commonshare outstanding as at the close of business on March 29, 2004 (the “RecordTime”). In addition, one right will be issued for each additional common shareissued after the Record Time and prior to the earlier of the Expiration Timeand the Separation Time (as defined below). The rights have an initial exerciseprice equal to the Market Price (as defined below) of the common shares asdetermined at the Separation Time, multiplied by five, subject to certainadjustments, and they are not exercisable until the Separation Time. Upon theoccurrence of a Flip-in Event (as defined below), each right will entitle theholder thereof, other than an Acquiring Person (as defined below), to purchasefrom the Company one common share upon payment to the Company of 50% of theMarket Price of the common shares on the TSX on the date of consummation oroccurrence of such Flip-in Event, subject to certain anti-dilution adjustments.

 

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***Trading of Rights***

 

Untilthe Separation Time, the rights trade with the common shares and arerepresented by the same share certificates as the common shares or an entry inthe Company’s securities register in respect of any outstanding common shares.From and after the Separation Time and prior to the Expiration Time, the rightsare evidenced by rights certificates and trade separately from the commonshares. The rights do not carry any of the rights attaching to the commonshares such as voting or dividend rights.

 

***Separation Time***

 

Therights will separate from the common shares to which they are attached andbecome exercisable at the time (the “Separation Time”) of the close of businesson the eighth business day after the earliest to occur of:

 

·                  the first date (the “Stock Acquisition Date”)of a public announcement of facts indicating that a person has become anAcquiring Person (as defined below);

 

·                  the date of the commencement of, or firstpublic announcement of the intention of any person (other than the Company orany of its subsidiaries) to commence a take-over bid or a share exchange bidfor more than 20% of the outstanding common shares of the Company other than aPermitted Bid or a Competing Permitted Bid (as defined below); and

 

·                  the date upon which a Permitted Bid or aCompeting Permitted Bid ceases to be a Permitted Bid or a Competing PermittedBid, as the case may be.

 

TheSeparation Time can also be such later time as may from time to time bedetermined by the Board.

 

***Flip-in Event***

 

Theacquisition by a person (an “Acquiring Person”), including others actingjointly or in concert with such person, of more than 20% of the outstandingcommon shares, other than by way of a Permitted Bid, a Competing Permitted Bidor in certain other limited circumstances described in the Rights Plan, isreferred to as a “Flip-in Event”.

 

***Definition of Market Price***

 

MarketPrice is generally defined in the Rights Plan, on any given day on which adetermination must be made, as the average of the daily closing prices percommon share on each of the 20 consecutive Trading Days (as defined below)through and including the Trading Day immediately preceding such date ofdetermination; subject to certain exceptions. Trading Day is generally definedas the day on which the principal Canadian or United States stock exchange (asdetermined by the Board acting in good faith) on which the common shares arelisted or admitted to trading is open for the transaction of business.

 

***Exercise of Rights***

 

Uponthe Separation Time or the effective date of the Flip-in Event, whicheveroccurs first, each right (other than those held by the Acquiring Person) willentitle the holder thereof to purchase from the Company one common share uponpayment to the Company of 50% of the Market Price of the common shares of theCompany on the Stock Acquisition Date subject to certain anti-dilutionadjustments.

 

***Permitted Bid Requirements***

 

Therequirements of a Permitted Bid include the following:

 
| (1)    |   | the  take-over bid must be made by means of a take-over bid circular;                                                                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                          |
| (2)    |   | the  take-over bid must be made to all holders of common shares wherever resident,  on identical terms and conditions, other than the bidder; |
|   |   |                                                                                                                                          |
| (3)    |   | the  take-over bid must not permit common shares tendered pursuant to the bid to  be taken up or paid for:                                    |
|   |   |                                                                                                                                          |
|   | a)     | prior  to the close of business on a date which is not less than 60 days following  the date of the bid, and                                  |

 

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|   | b)     | then  only if at such date more than 50% of the then outstanding common shares held  by shareholders other than any other Acquiring Person, the bidder, the  bidder’s affiliates or associates, persons acting jointly or in concert with  the bidder and any employee benefit plan, deferred profit-sharing plan, stock  participation plan or trust for the benefit of employees of the Company or  any of its subsidiaries, unless the beneficiaries of such plan or trust  direct the manner in which the common shares are to be voted or direct  whether the common shares are to be tendered to a take-over bid (the  “Independent Shareholders”), have been deposited or tendered to the take-over  bid and not withdrawn. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (4)    |   | the  take-over bid must allow common shares to be deposited, unless the take-over  bid is withdrawn, at any time up to the close of business on the date that  the common shares are to be first taken up and paid for;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (5)    |   | the  take-over bid must allow common shares to be withdrawn until taken up and  paid for; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (6)    |   | if  more than 50% of the then outstanding common shares held by Independent  Shareholders are deposited or tendered to the take-over bid and not  withdrawn, the bidder must make a public announcement of that fact and the  take-over bid must remain open for deposits and tenders of common shares for  not less than 10 days from the date of such public announcement.                                                                                                                                                                                                                                                                                                                                                                      |

 

TheRights Plan allows a competing Permitted Bid (a “Competing Permitted Bid”) tobe made while a Permitted Bid is in existence. A Competing Permitted Bid mustsatisfy all the requirements of a Permitted Bid other than the requirements setout in clauses (3) and (6) above and must not permit common sharestendered or deposited pursuant to the bid to be taken up or paid for (a) priorto the close of business on a date which is not earlier than the latter of thelast day on which the bid must be open for acceptance after the date of the bidunder applicable Canadian provincial securities legislation and the earliestdate on which common shares of the Company may be taken up and paid for underany earlier Permitted Bid or Competing Permitted Bid that is then in existence,and (b) then only if at such date more than 50% of the then outstandingcommon shares held by the Independent Shareholders have been deposited ortendered to the take-over bid and not withdrawn. In the event that therequirement set forth in (b) of this paragraph is satisfied, the competingbidder must make a public announcement of the fact and the take-over bid mustremain open for deposits and tenders of common shares for not less than 10 daysfrom the date of such public announcement.

 

***Waiver and Redemption***

 

TheBoard may, prior to the occurrence of a Flip-in Event, waive the dilutiveeffects of the Rights Plan in respect of, among other things, a particularFlip-in Event resulting from a take-over bid made by way of a take-over bidcircular to all holders of common shares of the Company. In such an event, suchwaiver shall also be deemed to be a waiver in respect of any other Flip-inEvent occurring under a take-over bid made by way of a take-over bid circularto all holders of common shares prior to the expiry of the first mentionedtake-over bid. The Board may, at any time prior to the Separation Time, electto redeem all but not less than all of the outstanding rights at a price ofCAN$0.00001 each.

 

***Amendment to the Rights Plan***

 

TheRights Plan may be amended to correct any clerical or typographical error or tomake such changes as are required to maintain the validity of the Rights Planas a result of any change in any applicable legislation, regulations or rules thereunder,without the approval of the holders of the common shares or rights. Prior tothe Separation Time, the Company may, with the prior consent of the holders ofcommon shares, amend, vary or delete any of the provisions of the Rights Planin order to effect any changes which the Board, acting in good faith, considersnecessary or desirable. The Company may, with the prior consent of the holdersof rights, at any time after the Separation Time and before the ExpirationTime, amend, vary or delete any of the provisions of the Rights Plan. TheRights Plan, including the amendments thereto and the restatement thereof, was approvedby the Board on March 2, 2007, was signed on March 5, 2007 and wasratified and confirmed by the Company’s shareholders on May 2, 2007.

 

***Fiduciary Duty of Board***

 

TheRights Plan will not detract from or lessen the duty of the Board to acthonestly and in good faith with a view to the best interests of the Company andits shareholders. The Board will continue to have the duty and power to takesuch actions and make such recommendations to the Company’s shareholders as areconsidered appropriate.

 

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***Exemptions for Investment Advisors***

 

Fundmanagers, investment advisors (for fully-managed accounts), trust companies(acting in their capacities as trustees and administrators), statutory bodieswhose business includes the management of funds, and administrators ofregistered pension plans are exempt under the Rights Plan from triggering aFlip-in Event, provided that they are not making, or are not part of a groupmaking, a take-over bid.

 

**Action Necessary to Change Rights of Shareholders**

 

Inorder to change the rights of its shareholders, the Company would need to amendits Restated Articles of Incorporation to effect the change. Such an amendmentwould require the approval of holders of two-thirds of the issued andoutstanding shares cast at a duly called special meeting. For certainamendments such as those creating a class of Preferred Shares, a shareholder isentitled under the CBCA to dissent in respect of such a resolution amending theRestated Articles of Incorporation and, if the resolution is adopted and theCompany implements such changes, demand payment of the fair value of itsshares.

 

**Disclosure of Share Ownership**

 

Ingeneral, under applicable securities regulation in Canada, a person or companywho beneficially owns, directly or indirectly, voting securities of a reportingissuer or who exercises control or direction over voting securities of anissuer or a combination of both, carrying more than ten percent of the votingrights attached to all the issuer’s outstanding voting securities is an insiderand must, within ten days of becoming an insider, file a report in the requiredform effective the date on which the person became an insider, disclosing anydirect or indirect beneficial ownership of, or control or direction over,securities of the reporting issuer.

 

Additionally,securities regulation in Canada provides for the filing of a report by an insiderof a reporting issuer whose holdings change, which report must be filed withinten days from the day on which the change takes place.

 

Section 13of the *United States Securities Exchange Act of 1934*(the “Exchange Act”) imposesreporting requirements on persons who acquire beneficial ownership (as suchterm is defined in the Rule 13d-3 under the Exchange Act) of more thanfive percent of a class of an equity security registered under Section 12of the Exchange Act. The Company’s common shares are so registered. In general,such persons must file, within ten days after such acquisition, a report ofbeneficial ownership with the SEC containing the information prescribed by theregulations under Section 13 of the Exchange Act. This information is alsorequired to be sent to the issuer of the securities and to each exchange wherethe securities are traded.

 

**Meeting of Shareholders**

 

Anannual meeting of shareholders is held each year for the purpose of consideringthe financial statements and reports, electing directors, appointing auditorsand fixing or authorizing the Board to fix their remuneration and for thetransaction of other business as may properly come before a meeting ofshareholders. Any annual meeting may also constitute a special meeting to takecognizance and dispose of any matter of which a special meeting may takecognizance and dispose. Under the bylaws, the president of the Company has thepower to call a meeting of shareholders.

 

Whilethe bylaws provide that one or more shareholders who hold at least 20% of theoutstanding voting shares of the Company may requisition the directors of theCompany to call a meeting of shareholders for the purpose stated in therequisition, the CBCA provides that the holders of not less than 5% of the outstandingvoting shares of the Company may so requisition the directors of the Company.Except in limited circumstances, including where a meeting of shareholders hasalready been called and a notice of meeting already given or where it is clearthat the primary purpose of the requisition is to redress a personal grievanceagainst the Company or its directors, officers or shareholders, the directorsof the Company, on receipt of such requisition, must call a meeting ofshareholders. If the directors fail to call a meeting of shareholders withintwenty-one days after receiving the requisition, any shareholder who signed therequisition may call the meeting of shareholders and, unless the shareholdersresolve otherwise at the meeting, the Company shall reimburse the shareholdersfor the expenses reasonably incurred by them in requisitioning, calling andholding the meeting of shareholders.

 

TheCBCA also provides that, except in limited circumstances, a resolution inwriting signed by all of the shareholders entitled to vote on that resolutionat a meeting of shareholders is as valid as if it had been passed at a meetingof shareholders.

 

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Aquorum of shareholders is present at an annual or special meeting ofshareholders, regardless of the number of persons present in person at themeeting, if the holder or holders of shares representing at least 20% of theoutstanding voting shares at such meeting are present in person or representedin accordance with the Company’s bylaws. In the case where the CBCA, theRestated Articles of Incorporation or the bylaws of the Company require orpermit the vote by class of holders of a given class of shares of the sharecapital of the Company, the quorum at any meeting will be one or more personsrepresenting 20% of the outstanding shares of such class.

 

Noticeof the time and place of each annual or special meeting of shareholders must begiven not less than 21 days, nor more than 50 days, before the date of eachmeeting to each director, to the auditor and to each shareholder entitled tovote thereat. If the address of any shareholder, director or auditor does notappear in the books of the Company, the notice may be sent to such address asthe person sending the notice may consider to be most likely to reach suchshareholder, director or auditor promptly. Every person who, by operation ofthe CBCA, transfers or by any other means whatsoever, becomes entitled to anyshare, shall be bound by every notice given in respect of such share which,prior to the entry of his or her name and address on the register of the Company,is given to the person whose name appears on the register at the time suchnotice is sent. Notice of meeting of shareholders called for any other purposeother than consideration of the financial statements and auditor’s report,election of directors and reappointment of the incumbent auditor, must statethe nature of the business in sufficient detail to permit the shareholder toform a reasoned judgment on and must state the text of any special resolutionor bylaw to be submitted to the meeting.

 

**Limitations on Right to Own Securities**

 

NeitherCanadian law nor the Company’s Restated Articles of Incorporation or bylawslimit the right of a non-resident to hold or vote common shares, other than asprovided in the *Investment Canada Act* (the “InvestmentAct”). The Investment Act prohibits implementation of certain direct reviewableinvestments by an individual, government or agency thereof, corporation,partnership, trust or joint venture that is not a “Canadian,” as defined in theInvestment Act (a “non-Canadian”), unless, after review, the ministerresponsible for the Investment Act is satisfied or is deemed to be satisfiedthat the investment is likely to be of net benefit to Canada. An investment inthe common shares of the Company by a non-Canadian (other than a “WTO Investor,”as defined below) would be reviewable under the Investment Act if it were aninvestment to acquire direct control of the Company, and the book value of theassets of the Company were CAN$5.0 million or more (provided that immediatelyprior to the implementation of the investment the Company was not controlled byWTO Investors). Subject to the Amendments (as defined below), an investment incommon shares of the Company by a WTO Investor would be reviewable under theInvestment Act if it were an investment to acquire direct control of theCompany and the value of the assets of the Company equalled or exceededCAN$312 million (for 2009). A non-Canadian, whether a WTO Investor orotherwise, would be deemed to acquire control of the Company for purposes ofthe Investment Act if he or she acquired a majority of the common shares of theCompany. The acquisition of less than a majority, but at least one-third of theshares, would be presumed to be an acquisition of control of the Company, unlessit could be established that the Company was not controlled in fact by theacquirer through the ownership of the shares. In general, an individual is aWTO Investor if he or she is a “national” of a country (other than Canada) thatis a member of the World Trade Organization (“WTO Member”) or has a rightof permanent residence in a WTO Member. A corporation or other entity will be a“WTO Investor” if it is a “WTO Investor-controlled entity,” pursuant todetailed rules set out in the Investment Act. The United States is aWTO Member. Certain transactions involving the common shares would be exemptfrom the Investment Act, including: (a) an acquisition of the shares ifthe acquisition were made in the ordinary course of that person’s business as atrader or dealer in securities; (b) an acquisition of control of theCompany in connection with the realization of a security interest granted for aloan or other financial assistance and not for any purpose related to theprovisions of the Investment Act; and (c) an acquisition of control of theCompany by reason of an amalgamation, merger, consolidation or corporatereorganization, following which the ultimate direct or indirect control in factof the Company, through the ownership of voting interests, remains unchanged.

 

TheCanadian Federal Government has recently adopted certain amendments (the “Amendments”)to the Investment Act. Some of the Amendments, which came into force on February 6,2009, introduce a national security test and review process, authorizing theCanadian Minister of Industry to review investments that “could be injurious tonational security,” regardless of the size of the transaction. Some of theother Amendments will come into force on a day to be fixed by order of theCanadian Governor in Council, including the increase to the thresholds thattrigger governmental review for WTO Investors. Therefore, the thresholds forthe review of direct acquisitions of control by WTO Investors would increasefrom the current CAN$312 million (based on book value) toCAN$600 million (to be based on the “enterprise value” of theCanadian business) for the two years after such Amendments come into force, toCAN$800 million in the following two years and then to CAN$1 billionfor the next two years. Thereafter, the thresholds are to be adjusted toaccount for inflation. A number of the Amendments still require additionaldefinition and details, which will be set forth in regulations promulgatedunder the Investment Act.

 

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### ***C.            Material contracts***

### ** **

Other than as disclosed herein under “ShareholderRights Plan” and below, and except for contracts entered into in the ordinarycourse of business, there are no material contracts to which the Company or anyof its subsidiaries is a party other than the employment agreements and changeof control agreements with our executive officers as described below.

 

**Employment Agreements**

 

The Company and/or its subsidiaries have entered into employmentagreements (the “Employment Agreements”) with each of the Named ExecutiveOfficers. The Employment Agreements provide that we will pay the NamedExecutive Officers a base salary and an annual bonus and that such executiveswill be eligible to receive grants of stock options which will be reviewedannually in accordance with our policies. The Employment Agreements have anindefinite term. However, in addition to his Employment Agreement, Dr. Engelhad previously entered into a service contract in his prior capacity asManaging Director with AEZS Germany, our principal subsidiary, which servicecontract expires on August 31, 2010. Furthermore, each of the EmploymentAgreements provides that, if we terminate the employment of a Named ExecutiveOfficer without cause, then the executive will be entitled to receive, in thecase of Dr. Engel, a lump-sum payment, less statutory deductions, of theequivalent of twelve months of his then applicable base salary, an amountequivalent to the annual bonus received for the most recently completed yearand an amount equivalent to twelve months of the cost of the other benefits towhich he is entitled (such amounts increasing to the equivalent of 24 months ofhis then applicable base salary and twice his annual bonus received for thelast completed year, commencing in March 2010). In the case of Mr. Turpin,the lump sum will be equivalent to 18 months of his then applicable basesalary, 1.5 times the annual bonus of the preceding year and 18 months of thevalue of the other benefits to which he is entitled. In the case of Dr. Blakeand Messrs. Pelliccione and Seeber, they are entitled to receive, upontermination of employment without cause, a lump sum equivalent to twelve monthsof their then applicable base salaries, an amount equivalent to the annualbonus received for the preceding year and twelve months of the value of theother benefits to which they are entitled.

 

Furthermore, each Named Executive Officer shall not, directly orindirectly, solicit any of our customers for the purpose or intent of sellingthem any products which are similar or otherwise competing with our products;nor shall any Named Executive Officer induce, entice or otherwise attempt todirectly or indirectly hire or engage any of our employees, for a period equalto one year following such executive’s termination of employment with theCompany.

 

Pursuantto the Employment Agreements, each of the Named Executive Officers is alsoentitled to certain payments (the “Change of Control Payments”) in the event (i) a“Change of Control” occurs and (ii) during the twelve-month periodfollowing the Change of Control, either the Company terminates the employmentof the executive “without Cause” or the executive terminates his or heremployment “for Good Reason”.

 

TheChange of Control Payments are as follows:

 

·                  for Dr. Engel and Mr. Seeber, (i) theequivalent of 24 months of their then prevailing annual base salaries, (ii) anamount equivalent to twice the annual bonus, if any, which the executive wouldhave been entitled to receive in the year during which the Change of Controloccurred, and (iii) an amount equivalent to 24 months of the value of thebenefits which were in force at the time of termination of the executive’semployment, calculated on a yearly basis, including car allowance, butexcluding operating costs; and

 

·                  for Mr. Turpin, Dr. Blake and Mr. Pelliccione(i) the equivalent of 18 months of their then prevailing annual basesalaries, (ii) an amount equivalent to 1.5 times the annual bonus, if any,which the executive would have been entitled to receive in the year duringwhich the Change of Control occurred, and (iii) an amount equivalent to 18months of the value of the benefits which were in force at the time oftermination of the executive’s employment, calculated on a yearly basis,including car allowance, but excluding operating costs.

 

All Change of Control Payments described aboveare subject to applicablestatutory withholdings. In addition, any outstanding stock options held by aNamed Executive Officer are unaffected by the change of control provisions includedin the Employment Agreements and, in the event of a Change of Control followedby termination of employment within twelve months, such stock options will betreated in accordance with the applicable provisions of the Stock Option Plandescribed elsewhere in this annual report.

 

For the purposes of the Employment Agreements(including the annexes and schedules thereto):

 

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·                  a “Change of Control” shall be deemed to have occurred in any of thefollowing circumstances: (i) subject to certain exceptions, upon theacquisition by a person (or one or more persons who are affiliates of oneanother or who are acting jointly or in concert) of a beneficial interest insecurities of the Company representing in any circumstance 50% or more of thevoting rights attaching to the then outstanding securities of the Company; (ii) upona sale or other disposition of all or substantially all of the Company’sassets; (iii) upon a plan of liquidation or dissolution of the Company; or(iv) if, for any reason, including an amalgamation, merger orconsolidation of the Company with or into another company, the individuals who,as at the date of the relevant Employment Agreement, constituted the Board (andany new directors whose appointment by the Board or whose nomination forelection by the Company’s shareholders was approved by a vote of at leasttwo-thirds of the directors then still in office who either were directors asat the date of the relevant Employment Agreement or whose appointment ornomination for election was previously so approved) cease to constitute amajority of the members of the Board;

 

·                  terminationof employment by the Company “for Cause” includes (but is not limited to) (i) ifthe Executive commits any fraud, theft, embezzlement or other criminal act of asimilar nature, and (ii) if the Executive is guilty of serious misconductor willful negligence in the performance of his duties; and

 

·                  terminationof employment by the executive officer for “Good Reason” means the occurrence, without the executive’sexpress written consent, of any of the following acts: (i) a materialreduction of the executive’s total compensation (including annual base salaryplus annual bonus, benefits and number of stock options) as in effect on thedate of the relevant Employment Agreement or as same may be increased from timeto time; (ii) a material reduction or change in the executive’s duties,authority, responsibilities, accountability or a change in the business orcorporate structure of the Company which materially affects his or herauthority, compensation or ability to perform duties or responsibilities (suchas shifting from a policy-making to a policy-implementation position); (iii) aforced relocation; or (iv) a material change in the terms and conditionsof the change of control provisions included in the relevant EmploymentAgreement.

 

**OtherMaterial Contracts**

 

On March 5, 2009, we entered into adevelopment, commercialization and licensing agreement with sanofi-aventis forthe development, registration and marketing of cetrorelix in benign prostatichyperplasia (BPH) for the U.S. market. Under the terms of the agreement,sanofi-aventis made an initial $30 million upfront payment to us, and we willalso be entitled to receive up to $135 million in additional payments uponachieving certain pre-established regulatory and commercial milestones. We willalso be entitled to receive escalating double-digit royalties on future netsales of cetrorelix for BPH in the United States.

 

In November 2008, we signed a definitiveagreement to sell to CHRP our rights to royalties on future sales of Cetrotide® covered by our license agreement with MerckSerono. This license agreement was signed in 2000 and granted Merck Seronoexclusive rights to market, distribute and sell Cetrotide® worldwide, with the exception of Japan, in thefield of *in vitro*fertilization. On closing, wereceived $52.5 million from CHRP (less transaction costs of $1.0 million) and,contingent on 2010 net sales of Cetrotide® reaching aspecified level, we would receive an additional payment of $2.5 million fromCHRP. Under the terms of the agreement, if cetrorelix is approved for sale bythe European regulatory authorities in an indication other than *in vitro* fertilization, we have agreed to make a one-timecash payment to CHRP in an amount ranging from $5 million up to $15 million.

 

### ***D.            Exchange controls***

### ** **

Canadahas no system of exchange controls. There are no exchange restrictions onborrowing from foreign countries or on the remittance of dividends, interest,royalties and similar payments, management fees, loan repayments, settlement oftrade debts or the repatriation of capital. There are no limits on the rightsof non-Canadians to exercise voting rights on their common shares of theCompany.

 

### ***E.            Taxation***

### ** **

THE FOLLOWING SUMMARY IS OFA GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TOBE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER.  CONSEQUENTLY, HOLDERS ARE URGED TO CONSULTTHEIR OWN TAX ADVISORS FOR ADVICE AS TO THE TAX CONSEQUENCES OF AN INVESTMENTIN THE COMMON SHARES HAVING REGARD TO THEIR PARTICULAR CIRCUMSTANCES.

 

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The following summarydescribes the principal Canadian federal income tax consequences to a purchaserwho acquires common shares (a “holder”) who, for the purposes of the Canadianfederal *Income Tax Act*, R.S.C. 1985, as amended(The “Tax Act”), deals at arm’s length with, and is not affiliated with, theCorporation and holds common shares as capital property.  The common shares will generally beconsidered to be capital property for this purpose unless either the holderholds such common shares in the course of carrying on a business, or the holderhas held or acquired such common shares in a transaction or transactionsconsidered to be an adventure in the nature of trade.

 

This summary is notapplicable to a holder an interest in which is a “tax shelter investment” asdefined in the Tax Act, or to a holder which is a “financial institution” asdefined in the Tax Act subject to the “mark-to-market” rules set outtherein.  Such holders should consulttheir own tax advisors.

 

This summary is based uponthe current provisions of the Tax Act and the regulations thereunder and theCompany’s understanding of the current published administrative practices andpolicies of the Canada Revenue Agency (“CRA”). It also takes into account all proposed amendments to the Tax Act andthe regulations publicly released by the Minister of Finance (Canada) (“TaxProposals”), and assumes that all such Tax Proposals will be enacted ascurrently proposed.  No assurance can begiven that the Tax Proposals will be enacted in the form proposed or atall.  This summary does not otherwisetake into account or anticipate any changes in law, whether by way oflegislative, judicial or administrative action or interpretation, nor does itaddress any provincial, territorial or foreign tax considerations.

 

**Holders NotResident in Canada**

 

The following discussionapplies to a holder of common shares who, at all relevant times, for purposesof the Tax Act and any applicable income tax treaty or convention, is neitherresident nor deemed to be resident in Canada and does not, and is not deemedto, use or hold common shares, in carrying on a business or part of a businessin Canada (a “Non-Resident holder”).  Inaddition, this discussion does not apply to an insurer who carries on aninsurance business in Canada and elsewhere or to an authorized foreign bank (asdefined in the Tax Act).

 

***Disposition of Common Shares***

 

A Non-Resident holder willnot be subject to tax under the Tax Act in respect of any capital gain realizedby such Non-Resident holder on a disposition of common shares unless suchshares constitute “taxable Canadian property” (as defined in the Tax Act) ofthe Non-Resident holder at the time of disposition and the holder is notentitled to relief under the applicable income tax treaty or convention.  As long as the common shares are then listedon a “designated stock exchange” (which currently includes the NASDAQ and theTSX), the common shares generally will not constitute taxable Canadian propertyof a Non-Resident holder, unless at any time during the 60-month periodimmediately preceding the disposition, the Non-Resident holder, persons with whomthe Non-Resident holder did not deal at arm’s length, or the Non-Residentholder together with all such persons, owned 25% or more of the issued sharesof any class or series of shares of the capital stock of the Corporation.  If the common shares were to cease beinglisted on the NASDAQ, the TSX or another “recognized stock exchange”, aNon-Resident holder who disposes of common shares that are taxable Canadianproperty may be required to fulfill the requirements of section 116 of the TaxAct. An exemption from such requirements is available on the disposition of “treaty-protectedproperty”, which is property any income or gain on the disposition of which isexempt from tax under Part I of the Tax Act as a result of an applicableincome tax treaty or convention.

 

***Taxation of Dividends on Common Shares***

 

Dividends paid or creditedor deemed to be paid or credited on the common shares to a Non-Resident holderwill be subject to a Canadian withholding tax in the amount of 25%.  Such withholding tax may be reduced by virtueof the provisions of an income tax treaty or convention between Canada and thecountry of which the Non-Resident holder is a resident.  Under the Canada-United States Income TaxConvention (the

 

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“Convention”), the rate ofwithholding tax in respect of dividends or deemed dividends beneficially ownedby a resident of the United States entitled to the benefits of the Conventionis generally reduced to 15%.

 

**HoldersResident in Canada**

 

The following discussionapplies to a holder of common shares who, at all relevant times, for purposesof the Tax Act and any applicable income tax treaty or convention, is residentin Canada (a “Canadian holder”).  CertainCanadian holders whose common shares might not otherwise qualify as capitalproperty may, in certain circumstances, treat the common shares and other “Canadiansecurities” as defined in the Tax Act, as capital property by making anirrevocable election provided by subsection 39(4) of the Tax Act.

 

***Taxation of Dividends on Common Shares***

 

Dividends received or deemedto be received on the common shares will be included in a Canadian holder’sincome for purposes of the Tax Act.  Suchdividends received or deemed to be received by a Canadian holder that is anindividual (other than certain trusts) will be subject to the gross-up anddividend tax credit rules generally applicable under the Tax Act inrespect of dividends received on shares of taxable Canadian corporations.  Generally, a dividend will be eligible to theenhanced gross-up and dividend tax credit if the recipient receives writtennotice from the corporation designating the dividend as an “eligible dividend”(within the meaning of the Tax Act). There may be limitations on the ability of the Corporation to designatedividends as eligible dividends.  ACanadian holder that is a corporation will include such dividends in computingits income and will generally be entitled to deduct the amount of suchdividends in computing its taxable income. A Canadian holder that is a “private corporation” or a “subjectcorporation” (as such terms are defined in the Tax Act), may be liable under Part IVof the Tax Act to pay a refundable tax of 331/3% on dividends received or deemed to be received on the common sharesto the extent such dividends are deductible in computing the holder’s taxableincome.

 

***Disposition of Common Shares***

 

A disposition, or a deemeddisposition, of a common share by a Canadian holder will generally give rise toa capital gain (or a capital loss) equal to the amount by which the proceeds ofdisposition of the share, net of any reasonable costs of disposition, exceed(or are less than) the adjusted cost base of the share to the holder.  Such capital gain (or capital loss) will besubject to the treatment described below under “Taxation of Capital Gains andCapital Losses”.

 

***Additional Refundable Tax***

 

A Canadian holder that is a “Canadian-controlledprivate corporation” (as such term is defined in the Tax Act) may be liable topay an additional refundable tax of 62/3% on certain investment income including amountsin respect of “Taxable Capital Gains”, as defined below.

 

***Taxation of Capital Gains and Capital Losses***

 

In general, one half of anycapital gain (a “Taxable Capital Gain”) realized by a Canadian holder in ataxation year will be included in the holder’s income in the year.  Subject to and in accordance with theprovisions of the Tax Act, one half of any capital loss (an “Allowable CapitalLoss”) realized by a Canadian holder in a taxation year must be deducted fromTaxable Capital Gains realized by the holder in the year and Allowable CapitalLosses in excess of Taxable Capital Gains may be carried back and deducted inany of the three preceding taxation years or carried forward and deducted inany subsequent taxation year against net taxable capital gains realized in suchyears.  The amount of any capital lossrealized by a Canadian holder that is a corporation on the disposition of acommon share may be reduced by the amount of dividends received or deemed to bereceived by it on such common share (or on a share for which the common sharehas been substituted) to the extent and under the circumstances prescribed bythe Tax Act.  Similar rules mayapply where a corporation is a member of a partnership or a beneficiary of atrust that owns common shares, directly or indirectly, through a partnership ora trust.  A Taxable Capital Gain realizedby a Canadian holder who is an individual may give rise to liability foralternative minimum tax.

 

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**CertainU.S. Federal Income Tax Considerations**

** **

The followingdiscussion is a summary of certain U.S. federal income tax consequencesapplicable to the ownership and disposition of common shares (“Shares”) by aU.S. Holder (as defined below), but does not purport to be a complete analysisof all potential U.S. federal income tax effects. This summary is based on theInternal Revenue Code of 1986, as amended (the “Code”), U.S. Treasuryregulations promulgated thereunder, Internal Revenue Service (“IRS”) rulingsand judicial decisions in effect on the date hereof. All of these are subjectto change, possibly with retroactive effect, or different interpretations.

 

This summarydoes not address all aspects of U.S. federal income taxation that may berelevant to particular U.S. Holders in light of their specific circumstances(for example, U.S. Holders subject to the alternative minimum tax provisions ofthe Code) or to holders that may be subject to special rules under U.S.federal income tax law.

 

This summaryalso does not discuss any aspect of state, local or foreign law, or U.S.federal estate or gift tax law as applicable to U.S. Holders. In addition, thisdiscussion is limited to U.S. Holders holding Shares as capital assets. Forpurposes of this summary, “U.S. Holder” means a beneficial holder of Shares whoor that for U.S. federal income tax purposes is:

 

·                  anindividual citizen or resident of the United States;

·                  a corporation or other entityclassified as a corporation for U.S. federal income tax purposes created ororganized in or under the laws of the United States, any state thereof or theDistrict of Columbia;

·                  anestate, the income of which is subject to U.S. federal income taxationregardless of its source; or

·                  atrust, if a court within the United States is able to exercise primarysupervision over the administration of such trust and one or more “U.S. persons”(within the meaning of the Code) have the authority to control all substantialdecisions of the trust, or if a valid election is in effect to be treated as aU.S. person.

 

If apartnership or other entity or arrangement classified as a partnership for U.S.federal income tax purposes holds Shares, the U.S. federal income tax treatmentof a partner generally will depend on the status of the partner and theactivities of the partnership. Such a partner should consult its own taxadvisor as to the tax consequences of the partnership owning and disposing ofShares.

 

***Dividends***

* *

Subjectto the passive foreign investment company (“PFIC”) rules discussed below,distributions paid by the Company out of current or accumulated earnings andprofits (as determined for U.S. federal income tax purposes), before reductionfor any Canadian withholding tax paid with respect thereto, will generally betaxable to a U.S. Holder as foreign source dividend income, and will not beeligible for the dividends received deduction generally allowed tocorporations. Distributions in excess of current and accumulated earnings andprofits will be treated as a non-taxable return of capital to the extent of theU.S. Holder’s adjusted tax basis in the Shares and thereafter as capital gain.U.S. Holders should consult their own tax advisors with respect to theappropriate U.S. federal income tax treatment of any distribution received fromthe Company.

 

Fortaxable years beginning before January 1, 2011, dividends paid by theCompany should be taxable to a non-corporate U.S. Holder at the special reducedrate normally applicable to long term capital gains, provided that certainconditions are satisfied. A U.S. Holder will not be able to claim the reducedrate for any year in which the Company is treated as a PFIC. See “PassiveForeign Investment Company Considerations” below.

 

Undercurrent law payments of dividends by the Company to non-Canadian investors aregenerally subject to a 25 percent Canadian withholding tax. The rate ofwithholding tax applicable to U.S. Holders that are eligible for benefits underthe Canada-United States Tax Convention (1980) (“theTreaty”)is reduced to a maximum of 15 percent.

 

Dividendspaid in Canadian dollars will be included in income in a U.S. dollar amountcalculated by reference to the exchange rate in effect on the day the dividendsare received by the U.S. Holder, regardless of whether the Canadian dollars areconverted into U.S. dollars at that time. If dividends received in Canadiandollars  are converted into U.S. dollarson the day they are received, the U.S. Holder generally will not be required torecognise foreign currency gain or loss in respect of the dividend income.

 

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A U.S.Holder will generally be entitled, subject to certain limitations, to a creditagainst its U.S. federal income tax liability, or a deduction in computing itsU.S. federal taxable income, for Canadian income taxes withheld by the Company.U.S. Holders should consult their tax advisors concerning the foreign taxcredit implications of the payment of Canadian taxes.

 

***Sale or Other Taxable Disposition***

* *

Subject to the PFIC rules discussed below, upon a sale or othertaxable disposition of Shares, a U.S. Holder generally will recognize capitalgain or loss for U.S. federal income tax purposes equal to the difference, ifany, between the amount realized on the sale or other taxable disposition andthe U.S. Holder’s adjusted tax basis in the Shares.

 

This capital gain or loss will be long-term capital gain or loss if theU.S. Holder’s holding period in the Shares exceeds one year. Long-term capitalgains of non-corporate U.S. Holders are currently eligible for reduced rates oftaxation. The deductibility of capital losses is subject to limitations. Anygain or loss will generally be U.S. source for U.S. foreign tax creditpurposes.

 

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***Passive Foreign Investment CompanyConsiderations***

* *

Aforeign corporation will be classified as a PFIC for any taxable year in which,after taking into account the income and assets of the corporation and certainsubsidiaries pursuant to applicable “look-through rules,” either (i) atleast 75 percent of its gross income is “passive income” or (ii) at least50 percent of the average value of its assets is attributable to assets whichproduce passive income or are held for the production of passive income.

 

If theCompany is classified as a PFIC for any taxable year during which a U.S. Holderowns Shares, the U.S. Holder, absent certain elections (including a mark-to-marketelection), will generally be subject to adverse rules (regardless ofwhether the Company continues to be classified as a PFIC) with respect to (i) any“excess distributions” (generally, any distributions received by the U.S.Holder on the Shares in a taxable year that are greater than 125 percent of theaverage annual distributions received by the U.S. Holder in the three precedingtaxable years or, if shorter, the U.S. Holder’s holding period for the Shares)and (ii) any gain realized on the sale or other disposition of Shares.

 

Underthese adverse rules (a) the excess distribution or gain will beallocated rateably over the U.S. Holder’s holding period, (b) the amountallocated to the current taxable year and any taxable year prior to the firsttaxable year in which the Company is classified as a PFIC will be taxed asordinary income, and (c) the amount allocated to each of the other taxableyears during which the Company was classified as a PFIC will be subject to taxat the highest rate of tax in effect for the applicable class of taxpayer forthat year and an interest charge will be imposed with respect to the resultingtax attributable to each such other taxable year.

 

TheCompany believes it was not a PFIC for the 2008 taxable year. However, since the fairmarket value of the Company’s assets may be determined in large part by themarket price of the Shares, which is likely to fluctuate, and the compositionof the Company’s income and assets will be affected by how, and how quickly,the Company spends any cash that is raised in any financing transaction, noassurance can be provided that the Company would not be classified as a PFICfor the 2009 taxable year and for any future taxable year.

 

U.S.Holders should consult their tax advisors regarding the potential applicationof the PFIC regime.

 

***Information Reporting and Backup Withholding***

 

Theproceeds of a sale or other disposition, as well as dividends paid with respectto Shares by a U.S. payor, generally will be reported to the IRS and to theU.S. Holder as required under applicable regulations. Backup withholding taxmay apply to these payments if the U.S. Holder fails to timely provide anaccurate taxpayer identification number or otherwise fails to comply with, orestablish an exemption from, such backup withholding tax requirements. CertainU.S. Holders (including, among others, corporations) are not subject to theinformation reporting or backup withholding tax requirements described herein.U.S. Holders should consult their tax advisors as to their qualification forexemption from backup withholding tax and the procedure for obtaining anexemption.

 

### ***F.            Dividends and paying agents.***

### ** **

Not applicable.

 

### ***G.            Statement by experts.***

### ** **

Not applicable.

 

### ***H.            Documents on display.***

### ** **

We are subject to the informationrequirements of the Securities Exchange Act of 1934, as amended. In accordancewith these requirements, we file and furnish reports and other information withthe United States Securities and Exchange Commission. These materials,including this annual report on Form 20-F and the exhibits thereto, may beinspected and copied at the Commission’s Public Reference Room at 100 FStreet, N.E., Room 1580, Washington, D.C. 20549. The public may obtaininformation on the operation of the Commission’s Public Reference Room bycalling the Commission in the United States at 1-800-SEC-0330. The Commissionalso maintains a website at www.sec.gov that contains reports, proxy statementsand other information regarding registrants that file electronically with theCommission. The Company’s annual reports and some of the other informationsubmitted by the Company to the Commission may be accessed through thiswebsite. In addition, material filed by the Company can be inspected on theCanadian Securities Administrators’ electronic filing system, SEDAR, accessibleat the website www.sedar.com. This material includes the Company’s Management

 

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Information Circular for its annual meetingto be held on May 6,2009 to be furnished to the SEC on Form 6-K, which provides informationincluding directors’ and officers’, remuneration and indebtedness and principalholders of securities. Additional financial information is provided in ourannual financial statements for the year ended December 31, 2008 and ourManagement’s Discussion and Analysis relating to these statements. Thesedocuments are also accessible on SEDAR (www.sedar.com and on EDGAR(www.sec.gov)).

 

### ***I.             Subsidiary information.***

### ** **

The subsidiaries of the Company are set forth under “Item4C. — Organizational Structure”.

 

## ***Item 11.         Quantitative and QualitativeDisclosures About Market Risk***

## *** ***

**ForeignCurrency Risk**

 

Since the Companyoperates on an international scale, it is exposed to currency risks as a resultof potential exchange rate fluctuations. For the year ended December 31,2008, there were no operations using forward-exchange contracts and noforward-exchange contract is outstanding as of the date of this annual report.

 

**CreditRisk**

 

Financialinstruments, which potentially subject the Company to concentrations of creditrisk, consist primarily of cash and cash equivalents, short-term investmentsand accounts receivable. Cash and cash equivalents are maintained withhigh-credit quality financial institutions. Short-term investments consistprimarily of bonds issued by high-credit quality corporations and institutions.Consequently, management considers the risk of non-performance related to cashand cash equivalents and investments to be minimal.

 

Generally, we do notrequire collateral or other security from customers for trade accountsreceivable; however, credit is extended following an evaluation ofcreditworthiness. In addition, we perform ongoing credit reviews of all ourcustomers and establish an allowance for doubtful accounts when accounts aredetermined to be uncollectible.

 

**InterestRate Risk**

 

We are exposed to market risk relating to changes in interest rateswith regard to our short-term investments.

 

## ***Item 12.         Description of Securities Other thanEquity Securities***

 

### ***A.            Debt securities.***

### ** **

Not applicable.

 

### ***B.            Warrants and rights.***

### ** **

Not applicable.

 

### ***C.            Other securities.***

### ** **

Not applicable.

 

### ***D.            American depositary shares.***

### ** **

Not applicable.

 

**PART II**

** **

## ***Item 13.         Defaults, Dividend Arrearages andDelinquencies***

## *** ***

None.

 

## ***Item 14.         Material Modification to the Rights ofSecurity Holders and Use of Proceeds***

 

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None.

 

## ***Item 15.         Controls and Procedures***

## *** ***

Underthe supervision and with the participation of our management, including theChief Executive Officer and Chief Financial Officer, we have evaluated theeffectiveness of our disclosure controls and procedures as at December 31,2008. Based on that evaluation, the Chief Executive Officer and Chief FinancialOfficer have concluded that these disclosure controls and procedures areeffective as at December 31, 2008.

 

**Management’s Report onInternal Control over Financial Reporting**

 

Æterna Zentaris’ managementis responsible for establishing and maintaining adequate internal control overfinancial reporting. Our internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. (1)

 

Our internal control overfinancial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of Æterna Zentaris; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance  generally accepted accounting principles (1),and that receipts and expenditures of the Company are being made only inaccordance with authorizations of Company management; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of Company assets that could have a materialeffect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

Management conducted anevaluation of the effectiveness of our internal control over financialreporting based on the criteria established in *InternalControl — Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on this evaluation,management concluded that our internal control over financial reporting waseffective as at December 31, 2008.

 

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| (1) | Our consolidated financial  statements are prepared in accordance with generally accepted accounting  principles in Canada (“Canadian GAAP”) and significant differences in  measurement and disclosure from generally accepted principles in United  States  (“US GAAP”) are set out in Note 27 to our consolidated financial  statements included elsewhere in this annual report |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**Changes in Internal Controlover Financial Reporting**

 

Therehave been no changes in our internal control over financial reporting duringthe year ended December 31, 2008 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

During 2008, in the course of our evaluation,we identified significant deficiencies in our internal control over financialreporting which we do not believe, either individually or in the aggregate,resulted in a material weakness to our internal control over financialreporting.

 

The design of any system of controls andprocedures is based in part upon certain assumptions about the likelihood ofcertain events. There can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions, includingconditions that are remote.

 

## ***Item 16.         [Reserved]***

## *** ***

## ***Item 16A.      Audit Committee Financial Expert***

## *** ***

TheBoard of the Registrant has determined that the Registrant has at least oneaudit committee financial expert (as defined in paragraph 16(b) of GeneralInstruction B to Form 20-F). The name of the audit committee financialexpert of the Registrant is Mr. Gérard Limoges, FCA, the AuditCommittee’s Chairman. The Commission has indicated that the designation of Mr. Limogesas the audit committee financial expert of the Registrant does not: (i) makeMr. Limoges an “expert” for any purpose, including without limitation forpurposes of Section 11 of the Securities Act of 1933, as amended, as aresult of this designation; (ii) impose any duties, obligations orliability on Mr. Limoges that are greater than those imposed on him as amember of the Audit Committee and the Board in the absence of such designation;or (iii) affect the duties, obligations or liability of any other memberof the Audit Committee or the Board. The other members of the Audit committeeare Ms. Martha Byorum and Mr. Pierre MacDonald who are allindependent. For a description of their respective education and experience,please refer to “Item 6. — Directors, Senior Management and Employees”.

 

## ***Item 16B.      Code of Ethics***

## *** ***

OnMarch 29, 2004, the Board adopted a “Code of Ethical Conduct”, which hasbeen amended by the Board on November 3, 2004, December 13, 2005, March 2,2007 and March 10, 2009. The December 13, 2005 amendment incorporateschanges to the duty to report violations consistent with applicable laws. TheRegistrant has selected an independent third party supplier to provide aconfidential and anonymous communication channel for reporting concerns aboutpossible violations to the Registrant’s Code of Ethical Conduct as well asfinancial and/or accounting irregularities or fraud. A copy of the Code ofEthical Conduct, as amended, is attached as Exhibit 11.1  to this annual report and is also available onthe Registrant’s Web site at www.aezsinc.com under the Investors — Governance tab. TheCode of Ethical Conduct is a “codeof ethics” as defined in paragraph (16)(b) of General Instruction B to Form 20-F.The Code of Ethical Conduct applies to all of the Registrant’s employees,directors and officers, including the Registrant’s principal executive officer,principal financial officer, and principal accounting officer or controller, orpersons performing similar functions, and includes specific provisions dealingwith integrity in accounting matters, conflicts of interest and compliance withapplicable laws and regulations. The Registrant will provide this documentwithout charge to any person or company upon request to the Corporate Secretaryof the Registrant, at its head office at 1405 du Parc-Technologique Boulevard,Québec, Quebec, G1P 4P5, Canada.

 

## ***Item 16C.      Principal Accountant Fees and Services***

## *** ***

    *(All amounts are in USdollars)*

 

### ***A.            Audit Fees***

### ** **

During the financial years ended December 31,2008 and 2007, our principal accountant, PricewaterhouseCoopers LLP, billed usaggregate amounts of $332,495 and $284,973, respectively, for the audit of ourannual consolidated financial statements and services in connection withstatutory and regulatory filings.

 

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### ***B.            Audit-related Fees***

### ** **

During the financial years ended December 31, 2008and 2007, our principal accountant, PricewaterhouseCoopers LLP, billed usaggregate amounts of $219,407 and $306,804, respectively, for audit or attestservices not required by statute or regulation, employee benefit plan audits,due diligence services, and accounting consultations on proposed transactions,including the review of prospectuses and the delivery of customary consent andcomfort letters in connection therewith.

 

### ***C.            Tax Fees***

### ** **

During the financial years ended December 31,2008 and 2007, our principal accountant, PricewaterhouseCoopers LLP, billed usaggregate amounts of $96,017 and $43,182, respectively, for services related totax compliance, tax planning and tax advice.

 

### ***D.            All Other Fees***

### ** **

During the financial years ended December 31,2008 and 2007, our principal accountant, Pricewaterhouse Coopers LLP, billed usaggregate amounts of $12,962 and $4,508, respectively, for services notincluded in audit fees, audit-related fees and tax fees.

 

### ***E.            Audit Committee Pre-ApprovalPolicies and Procedures***

### ** **

Under applicable Canadian securitiesregulations, we arerequired to disclose whether our Audit Committee has adopted specific policiesand procedures for the engagement of non-audit services and to prepare asummary of these policies and procedures. The Audit Committee Charter (filed asExhibit 11.6 to this annual report) provides that it is such committee’sresponsibility to approve all audit engagement fees and terms as well asreviewing policies for the provision of non-audit services by the externalauditors and, when required, the framework for pre-approval of such services.The Audit Committee delegates to its Chairman the pre-approval of suchnon-audit fees. The pre-approval by the Chairman is then presented to the AuditCommittee at its first scheduled meeting following such pre-approval.

 

For each of the years ended December 31,2008 and 2007, none of the non-audit servicesprovided by our external auditor wereapproved by the Audit Committee pursuant to the “de minimis exception” to thepre-approval requirement for non-audit services.

 

During the financial yearended on December 31, 2008, only full-time permanent employees of ourprincipal accountant, PricewaterhouseCoopers LLP, performed work to audit ourfinancial statements.

 

## ***Item 16D.      Exemptions from the Listing Standards forAudit Committees***

## *** ***

None.

 

## ***Item 16E.       Purchases of Equity Securities by theIssuer and Affiliated Purchasers***

## *** ***

None.

 

## ***Item 16F.       Changes in Registrant’s CertifyingAccountant***

## *** ***

None.

 

## ***Item 16G.      Corporate Governance***

## *** ***

The Registrant is incompliance with the corporate governance requirements of the NASDAQ except asdescribed below. The Registrant is not in compliance with the NASDAQrequirement that a quorum for a meeting of the holders of the common stock ofthe Registrant be no less than 33 1/3% of such outstanding shares. The by-lawsof the Registrant provide that a quorum for purposes of any meeting ofshareholders of the Registrant consists of at least 20% of the outstandingvoting shares. The Registrant received an exemption from NASDAQ from thisquorum requirement because the quorum provided for in the by-laws of theRegistrant is consistent with generally accepted business practices in Canada,the Registrant’s country of domicile, and with the TSX, the principal market onwhich the Registrant’s voting shares are traded.

 

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In addition, the Registrantfollows certain of its home country practices in lieu of compliance with theNASDAQ requirements that: (i) independent directors of the Registrant haveregularly scheduled meetings at which only independent directors are present (“executivesessions”); (ii) the compensation of the chief executive officer and theother executive officers of the Registrant be determined, or recommended to theRegistrant’s Board for determination, by a compensation committee comprisedsolely of independent directors; and (iii) the director nominees be selected,or recommended for selection by the Registrant’s Board, by a nominationscommittee comprised solely of independent directors. The Chairman of the Boardof the Registrant from time to time ensures that directors hold meetings atwhich senior management is not present, and the Registrant’s CorporateGovernance, Nominating and Human Resources Committee, which serves as theRegistrant’s compensation and nominations committee, is comprised of fourmembers, four of whom are independent directors. In accordance with applicablecurrent NASDAQ requirements, the Registrant has in the past provided to NASDAQletters from outside counsel certifying that these practices are not prohibitedby the Registrant’s home country law.

 

**PART III**

** **

## ***Item 17.         Financial Statements***

## *** ***

We have elected to providefinancial statements pursuant to Item 18.

 

## ***Item 18.         Financial Statements***

## *** ***

The financial statements appear on pages 116through 173.

 

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**ÆternaZentaris Inc.**

 

ConsolidatedFinancial Statements

December 31,2008, 2007 and 2006

(expressed inthousands of US dollars)

 

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**Report of the Independent Registered Public AccountingFirm**

 

**To the Shareholders of**

**Æterna Zentaris Inc.**

 

We have completed integrated audits of Æterna Zentaris Inc.’ s 2008 and2007 consolidated financial statements and of its internal control overfinancial reporting as at December 31, 2008  and an audit of its 2006consolidated financial statements. Our opinions, based on our audits, are presentedbelow. 

 

**Consolidatedfinancial statements**

 

We have audited the accompanying consolidatedbalance sheets of Æterna Zentaris Inc.****asat December 31, 2008 and December 31, 2007, and the related consolidated****statements of earnings (loss), comprehensiveincome (loss), changes in shareholders’ equity and cash flows****for each of the years in the three-yearperiod ended December 31, 2008. We have also audited the financialstatement schedules, Valuation and Qualifying Accounts and Export Sales, inItem 8.A. of this Annual Report on Form 20-F. These consolidated financialstatements and financial statement schedules are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements and financial statement schedules based onour audits.

 

We conducted our audits of the Company’s financialstatements in accordance with Canadian generally accepted auditing standardsand the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform an audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit of financial statements includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. A financial statement audit also includes assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of the Company as at December 31,2008 and December 31, 2007 and the results of its operations and its cash flowsfor each of the years in the three-year period ended December 31, 2008****in accordance with Canadian generallyaccepted accounting principles. Furthermore, in our opinion, the financialstatement schedules, Valuation and Qualifying Accounts and Export Sales, inItem 8.A. of this Annual Report on Form 20-F present fairly, in all materialrespects, the information set forth therein when read in conjunction with therelated consolidated financial statements.

 

**Internalcontrol over financial reporting**

 

We have also audited Æterna Zentaris Inc.’s internal control overfinancial reporting as at December 31, 2008, based on criteria establishedin *Internal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission*(COSO). The Company’s management is responsible for maintaining effectiveinternal control over financial reporting, and for its assessment of theeffectiveness of internal control over financial reporting included in “Management’sReport on Internal Control over Financial Reporting” appearing on page 112 ofthe Annual Report on Form 20-F. Our responsibility is to express an opinion onthe Company’s internal control over financial reporting based on our audit. 

 

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We conducted our audit of internal control over financial reporting inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. An audit ofinternal control over financial reporting includes obtaining an understandingof internal control over financial reporting, assessing the risk that amaterial weakness exists, testing and evaluating the design and operating effectivenessof internal control based on the assessed risk, and performing such otherprocedures as we consider necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion. 

 

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements. 

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as at December 31,2008****based on criteria establishedin Internal Control — Integrated Framework issued by the COSO.

 
|  | (1) |
|--|-----|

 

**Chartered Accountants**

 

 

Québec, Quebec, Canada

March 10, 2009

 

----

(1) Chartered accountant auditor permit No. 11070

 

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** **

**Æterna Zentaris Inc.**

Consolidated BalanceSheets

(expressed in thousands of US dollars)

 
| ** **                                                   | ** ** | **As at December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                                                   | ** ** | **$**                                 | ** ** | **$** | ** ** |
| **ASSETS**                                                   |       |                                  |       |   |   |
|                                                         |       |                                  |       |   |   |
| **Current assets**                                           | ** ** | ** **                            |       |   |   |
| Cash and cash equivalents                                    |       | 49,226                                |       | 10,272 |   |
| Short-term investments (note 24)                             |       | 493                                   |       | 31,115 |   |
| Accounts receivable                                          |       |                                  |       |   |   |
| Trade                                                        |       | 3,425                                 |       | 6,170 |   |
| Other (note 8)                                               |       | 1,100                                 |       | 3,044 |   |
| Income taxes                                                 |       | 48                                    |       | — |   |
| Inventory (note 9)                                           |       | 3,385                                 |       | 5,406 |   |
| Prepaid expenses and other current assets                    |       | 4,047                                 |       | 3,573 |   |
|                                                         |       | 61,724                                |       | 59,580 |   |
|                                                         |       |                                  |       |   |   |
| **Property, plant and equipment** (note 11)                  |       | 6,682                                 |       | 7,460 |   |
| **Long-lived assets held for sale** (note 6)                 |       | —                                |       | 13,999 |   |
| **Deferred charges and other long-term assets****(note 10)** |       | 5,959                                 |       | 1,441 |   |
| **Intangible assets****(note 12)**                           |       | 23,894                                |       | 30,391 |   |
| **Goodwill****(note 13)**                                    |       | 10,083                                |       | 10,492 |   |
|                                                         |       |                                  |       |   |   |
|                                                         |       | 108,342                               |       | 123,363 |   |
| ** **                                                   |       |                                  |       |   |   |
| **LIABILITIES**                                              |       |                                  |       |   |   |
|                                                         |       |                                  |       |   |   |
| **Current liabilities**                                      |       |                                  |       |   |   |
| Accounts payable and accrued liabilities  (note 14)          |       | 13,690                                |       | 16,084 |   |
| Income taxes                                                 |       | 800                                   |       | 23 |   |
| Deferred revenues (note 7)                                   |       | 7,631                                 |       | 5,373 |   |
| Current portion of long-term debt and  payable               |       | 49                                    |       | 775 |   |
|                                                         |       | 22,170                                |       | 22,255 |   |
|                                                         |       |                                  |       |   |   |
| **Deferred revenues****(note 7)**                            |       | 54,433                                |       | 3,333 |   |
| **Long-term debt and payable** (notes 6 and 15)              |       | 172                                   |       | — |   |
| **Employee future benefits** (note 16)                       |       | 10,092                                |       | 9,184 |   |
|                                                         |       | 86,867                                |       | 34,772 |   |
| **Commitments and contingencies**(note 25)                   |       |                                  |       |   |   |
| **Subsequent event**(note 26)                                |       |                                  |       |   |   |
| **SHAREHOLDERS’ EQUITY**                                |       |                                  |       |   |   |
| **Share capital** (note 17)                                  |       | 30,566                                |       | 30,566 |   |
| **Other capital**                                            |       | 79,669                                |       | 79,306 |   |
| **Deficit**                                                  |       | (102,814                              | )          | (42,997 | ) |
| **Accumulated other comprehensive income**                   |       | 14,054                                |       | 21,716 |   |
|                                                         |       | 21,475                                |       | 88,591 |   |
|                                                         |       | 108,342                               |       | 123,363 |   |

 

Evaluation of going concern (note 2)

 

**Approved by the Board of Directors**

 
|                              |   |                                    |
|------------------------------|--------|------------------------------------|
| Juergen Ernst, MBA  Director |   | Gérard Limoges, FCA  Director |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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# **ÆternaZentaris Inc.**

## ConsolidatedStatements of Changes in Shareholders’ Equity

### For the years ended December 31, 2008, 2007 and2006

(tabular amounts in thousands of US dollars,except common share data)

* *

 
| ** **                                                                  | ** ** | **Common  shares**   | ** ** | **Share  capital** | ** ** | **Other  capital** | ** ** | **Deficit** | ** ** | **Accumulated  other  comprehensive  income** | ** ** | **Total**   | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|--------------------|------------|-------------|------------|-----------------------------------------------|------------|-------------|------------|
| ** **                                                                  | ** ** | **(number of)** | ** ** | **$**              | ** ** | **$**              | ** ** | **$**       | ** ** | **$**                                         | ** ** | **$**       | ** ** |
| **Balance –  December 31, 2005**                                  | ** ** | **46,139,814**       | ** ** | **130,344**        | ** ** | **10,474**         | ** ** | **(43,224** | **)**      | **11,937**                                    | ** ** | **109,531** | ** ** |
| Net earnings for the year                                                   |       | —               |       | —             |       | —             |       | 33,390      |       | —                                        |       | 33,390      |       |
| Conversion of convertible term loans (note  17b)                            |       | 6,955,088            |       | 37,786             |       | (6,339             | )          | (280        | )          | —                                        |       | 31,167      |       |
| Foreign currency translation adjustment                                     |       | —               |       | —             |       | —             |       | —      |       | 4,007                                         |       | 4,007       |       |
| Foreign currency translation adjustment  related to disposal of Atrium      |       | —               |       | —             |       | —             |       | —      |       | (1,643                                        | )          | (1,643      | )          |
| Issued pursuant to the stock option plan                                    |       |                 |       |               |       |               |       |        |       |                                          |       |        |       |
| For cash (note 17d)                                                         |       | 22,000               |       | 81                 |       | —             |       | —      |       | —                                        |       | 81          |       |
| Ascribed value from Other capital                                           |       | —               |       | 29                 |       | (29                | )          | —      |       | —                                        |       | —      |       |
| Issued pursuant to acquisition of Echelon  (note 5)                         |       | 23,789               |       | 163                |       | —             |       | —      |       | —                                        |       | 163         |       |
| Issued pursuant to acquisition of a patent  from a senior officer (note 22) |       | 28,779               |       | 175                |       | —             |       | —      |       | —                                        |       | 175         |       |
| Share issue expenses                                                        |       | —               |       | (112               | )          | —             |       | —      |       | —                                        |       | (112        | )          |
| Stock-based compensation costs                                              |       | —               |       | —             |       | 2,120              |       | —      |       | —                                        |       | 2,120       |       |
| **Balance – December 31,  2006**                                  | ** ** | **53,169,470**       | ** ** | **168,466**        | ** ** | **6,226**          | ** ** | **(10,114** | **)**      | **14,301**                                    | ** ** | **178,879** | ** ** |
| Effect of the application of new accounting  standards                      |       | —               |       | —             |       | —             |       | (587        | )          | (41                                           | )          | (628        | )          |
| Distribution of Atrium (note 4)                                        |       | —               |       | (137,959           | )          | 71,122             |       | —      |       | (5,624                                        | )          | (72,461     | )          |
| Net loss for the year                                                       |       | —               |       | —             |       | —             |       | (32,296     | )          | —                                        |       | (32,296     | )          |
| Foreign currency translation adjustment                                     |       | —               |       | —             |       | —             |       | —      |       | 13,783                                        |       | 13,783      |       |
| Variation in the fair value of short-term  investments, net of income taxes |       | —               |       | —             |       | —             |       | —      |       | 51                                            |       | 51          |       |
| Issued pursuant to the stock option plan                                    |       |                 |       |               |       |               |       |        |       |                                          |       |        |       |
| For cash (note 17d)                                                         |       | 18,000               |       | 33                 |       | —             |       | —      |       | —                                        |       | 33          |       |
| Ascribed value from Other capital                                           |       | —               |       | 26                 |       | (26                | )          | —      |       | —                                        |       | —      |       |
| Disposal of Shares of Echelon (note 5)                                      |       | —               |       | —             |       | —             |       | —      |       | (754                                          | )          | (754        | )          |
| Stock-based compensation costs                                              |       | —               |       | —             |       | 1,984              |       | —      |       | —                                        |       | 1,984       |       |
| **Balance – December 31,  2007**                                  | ** ** | **53,187,470**       | ** ** | **30,566**         | ** ** | **79,306**         | ** ** | **(42,997** | **)**      | **21,716**                                    | ** ** | **88,591**  | ** ** |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**Æterna Zentaris Inc.**

ConsolidatedStatements of Changes in Shareholders’ Equity

For theyears ended December 31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars, except common share data)

 
| ** **                                                                  | ** ** | **Common  shares**   | ** ** | **Share  capital** | ** ** | **Other  capital** | ** ** | **Deficit**  | ** ** | **Accumulated  other  comprehensive  income** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|--------------------|------------|--------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                                                                  | ** ** | **(number of)** | ** ** | **$**              | ** ** | **$**              | ** ** | **$**        | ** ** | **$**                                         | ** ** | **$**      | ** ** |
| **Balance –  December 31, 2007**                                  | ** ** | **53,187,470**       | ** ** | **30,566**         | ** ** | **79,306**         | ** ** | **(42,997**  | **)**      | **21,716**                                    | ** ** | **88,591** | ** ** |
| Net loss for the year                                                       |       | —               |       | —             |       | —             |       | (59,817      | )          | —                                        |       | (59,817    | )          |
| Foreign currency translation adjustment                                     |       | —               |       | —             |       | —             |       | —       |       | (7,655                                        | )          | (7,655     | )          |
| Variation in the fair value of short-term  investments, net of income taxes |       | —               |       | —             |       | —             |       | —       |       | (7                                            | )          | (7         | )          |
| Stock based compensation costs                                              |       | —               |       | —             |       | 363                |       | —       |       | —                                        |       | 363        |       |
| **Balance – December 31,  2008**                                  | ** ** | **53,187,470**       | ** ** | **30,566**         | ** ** | **79,669**         | ** ** | **(102,814** | **)**      | **14,054**                                    | ** ** | **21,475** | ** ** |

 
| ** **                                                                     | ** ** | **As at December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                     | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                     |       | **$**                                 |       | **$** |   | **$** |   |
| ** **                                                                     |       |                                  |       |   |   |   |   |
| **Accumulated Other  Comprehensive Income**                                    |       |                                  |       |   |   |   |   |
| Consisting of the following:                                                   |       |                                  |       |   |   |   |   |
| Foreign currency translation adjustments                                       |       | 14,051                                |       | 21,706 |   | 14,301 |   |
| Variation in fair market value of  short-term investments, net of income taxes |       | 3                                     |       | 10 |   | — |   |
|                                                                           |       |                                  |       |   |   |   |   |
| Accumulated Other Comprehensive income                                         |       | 14,054                                |       | 21,716 |   | 14,301 |   |
| **Deficit**                                                                    |       | (102,814                              | )          | (42,997 | ) | (10,114 | ) |
|                                                                           |       |                                  |       |   |   |   |   |
| Total Accumulated Other Comprehensive  Income and Deficit                      |       | (88,760                               | )          | (21,281 | ) | 4,187 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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# **ÆternaZentaris Inc.**

## ConsolidatedStatements of Earnings (Loss)

### For the years ended December 31,

(expressed in thousands of US dollars, exceptshare and per share data)

 
| ** **                                                            | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **$**      | ** ** | **$**      | ** ** | **$**      | ** ** |
| ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                                          |       | 38,478     |       | 42,068     |       | 38,799     |       |
| **Operating expenses**                                                |       |       |       |       |       |       |       |
| Cost of sales (note 9)                                                |       | 19,278     |       | 12,930     |       | 11,270     |       |
| Selling, general and administrative  expenses                         |       | 17,325     |       | 20,403     |       | 16,478     |       |
| Research and development costs                                        |       | 57,448     |       | 39,248     |       | 27,422     |       |
| Research and development tax credits and  grants                      |       | (343       | )          | (2,060     | )          | (1,564     | )          |
| Depreciation and amortization                                         |       |       |       |       |       |       |       |
| Property, plant and equipment                                         |       | 1,515      |       | 1,562      |       | 2,816      |       |
| Intangible assets (note 12)                                           |       | 5,639      |       | 4,004      |       | 6,148      |       |
| Impairment of long-lived asset held for  sale (note 6)                |       | —     |       | 735        |       | —     |       |
|                                                                  |       | 100,862    |       | 76,822     |       | 62,570     |       |
| **Loss from operations**                                              |       | (62,384    | )          | (34,754    | )          | (23,771    | )          |
| **Other income (expenses)**                                           |       |       |       |       |       |       |       |
| **Interest income**                                                   |       | 868        |       | 1,904      |       | 1,441      |       |
| Interest expense                                                      |       |       |       |       |       |       |       |
| Long-term debt and convertible term loans                             |       | —     |       | (85        | )          | (1,270     | )          |
| Other                                                                 |       | (118       | )          | —     |       | (163       | )          |
| Foreign exchange (loss) gain                                          |       | 3,071      |       | (1,035     | )          | 319        |       |
| Loss on disposal of long-lived assets held  for sale (note 6)         |       | (35        | )          | —     |       | —     |       |
| Loss on disposal of equipment                                         |       | (44        | )          | (28        | )          | —     |       |
| Gain on disposal of a long-term investment                            |       | —     |       | —     |       | 409        |       |
|                                                                  |       | 3,742      |       | 756        |       | 736        |       |
| **Share in the results of an  affiliated company**                    |       | —     |       | —     |       | 1,575      |       |
| **Loss before income taxes from  continuing operations**              |       | (58,642    | )          | (33,998    | )          | (21,460    | )          |
| **Income tax (expense) recovery**(note  19)                           |       | (1,175     | )          | 1,961      |       | 29,037     |       |
| **Net (loss) earnings from  continuing operations**                   |       | (59,817    | )          | (32,037    | )          | 7,577      |       |
| **Net (loss) earnings from  discontinued operations** (notes 4 and 5) |       | —     |       | (259       | )          | 25,813     |       |
| **Net (loss) earnings for the  year**                                 |       | (59,817    | )          | (32,296    | )          | 33,390     |       |
| **Net (loss) earnings per share  from continuing operations**         |       |       |       |       |       |       |       |
| Basic                                                                 |       | (1.12      | )          | (0.61      | )          | 0.14       |       |
| Diluted                                                               |       | (1.12      | )          | (0.61      | )          | 0.14       |       |
| **Net (loss) earnings per share  from discontinued operations**       |       |       |       |       |       |       |       |
| Basic                                                                 |       | —     |       | —     |       | 0.50       |       |
| Diluted                                                               |       | —     |       | —     |       | 0.48       |       |
| **Net (loss) earnings per share**                                     |       |       |       |       |       |       |       |
| Basic                                                                 |       | (1.12      | )          | (0.61      | )          | 0.64       |       |
| Diluted                                                               |       | (1.12      | )          | (0.61      | )          | 0.62       |       |
| **Weighted average number of  shares****(note 21)**                   |       |       |       |       |       |       |       |
| Basic                                                                 |       | 53,187,470 |       | 53,182,803 |       | 52,099,290 |       |
| Diluted                                                               |       | 53,187,470 |       | 53,182,803 |       | 52,549,260 |       |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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# **ÆternaZentaris Inc.**

## ConsolidatedStatements of Comprehensive Income (Loss)

### For the years ended December 31,

(expressed in thousands of US dollars)

 
| ** **                                                                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                                     | ** ** | **$**    | ** ** | **$**    | ** ** | **$**    | ** ** |
|                                                                           |       |     |       |     |       |     |       |
| Net earnings (loss) for the year                                               |       | (59,817  | )          | (32,296  | )          | 33,390   |       |
| Other comprehensive income (loss):                                             |       |     |       |     |       |     |       |
| Foreign currency translation adjustments                                       |       | (7,655   | )          | 13,783   |       | 4,007    |       |
| Reclassification adjustment related to  disposal of Atrium                     |       | —   |       | —   |       | (1,643   | )          |
| Reclassification adjustment related to  disposal of Echelon                    |       | —   |       | (754     | )          | —   |       |
| Variation in fair market value of  short-term investments, net of income taxes |       | (7       | )          | 51       |       | —   |       |
|                                                                           |       |     |       |     |       |     |       |
| Comprehensive income (loss)                                                    |       | (67,479  | )          | (19,216  | )          | 35,754   |       |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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# **ÆternaZentaris Inc.**

## ConsolidatedStatements of Cash Flows

## For the yearsended December 31,

(expressed inthousands of US dollars)

 
| ** **                                                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                             | ** ** | **$**    | ** ** | **$**    | ** ** | **$**    | ** ** |
| **Cash flows from operating  activities**                              |       |     |       |     |       |     |       |
| Net earnings (loss) for the year                                       |       | (59,817  | )          | (32,296  | )          | 33,390   |       |
| Net (earnings) loss from discontinued  operations                      |       | —   |       | 259      |       | (25,813  | )          |
| Net earnings (loss) from continuing  operations                        |       | (59,817  | )          | (32,037  | )          | 7,577    |       |
| Items not affecting cash and cash  equivalents                         |       |     |       |     |       |     |       |
| Depreciation and amortization                                          |       | 7,154    |       | 5,566    |       | 8,964    |       |
| Stock-based compensation costs                                         |       | 363      |       | 1,984    |       | 2,120    |       |
| Future income taxes                                                    |       | —   |       | (1,868   | )          | (29,160  | )          |
| Gain on disposal of a long-term investment                             |       | —   |       | —   |       | (409     | )          |
| Share in the results of an affiliated  company                         |       | —   |       | —   |       | (1,575   | )          |
| Inventory write-down (note 9)                                          |       | 726      |       | —   |       | —   |       |
| Employee future benefits                                               |       | 984      |       | 164      |       | (115     | )          |
| Amortization of deferred charges and other  long term assets           |       | 729      |       | 510      |       | 150      |       |
| Amortization of deferred revenues                                      |       | (6,213   | )          | (7,012   | )          | (5,141   | )          |
| Accretion on long term borrowings                                      |       | —   |       | 82       |       | 1,227    |       |
| Loss on disposal of long-lived assets held  for sale                   |       | 35       |       | —   |       | —   |       |
| Loss on disposal of equipment                                          |       | 44       |       | 28       |       | —   |       |
| Impairment of long-lived asset held for  sale                          |       | —   |       | 735      |       | —   |       |
| Foreign exchange loss (gain) on items  denominated in foreign currency |       | (3,801   | )          | 641      |       | (587     | )          |
| Changes in operating assets and liabilities  (note 18)                 |       | 58,524   |       | 5,545    |       | 1,079    |       |
| Net cash used in continuing operating  activities                      |       | (1,272   | )          | (25,662  | )          | (15,870  | )          |
| Net cash provided by discontinued operating  activities                |       | —   |       | 132      |       | 23,827   |       |
| Net cash provided by (used in) operating  activities                   |       | (1,272   | )          | (25,530  | )          | 7,957    |       |
| **Cash flows from financing  activities**                              |       |     |       |     |       |     |       |
| Repayment of long-term debt and long-term  payable                     |       | (784     | )          | (751     | )          | (718     | )          |
| Issuance of shares pursuant to the exercise  of stock options          |       | —   |       | 33       |       | 81       |       |
| Share issue expenses                                                   |       | (408     | )          | (366     | )          | (112     | )          |
| Net cash used in continuing financing  activities                      |       | (1,192   | )          | (1,084   | )          | (749     | )          |
| Net cash used in discontinued financing  activities                    |       | —   |       | (230     | )          | (7,825   | )          |
| Net cash used in financing activities                                  |       | (1,192   | )          | (1,314   | )          | (8,574   | )          |
| **Cash flows from investing  activities**                              |       |     |       |     |       |     |       |
| Purchase of short-term investments                                     |       | (1,664   | )          | (6,180   | )          | (79,300  | )          |
| Proceeds from sale and maturity of  short-term investments             |       | 30,027   |       | 33,405   |       | 49,267   |       |
| Proceeds from sale of a long-term  investment                          |       | —   |       | —   |       | 1,387    |       |
| Business acquisitions, net of cash and cash  equivalents acquired      |       | —   |       | —   |       | (32      | )          |
| Purchase of property, plant and equipment                              |       | (1,147   | )          | (3,702   | )          | (1,845   | )          |
| Net proceeds from sale of long-lived assets  held for sale             |       | 14,854   |       | —   |       | —   |       |
| Proceeds from sale of property, plant and  equipment                   |       | —   |       | 729      |       | —   |       |
| Acquisition of amortizable intangible  assets                          |       | (67      | )          | (67      | )          | (5       | )          |
| Net cash provided by (used in) continuing  investing activities        |       | 42,003   |       | 24,185   |       | (30,528  | )          |
| Net cash provided by discontinued investing  activities                |       | —   |       | 2,238    |       | 11,878   |       |
| Net cash provided by (used in) in investing  activities                |       | 42,003   |       | 26,423   |       | (18,650  | )          |
| **Effect of exchange rate  changes on cash and cash equivalents**      |       | (585     | )          | 1,337    |       | 1,356    |       |
| **Net change in cash and cash  equivalents**                           |       | 38,954   |       | 916      |       | (17,911  | )          |
| **Cash and cash equivalents —  Beginning of year**                |       | 10,272   |       | 9,356    |       | 27,267   |       |
| **Cash and cash equivalents —  End of year**                      |       | 49,226   |       | 10,272   |       | 9,356    |       |
| **Cash and cash equivalents  related to:**                             |       |     |       |     |       |     |       |
| Continuing operations                                                  |       | 49,226   |       | 10,272   |       | 8,939    |       |
| Discontinued operations                                                |       | —   |       | —   |       | 417      |       |
|                                                                   |       | 49,226   |       | 10,272   |       | 9,356    |       |
| Cash and  cash equivalents components:                                 |       |     |       |     |       |     |       |
| Cash                                                                   |       | 13,256   |       | 10,195   |       | 9,174    |       |
| Cash equivalents                                                       |       | 35,970   |       | 77       |       | 182      |       |
|                                                                   |       | 49,226   |       | 10,272   |       | 9,356    |       |

** **

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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# **ÆternaZentaris Inc.**

## Notes toConsolidated Financial Statements

## December 31,2008, 2007 and 2006

### (tabular amounts in thousands of US dollars,

### except share/option and per share/option data and asotherwise noted)

 
| **1**      | ** ** | **Incorporation  and nature of activities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | Æterna  Zentaris Inc. (“Æterna Zentaris” or the “Company”), incorporated under the  Canada Business Corporations Act, is a global biopharmaceutical company focused  on endocrine therapy and oncology with expertise in drug discovery,  development and commercialization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | Our pipeline  encompasses compounds at all stages of development, from drug discovery  through marketed products. The two highest priority clinical programs are our  lead value driver, cetrorelix for benign prostatic hyperplasia (“BPH”) and  our lead oncology program, AEZS-108, for endometrial and ovarian cancers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **2**      | ** ** | **Summary  of significant accounting policies**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** ** | ** ** | **Basis  of presentation**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | The accompanying consolidated financial  statements have been prepared in accordance with Canadian generally accepted  accounting principles (“Canadian GAAP”). These consolidated financial  statements differ in certain respects from those prepared in accordance with  United States generally accepted principles (“US GAAP”). The recognition,  measurement and disclosure differences as they relate to the Company are  described in note 27 “Summary of differences between generally accepted  accounting principles in Canada and in the United States”.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** ** | ** ** | **Evaluation of going concern,  results of operations and management’s plans:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** ** | ** ** | In May 2007, the Accounting Standards  Board amended CICA Handbook Section 1400, *General  Standards of Financial Statement Presentation*, to change the  guidance related to management’s responsibility to assess the ability of the  entity to continue as a going concern. Management is required to make an  assessment of an entity’s ability to continue as a going concern and should  take into account all available information about the future, which is at  least, but is not limited to, 12 months from the balance sheet dates.  Disclosure is required of material uncertainties related to events or  conditions that may cast significant doubt upon the entity’s ability to  continue as a going concern. The Company adopted these amendments, which were  effective for years beginning on or after January 1, 2008. Management’s  assessment took into account the sale of rights to future royalties described  in note 7, the signing of the development, commercialization and license  agreement with sanofi-aventis on March 5, 2009, which is disclosed in  note 26, as well as the Company’s strategic plan and corresponding budgets  for 2009, 2010 and 2011.  As a result of this assessment, management  believes that the Company has sufficient financial resources to fund planned  expenditures and other working capital needs for at least the next 12-month  period from the balance sheet date. |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** ** | ** ** | **Basis of consolidation**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | These consolidated financial statements  include all companies in which the Company, directly or indirectly holds more  than 50% of the voting rights or over which it exercises control. Companies  are included in the consolidation from the date that control is transferred  to the Company, while companies sold are excluded from the consolidation from  the date that control ceases. The purchase method of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

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# **ÆternaZentaris Inc.**

## Notes toConsolidated Financial Statements

## December 31,2008, 2007 and 2006

### (tabular amounts in thousands of US dollars,

### except share/option and per share/option data and asotherwise noted)

###  

| ** ** | ** ** | accounting is used to account for  acquisitions. All intercompany balances and transactions are eliminated on  consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** ** | ** ** | **Investments in affiliated companies**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** ** | ** ** | Where applicable, investments in companies  over which the Company exercises significant influence (generally where the  Company holds 20% to 50% of the investee’s voting rights) but over which it  does not exercise control are accounted for using the equity method. The  Company’s share of its affiliated results of operations is recognized in the  statement of earnings (loss). Also where applicable, investments where the  Company holds less than 20% of the investee’s voting rights and does not have  the ability to exercise significant influence are accounted for using the  cost method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | **Accounting estimates**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** ** | ** ** | The preparation of financial statements in  conformity with Canadian generally accepted accounting principles requires  management to make estimates and assumptions that affect the amounts reported  in the financial statements. Those estimates and assumptions also affect the  disclosure of contingencies at the date of the financial statements as well  as the reported amounts of revenues and expenses during the reported years.  Significant estimates are generally made in connection with the calculation  of revenues, research and development expenses, stock-based compensation  cost, as well as in determining the allowance for doubtful accounts,  inventory and provisions for obsolete inventory, future income tax assets and  liabilities, the useful lives of property, plant and equipment and intangible  assets with finite lives, the valuation of intangible assets and goodwill,  the fair value of stock options granted, employee future benefits and certain  accrued liabilities. The Company bases its estimates on historical  experience, where relevant, and on various other assumptions that management  believes to be reasonable under the circumstances. Actual results could  differ from those estimates. |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | **Foreign currency translation**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** ** | ** ** | *Reporting currency and self-sustaining  subsidiaries*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | The Company uses the US dollar as its  reporting currency. Assets and liabilities of the Company and of its  self-sustaining subsidiaries whose functional currency is other than the US  dollar are translated using the exchange rate in effect at the balance sheet  date. Revenues and expenses are translated at the average rate in effect  during the year. Translation gains and losses are included in the statement  of comprehensive income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | *Foreign currency transactions  and integrated foreign subsidiary*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | The financial statements of integrated  foreign operations and transactions denominated in currencies other than the  functional currency are re-measured into the functional currency using the  temporal method. Under this method, monetary assets and liabilities are  re-measured to their functional currency at the exchange rate in effect on  the date of the balance sheet. Non-monetary assets and liabilities are  re-measured at historical rates, unless such assets and liabilities are  carried at market, in which case, they are remeasured using the exchange rate  in effect on the date of the balance sheet. Revenues and expenses are                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

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# **ÆternaZentaris Inc.**

## Notes toConsolidated Financial Statements

## December 31,2008, 2007 and 2006

### (tabular amounts in thousands of US dollars,

### except share/option and per share/option data and asotherwise noted)

 
| ** ** | ** ** | re-measured at the monthly average exchange  rate. Transaction gains and losses resulting from such re-measurement are  reflected in the statements of earnings (loss).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | **Cash and cash equivalents**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** | Cash and cash equivalents consist of cash  on hand and balances with banks, excluding bank advances, as well as  short-term, interest-bearing deposits with a term of less than three months  at the acquisition date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | **Short-term investments**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | Short-term investments consist mainly of  notes and bonds which do not meet the Company’s definition of cash and cash  equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | In accordance with the new requirements of  the Canadian Institute Chartered Accountants’ (“CICA”) Handbook  Section 3855, *Financial Instruments*,  adopted by the Company on January 1, 2007, short-term investments are  classified as available-for-sale investments. The Company recognizes  transactions on the settlement date. These investments are recognized at fair  value. Unrealized gains and losses are recognized, net of income taxes, if  any, in comprehensive income. Upon the disposal or impairment of these  investments, these gains or losses are reclassified in the consolidated  statement of earnings (loss). See also note 3. |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | Prior to 2007, short-term investments were  valued at the lower of amortized cost and market value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | **Inventory**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | Inventory is valued at the lower of cost  and net realizable value, which is defined as the estimated selling price in  the ordinary course of business less the estimated costs of completion and  the estimated costs necessary to make the sale. Cost is determined on a  first-in, first-out basis. The cost of finished goods and work in progress  includes raw materials, labour and manufacturing overhead under the  absorption costing method.                                                                                                                                                                                                                              |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | **Property, plant and equipment  and depreciation**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | Property, plant and equipment are recorded  at cost, net of related government grants and accumulated depreciation.  Depreciation is calculated using the following methods and annual rates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 
| ** **             | ** ** | **Methods**                          | ** ** | **Annual rates** | ** ** |
|------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **             | ** ** | ** **                           | ** ** | ** **            | ** ** |
| Building               |       | Straight-line                        |       | 5                     | %          |
| Equipment              |       | Declining  balance and straight-line |       | 20                    | %          |
| Office furniture       |       | Declining  balance and straight-line |       | 10 and 20             | %          |
| Computer equipment     |       | Straight-line                        |       | 25 and 33 1/3         | %          |
| Automotive equipment   |       | Straight-line                        |       | 20                    | %          |
| Leasehold improvements |       | Straight-line                        |       | Remaining  lease term |       |

 

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# **ÆternaZentaris Inc.**

## Notes to ConsolidatedFinancial Statements

## December 31,2008, 2007 and 2006

### (tabular amounts in thousands of US dollars,

### except share/option and per share/option data and asotherwise noted)

 
| ** ** | ** ** | **Royalty sale transaction  expenses and other deferred charges**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** ** | ** ** | The Company has deferred direct and  incremental costs associated with its transaction to sell its future rights  to a royalty stream and are accounted for as discussed in note 7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** ** | ** ** | Other deferred charges relate to deferred  upfront payments made related to research and development collaborations.  These charges are included in deferred charges and other long-term assets and  are amortized in the consolidated statement of earnings (loss) over the  duration of the research and development work related to the contracts. Also  included in deferred charges and other long-term assets are transaction costs  that have been incurred in connection with a shelf prospectus, which was  filed in 2007. These costs are not amortized but instead will be included in  share capital once proceeds are raised in a related transaction. If no  transaction is consummated by the expiry date of the shelf prospectus, which  will occur at the end of 2009 or earlier, should management determine that no  transaction will be pursued, these transaction costs will be recorded as an  expense in the consolidated statement of earnings (loss) (see also note 10).                                                  |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** ** | ** ** | **Intangible assets**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | Intangible assets with finite useful lives  consist of in-process research and development, acquired in business  combinations, patents and trademarks, technology and other. Patents and  trademarks comprise costs, including professional fees incurred in connection  with the filing of patents and the registration of trademarks for product  marketing and manufacturing purposes, net of related government grants and  accumulated amortization. Intangible assets with finite useful lives are  amortized on a straight-line basis over their estimated useful lives of eight  to fifteen years for in-process research and development and patents, ten  years for trademarks and from three to ten years for technology and other.                                                                                                                                                                                                                                                                                                    |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** ** | ** ** | **Goodwill**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | Goodwill represents the excess of the  purchase price over the fair values of the net assets of entities acquired at  the respective dates of acquisition. Goodwill is not amortized but is tested  for impairment annually or more frequently if events or changes in  circumstances indicate that it might be impaired. Testing for impairment is  accomplished mainly by determining whether the fair value of a reporting unit  exceeds the net carrying amount of that reporting unit as of the assessment  date. If the fair value is greater than the carrying amount, no impairment is  necessary. In the event that the carrying amount of a reporting unit exceeds  its fair value, an impairment loss is recognized in an amount equal to the  excess. Fair value of goodwill is estimated in the same way as goodwill is  determined at the date of the acquisition in a business combination, that is,  the excess of the fair value of the reporting unit over the fair value of the  identifiable net assets of the reporting unit. |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** ** | ** ** | **Impairment of long-lived assets**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | Property, plant and equipment and  intangible assets with finite lives are reviewed for impairment when events  or circumstances indicate that carrying values may not be recoverable.  Impairment exists when the carrying value of the asset is greater than the  undiscounted future cash flows expected to be provided by the asset. The  amount of impairment loss, if any, is the excess of its carrying value over  its fair value,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

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# **ÆternaZentaris Inc.**

## Notes toConsolidated Financial Statements

## December 31,2008, 2007 and 2006

### (tabular amounts in thousands of US dollars,

### except share/option and per share/option data and asotherwise noted)

 
| ** ** | ** ** | which in turn is determined based upon  discounted cash flows or appraised values, depending on the nature of assets.                                                                                                                                                                                      |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                       |
| ** ** | ** ** | **Employee future benefits**                                                                                                                                                                                                                                                                               |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                 |
| ** ** | ** ** | The Company’s subsidiary in Germany  maintains defined contribution and unfunded defined benefit plans as well as  other benefit plans for its employees. Its obligations are accrued under  employee benefit plans and the related costs. In this regard, the following  policies have been adopted: |

 
| ** ** | ** ** | **·**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | the cost of  pension and other benefits earned by employees is actuarially determined  using the projected unit credit method and benefit method prorated on length  of service and management’s best estimate of salary escalation, retirement  ages of employees and employee turnover; |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** |                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** | **·**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | the net  actuarial gain (loss) of the benefit obligation is recorded in the statement  of earnings (loss) as it arises.                                                                                                                                                                        |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** |                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** | For defined contribution plans, the pension expenses recorded in the  statement of earnings (loss) is the amount of contribution the Company is  required to pay for services rendered by employees.                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | **Deferred revenues**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** | Deferred revenues relate to the unamortized  portion of the cash proceeds received in connection with the Company’s sale  of future rights to a royalty stream. Those proceeds are recognized as  royalty revenue based on the “units-of-revenue” method, as discussed in note  7. Also included in deferred revenues are upfront payments received primarily  in connection with license cooperation agreements. Those payments are  recognized as revenues, as discussed below.                                                      |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | **Revenue recognition**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** | The Company is currently in a phase in  which potential products are being further developed or marketed jointly with  strategic partners. Existing licensing agreements usually foresee one-time  payments (upfront payments), payments for research and development services  in the form of cost reimbursements, milestone payments and royalty receipts  for licensing and marketing product candidates. Revenues associated with  those multiple-element arrangements are allocated to the various elements  based on their relative fair value. |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | Agreements containing multiple elements are  divided into separate units of accounting if certain criteria are met,  including whether the delivered element has stand-alone value to the customer  and whether there is objective and reliable evidence of the fair value of the  undelivered obligation(s). The consideration received is allocated among the  separate units based on each unit’s fair value or using the residual method,  and the applicable revenue recognition criteria are applied to each of the  separate units.       |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | License fees representing non-refundable  payments received upon the execution of license agreements are recognized as  revenue upon execution of the license agreements when the Company has no  significant future performance obligations and collectibility of the fees is  assured. Upfront payments received at the beginning of licensing agreements  are not recorded as revenue when received but are amortized based on                                                                                                                     |

 

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# **ÆternaZentaris Inc.**

## Notes toConsolidated Financial Statements

## December 31,2008, 2007 and 2006

### (tabular amounts in thousands of US dollars,

### except share/option and per share/option data and asotherwise noted)

 
| ** ** | ** ** | the progress to the related research and  development work. This progress is based on estimates of total expected time  or duration to complete the work, which is compared to the period of time  incurred to date in order to arrive at an estimate of the percentage of  revenue earned to date.                                                                                                                                                                                                                                                                                                                          |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | Milestone payments, which are generally  based on developmental or regulatory events, are recognized as revenue when  the milestones are achieved, collectibility is assured, and when there are no  significant future performance obligations in connection with the milestones.                                                                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | In those instances where the Company has  collected upfront or milestone payments but has ongoing future obligations  related to the development of the drug product, management considers the  milestone payments and the remaining obligations under the contract as a  single unit of accounting. In those circumstances where the collaboration  does not require specific deliverables at specific times or at the end of the  contract term, but rather the Company’s obligations are satisfied over a  period of time, revenue recognition is deferred and amortized over the period  of its future obligations. |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | Royalty revenue, based on a percentage of  sales of certain declared products sold by third parties, is recorded when  the Company has fulfilled the terms in accordance with the contractual  agreement, has no future obligations, the amount of the royalty fee is  determinable and collection is reasonably assured.                                                                                                                                                                                                                                                                                                    |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | As discussed in note 7, the Company has  sold its rights to certain future royalties. The Company defers recognition  of the proceeds it receives for the royalty stream and recognizes these  deferred revenues over the life of the license agreement, pursuant to the  “units-of-revenue” method.                                                                                                                                                                                                                                                                                                               |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | Revenues from sales of products are  recognized, net of estimated sales allowances and rebates, when title passes  to customers, which is at the time goods are shipped, when there are no  future performance obligations, when the purchase price is fixed and  determinable, and collection is reasonably assured.                                                                                                                                                                                                                                                                                                        |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | **Stock-based compensation costs**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** ** | ** ** | Since January 1, 2003, the Company  accounts for all forms of employee stock-based compensation using the fair  value-based method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | The fair value of stock options is  determined on the date of grant using the Black-Scholes option pricing model  and stock-based compensation costs are recognized over the vesting period of  the options and credited to Other Capital, and any consideration received by  the Company on the exercise of stock options is credited to Share Capital.  Other capital component of the stock-based compensation is transferred to  Share Capital upon the issuance of shares.                                                                                                                                              |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | **Income taxes**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** ** | ** ** | The Company follows the liability method of  accounting for income taxes. Under this method, future income tax assets and  liabilities are determined based on the temporary differences between the  carrying amounts and tax bases of the assets and liabilities. Future income  tax assets and liabilities are measured using substantively enacted and  enacted tax rates expected to apply in the years in which the differences are  expected to reverse.                                                                                                                                                              |

 

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# **ÆternaZentaris Inc.**

## Notes toConsolidated Financial Statements

## December 31,2008, 2007 and 2006

### (tabular amounts in thousands of US dollars,

### except share/option and per share/option data and asotherwise noted)

 
| ** ** | ** ** | The Company establishes a valuation allowance  against future income tax assets if, based on available information, it is  more likely than not that some or all of the future income tax assets will  not be realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** | **Research and development costs**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** ** | ** ** | Research costs are expensed as incurred. Development  costs are expensed as incurred except for those which meet generally accepted  criteria for deferral, in which case, the costs are capitalized and amortized  to earnings over the estimated period of benefit. No costs have been deferred  during any periods.                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** | **Research and development tax credits and  grants**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** ** | ** ** | The Company is entitled to scientific  research and experimental development (“SR&ED”) tax credits granted by  the Canadian federal government (“Federal”) and the government of the Province  of Quebec (“Provincial”). Federal SR&ED tax credits are earned on  qualified Canadian SR&ED expenditures at a rate of 20% and can only be  used to offset Federal income taxes otherwise payable. Refundable Provincial  SR&ED tax credits are generally earned on qualified SR&ED salaries,  subcontracting and university contract expenses incurred in the Province of  Quebec, at a rate of 35% of eligible base amounts. |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** | SR&ED tax credits and grants are  accounted for using the cost reduction method. Accordingly, tax credits and  grants are recorded as a reduction of the related expenses or capital  expenditures in the period the expenses are incurred. The refundable portion  of SR&ED tax credits is recorded in the year in which the related  expenses or capital expenditures are incurred and the non-refundable portion  of SR&ED tax credits and grants is recorded at such time, provided the  Company has reasonable assurance the credits or grants will be realized.                                                                                              |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** | **Earnings (loss) per share**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** ** | ** ** | Basic net earnings (loss) per share is  calculated using the weighted average number of common shares outstanding  during the year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** | Diluted net earnings (loss) per share is  calculated based on the weighted average number of common shares outstanding  during the year, plus the effects of dilutive common share equivalents such  as options and convertible term loans. This method requires that diluted net  earnings (loss) per share be calculated using the treasury stock method, as  if all common share equivalents had been exercised at the beginning of the  reporting period, or period of issuance, as the case may be, and that the  funds obtained thereby were used to purchase common shares of the Company at  the average trading price of the common shares during the period.         |

 
| **3**      | ** ** | **New accounting standards and  pronouncements** |
|------------|------------|--------------------------------------------------|
| ** ** | ** ** | ** **                                       |
| ** ** | ** ** | **a)**                                           | ** ** | **Accounting changes adopted in 2008** |
| ** ** | ** ** | ** **                                       | ** ** | ** ** |
| ** ** | ** ** | ** **                                       | ** ** | On January 1, 2008, the Company adopted CICA Handbook Section 1535,  *Capital Disclosures*; Section 3862,  *Financial Instruments – Disclosures;*  Section 3863, *Financial Instruments –  Presentation;* and Section 3031, *Inventories*, which replaces Section 3030. |

 

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# **ÆternaZentaris Inc.**

## Notes toConsolidated Financial Statements

## December 31,2008, 2007 and 2006

### (tabular amounts in thousands of US dollars,

### except share/option and per share/option data and asotherwise noted)

 
| ** ** | ** ** | ** ** | ** ** | Section 1535, *Capital  Disclosures*,**establishes guidelines for  disclosure of information regarding an entity’s capital which will enable  users of its financial statements to evaluate an entity’s objectives,  policies and processes for managing capital, including disclosures of any  externally imposed capital requirements and the consequences of  non-compliance (see note 23).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** ** | ** ** | ** ** | ** ** | Section 3862 and Section 3863, which replace Section 3861,  *Financial Instruments — Disclosure and  Presentation*, require the disclosure of additional details of  financial asset and liability categories as well as a detailed discussion on  the risks associated with the Company’s financial instruments. The  presentation requirements are carried forward unchanged (see note 24).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** ** | ** ** | ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** ** | ** ** | ** ** | ** ** | The CICA issued Section 3031, *Inventories*, which replaced Section 3030  with the same title. This standard requires that inventories be measured at  the lower of cost and net realizable value and includes guidance on the  determination of cost, including allocation of overheads and other costs.  The standard also requires that similar  inventories within a consolidated group be measured using the same method. Section 3031  also requires the reversal of previous write-downs to net realizable value  when there is a subsequent increase in the value of inventories. The Company  has adopted this standard effective January 1, 2008, and there has been  no impact on the consolidated financial statements.                                                                                                                                                                                  |
| ** ** | ** ** | ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** ** | ** ** | **b)**     | ** ** | **Future Accounting Changes**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** ** | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** ** | ** ** | ** ** | ** ** | In February 2008, the CICA issued  Handbook Section 3064, *Goodwill and  Intangible Assets*. This standard provides guidance on the  recognition of intangible assets and the criteria for asset recognition,  clarifying the applications of the concept of matching revenues and expenses,  whether these assets are separately acquired or are developed internally. The  standard will apply to the Company’s interim and annual financial statements  for periods beginning on January 1, 2009. The Company does not expect  that adoption of this standard will have a significant impact on the consolidated  financial statements.                                                                                                                                                                                                                                                                                |
| ** ** | ** ** | ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** ** | ** ** | ** ** | ** ** | In January 2009, the CICA issued  Handbook Section 1582, Business Combinations, which replaces the  existing standards. This section establishes the standards for the accounting  of business combinations and states that all assets and liabilities of an  acquired business will be recorded at fair value. Obligations for contingent  considerations and contingencies will also be recorded at fair value at the  acquisition date. The standard also states that acquisition-related costs will  be expensed as incurred and that restructuring charges will be expensed in  the periods after the acquisition date. This standard is applied  prospectively to business combinations with acquisition dates on or after  January 1, 2011. Earlier adoption is permitted. The Company is currently  evaluating the impact, if any, that adoption of this standard will have on  its consolidated financial statements. |
| ** ** | ** ** | ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** ** | ** ** | ** ** | ** ** | In January 2009, the CICA issued  Handbook Section 1601, *Consolidated Financial  Statements*, which replaces the existing standards and establishes  the standards for preparing consolidated financial statements and is  effective for 2011. Earlier adoption is permitted. The Company is currently  evaluating the impact, if any, that adoption of this standard will have on  its consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

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# **ÆternaZentaris Inc.**

## Notes toConsolidated Financial Statements

## December 31,2008, 2007 and 2006

### (tabular amounts in thousands of US dollars,

### except share/option and per share/option data and asotherwise noted)

 
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | In January 2009, the CICA issued  Handbook Section 1602, *Non-controlling  Interests*, which establishes standards for the accounting of  non-controlling interests of a subsidiary in the preparation of consolidated  financial statements subsequent to a business combination. This standard is  effective for 2011. Earlier adoption is permitted. The Company is currently  evaluating the impact, if any, that adoption of this standard will have on  its consolidated financial statements.                                                                                                                  |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | In January 2009, the CICA’s Emerging  Issue Committee (“EIC”) issued Abstract EIC-173, *Credit Risk and the Fair Value of Financial**Assets and  Liabilities*, which requires entities to take both counterparty  credit risk and their own credit risk into account when measuring the fair  value of financial assets and liabilities, including derivatives. EIC-173  will be effective for interim and annual periods beginning on or after January 1,  2009. The Company does not expect that adoption of this guidance will have a  significant impact on its consolidated financial statements. |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **4**      | ** ** | **Distribution of the remaining  interest in Atrium Biotechnologies Inc.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | ** ** | During 2006, the Company completed a lengthy and  detailed review process whereby it examined a number of strategic  alternatives for how best to pursue and implement its business plan of  becoming a “pure play” biopharmaceutical company with a focus on endocrine  therapy and oncology. Among the alternatives considered was the divestiture  of Æterna Zentaris’ interest in Atrium Biotechnologies Inc., now Atrium  Innovation Inc. (“Atrium”) and the resulting focus on advancing its development  pipeline. |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** ** | ** ** | On September 19, 2006, the Company initiated a  Secondary Offering to sell 3,485,000 Atrium Subordinate Voting Shares at a  price of CAN$15.80 per share.                                                                                                                                                                                                                                                                                                                                                                                          |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** ** | ** ** | On October 18, 2006, the Company closed this  Secondary Offering for net proceeds of approximately $45,000,000. The gain on  the disposal of this investment amounted to $29,248,000 including $1,643,000  related to cumulative translation adjustments.                                                                                                                                                                                                                                                                                          |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** ** | ** ** | Concurrently with the closing of the Secondary  Offering and in accordance with the articles of Atrium, the Company’s  remaining Atrium Multiple Voting Shares were automatically converted into  Atrium Subordinate Voting Shares on a one-for-one basis such that the Company  subsequently owned 11,052,996 Atrium Subordinate Voting Shares representing  approximately 36.1% of the issued and outstanding shares of Atrium.                                                                                                                  |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** ** | ** ** | As of October 18, 2006, Atrium was excluded  from the consolidation since the Company’s control ceased. Furthermore, given  the distribution of the remaining Atrium shares discussed below, all  historical operations and cash flows recorded through the consolidation of  Atrium until that date have been reported as discontinued operations and  therefore, these operations and cash flows are presented as such in the  statement of earnings (loss) and in the statement of cash flows.                                             |
| ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** ** | ** ** | On December 15, 2006, the Company’s  shareholders approved a reduction in the stated capital of the Company in an  amount equal to the fair market value of its remaining interest in Atrium for  the purpose of effecting a special distribution in kind of all 11,052,996  subordinate voting shares of Atrium held by the Company. On January 2,  2007, Æterna Zentaris’ shareholders received approximately 0.2079 of an  Atrium subordinate voting share for each one of their common shares.                             |

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

Thisspecial distribution was accounted for as a nonreciprocal transfer toshareholders measured at the carrying value of the investment in Atrium on January 2,2007. As the special distribution is considered as a taxable transaction forthe Company and treated as a reduction of the stated capital for tax purposes,the share capital of the Company was reduced by the fair value of the Atriumshares distributed of $137,959,000, the long-term investment in Atrium of$57,128,000 was removed from the balance sheet, and the difference, taking intoaccount the related income taxes of $15,333,000 and cumulative translationadjustment of $5,624,000, was recorded as Other Capital in the amount of$71,122,000.

 

Forthe year ended December 31, 2006, previously consolidated revenues andexpenses of Atrium, representing the former Active Ingredients &Specialty Chemicals Segment as well as the Health & Nutrition Segment,have been reclassified from continuing operations to discontinued operations,as follows:

 
| ** **                                     | ** ** | **$**      | ** ** |
|------------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | ** ** | ** ** |
| **Revenues**                                   |       | 239,535    |       |
| **Earnings before the following  items**       |       | 28,360     |       |
| Gain on disposal of Atrium shares              |       | 29,248     |       |
| Income tax expense (a)                         |       | (19,923    | )          |
| Loss on dilution of investments (b)            |       | (628       | )          |
| **Earnings before  non-controlling interest**  |       | 37,057     |       |
| **Non-controlling interest**                   |       | (10,967    | )          |
| **Net earnings from  discontinued operations** |       | 26,090     |       |

 

----

(a)                      Anamount of $7,006,000 is related to the gain on disposal of Atrium shares and anamount of $5,692,000 is related to future income tax liabilities on unremittedearnings of Atrium.

 

(b)                     Loss on dilutionof investments.

 

Followingthe exercise of Atrium’s stock options, Atrium issued 627,500 subordinatevoting shares between January 1 and October 18, 2006. As aconsequence, a loss on dilution amounting to $628,000 was recognized.

 

**5**                                         Acquisition and disposal of EchelonBiosciences Inc.

** **

On January 1,2005, the Company completed the acquisition of 100% of the issued andoutstanding common shares of Echelon Biosciences Inc. (“Echelon”) for a totalconsideration of $2,935,522, of which an amount of $36,718 including allacquisition-related costs, was paid cash, net of cash and cash equivalentsacquired of $161,734, and the balance was paid through the issuance of 443,905common shares of the Company, the price per share corresponded to the weightedmoving average trading prices of the Company for the last fifteen consecutivetrading days ending on December 31, 2004. The acquisition was subject tocontingent payments specified in the agreement for an approximate amount of$3,500,000 of which an amount of $2,900,000 was payable in shares and thebalance of $600,000 payable in cash at the latest in January 2008, basedon contractual conditions being met. During 2005, an amount 

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

of$196,000 had been recorded as contingent consideration payable, thus having theeffect of increasing goodwill. This amount has been settled through a cashpayment of $32,000 and the issuance of 23,789 common shares of the Company. Asof January 1, 2008 the remaining conditions were not met, and as such, noadditional consideration has been paid.

 

During 2007,the Company continued its review process whereby it examined a number ofstrategic alternatives for how best continue the pursuit and implementation ofits business plan of becoming a “pure play” biopharmaceutical company with afocus on endocrine therapy and oncology. Among the alternatives considered wasthe divestiture of Æterna Zentaris’ investment in Echelon and the resultingfocus on advancing its development pipeline.

 

At September 30,2007, the Company performed a preliminary impairment test on the goodwillrelated to Echelon. According to the preliminary test results, an estimatedimpairment loss of $500,000 was recorded.

 

On November 30,2007, Æterna Zentaris sold all issued and outstanding shares of Echelon toFrontier Scientific, Inc. for an upfront payment of $2,600,000 and$600,000 of contingent consideration. From that date, Echelon was excluded fromthe consolidation, and all historical operations and cash flows recordedthrough the consolidation of Echelon until that date have been reported asdiscontinued operations. The contingent consideration is based on the Echelonreaching specific sales levels in 2008 and 2009, and no contingentconsideration is payable relative to 2008.

 

Forthe years ended December 31, 2007 and 2006, consolidated revenues andexpenses of Echelon have been reclassified from continuing operations todiscontinued operations, as follows:

 
| ** **                                                                    | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                    | ** ** | **2006** | ** ** |
| ** **                                                                    | ** ** | **$**                                       | ** ** | **$** | ** ** |
|                                                                          |       |                                        |       |   |   |
| **Revenues**                                                                  |       | 2,358                                       |       | 2,593 |   |
| **Loss before the following  items**                                          |       | (206                                        | )          | (369 | ) |
|                                                                          |       |                                        |       |   |   |
| Goodwill impairment                                                           |       | (500                                        | )          | — |   |
| Loss on disposal of Echelon shares, net of  cumulative translation adjustment |       | (44                                         | )          | — |   |
| Income tax recovery                                                           |       | 491                                         |       | 92 |   |
| **Net loss from discontinued  operations**                                    |       | (259                                        | )          | (277 | ) |

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**6**                                         Long-lived assets held for sale

 

**In September 2007, as part of its strategy tofinance with non-dilutive vehicles, using non-core assets, the Company decidedto dispose of its building and land located in Quebec City, as well as itsrights to intangible property, Impavido**® (miltefosine) andcertain equipment. As at December 31, 2007, the assets reclassified as “long-livedassets held for sale” can be summarized as follows:

 
| **Asset**                  | ** ** | **Cost** | ** ** | **Accumulated  depreciation and  amortization** | ** ** | **Net book value** | ** ** |
|----------------------------|------------|----------|------------|------------------------------------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **$**    | ** ** | **$**                                                | ** ** | **$**                        | ** ** |
| Building and Land          |       | 11,181   |       | 3,919                                                |       | 7,262                        |       |
| Equipment                  |       | 1,347    |       | 1,164                                                |       | 183                          |       |
| Intangible property        |       | 11,851   |       | 5,297                                                |       | 6,554                        |       |
|                       |       |     |       |                                                 |       |                         |       |
| Total assets held for sale |       | 24,379   |       | 10,380                                               |       | 13,999                       |       |

 

In2006, following the decision to terminate the pharmaceutical development of oneof its products, the Company recorded an impairment on related manufacturingequipment in order to bring it down to its fair value, which was based on theCompany’s best estimate of realizable value. Accordingly, during 2006, anamount of $1,060,856 was recorded as an impairment loss included indepreciation of property, plant and equipment.

 

**In December 2007, management evaluated the netrealizable value of the Quebec City building and land based on certain preliminaryoffers received from third parties. That evaluation resulted in thedetermination that the assets held for sale were impaired, and, accordingly,the Company recorded an impairment charge of $735,000 against the assets heldfor sale.**

** **

On March 1,2008, the Company entered into a definitive purchase and sale agreement withrespect to all rights related to the manufacture, production, distribution,marketing, sale and/or use of Impavido® (miltefosine) with Paladin Labs Inc., for anaggregate purchase price of approximately $9,200,000, payable in cash, subjectto certain post-closing purchase price adjustments. The transaction, whichclosed on March 31, 2008, generated net cash proceeds of $8,309,000,resulting in a gain of $775,000.

 

On June 26,2008, the Company sold the Quebec City building and land for a gross amount of$7,061,000, payable in cash. The net proceeds received amounted to $6,545,000,resulting in an additional loss on sale of $810,000.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

Inconnection with the sale of the Quebec City building and land, the Companyentered into a long-term lease agreement with the principal tenant of thebuilding.  As part of the agreement, theCompany agreed to pay the principal tenant CAN$300,000 (approximately $246,305)as an incentive and service fee.  Thisfee is included in the additional loss on sale, and the resulting payable isnon interest-bearing and is due in bi-annual instalments of CAN$30,000(approximately $24,630) over the next five years (see also note 15).

 

**7**                                         Sale of Cetrotide® royalty stream

** **

In June 2003,the Company had amended certain sections of a license and supply agreement withARES Trading S.A. (“Merck Serono”) in which the latter was granted worldwide marketing, distribution and sellingrights, except in Japan, for Cetrotide®, a compound used for *in vitro* fertilization (referred to as the License Agreement).  Under the License Agreement,Merck Serono had agreed to pay certain lump sumpayments to the Company each calendar year up to and including December 31,2010 as well as certain variable royalties through the expiry date of Company’sunderlying patent rights.

 

In November 2008, the Company enteredinto a purchase and sale agreement (“PSA”) with Cowen Healthcare RoyaltyPartners L.P. (“Cowen”) relating to the Company’srights to royalties on future sales of Cetrotide® covered by the License Agreement.

 

In connection with the PSA, which waseffective for royalty determination purposes on October 1, 2008 andfinalized in December 2008, the Company received $52,500,000 from Cowen,less certain transaction costs of $1,000,000 that had been advanced by Cowen tocertain third-party firms and institutions on the Company’s behalf, resultingin net proceeds of $51,500,000.  Underthe terms of the PSA, the Company is entitled to an additional payment of$2,500,000 contingent on 2010 net sales of Cetrotide® reaching a specified level.

 

Per the PSA, if cetrorelix, the activesubstance in Cetrotide®, is approved for sale byEuropean regulatory authorities in an indication other than *in vitro* fertilization, the Company has agreed to make aone-time cash payment to Cowen in an amount ranging from $5,000,000 up to amaximum of $15,000,000.  The amount whichmay be due to Cowen will be higher in proportion to the timing of the product’sreceiving European regulatory approval; that is, the earlier the productreceives regulatory approval, the higher the amount payable to Cowen will be.

 

Also per the PSA, for each calendar quarterin which a royalty rate reduction—defined as the actual reduction by MerckSerono, for any calendar quarter(s), of the rate applied in calculatingvariable royalties under the License Agreement, to amounts less than pre-establishedpercentages—has occurred or is continuing, the Company will pay Cowen aquarterly make-whole payment in an amount equal to the lesser of (i) thevariable royalties in respect of such quarter that would have been received byCowen if the aforementioned royalty rate reduction had not occurred or beencontinuing, and (ii) the difference of $15,000,000 less Cowen’s netreduction payments, as defined.

 

Pursuant to the aforementioned transactions,the Company has certain obligations in the royalty arrangement, including thesupply of Cetrotide® to Merck Serono, the payment of royalties to athird party under the License Agreement, overseeing Merck-Serono’s compliancewith the License Agreement, 

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

cooperation in handling any adverse claims orlitigation involving the License Agreement and monitoring and defending anypatent or trademark infringement.

 

The Company has recorded the proceeds, as perthe provisions of Issue No. 88-18, “Sales of Future Revenues”, aspromulgated by the Financial Accounting Standards Board’s (“FASB”) EmergingIssues Task Force (“EITF”) in the United States, as deferred revenues, whichare recognizable as royalty revenues over the life of the License Agreementunder the “units-of-revenue” method. Under that method,periodic royalty revenues are calculated by multiplying the ratio of theremaining deferred revenue amount to the total estimated remaining royaltiesthat Merck Serono is expected to pay to Cowen over the term of the underlyingarrangement by the royalty payments due to Cowen for the period.

 

The Company has and will continue torecognize royalty expenses in each period based on the transaction costs, whichhave been capitalized as deferred charges in the accompanying balance sheet asof December 31, 2008 (see note 10), in the same manner and over the sameperiod in which the related deferred revenues are recognized as royaltyrevenues.

 

During the quarter ended December 31, 2008,the Company has recorded approximately $1,355,000 as royalty revenues and$124,000 as royalty expense, which is included in selling, general andadministrative expenses in the accompanying consolidated statement of earnings(loss).

 

**8**                                         Other receivables

 
| ** **                                        | ** ** | **As at December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                                        | ** ** | **$**                                 | ** ** | **$** | ** ** |
| Interest                                          |       | —                                |       | 272 |   |
| Grants                                            |       | —                                |       | 1,060 |   |
| Research and development tax credits  recoverable |       | 82                                    |       | 252 |   |
| Commodity taxes                                   |       | 870                                   |       | 453 |   |
| Other                                             |       | 148                                   |       | 1,007 |   |
|                                              |       | 1,100                                 |       | 3,044 |   |

 

**9**                                         Inventory

 
| ** **       | ** ** | **As at December 31,** | ** ** |
|------------------|------------|---------------------------------------|------------|
| ** **       | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **       | ** ** | **$**                                 | ** ** | **$** | ** ** |
|             |       |                                  |       |   |   |
| Raw materials    |       | 2,367                                 |       | 3,399 |   |
| Work in progress |       | 682                                   |       | 1,602 |   |
| Finished goods   |       | 336                                   |       | 405 |   |
|             |       | 3,385                                 |       | 5,406 |   |

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

For the years ended December 31, 2008,2007 and 2006, cost of sales, as presented in the accompanying consolidatedstatements of earnings (loss), almost exclusively represents the amount ofinventory recognized as an expense during the year.

 

In December 2008, the Company wrote downcertain inventory items, consisting predominantly of raw materials, to theirestimated net realizable values. The adjustment, which amounted toapproximately $726,000 (nil in 2007), has been recorded as an additional costof sales in the accompanying consolidated statement of earnings (loss).

 

**10**                                  Deferred charges and other long-term assets

** **
| ** **                                         | ** ** | **As at December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | **$**                                 | ** ** | **$** | ** ** |
|                                               |       |                                  |       |   |   |
| Royalty sale transaction expenses (notes 2  and 7) |       | 4,655                                 |       | — |   |
| Deferred charges                                   |       | 929                                   |       | 1,051 |   |
| Other                                              |       | 375                                   |       | 390 |   |
|                                               |       | 5,959                                 |       | 1,441 |   |

 

Includedin the above deferred charges as at December 31, 2008 is $680,111 of costrelated to the filing of a shelf prospectus ($392,000 as at December 31,2007).

 

**11**                                  Property, plant and equipment

 
| ** **               | ** ** | **As at December 31,** | ** ** |
|--------------------------|------------|---------------------------------------|------------|
| ** **               | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **               | ** ** | **Cost**                              | ** ** | **Accumulated  depreciation** | ** ** | **Cost** | ** ** | **Accumulated  depreciation** | ** ** |
| ** **               | ** ** | **$**                                 | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
|                     |       |                                  |       |   |   |   |   |   |   |
| Equipment                |       | 9,384                                 |       | 4,737 |   | 9,379 |   | 3,923 |   |
| Office furniture         |       | 1,394                                 |       | 410 |   | 1,261 |   | 648 |   |
| Computer equipment       |       | 1,071                                 |       | 874 |   | 1,174 |   | 805 |   |
| Automotive equipment     |       | —                                |       | — |   | 38 |   | 36 |   |
| Leasehold improvements   |       | 1,139                                 |       | 285 |   | 1,170 |   | 150 |   |
|                     |       |                                  |       |   |   |   |   |   |   |
|                     |       | 12,988                                |       | 6,306 |   | 13,022 |   | 5,562 |   |
| Less:                    |       |                                  |       |   |   |   |   |   |   |
| Accumulated depreciation |       | 6,306                                 |       |   |   | 5,562 |   |   |   |
|                     |       |                                  |       |   |   |   |   |   |   |
| Net amount               |       | 6,682                                 |       |   |   | 7,460 |   |   |   |

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**12**                                  Intangible assets

 
| ** **                                                   | ** ** | **As at December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                                                   | ** ** | **Cost**                              | ** ** | **Accumulated  amortization** | ** ** | **Cost** | ** ** | **Accumulated  depreciation** | ** ** |
| ** **                                                   | ** ** | **$**                                 | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                                   | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| In-process research and development,  patents and trademarks |       | 42,146                                |       | 18,391 |   | 47,758 |   | 17,514 |   |
| Technology and other                                         |       | 767                                   |       | 628 |   | 740 |   | 593 |   |
|                                                         |       |                                  |       |   |   |   |   |   |   |
|                                                         |       | 42,913                                |       | 19,019 |   | 48,498 |   | 18,107 |   |
|                                                         |       |                                  |       |   |   |   |   |   |   |
| Less: Accumulated amortization                               |       | 19,019                                |       |   |   | 18,107 |   |   |   |
|                                                         |       |                                  |       |   |   |   |   |   |   |
| Net amount                                                   |       | 23,894                                |       |   |   | 30,391 |   |   |   |

 

In 2002, the Company granted an exclusivelicense to Ardana Bioscience Ltd. (“Ardana”) for the development andcommercialization of teverelix, a luteinizing hormone-releasing hormone (“LHRH”)antagonist, for all therapeutic uses worldwide with the exception of Japan,Korea and Taiwan. On April 2, 2004, Ardana acquired full worldwide rightsand was assigned the intellectual property rights relating to teverelix and theunderlying microcrystalline suspension technology for the use of teverelix andany other potential LHRH antagonists.

 

The agreement with Ardana provides, amongother things, certain guaranteed payments and additional milestone paymentsupon successful achievement of a certain level of sales and low single-digitroyalties on future worldwide net sales.

 

In June 2008,Ardana communicated that it was entering into voluntary administration, and,consequently, clinical studies and future development efforts were suspended.Additional correspondence was received in January 2009 from Ardana’sappointed administrators, providing further evidence that future cash flows areno longer likely to be received by the Company in connection with theaforementioned license agreement, on which the recoverability of teverelixexclusively depends.

 

Giventhese facts, the Company has determined thatteverelix was impaired, and consequently, an impairment charge to amortize thefull remaining carrying value of the intangible asset, or approximately$2,362,000, was recorded in the accompanying consolidated statement of earnings(loss), and the asset was written off. Additionally, the remaining balance ofdeferred revenues, amounting to approximately $1,047,000, was fully recognizedin the accompanying consolidated statement of earnings (loss).

 

Amortization expense for intangible assets ineach of the next five fiscal years will amount to approximately $2,808,040 in2009, and $2,780,430 in 2010, 2011, 2012 and 2013.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**13**                                  Goodwill

 

Thechange in the carrying value is as follows:

 
| ** **                                                                    | ** ** | **Continuing  operations** | ** ** | **Discontinued  operations** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------|------------|
| ** **                                                                    | ** ** | **$**                      | ** ** | **$**                        | ** ** |
| ** **                                                                    | ** ** | ** **                 | ** ** | ** **                   | ** ** |
| **Balance as at  December 31, 2006**                                     | ** ** | 9,509                      |       | 1,239                        |       |
|                                                                          |       |                       |       |                         |       |
| Impact of foreign exchange rate changes                                       | ** ** | 983                        |       | 212                          |       |
| Reduction and impairment of goodwill  related to disposal of Echelon (note 5) | ** ** | —                     |       | (1,451                       | )          |
|                                                                          |       |                       |       |                         |       |
| **Balance as at  December 31, 2007**                                     | ** ** | 10,492                     |       | —                       |       |
|                                                                          |       |                       |       |                         |       |
| Impact of foreign exchange rate changes                                       | ** ** | (409                       | )          | —                       |       |
|                                                                          |       |                       |       |                         |       |
| **Balance as at  December 31, 2008**                                     | ** ** | 10,083                     |       | —                       |       |

 

**14**                                  Accounts payable and accruedliabilities

 
| ** **                     | ** ** | **As at December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|
| ** **                     | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                     | ** ** | **$**                                 | ** ** | **$** | ** ** |
| ** **                     | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Trade payables                 |       | 10,256                                |       | 11,404 |   |
| Salaries and employee benefits |       | 899                                   |       | 1,628 |   |
| Other accrued liabilities      |       | 2,535                                 |       | 3,052 |   |
|                           |       |                                  |       |   |   |
|                           |       | 13,690                                |       | 16,084 |   |

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**15**                                  Long-term debt and payable

 
| ** **                                                                                                                                                                                                                                                    | ** ** | **As at December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                    | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                                                                                                                                                                                                                                                    | ** ** | **$**                                 | ** ** | **$** | ** ** |
| Loan from the federal and provincial  governments, nominal value of CAN$800 discounted at an effective rate of 8.43%  (nil in 2008 and CAN$769 in 2007) non-interest bearing, payable in five  annual equal and consecutive instalments since July 2004. |       | —                                |       | 775 |   |
| Long-term payable (note 6)                                                                                                                                                                                                                                    |       | 221                                   |       | — |   |
|                                                                                                                                                                                                                                                          |       | 221                                   |       | 775 |   |
| Less: Current portion                                                                                                                                                                                                                                         |       | 49                                    |       | 775 |   |
|                                                                                                                                                                                                                                                          |       |                                  |       |   |   |
|                                                                                                                                                                                                                                                          |       | 172                                   |       | — |   |

 

**16**                                  Employee future benefits

** **

TheCompany’s subsidiary in Germany provides unfunded defined benefit pension plansand unfunded postemployment benefit plans for some groups of employees.Provisions for pension obligations are established for benefits payable in theform of retirement, disability and surviving dependent pensions.

 

Thefollowing table provides a reconciliation of the changes in the plans’ accruedbenefits obligations:

 
| ** **                                        | ** ** | **Pension benefit plans** | ** ** | **Other benefit plans** | ** ** |
|---------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                        | ** ** | **2008**                            | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                        | ** ** | **$**                               | ** ** | **$**                             | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
|                                              |       |                                |       |                              |       |   |   |   |   |   |   |   |   |
| Obligation – Beginning of year               |       | 8,390                               |       | 7,547                             |       | 6,932 |   | 794 |   | 620 |   | 523 |   |
|                                              |       |                                |       |                              |       |   |   |   |   |   |   |   |   |
| Current service cost                              |       | 216                                 |       | 352                               |       | 293 |   | 47 |   | 29 |   | 39 |   |
| Interest cost                                     |       | 473                                 |       | 269                               |       | 293 |   | 44 |   | 52 |   | 22 |   |
| Actuarial loss (gain)                             |       | 544                                 |       | (490                              | )          | (674 | ) | 230 |   | 104 |   | 53 |   |
| Benefits paid                                     |       | (89                                 | )          | (70                               | )          | (64 | ) | (163 | ) | (81 | ) | (70 | ) |
| Effect of foreign currency exchange rate  changes |       | (357                                | )          | 782                               |       | 767 |   | (37 | ) | 70 |   | 53 |   |
|                                              |       |                                |       |                              |       |   |   |   |   |   |   |   |   |
| Obligation – End of year                     |       | 9,177                               |       | 8,390                             |       | 7,547 |   | 915 |   | 794 |   | 620 |   |
|                                              |       |                                |       |                              |       |   |   |   |   |   |   |   |   |
| Expenses (recovery) recognized                    |       | 1,233                               |       | 131                               |       | (88 | ) | 321 |   | 185 |   | 114 |   |

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

except share/optionand per share/option data and as otherwise noted)

 

Thesignificant actuarial assumptions adopted to determine the Company’s accruedbenefit obligations are as follows:

 
| ** **                    | ** ** | **Pension benefit plans** | ** ** | **Other benefit plans** | ** ** |
|-------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | **2008**                            | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                    | ** ** | **%**                               | ** ** | **%**                             | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** |
| ** **                    | ** ** | ** **                          | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Actuarial assumptions**     | ** ** | ** **                          | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                          |       |                                |       |                              |       |   |   |   |   |   |   |   |   |
| Discount rate for expenses    |       | 5.60                                |       | 4.50                              |       | 4.00 |   | 5.60 |   | 4.50 |   | 4.00 |   |
| Discount rate for liabilities |       | 5.60                                |       | 5.70                              |       | 4.50 |   | 5.60 |   | 5.70 |   | 4.50 |   |
| Pension benefits increase     |       | 2.00                                |       | 2.00                              |       | 1.25 |   | 2.00 |   | 2.00 |   | 1.25 |   |
| Rate of compensation increase |       | 2.75 to 3.75                        |       | 2.75 to 3.75                      |       | 2.75 to 3.75 |   | 2.75 |   | 2.75 |   | 2.75 |   |

 

Thelast actuarial reports give effect to the pension and postemployment benefit obligationsas at December 31, 2008. The next actuarial reports are planned for December 2009.

 

Inaccordance with the assumptions used as at December 31, 2008, the benefitsexpected to be paid in each of the next five fiscal years will amount to$278,391 in 2009, $283,490 in 2010, $322,858 in 2011, $453,659 in 2012 and$477,081 in 2013. Furthermore, total benefits amounting to $2,724,020 areexpected to be paid from 2014 to 2018.

 

Cashrequired in the next year to fund the plans will approximate the amount ofexpected benefits.

 

**Defined contribution plans**

 

Totalexpenses for defined contribution pension plans amounted to $344,237 in 2008($285,824 in 2007 and $263,810 in 2006).

 

TheCompany sponsors a matching defined benefit plan in its Canadian headquarters.Under this plan, the Company may contribute amounts equal to a percentage ofemployee contributions to the plan. During the year ended December 31,2008, matching contributions to the plan totalled $67,184. For the years ended December 31,2007 and 2006, the Company did not record any contributions.

 

TheCompany also sponsors a 401K plan in its US subsidiary. Under this plan, theCompany may contribute a discretionary amount equal to a percentage of employeecontributions to the plan and may also make discretionary profit sharingcontributions. During the year ended December 31, 2008, matchingcontributions to the plan amounted to $69,155. During the years ended December 31,2007 and 2006, the Company did not record any contributions.

 

Totalcash payments for employee future benefits in 2008, consisting of cashcontributed by the Company to its defined contribution plans as well as directpayments to retired employees, amount to $595,638 ($436,696 in 2007 and$398,340 in 2006).

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**17**                                  Share capital

** **

(a)          Authorized

 

Unlimitednumber of shares of the following classes:

 

Common,voting and participating, one vote per share, no par value Preferred, first andsecond ranking, issuable in series, with rights and privileges specific to eachclass.

 

(b)         Common shareissues

 

Pursuantto the exercise of stock options, the Company issued, during fiscal 2007,18,000 common shares for total proceeds of $33,200. Consequently, stock-basedcompensation costs of $26,000 relating to those exercised options have beenreclassified from other capital to share capital.

 

On February 14and 17, 2006, the Solidarity Fund QFL (the “Fund”) and SGF Santé inc. (“SGF”),respectively, exercised early their right to convert the entirety of theirconvertible term loans in the principal amount of CAN$12,500,000 each that theyhad extended to the Company in April 2003 and that were to mature on March 31,2006. In accordance with the terms of the convertible term loans and additionalarrangements between the Company, the Fund and SGF, Æterna Zentaris issued toeach of the loan holders 3,477,544 of its common shares upon conversion oftheir loans, representing the principal and interest due to the stated maturitydate under the loans, based on the conversion price that had been agreed uponin the loan agreements.

 

Foraccounting purposes, the convertible term loans are separated between debt andequity, the equity portion representing the value of the holders’ conversionoptions. As a consequence of this transaction, the Company recorded a loss onsettlement of long-term debt amounting to $599,190, representing an inducementto the original terms of the loan agreements. An amount of $280,000 was recordedin the statement of deficit, and the remainder was charged to expense in thestatement of earnings (loss) and was included in the accretion on convertibleterm loans in the statement of cash flows.

 

(c)          Shareholder rightplan

 

On March 29,2004, the Company adopted a shareholder right plan (the “Rights Plan”). Thecontinuation of the Rights Plan and its amendments and restatement has beenapproved by the Board of Directors on March 5, 2007. The rights issued tothe shareholders under the Rights Plan will be exercisable, under certainconditions, only when a person or entity, including related parties, acquiresor announces his/her or its intention to acquire more than twenty (20) percentof the outstanding common shares of the Company (as such, shares may beredesignated or reclassified) without complying with the “permitted bid”provisions of the Rights Plan or without approval of the Company’s Board ofDirectors. Should such an acquisition occur, each right would, upon exercise,entitle a holder, other than the person pursuing the acquisition together withits related party(ies), to purchase common shares of the Company at a fifty(50) percent discount to the market price of the Company’s shares at that time.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

(d)         Company’s stockoption plan

 

In December 1995,the Company’s Board of Directors adopted a stock option plan (the “Stock OptionPlan”) for its directors, senior executives, employees and other collaboratorswho provide services to the Company. The total number of common shares that maybe issued under the Stock Option Plan, as per a resolution approved by theCompany’s Board of Directors on March 4, 2008, cannot exceed eleven pointfour percent (11.4%) of the total number of issued and outstanding commonshares at any given time.

 

On June 26,2008, the Toronto Stock Exchange accepted a stock option pool totalling6,063,371. In 2008, 735,000 options were granted in Canadian dollars, and nooptions were granted in US dollars. Options granted under the Stock Option Planexpire after a maximum period of ten years following the date of grant. Optionsgranted under the Stock Option Plan generally vest over a three-year period.The following table summarizes the stock option activity under the Stock OptionPlan:

 

**Canadian dollar denominated awards**

 
| ** **                             | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                             | ** ** | **Number**                                  | ** ** | **Weighted  average  exercise  price  (CAN$)** | ** ** | **Number** | ** ** | **Weighted  average  exercise  price  (CAN$)** | ** ** | **Number** | ** ** | **Weighted  average  exercise  price  (CAN$)** | ** ** |
|                                   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Balance – Beginning of year (*)   |       | 4,136,092                                   |       | 3.83 |   | 3,490,092 |   | 4.00 |   | 3,843,592 |   | 6.16 |   |
| Granted                                |       | 735,000                                     |       | 0.59 |   | 815,000 |   | 3.24 |   | 45,000 |   | 6.41 |   |
| Exercised                              |       | —                                      |       | — |   | (18,000 | ) | 1.96 |   | (22,000 | ) | 3.98 |   |
| Forfeited                              |       | (165,000                                    | )          | 3.41 |   | (151,000 | ) | 4.93 |   | (30,500 | ) | 6.21 |   |
| Expired                                |       | (215,333                                    | )          | 4.51 |   | — |   | — |   | (346,000 | ) | 7.68 |   |
|                                   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Balance – End of year             |       | 4,490,759                                   |       | 3.28 |   | 4,136,092 |   | 3.83 |   | 3,490,092 |   | 6.02 |   |
|                                   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Options exercisable – End of year |       | 3,462,441                                   |       | 3.91 |   | 3,300,593 |   | 4.02 |   | 2,736,099 |   | 5.88 |   |

 

----

(*)                     Following the one-time distribution of the Company’s remaininginterest in Atrium on January 2, 2007 and as contemplated under the StockOption Plan (see note 4), the Board of Directors of the Company approved anequitable adjustment to all unexercised options outstanding pursuant to theStock Option Plan. The adjustment was a reduction in the exercise price of alloutstanding stock options of CAN$2.02 per common share.  Furthermore, in 2007 the Board of Directorsapproved the extension of the option period from 1 month to 3 years on 875,000options in connection with the departure of executive members.

 

The total intrinsic value for stock optionsexercised in 2006 and 2007 was CAN$68,959 and CAN$24,040, respectively. Thereis no tax benefit realized by the Company, since the compensation cost relatedto stock options is not deductible for income tax purposes.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

Thefollowing tables summarize the stock options outstanding and exercisable as at December 31,2008:

 
| ** **                      | ** ** | **Options outstanding** | ** ** |
|---------------------------------|------------|------------------------------|------------|
| **Exercise price  (CAN$)** | ** ** | **Number**                   | ** ** | **Weighted average   remaining  contractual life  (years)** | ** ** | **Weighted average  exercise price  (CAN$)** | ** ** | **Global  intrinsic value  (CAN$)** | ** ** |
|                            |       |                         |       |   |   |   |   |   |   |
| 0.55 to 1.70                    |       | 735,000                      |       | 9.91 |   | 0.59 |   | 12 |   |
| 1.71 to 2.40                    |       | 1,018,093                    |       | 6.03 |   | 1.77 |   | — |   |
| 2.41 to 3.60                    |       | 863,500                      |       | 5.25 |   | 3.22 |   | — |   |
| 3.61 to 5.00                    |       | 790,333                      |       | 5.04 |   | 4.09 |   | — |   |
| 5.01 to 8.88                    |       | 1,083,833                    |       | 4.77 |   | 5.99 |   | — |   |
|                            |       |                         |       |   |   |   |   |   |   |
|                            |       | 4,490,759                    |       | 6.04 |   | 3.28 |   | 12 |   |

 
| ** **                      | ** ** | **Options currently exercisable** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|
| **Exercise price  (CAN$)** | ** ** | **Number**                                  | ** ** | **Weighted average  exercise price  (CAN$)** | ** ** | **Global  intrinsic  value  (CAN$)** | ** ** |
|                            |       |                                        |       |   |   |   |   |
| 0.55 to 1.70                    |       | —                                      |       | — |   | — |   |
| 1.71 to 2.40                    |       | 808,100                                     |       | 1.75 |   | — |   |
| 2.41 to 3.60                    |       | 863,500                                     |       | 3.22 |   | — |   |
| 3.61 to 5.00                    |       | 707,008                                     |       | 4.02 |   | — |   |
| 5.01 to 8.88                    |       | 1,083,833                                   |       | 5.99 |   | — |   |
|                            |       |                                        |       |   |   |   |   |
|                            |       | 3,462,441                                   |       | 3.91 |   | — |   |

 

146

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**US dollar denominatedawards**

 
| ** **                             | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                             | ** ** | **Number**                                  | ** ** | **Weighted  average  exercise  price  (US$)** | ** ** | **Number** | ** ** | **Weighted  average  exercise  price  (US$)** | ** ** | **Number** | ** ** | **Weighted  average  exercise  price  (US$)** | ** ** |
|                                   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Balance – Beginning of year       |       | 870,000                                     |       | 2.79 |   | — |   | — |   | — |   | — |   |
| Granted                                |       | —                                      |       | — |   | 870,000 |   | 2.79 |   | — |   | — |   |
| Forfeited                              |       | (556,666                                    | )          | 2.80 |   | — |   | — |   | — |   | — |   |
| Balance – End of year             |       | 313,334                                     |       | 2.76 |   | 870,000 |   | 2.79 |   | — |   | — |   |
|                                   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Options exercisable – End of year |       | 176,669                                     |       | 3.08 |   | — |   | — |   | — |   | — |   |

 
| ** **                     | ** ** | **Options outstanding** | ** ** |
|--------------------------------|------------|------------------------------|------------|
| **Exercise price  (US$)** | ** ** | **Number**                   | ** ** | **Weighted average  remaining contractual  life (years)** | ** ** | **Weighted average  exercise price  (US$)** | ** ** | **Global  intrinsic  value** | ** ** |
|                           |       |                         |       |   |   |   |   |   |   |
| 1.68 to 1.87                   |       | 135,000                      |       | 8.93 |   | 1.82 |   | — |   |
| 1.88 to 3.96                   |       | 178,334                      |       | 8.34 |   | 3.48 |   | — |   |
|                           |       |                         |       |   |   |   |   |   |   |
|                           |       | 313,334                      |       | 8.59 |   | 2.76 |   | — |   |

 
| ** **                     | ** ** | **Options currently exercisable** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| **Exercise price  (US$)** | ** ** | **Number**                                  | ** ** | **Weighted average  exercise price  (US$)** | ** ** | **Global  intrinsic  value** | ** ** |
|                           |       |                                        |       |   |   |   |   |
| 1.68 to 1.87                   |       | 45,001                                      |       | 1.82 |   | — |   |
| 1.88 to 3.96                   |       | 131,668                                     |       | 3.52 |   | — |   |
|                           |       |                                        |       |   |   |   |   |
|                           |       | 176,669                                     |       | 3.08 |   | — |   |

 

147

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

As at December 31, 2008, the totalcompensation cost related to nonvested stock options not yet recognizedamounted to $347,390 ($1,366,409 in 2007). This amount is expected to berecognized over a weighted average period of 1.56 years (1.88 years in 2007).

 

The Company settles stock options exercisedthrough the issuance of common shares from treasury.

 

The factors considered in developing theassumptions used in the Black-Scholes option pricing model are the following:

 

(a)          The risk-free interest rate is based on CanadianGovernment Bond constant maturity interest rate whose term is consistent withthe expected life of the stock options.

 

(b)         The historical volatility of the Company’s stockprice as well as future expectations are used to establish the expected stockprice volatility.

 

(c)          The Company estimates the expected life of stockoptions based upon employee’s historical data related to the exercise of stockoptions and post-vesting employment terminations.

 

**Assumptions used in determining stock-based compensation costs**

 

Thetable below shows the assumptions used in determining stock-based compensationcosts under the Black-Scholes option pricing model:

 
| ** **                             | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                   |       |                                        |       |   |   |   |   |
| Dividend yield                         |       | Nil                                         |       | Nil |   | Nil |   |
| Expected volatility                    |       | 60.0                                        | %          | 57.2 | % | 58.1 | % |
| Risk-free interest rate                |       | 1.98                                        | %          | 3.88 | % | 4.06 | % |
| Expected life (years)                  |       | 3.04                                        |       | 4.62 |   | 5.77 |   |
| Weighted average grant date fair value |       | CAN$0.25                                    |       | US$1.93 and CAN$2.25 |   | CAN$3.67 |   |

 

148

----

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**18**                                  Statements of cash flows

 
| ** **                                    | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| Changes in operating assets and  liabilities: |       |                                        |       |   |   |   |   |
| Accounts receivable                           |       | 4,353                                       |       | 1,371 |   | 2,686 |   |
| Inventory                                     |       | 1,171                                       |       | 148 |   | 650 |   |
| Prepaid expenses and other current assets     |       | (55                                         | )          | (708 | ) | 263 |   |
| Deferred charges and other long-term assets   |       | (4,689                                      | )          | — |   | (991 | ) |
| Accounts payable and accrued liabilities      |       | (1,089                                      | )          | 5,340 |   | 1,848 |   |
| Income taxes                                  |       | 775                                         |       | (1,250 | ) | (5,260 | ) |
| Deferred revenues                             |       | 58,058                                      |       | 644 |   | 1,883 |   |
|                                          |       |                                        |       |   |   |   |   |
|                                          |       | 58,524                                      |       | 5,545 |   | 1,079 |   |
| ** **                                    | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Years ended December 31,** | ** ** |
| ** **                                    | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| **Additional information**                    |       |                                        |       |   |   |   |   |
| Interest paid                                 |       |                                        |       |   |   |   |   |
| From continuing operations                    |       | 29                                          |       | — |   | 4 |   |
| From discontinued operations                  |       | —                                      |       | 9 |   | 7,784 |   |
| Income taxes paid (recovered)                 |       |                                        |       |   |   |   |   |
| From continuing operations                    |       | 293                                         |       | (937 | ) | 5,756 |   |
| From discontinued operations                  |       | —                                      |       | 7 |   | 8,698 |   |

 

149

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**19**                                  Income taxes

** **

Thereconciliation of the combined Canadian federal and Quebec provincial incometax rate to the income tax (expense) recovery from continuing operations is asfollows:

 
| ** **                                                             | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                             | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Combined federal and provincial statutory  income tax rate             |       | 30.90                                       | %          | 32.02 | % | 32.02 | % |
|                                                                   |       |                                        |       |   |   |   |   |
| ** **                                                             | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| Income tax recovery based on statutory  income tax rate                |       | 18,120                                      |       | 10,886 |   | 6,872 |   |
| Change in valuation allowance                                          |       | (17,554                                     | )          | (6,963 | ) | 22,644 |   |
| Minimum tax attributable to German  subsidiary                         |       | (1,175                                      | )          | — |   | — |   |
| Accretion on convertible term loans                                    |       | —                                      |       | — |   | (258 | ) |
| Stock-based compensation costs                                         |       | (112                                        | )          | (635 | ) | (679 | ) |
| Difference in statutory income tax rate of  foreign subsidiaries       |       | 576                                         |       | (16 | ) | 994 |   |
| Permanent difference attributable to  unrealized foreign exchange gain |       | 494                                         |       | — |   | — |   |
| Change in enacted rates used                                           |       | (985                                        | )          | (1,345 | ) | 2,428 |   |
| Tax loss consolidation strategy                                        |       | —                                      |       | — |   | (2,376 | ) |
| Other                                                                  |       | (539                                        | )          | 34 |   | (588 | ) |
|                                                                   |       |                                        |       |   |   |   |   |
|                                                                   |       | (1,175                                      | )          | 1,961 |   | 29,037 |   |

 

*Loss before income taxes*

 

Theloss before income taxes from continuing operations is allocated as follows:

 
| ** **    | ** ** | **Years ended December 31,** | ** ** |
|---------------|------------|---------------------------------------------|------------|
| ** **    | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **    | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| ** **    | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Canada        |       | (5,103                                      | )          | (10,556 | ) | (10,436 | ) |
| Germany       |       | (52,730                                     | )          | (23,276 | ) | (11,024 | ) |
| United States |       | (809                                        | )          | (166 | ) | — |   |
|          |       |                                        |       |   |   |   |   |
|          |       | (58,642                                     | )          | (33,998 | ) | (21,460 | ) |

 

150

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 
| ** **                                        | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                        | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
|                                              |       |                                        |       |   |   |   |   |
| Income tax recovery (expense) is  represented by: |       |                                        |       |   |   |   |   |
| Current                                           |       | (1,175                                      | )          | 93 |   | (123 | ) |
| Future                                            |       | —                                      |       | 1,868 |   | 29,160 |   |
|                                              |       |                                        |       |   |   |   |   |
|                                              |       | (1,175                                      | )          | 1,961 |   | 29,037 |   |
|                                              |       |                                        |       |   |   |   |   |
| Current:                                          |       |                                        |       |   |   |   |   |
| Foreign                                           |       | (1,175                                      | )          | 93 |   | (123 | ) |
|                                              |       |                                        |       |   |   |   |   |
| Future:                                           |       |                                        |       |   |   |   |   |
| Domestic                                          |       | —                                      |       | (284 | ) | 25,036 |   |
| Foreign                                           |       | —                                      |       | 2,152 |   | 4,124 |   |
|                                              |       |                                        |       |   |   |   |   |
|                                              |       | —                                      |       | 1,868 |   | 29,160 |   |
|                                              |       |                                        |       |   |   |   |   |
|                                              |       | (1,175                                      | )          | 1,961 |   | 29,037 |   |

 

Foreignoperations are predominantly in Germany.

 

151

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

Significantcomponents of future income tax assets and liabilities are as follows:

 
| ** **                                       | ** ** | **As at December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **$**                                 | ** ** | **$** | ** ** |
| Future income tax assets                         |       |                                  |       |   |   |
| Current                                          |       |                                  |       |   |   |
| Deferred revenues                                |       | 2,459                                 |       | 1,738 |   |
| Inventory                                        |       | 526                                   |       | 658 |   |
|                                             |       |                                  |       |   |   |
|                                             |       | 2,985                                 |       | 2,396 |   |
|                                             |       |                                  |       |   |   |
| Long-term                                        |       |                                  |       |   |   |
| Research and development costs                   |       | 8,961                                 |       | 12,119 |   |
| Share issue expenses                             |       | 129                                   |       | 91 |   |
| Operating losses carried forward                 |       | 15,543                                |       | 17,145 |   |
| Property, plant and equipment                    |       | 576                                   |       | 1,973 |   |
| Intangible assets and goodwill                   |       | 10,817                                |       | 206 |   |
| Employee future benefits                         |       | 747                                   |       | 648 |   |
| Deferred revenues                                |       | —                                |       | 1,211 |   |
| Other                                            |       | —                                |       | 144 |   |
|                                             |       |                                  |       |   |   |
|                                             |       | 36,773                                |       | 33,537 |   |
|                                             |       |                                  |       |   |   |
| Valuation allowance                              |       | (36,581                               | )          | (23,289 | ) |
|                                             |       |                                  |       |   |   |
|                                             |       | 192                                   |       | 10,248 |   |
|                                             |       |                                  |       |   |   |
|                                             |       | 3,177                                 |       | 12,644 |   |
|                                             |       |                                  |       |   |   |
| Future income tax liabilities                    |       |                                  |       |   |   |
| Long-term                                        |       |                                  |       |   |   |
| Accounts receivable                              |       | 65                                    |       | 48 |   |
| Property, plant and equipment                    |       | 330                                   |       | 190 |   |
| Deferred charges and other long-term assets      |       | 1,566                                 |       | 2,434 |   |
| Intangible assets                                |       | —                                |       | 9,376 |   |
| Deferred revenues                                |       | 528                                   |       | — |   |
| Investment tax credits                           |       | —                                |       | 573 |   |
| Other                                            |       | 688                                   |       | 23 |   |
|                                             |       |                                  |       |   |   |
|                                             |       | 3,177                                 |       | 12,644 |   |
|                                             |       |                                  |       |   |   |
| **Future income tax assets  (liabilities), net** |       | —                                |       | — |   |

 

152

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

except share/option and per share/option dataand as otherwise noted)

 

As at December 31, 2008, the Company hasestimated non-refundable research and development tax credits of $5,741,778which can be carried forward to reduce Canadian federal income taxes payableand expire from 2011 to 2028. No tax benefit has been accounted for inconnection with those credits.

 

As at December 31, 2008, the Company hadavailable operating losses in Canada. The following table summarizes the yearof expiry of these operating losses by tax jurisdiction:

 
| ** ** | ** ** | **Canada**  | ** ** |
|------------|------------|-------------|------------|
| ** ** | ** ** | **Federal** | ** ** | **Provincial** | ** ** |
| ** ** | ** ** | **$**       | ** ** | **$** | ** ** |
| ** ** | ** ** | ** **  | ** ** | ** ** | ** ** |
| 2010       |       | 6,337       |       | — |   |
| 2014       |       | 7,977       |       | — |   |
| 2015       |       | 5,645       |       | 26 |   |
| 2028       |       | 11,516      |       | 9,520 |   |
|       |       |        |       |   |   |
|       |       | 31,475      |       | 9,546 |   |

 

Furthermore, the Company has availableoperating losses in Germany amounting to approximately $33,304,000, for whichthere is no expiry date, as well as in the United States, totalling $791,163and expiring as follows:

 
| ** ** | ** ** | **United States** | ** ** |
|------------|------------|------------------------|------------|
| ** ** | ** ** | **$**                  | ** ** |
| ** ** | ** ** | ** **             | ** ** |
| 2027       |       | 175                    |       |
| 2028       |       | 616                    |       |
|       |       |                   |       |
|       |       | 791                    |       |

 

The carryforwards and the tax credits claimedcould be subjected to a review and a possible adjustment by tax authorities.

 

153

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**20**                                  Segment information forcontinuing operations

 

Subsequent to the divestiture ofAtrium in 2006, the Company operates in one single operating segment, being thebiopharmaceutical segment.

 

**Information by geographic region**

 

Revenues by geographic region are detailed asfollows:

 
| ** **     | ** ** | **Years ended December 31,** | ** ** |
|----------------|------------|---------------------------------------------|------------|
| ** **     | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **     | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| ** **     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Canada         |       | 333                                         |       | 400 |   | 25 |   |
| United States  |       | 2,987                                       |       | 5,911 |   | 4,094 |   |
| Europe         |       |                                        |       |   |   |   |   |
| Switzerland    |       | 22,770                                      |       | 23,316 |   | 20,681 |   |
| United Kingdom |       | 3,823                                       |       | 5,343 |   | 5,257 |   |
| Netherlands    |       | 2,158                                       |       | 2,031 |   | 1,748 |   |
| Other          |       | 874                                         |       | 70 |   | 809 |   |
| Japan          |       | 4,029                                       |       | 1,862 |   | 6,114 |   |
| Other          |       | 1,504                                       |       | 3,135 |   | 71 |   |
|           |       |                                        |       |   |   |   |   |
|           |       | 38,478                                      |       | 42,068 |   | 38,799 |   |

 

Revenues have been allocated to geographicregions based on the country of residence of the related customers.

 

Customers who represent more than 10% ofrevenues are as follows:

 
| ** ** | ** ** | **Years ended December 31,** | ** ** |
|------------|------------|---------------------------------------------|------------|
| ** ** | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** ** | ** ** | **%**                                       | ** ** | **%** | ** ** | **%** | ** ** |
| ** ** | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer 1 |       | 66                                          |       | 59 |   | 52 |   |
| Customer 2 |       | 10                                          |       | 13 |   | 13 |   |

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

The following table presents revenues bysource:

 
| ** **          | ** ** | **Years ended December 31,** | ** ** |
|---------------------|------------|---------------------------------------------|------------|
| ** **          | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **          | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| ** **          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues            |       |                                        |       |   |   |   |   |
| Sales and royalties |       | 29,462                                      |       | 28,825 |   | 25,123 |   |
| License fees        |       | 8,504                                       |       | 12,843 |   | 13,652 |   |
| Other               |       | 512                                         |       | 400 |   | 24 |   |
|                |       |                                        |       |   |   |   |   |
|                |       | 38,478                                      |       | 42,068 |   | 38,799 |   |

 

Long-lived assets by geographic region aredetailed as follows:

 
| ** **    | ** ** | **As at December 31,** | ** ** |
|---------------|------------|---------------------------------------|------------|
| ** **    | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **    | ** ** | **$**                                 | ** ** | **$** | ** ** |
| ** **    | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Canada        |       | 110                                   |       | 7,643 |   |
| United States |       | 615                                   |       | 841 |   |
| Germany       |       | 39,934                                |       | 53,858 |   |
|          |       |                                  |       |   |   |
|          |       | 40,659                                |       | 62,342 |   |

 

Long-lived assets consist of property, plantand equipment, long-lived assets held for sale (2007 only), intangible assetsand goodwill.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**21**                                  Earnings (loss) per share

 

The information utilized in the computationof net earnings (loss) per share, as presented in the accompanying consolidatedstatements of earnings (loss), is as follows:

 
| ** **                                                                                                                                                                                                         | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                                                                                         | ** ** | **2008**                                    | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                                                                                                                                                                         | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                                                                                                                                                                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net earnings (loss) from  continuing operations**                                                                                                                                                                |       | (59,817                                     | )          | (32,037 | ) | 7,577 |   |
|                                                                                                                                                                                                               |       |                                        |       |   |   |   |   |
| **Net earnings (loss) from  discontinued operations**                                                                                                                                                              |       | —                                      |       | (259 | ) | 25,813 |   |
|                                                                                                                                                                                                               |       |                                        |       |   |   |   |   |
| Impact of assumed conversion of dilutive  stock options of Atrium                                                                                                                                                  |       | —                                      |       | — |   | (754 | ) |
|                                                                                                                                                                                                               |       |                                        |       |   |   |   |   |
| **Net earnings (loss) from  discontinued operations, adjusted for dilution effects**                                                                                                                               |       | —                                      |       | (259 | ) | 25,059 |   |
|                                                                                                                                                                                                               |       |                                        |       |   |   |   |   |
| **Net earnings (loss) adjusted  for dilution effects**                                                                                                                                                             |       | (59,817                                     | )          | (32,296 | ) | 32,636 |   |
|                                                                                                                                                                                                               |       |                                        |       |   |   |   |   |
| **Basic weighted average number  of shares outstanding**                                                                                                                                                           |       | 53,187,470                                  |       | 53,182,803 |   | 52,099,290 |   |
|                                                                                                                                                                                                               |       |                                        |       |   |   |   |   |
| Dilutive effect of stock options                                                                                                                                                                                   |       | 18,315                                      |       | 500,171 |   | 449,970 |   |
|                                                                                                                                                                                                               |       |                                        |       |   |   |   |   |
| **Diluted weighted average  number of shares outstanding**                                                                                                                                                         |       | 53,205,785                                  |       | 53,682,974 |   | 52,549,260 |   |
|                                                                                                                                                                                                               |       |                                        |       |   |   |   |   |
| **Items excluded from the  calculation of diluted net earnings (loss) per share because the exercise  price was greater than the average market price of the common shares or due to  their anti-dilutive effect** |       |                                        |       |   |   |   |   |
| Stock options                                                                                                                                                                                                      |       | 4,069,093                                   |       | 3,164,499 |   | 1,893,539 |   |
| Common shares which would have been issued  following the conversion of the convertible term loans                                                                                                                 |       | —                                      |       | — |   | 776,237 |   |

 

For the years ended December 31, 2008and 2007, the diluted amounts per share were the same amounts as the basicamounts per share since the dilutive effect of stock options and convertibleterm loans was not included in the calculation; otherwise, the effect wouldhave been anti-dilutive. Accordingly, the diluted amounts per share for thoseyears were calculated using the basic weighted average number of sharesoutstanding.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**22****                                 ****Related party transactions**

 
| ** **                                          | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Administrative revenues                             |       | Nil                                         |       | Nil |   | 35 |   |
| Lease revenues                                      |       | Nil                                         |       | Nil |   | 304 |   |
| Subcontracting revenues and sales of raw  materials |       | Nil                                         |       | Nil |   | 66 |   |
| Subcontracting expenses                             |       | Nil                                         |       | Nil |   | 44 |   |
| Patent acquired from a senior officer               |       | Nil                                         |       | Nil |   | 175 |   |

 

On December 15,2006, the Company’s shareholders approved a reduction in the stated capital ofthe Company in an amount equal to the fair market value of its remaininginterest in Atrium for the purpose of effecting a special distribution in kindof all 11,052,996 Subordinate Voting Shares of Atrium held by the Company. Thistransaction was completed on January 2, 2007, thus eliminating the relatedparty relationship.

 

Theseabove transactions in 2006 with our former subsidiary Atrium and a seniorofficer were in the normal course of operations. They were measured at theexchange amount, which is the amount of consideration established and agreedupon by the related parties. The price of the shares issued for the acquisitionof the patent was based on the closing trading price of the Company’s shares onFebruary 28, 2006, being the day before the signing of the agreement.

 

Thetransactions with Atrium include amounts that occurred before October 18,2006 and that were previously eliminated from the consolidated financialstatements but continue to occur after the disposal.

 

**23****                                  Capital disclosures**

 

TheCompany’s objective in managing capital composed of shareholders’ equity is toensure a sufficient liquidity position to finance its research and developmentactivities, general and administrative expenses, working capital and overallcapital expenditures. The Company makes every effort to manage its liquidity tominimize dilution to its shareholders.

 

Initially,the Company had funded its activities through public offerings of common sharesand convertible term loans. More recently, however, the Company has tried to optimizeits liquidity needs by non-dilutive sources, including the sale of non-coreassets and future rights to royalties, investment tax credits and grants,interest income, licensing, service and royalties.

 

During 2008,the Company fulfilled its obligation on the loan from the federal andprovincial governments with a nominal value of CAN$800,000, as discussed innote 15.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

Thecapital management objective of the Company remains the same as that ofprevious years.  The policy on dividendsis to retain cash to keep funds available to finance the activities required toadvance our product development pipeline, prioritizing our lead productcandidate, cetrorelix, in Phase 3 for BPH. The Statements of Changes inShareholders’ Equity describe the activity impacting the Company’s capital.

 

TheCompany is not subject to any capital requirements imposed by any regulators orany other external source.

 

**24****                                  Financial instruments and financial risk management**

 

**Short-term investments**

 

TheCompany’s short-term investments as at December 31, 2008 and 2007 werecomprised of the following:

 
| ** **                                                                                                                                                                                                                                                                           | ** ** | **As at December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                           | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                                                                                                                                                                                                                                                                           | ** ** | **$**                                 | ** ** | **$** | ** ** |
| ** **                                                                                                                                                                                                                                                                           | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Discount notes bearing interest at an  annual rate of 2.06% in 2008 and at effective annual rates ranging from 3.94%  to 4.23% in 2007. The 2008 balances will mature in December 2009, and  the 2007 balances matured on different dates from May to  December 2008. |       | 493                                   |       | 5,178 |   |
|                                                                                                                                                                                                                                                                                 |       |                                  |       |   |   |
| Bonds, bearing interest at effective annual  rates ranging from 2.81% to 4.43% in 2007, maturing on different dates from  January to November 2008.                                                                                                                        |       | —                                |       | 25,937 |   |
|                                                                                                                                                                                                                                                                                 |       |                                  |       |   |   |
|                                                                                                                                                                                                                                                                                 |       | 493                                   |       | 31,115 |   |

 

Short-term investments totalled CAN$601,766in 2008 and CAN$30,844,365 in 2007.

 

**Fairvalue**

** **

Cash and cash equivalents, short-terminvestments, accounts receivable and accounts payable and accrued liabilitiesare financial instruments whose fair value approximates their carrying valuedue to their short-term maturity. While the Company had no long-term debt as atDecember 31, 2008, the approximate fair value of long-term debt as at December 31,2007 was $775,000. The fair value of long-term debt was established bydiscounting the future cash flows at an interest rate corresponding to thatwhich the Company would currently be able to obtain for loans with similarmaturity dates and terms.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**Financial risk management**

 

Disclosures relating to the nature and extentof the Company’s exposure to risks arising from financial instruments,including credit risk, liquidity risk, foreign currency risk and interest raterisk, and how the Company manages those risks, are presented below.

 

*(a)**                   Credit risk*

 

Credit risk is the risk of an unexpected lossif a customer or third party to a financial instrument fails to meet itscontractual obligations. The Company regularly monitors its credit riskexposure and takes steps to mitigate the likelihood of these exposures fromresulting in actual loss.

 

Financial instruments, which potentiallysubject the Company to concentrations of credit risk, consist primarily of cashand cash equivalents, short-term investments and accounts receivable.  Cash and cash equivalents are maintained withhigh-credit quality financial institutions. Short-term investments consistprimarily of bonds and notes issued by high-credit quality corporations andinstitutions.  Consequently, managementconsiders the risk of non-performance related to cash and cash equivalents andshort-term investments to be minimal.

 

*(b)**                   Foreign Currency Risk*

 

Since the Company operates on aninternational scale, it is exposed to currency risks as a result of potentialexchange rate fluctuations.  Fluctuationsin the US dollar (“US$”), Canadian dollar (“CAN$”) and the Euro (“EUR”)exchange rates could have a potentially significant impact on the Company’sresults of operations.  The following variations are reasonably possibleover a 12-month period:

 

·                  Foreign exchange rate variation of -5% (depreciation of CAN$) and+5%(appreciation of CAN$) against the EUR, from a period-end rate of EUR1 =CAN$1.7046.

 

·                  Foreign exchange rate variation of -5% (depreciation of US$) and +5%(appreciation of US$) against the EUR. From a period-end rate of EUR1 =US$1.3995.

 

If these variations were to occur, the impacton the Company’s consolidated net loss for each category of financialinstruments held at December 31, 2008 would be as follows:

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**Parent location using CAN$ asfunctional currency**

 
| ** **                                                       | ** ** | ** **   | ** ** | **Transactions denominated** | ** ** |
|------------------------------------------------------------------|------------|--------------|------------|-----------------------------------|------------|
| ** **                                                       | ** ** | **Carrying** | ** ** | **in EUR**                   | ** ** |
| ** **                                                       | ** ** | **amount**   | ** ** | **-5%**                           | ** ** | **+5%** | ** ** |
| ** **                                                       | ** ** | **$**        | ** ** | **$**                             | ** ** | **$** | ** ** |
| **Assets**                                                       |       |         |       |                              |       |   |   |
|                                                             |       |         |       |                              |       |   |   |
| Advance to German subsidiary (1)                                 |       | 7,889        |       | (394                              | )          | 394 |   |
| Accounts receivable from German subsidiary  (2)                  |       | 6,271        |       | (314                              | )          | 314 |   |
| **Total impact on consolidated  net loss - (increase)/decrease** | ** ** | ** **   | ** ** | **(708**                          | **)**      | **708** | ** ** |

 

----

(1)          Æterna Zentaris’ parent company, located inCanada, has an advance due from its German subsidiary of EUR5,637,246(CAN$9,609,250, using a period-end exchange rate 1 EUR = CAN$1.7046, andUS$7,889,326, using a period-end exchange rate 1 EUR = US$1.3995), which iseliminated in the consolidated balance sheet. A foreign exchange gain/loss is periodically recorded in theconsolidated statement of earnings (loss), since this advance has not beenconsidered to be part of a net investment in a self-sustaining subsidiary.

 

(2)          Accounts receivable, due in the ordinary courseof business, amount to EUR4,480,959 (or CAN$7,638,243, or US$6,271,102).

 

**Subsidiary locationusing EUR as functional currency**

 
| ** **                                                       | ** ** | **Carrying** | ** ** | **Transactions denominated  in US$** | ** ** |
|------------------------------------------------------------------|------------|--------------|------------|------------------------------------------------|------------|
| ** **                                                       | ** ** | **amount**   | ** ** | **-5%**                                        | ** ** | **+5%** | ** ** |
| ** **                                                       | ** ** | **$**        | ** ** | **$**                                          | ** ** | **$** | ** ** |
| **Liabilities**                                                  |       |         |       |                                           |       |   |   |
| Accounts payable due to affiliate (1)                            |       | 9,989        |       | 499                                            |       | (499 | ) |
| Trade accounts payable                                           |       | 1,451        |       | 73                                             |       | (73 | ) |
| **Total impact on consolidated  net loss - (increase)/decrease** | ** ** | ** **   | ** ** | **572**                                        | ** ** | **(572** | **)** |

 

----

(1)          Æterna Zentaris’ German subsidiary hasaccounts payable, due in the ordinary course of business, to its US-basedaffiliate of US$9,989,076 (EUR7,137,603). Effective on January 1, 2009,due to a change in economic facts and circumstances arising in the firstquarter of 2009, the parent company, as well as its US subsidiary, will changeits functional currency from the Canadian dollar to the euro. Such change willbe reported prospectively.

 

*(c)**                    Liquidity risk*

 

Liquidity risk is the risk that the Companywill not be able to meet its financial obligations as they fall due. TheCompany manages liquidity risk through the management of its capital structureand financial leverage, as outlined in note 23. The Company also managesliquidity risk by continuously monitoring 

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

actual and projected cash flow. The Board ofDirectors reviews and approves the Company’s operating and capital budgets, andreviews any material transactions outside of the normal course of business.

 

The Company’s investment policy ensures thesafety and preservation of its principal, as outlined in section (a) above,to ensure the Company’s liquidity needs are met.

 

*(d)**                   Financial liabilities as at December 31, 2008*

 
| ** **                               | ** ** | **Carrying  Amount** | ** ** | **2009**   | ** ** | **2010-2011** | ** ** | **After 2011** | ** ** |
|------------------------------------------|------------|----------------------|------------|------------|------------|---------------|------------|---------------------|------------|
| ** **                               | ** ** | **$**                | ** ** | **$**      | ** ** | **$**         | ** ** | **$**               | ** ** |
| Accounts payable and accrued liabilities |       | 13,690               |       | 13,690     |       | —        |       | —              |       |
| Long-term payable                        |       | 221                  |       | 49         |       | 98            |       | 74                  |       |
| ** **                               | ** ** | **13,911**           | ** ** | **13,739** | ** ** | **98**        | ** ** | **74**              | ** ** |

 

**25**                                  Commitments, contingencies andguarantee

 

In addition to the long-term payablediscussed in notes 6 and 15, the Company is committed to various operatingleases for its premises plus service and manufacturing contracts, as follows:

 
| **Year**   | ** ** | **Minimum Lease  Commitments** | ** ** | **Service &  Manufacturing  Commitments** | ** ** | **Total  Commitments** | ** ** |
|------------|------------|-------------------------------------|------------|----------------------------------------------------|------------|------------------------|------------|
| ** ** | ** ** | **$**                               | ** ** | **$**                                              | ** ** | **$**                  | ** ** |
| 2009       |       | 2,191                               |       | 15,743                                             |       | 17,934                 |       |
| 2010       |       | 2,117                               |       | 3,129                                              |       | 5,246                  |       |
| 2011       |       | 2,124                               |       | 845                                                |       | 2,969                  |       |
| 2012       |       | 2,131                               |       | 811                                                |       | 2,942                  |       |
| 2013       |       | 372                                 |       | —                                             |       | 372                    |       |
| Thereafter |       | 1,431                               |       | —                                             |       | 1,431                  |       |
| Total      |       | 10,366                              |       | 20,528                                             |       | 30,894                 |       |

 

As discussed in note 7, in connection withthe PSA entered into with Cowen, the Company has agreed to make a one-time cashpayment to Cowen in the event that cetrorelix is approved for sale by Europeanregulatory authorities in an indication other than *in vitro*fertilization. Such a payment, which is not probable or reasonably estimable asat December 31, 2008, could range from $5,000,000 to a maximum of$15,000,000. Also as discussed in note 7, the Company could also be required topay Cowen a quarterly make-whole payment.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

Rent expense for operating leases, which mayhave escalating rentals over the term of the lease, are recorded on astraight-line basis over the term of the lease. The rent expense under theoperating leases for the periods ended December 31, 2008, 2007 and 2006was $1,700,647, $1,937,000 and $1,878,000, respectively.

 

In October 2004, the Company enteredinto a $2,500,000 (€1,750,000) bank guarantee in favour of one of its landlordsin Germany with respect to the Company’s lease obligation. This guarantee willexpire in 2009 and is expected to be renewed at that time.

 

In October 2007, the Company enteredinto a $100,000 letter of credit agreement in favour of its landlord in theUnited States with respect to the Company’s long-term lease obligation. Thisletter of credit, which would be drawn down and payable by the Company in theevent the Company fails to perform any of its obligations under the leaseagreement, will expire in August 2009 and will be renewed at or beforethat time.

 

**Contingencies**

 

In the normal course of operations, theCompany may become involved in various claims and legal proceedings mainlyrelated to contract terminations, employee lay-offs and other employee-relatedmatters. As at December 31, 2008, there are no known or anticipatedcontingencies or disputes pending against the company.

 

**26**                                  Subsequent event

 

On March 5, 2009, the Company enteredinto a development, commercialization and license agreement with sanofi-aventisfor the development, registration and marketing of cetrorelix in BPH for theUnited States market. Under the terms of the agreement, sanofi-aventis willmake an initial upfront payment to the Company of $30,000,000. Also per theagreement, the Company will be entitled to receive a total of $135,000,000 inpayments upon achieving certain pre-established regulatory and commercialmilestones. Furthermore, the Company will be entitled to receive escalatingdouble-digit royalties on future net sales of cetrorelix for BPH in the UnitedStates, while retaining the option to co-promote the product in that territory.

 

**27**                                  Summary of differences betweengenerally accepted accounting principles in Canada and in the United States

 

As a company listed on the NASDAQ GlobalMarket, the Company is required to reconcile its financial statements forsignificant measurement differences between Canadian GAAP and US GAAP.Furthermore, additional significant disclosures required under US GAAP andRegulation S-X of the Securities and Exchange Commission in the United States (“SEC”)are also provided in the accompanying financial statements and notes. Thefollowing summarizes the significant quantitative differences between Canadianand US GAAP, as well as other significant disclosures required under US GAAPand Regulation S-X of the SEC not already provided in the accompanyingfinancial statements.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

The following summary sets out the materialadjustments to the Company’s reported net earnings (loss), net earnings (loss)per share and shareholders’ equity that would be made to conform with US GAAP:

 

**Consolidated Statements of Earnings (Loss)**

 
| ** **                                                        | ** ** | ** ** | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|---------------------------------------------|------------|
| ** **                                                        | ** ** | ** ** | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                        | ** ** | ** ** | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                                        | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings (loss) for the year under  Canadian GAAP             |       |       |       | (59,817                                     | )          | (32,296 | ) | 33,390 |   |
| Amortization of in-process research and  development              |       | (a)        |       | 3,747                                       |       | 1,546 |   | 2,348 |   |
| Accretion on convertible term loans                               |       | (b)        |       | —                                      |       | — |   | 502 |   |
| Loss on conversion of convertible term  loans                     |       | (b)        |       | —                                      |       | — |   | (280 | ) |
| Deferred taxes                                                    |       | (c)        |       | —                                      |       | (5,430 | ) | (959 | ) |
| Reclassification adjustment related to the  sale of Echelon       |       | (d)        |       | —                                      |       | (754 | ) | — |   |
| Other                                                             |       |       |       | —                                      |       | — |   | (10 | ) |
| Income tax effects of the above adjustments                       |       |       |       | —                                      |       | (494 | ) | (729 | ) |
|                                                              |       |       |       |                                        |       |   |   |   |   |
| Net earnings (loss) for the year under US  GAAP                   |       |       |       | (56,070                                     | )          | (37,428 | ) | 34,262 |   |
|                                                              |       |       |       |                                        |       |   |   |   |   |
| Out of which:                                                     |       |       |       |                                        |       |   |   |   |   |
|                                                              |       |       |       |                                        |       |   |   |   |   |
| Net earnings (loss) from continuing  operations                   |       |       |       | (56,070                                     | )          | (36,415 | ) | 8,449 |   |
| Net earnings (loss) from discontinued  operations                 |       |       |       | —                                      |       | (1,013 | ) | 25,813 |   |
|                                                              |       |       |       |                                        |       |   |   |   |   |
| Basic net earnings (loss) per share                               |       |       |       | (1.05                                       | )          | (0.70 | ) | 0.66 |   |
| From continuing operations                                        |       |       |       | (1.05                                       | )          | (0.68 | ) | 0.16 |   |
| From discontinued operations                                      |       |       |       | —                                      |       | (0.02 | ) | 0.50 |   |
|                                                              |       |       |       |                                        |       |   |   |   |   |
| Diluted net earnings (loss) per share                             |       |       |       | (1.05                                       | )          | (0.70 | ) | 0.65 |   |
| From continuing operations                                        |       |       |       | (1.05                                       | )          | (0.68 | ) | 0.16 |   |
| From discontinued operations                                      |       |       |       | —                                      |       | (0.02 | ) | 0.49 |   |
|                                                              |       |       |       |                                        |       |   |   |   |   |
| **Weighted average number of  shares (note 21)****under US GAAP** |       |       |       |                                        |       |   |   |   |   |
| Basic                                                             |       |       |       | 53,187,470                                  |       | 53,182,803 |   | 52,099,290 |   |
|                                                              |       |       |       |                                        |       |   |   |   |   |
| Diluted                                                           |       |       |       | 53,187,470                                  |       | 53,182,803 |   | 52,549,260 |   |

 

For the years ended December 31, 2008and 2007, the diluted amounts per share were the same amounts as the basicamounts per share since the dilutive effect of stock options and convertibleterm loans was not included in the calculation; otherwise, the effect wouldhave been anti-dilutive. Accordingly, the diluted amounts per share for thoseyears were calculated using the basic weighted average number of sharesoutstanding.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**Reconciliation of shareholders’ equity toconform to US GAAP**

 

The following summary sets out thesignificant differences between the Company’s reported shareholders’ equityunder Canadian GAAP as compared to US GAAP.

 
| ** **                                                  | ** ** | ** ** | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|---------------------------------------------|------------|
| ** **                                                  | ** ** | ** ** | ** ** | **2008**                                    | ** ** | **2007** | ** ** |
| ** **                                                  | ** ** | ** ** | ** ** | **$**                                       | ** ** | **$** | ** ** |
| ** **                                                  | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Shareholders’ equity in accordance with  Canadian GAAP |       |       |       | 21,475                                      |       | 88,591 |   |
| In-process research and development                         |       | (a)        |       | (8,341                                      | )          | (14,181 | ) |
|                                                        |       |       |       |                                        |       |   |   |
| Shareholders’ equity in accordance with US  GAAP       |       |       |       | 13,134                                      |       | 74,410 |   |

 

**Statements of cash flows**

 

For the years ended December 31,2008, 2007 and 2006, there are no significant differences between thestatements of cash flows under Canadian GAAP as compared to US GAAP.

 

**(a)**                      Researchand development costs

** **

Under US GAAP, in-process research anddevelopment acquired in a business combination is written off at the time ofacquisition. Under Canadian GAAP, in-process research and development acquiredin a business combination is capitalized and amortized over its estimateduseful life. The balances presented as at December 31, 2007 includeintangible assets held for sale.

 

**(b)****                     ****Convertible term loans**

 

Under Canadian GAAP, proceeds from theissuance of convertible term loans are allocated among long-term convertibleterm loans and shareholders’ equity, resulting in a debt discount that isamortized to expense over the term of the loans. The financing costs related tothose loans have been allocated on a pro-rata basis between deferred chargesand other capital. Under US GAAP, those costs are all included in deferredcharges and amortized over the term of the loans, and convertible term loansare considered as long-term debt. Furthermore, under US GAAP, the entireincremental consideration to induce conversion is recorded in earnings.

 

**(c)****                     ****Deferred income taxes**

 

This adjustment reflects differences relatedto the accounting for valuation allowance for US GAAP purposes that arise fromtiming differences.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**(d)****                      Cumulative translation adjustment related to the sale of Echelon**

 

Under Canadian GAAP, a gain or lossequivalent to a proportionate amount of the exchange gain or loss accumulatedin the translation adjustment is recognized in income when there has been areduction of a net investment in a foreign operation. Under US GAAP, a gain orloss should only be recognized in income in the case of a substantial orcomplete liquidation of a net investment in a foreign operation being thesubstantial or complete liquidation of the Company.

 

**(e)****                     ****New accounting standardsand pronouncements**

 

**i)****               ****Adopted in 2008**

 

**FASB Statement of Financial AccountingStandards (“SFAS”) No. 157, *Fair Value Measurements*(“SFAS 157”)**

 

In September 2006, the FASB issued SFAS157, which defines fair value, establishes a framework for measuring fair valueand expands disclosures regarding fair value measurements.  SFAS 157 does not require any new fair valuemeasurements but, rather, eliminates inconsistencies in guidance found invarious prior accounting pronouncements. In February 2008, the FASB amended SFAS 157 to exclude leasingtransactions and to delay the effective date by one year for non-financialassets and liabilities that are recognized or disclosed at fair value in thefinancial statements on a non-recurring basis. The Company has adopted thisstatement as of January 1, 2008, and there has been is no significantimpact on the Company’s consolidated financial statements as a result of suchadoption.

 

**SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities - Including anamendment of FASB Statement No. 115* (“SFAS 159”)**

 

On February 15, 2007, the FASB issuedSFAS 159, which permits entities to choose to measure many financialinstruments and certain other items at fair value. Most of the provisions ofthis statement apply only to entities that elect the fair value option.  However, the amendment to SFAS 115, *Accounting**for Certain Investments in Debt and Equity Securities*,applies to all entities with available-for-sale and trading securities. Thisstatement is effective for fiscal years beginning after November 15, 2007.The Company has adopted this statement as of January 1, 2008 and has notelected to use the fair value option. Accordingly, there has not been anyimpact as a result of adopting SFAS 159.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**EITF Issue No. 07-3, “Accounting forAdvance Payments for Goods or Services to be Received for Use in FutureResearch and Development Activities” (“EITF 07-3”)**

 

EITF 07-3, issued in June 2007, providesclarification surrounding the accounting for non-refundable research anddevelopment advance payments, whereby such payments should be recorded as anasset when the advance payment is made and recognized as an expense when theresearch and development activities are performed.  EITF 07-3 is effective for interim and annualreporting periods beginning after December 15, 2007.  The Company adopted the provisions of EITF07-3 on January 1, 2008, and there has been no impact on the Company’sconsolidated financial statements as a result of adopting this guidance.

 

**ii)****           ****Future Accounting Changes**

 

**EITF Issue No. 07-1, “Accounting forCollaborative Agreements Related to the Development and Commercialization ofIntellectual Property” (“EITF 07-01”)**

 

The EITF has issued guidance for accountingfor arrangements under which companies participate in the development andcommercialization of intellectual property into commercially viableproducts.  The EITF defines acollaborative arrangement as a contractual arrangement that involves a jointoperating activity.  These arrangementsinvolve two or more parties who are both (a) active participants in theactivity and (b) exposed to significant risks and rewards dependent on thecommercial success of the activity.  Acompany may receive revenues and incur costs under such arrangements as well asmake or received payments from the other participant in the arrangement.  The EITF concluded that revenues earned andcosts incurred by a company should be presented gross or net depending onwhether the company is the principal participant in the arrangement.  The EITF ratified EITF 07-1 in December 2007,and it will become effective for financial statements issued for fiscal yearsbeginning after December 15, 2008, and interim periods within those fiscalyears.  The Company is currentlyassessing the impact on the presentation of revenues and costs within theCompany’s consolidated financial statements.

 

**SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities — Including an amendment ofFASB Statement No. 133* (“SFAS 161”)**

 

In March 2008, the FASB issued SFAS No. 161,which amends and expands the disclosure requirements in SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*,and other related literature. SFAS 161 is effective for financial statementsissued for periods beginning after November 15, 2008, with earlyapplication encouraged.  The Companybelieves that the updated disclosures will not have a material impact on itsconsolidated financial statements.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

**SFAS No. 141 (revised 2007), *Business Combinations*, (“SFAS 141R”)**

 

In December 2007, the FASB issued SFAS No. 141R,which is a revision of previously existing guidance on accounting for businesscombinations.  SFAS 141R retains the fundamentalconcept of the purchase method of accounting and introduces new requirementsfor the recognition and measurement of assets acquired, liabilities assumed andnon-controlling interests. SFAS 141R is effective for fiscal years beginningafter December 15, 2008. The Company will adopt SFAS 141R for anybusiness combinations entered into, where applicable, on or after January 1,2009.

 

**SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements — an amendment of ARB. No. 51***

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in ConsolidatedFinancial Statements—an amendment of ARB No. 51* (“SFAS 160”).SFAS 160 changes the accounting and reporting for minority interests,which will be recharacterized as noncontrolling interests and classified as acomponent of equity. This new consolidation method significantly changes theaccounting for transactions with minority interest holders. SFAS 160 iseffective prospectively to business combinations for which the acquisition dateis on or after the beginning of the first annual reporting period beginning onor after December 15, 2008. The Company will adopt SFAS 160 for anybusiness combinations entered into, where applicable, on or after January 1,2009.

 

**SFAS No. 162, *The Hierarchyof Generally Accepted Accounting Principles* (“SFAS 162”)**

 

In May 2008, the FASB issued SFAS 162,which is intended to improve financial reporting by identifying a consistentframework for selecting accounting principles to be used in preparing financialstatements that are presented in conformity with US GAAP for non-governmentalentities.  The guidance in SFAS 162replaces that which is prescribed by the American Institute of Certified PublicAccountants’ (“AICPA”) Statement on Auditing Standards (“SAS”) No. 69, “TheMeaning of *Present Fairly in Conformity with GenerallyAccepted Accounting Principles,* for Nongovernmental Entities”. SFAS162 will become effective 60 days following the SEC’s approval of the PublicCompany Accounting Oversight Board’s (“PCAOB”) amendment to the AICPA’s *Professional Standards*, vol. 1, AU sec.411, “The Meaning of *Present Fairly inConformity with Generally Accepted Accounting Principles*”. TheCompany is currently evaluating the potential impact, if any, that the adoptionof SFAS 162 will have on its consolidated financial statements.

 

**FASB Staff Position No. FAS 142-3, “Determinationof the Useful Life of Intangible Assets” (“FSP FAS 142-3”)**

 

On April 25, 2008, the FASB issuedFSP FAS 142-3, which amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset under SFAS No. 142, *Goodwill andOther Intangible Assets* (“SFAS 142”).  The intent of FSP FAS142-3 is to improve the consistency between the useful life of a recognizedintangible asset under SFAS 142 and the period of expected cash flows used tomeasure the fair value of the asset under SFAS 141R and as per other US GAAPguidance.  FSP FAS 142-3 is effective forfinancial years beginning after December 15, 2008 and interim periodswithin those 

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

fiscal years, and early adoption isprohibited.  The guidance for determiningthe useful life of a recognized intangible asset shall be applied prospectivelyto intangible assets acquired after the effective date.  The disclosure requirements shall be appliedprospectively to all intangible assets recognized as of, and subsequent to, theeffective date. The Company is currently evaluating the impact of adoption ofFSP FAS 142-3 will have on its consolidated financial statements.

 

**(f)****                       ****Other disclosures**

 

*Researchand development tax credits*

 

Under Canadian GAAP, all research and developmenttax credits are recorded as a reduction of costs in the consolidated statementsof earnings (loss). Under US GAAP, tax credits that reduce current income taxespayable are recorded in income taxes. These tax credits amounted to $nil in2008, $1,862,000 in 2007 and $1,684,000 in 2006. This accounting difference hasno impact on the net earnings (loss) and the net earnings (loss) per sharefigures for the reporting years.

 

Furthermore, under US GAAP, the future incometax assets related to the unrecognized tax credits totalled $5,742,000 in 2008and $7,004,000 in 2007. However, a valuation allowance corresponding to thesame amounts has been accounted for in 2008 and 2007.

 

*Long-lived assets*

 

Under US GAAP, long-lived assets bygeographic region only consist of property, plant and equipment which aredetailed as follows:

 
| ** **    | ** ** | **As at December 31,** | ** ** |
|---------------|------------|---------------------------------------|------------|
| ** **    | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **    | ** ** | **$**                                 | ** ** | **$** | ** ** |
| ** **    | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Canada        |       | 99                                    |       | 7,631 |   |
| Germany       |       | 5,968                                 |       | 6,436 |   |
| United States |       | 615                                   |       | 838 |   |
|          |       |                                  |       |   |   |
|          |       | 6,682                                 |       | 14,905 |   |

 

*Available-for-sale securities*

 

The Company uses the specific identificationmethod in order to reclassify the gains or losses realized out of accumulatedother comprehensive income into the statement of earnings (loss).

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

The gross realized gains and gross realizedlosses included in the statement of earnings (loss), the unrealized holdinggain or loss on available-for-sale securities as well as the amount of gainsand losses reclassified out of accumulated other comprehensive income into thestatement of earnings (loss) are as follows:

 
| ** **            | ** ** | **For the years ended December 31,** | ** ** |
|-----------------------|------------|---------------------------------------------------------------|------------|
| ** **            | ** ** | **2008**                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **            | ** ** | **$**                                                         | ** ** | **$** | ** ** | **$** | ** ** |
| ** **            | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross realized gains  |       | 3                                                             |       | — |   | 410 |   |
| Gross realized losses |       | 10                                                            |       | 67 |   | 21 |   |
| Unrealized gains      |       | —                                                        |       | — |   | 126 |   |
| Unrealized losses     |       | —                                                        |       | 42 |   | 67 |   |
| Gains reclassified    |       | —                                                        |       | 53 |   | 390 |   |
| Losses reclassified   |       | —                                                        |       | 30 |   | 78 |   |

 

As at December 31, 2008,available-for-sale securities were composed of short-term notes totallingapproximately $493,000, as discussed in note 24. The fair value of short-termnotes is based on Level 1 information, as required by SFAS 157.

 

*Research and collaboration agreements*

 

As part of Æterna Zentaris’ strategy toenhance its development capabilities and to partially fund capitalrequirements, the Company has entered into research and developmentcollaboration agreements with several pharmaceutical companies. Pursuant tothese collaboration arrangements, the Company oftentimes receives upfrontpayments, license fees and milestone payments and has the potential to receiveroyalty payments in the future. Upfront payments are typically non-refundable,received upon the signature of an agreement, or shortly thereafter, and areamortized over the estimated corresponding research and development period.License fees typically are contractually obligated payments that the Companyreceives and uses to fund research and development activities over the term ofcollaboration and include milestone payments, as well as contract services. Milestonepayments are contingent payments that are made upon the achievement ofspecified milestones, such as at the time of selection of candidates for drugdevelopment, the commencement or termination of clinical trials or the receiptof regulatory approvals and achievement of a certain level of sales. If drugsare successfully developed and commercialized as a result of collaborationagreements, the Company will receive royalty payments based upon net sales ofthose drugs developed under the collaboration. Finally, contract service feesrelate to research and development activities performed by the Company onbehalf of the counterparty to the related arrangement and for which the Companyhas the right to receive compensation.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

*Ardana*

 

In 2002, the Company entered into a licenseand collaboration agreement with Ardana, a subsidiary of Ardana plc. Ardana wasgranted an exclusive worldwide license to develop and commercialize a growthhormone secretagogue (“EP-1572”). Ardana has undertaken, at its own cost, allactivities necessary to obtain regulatory and marketing approvals for thesubstance. In return, the Company had received approximately $1,700,000 as anupfront payment upon signing of the agreement. The Company has been eligible toreceive payments of up to an aggregate of approximately $9,200,000 upon Ardana’ssuccessful achievement of clinical development and regulatory milestones, inaddition to low double-digit royalties on future net worldwide net sales ofEP-1572.

 

Revenues recognized under this agreement withArdana for the years ended December 31, 2008, 2007 and 2006 wereapproximately $197,000, $3,000,000 and $1,500,000, respectively.

 

No corresponding research and developmentcosts were incurred by the Company under the agreement for any of the threeyears ended December 31, 2008.

 

In 2002, the Company granted an exclusivelicense to Ardana for the development and commercialization of teverelix, aLHRH antagonist, for all therapeutic uses worldwide with the exception ofJapan, Korea and Taiwan. On April 2, 2004, Ardana acquired full worldwiderights and was assigned the intellectual property rights relating to teverelixand the underlying microcrystalline suspension technology for the use ofteverelix and any other potential LHRH antagonists.

 

The Company received approximately $3,200,000in 2002 and approximately $6,100,000 in 2004 as an upfront payment uponsignature of the agreement and upon the assignment of the substance,respectively. The agreement provided, among other things, approximately$9,200,000 of guaranteed payments through December 2006, approximately$19,800,000 upon successful achievement of a certain level of sales and lowsingle-digit royalties on future worldwide net sales.

 

Revenues recognized under this agreement withArdana for the years ended December 31, 2008, 2007 and 2006 wereapproximately $3,621,000, $3,500,000 and $3,600,000, respectively.

 

Corresponding research and development costsincurred under the agreement for the years ended December 31, 2008, 2007and 2006 were approximately $61,000, $100,000 and $300,000, respectively.

 

As discussed in note 12, in June 2008,Ardana communicated that it was entering into voluntary administration, and,consequently, clinical studies and future development efforts weresuspended.  Additional correspondence wasreceived by the Company in January 2009 from Ardana’s appointedadministrators, providing further evidence that future cash flows associatedwith the aforementioned license and collaboration arrangements are no longerlikely to be received.  As such,management does not expect to generate any revenues in the foreseeable futureunder either of the aforementioned agreements from Ardana.

 

170

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

*Keryx Biopharmaceuticals, Inc.*

 

The Company is party to a license andcollaboration agreement with Keryx Biopharmaceuticals, Inc. (“Keryx”). Perthis agreement, Keryx undertakes, at its own cost, all clinical activitiesnecessary to obtain regulatory and marketing approvals of perifosine, a signaltransduction inhibitor, for all uses in the United States, Canada and Mexico.The agreement provides, among other things, availability of data generated byboth parties free of charge. In September 2002, the company received anupfront payment of approximately $500,000 and is eligible to receive paymentsof up to an aggregate of $18,300,000 upon Keryx’s successful achievement ofclinical development and regulatory milestones, in addition to scale-uproyalties (from high single to low double-digit) on future net sales in theUnited States, Canada and Mexico.

 

Revenues recognized under the agreement withKeryx for the years ended December 31, 2008, 2007 and 2006 wereapproximately $410,000, $1,700,000 and $700,000, respectively.

 

Corresponding research and development costsincurred under the agreement for the years ended December 31, 2008, 2007and 2006 were approximately $448,000, $900,000 and $900,000, respectively.

 

*Nippon Kayaku Co. Ltd.*

 

In 2006, the Company entered into a licensingand collaboration agreement with Nippon Kayaku Co. Ltd. (“Nippon Kayaku”).Under the terms of the agreement, Nippon Kayaku was granted an exclusivelicense to develop and market ozarelix, a LHRH antagonist, for all potentialoncological indications in Japan. In return, the Company received approximately$1,900,000 as an upfront payment upon signature. The agreement provides, amongother things, availability of data generated by both parties free of charge.The Company is entitled to receive payments of up to an aggregate ofapproximately $23,800,000 upon Nippon Kayaku’s successful achievement ofclinical development, regulatory milestones and a certain level of sales, inaddition to low double-digit royalties on potential net sales. In turn, asindicated below regarding the Spectrum Pharmaceuticals, Inc. (“Spectrum”)agreement, Spectrum is entitled to receive fifty percent of any upfront,milestone payments and royalties received from any research and collaborationagreement signed by the Company for the development and commercialization ofozarelix in Japan.

 

Revenues recognized under the agreement forthe years ended December 31, 2008, 2007 and 2006 were approximately$445,000, $500,000 and $200,000, respectively.

 

Corresponding research and development costsincurred under the agreement for the years ended December 31, 2008, 2007and 2006 were $nil, approximately $100,000 and $100,000, respectively.

 

171

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

*Shionogi and Co.*

 

In 1995, the Company entered into a researchand collaboration agreement with Shionogi and Co. (“Shionogi”). The Companygranted Shionogi a license to develop, use, commercialize and manufacturecetrorelix, an LHRH antagonist, in Japan and for all human indications. Underthe agreement, Shionogi is responsible, at its own cost, for all activitiesnecessary to obtain regulatory and marketing approvals for cetrorelix. Theagreement provides, among other things, availability of data generated by bothparties free of charge. Upon signature of this agreement, the Company receivedapproximately $1,400,000 as an upfront payment and was eligible to receivemilestone payments of up to an aggregate of approximately $7,100,000 uponShionogi’s successful achievement of clinical development and regulatorymilestones. To date, the Company has received approximately $5,800,000 of thesemilestone payments. Since the development of cetrorelix is completed in *in vitro* fertilization (“IVF”), Control OvarianStimulation (“COS”) and Assisted Reproductive Technology (“ART”) in Japan, theCompany does not expect to receive any additional milestone payments.

 

In addition, upon commercialization ofcetrorelix in BPH, the Company will be entitled to a manufacturing margin.

 

Revenues recognized under the agreement withShionogi for the years ended December 31, 2008, 2007 and 2006 wereapproximately $1,000, $nil and $3,800,000, respectively.

 

Corresponding research and development costsincurred under the agreement for the years ended December 31, 2008, 2007and 2006 were approximately $13,000, $nil and $1,000,000, respectively.

 

*Solvay Pharmaceuticals BV*

 

In 2002, the Company entered into a researchand collaboration agreement with Solvay Pharmaceuticals BV, a subsidiary ofSolvay SA (“Solvay”). The Company granted Solvay an exclusive license todevelop, use, commercialize and manufacture cetrorelix worldwide (ex-Japan) andfor all indications excluding IVF/COS/ART. Under the agreement, Solvay was responsible, at its own cost, for allactivities necessary to obtain regulatory and marketing approvals for cetrorelixin different indications including, uterine myoma, endometriosis and BPH. Theagreement provides, among other things, availability of data generated by bothparties free of charge. Upon signature of this agreement, the Company receivedapproximately $6,200,000 as an upfront payment and was eligible to receivemilestone payments of up to an aggregate of approximately $23,800,000 uponSolvay’s successful achievement of clinical development and regulatorymilestones, in addition to low double-digit royalties on future worldwide(ex-Japan) net sales of cetrorelix.

 

In December 2005, Æterna Zentaris andSolvay amended the aforementioned agreement such that the Company regainedexclusive worldwide (ex-Japan) rights for cetrorelix for the BPH indicationsolely, without any financial compensation payable to Solvay. In May 2007,the parties entered into a termination agreement whereby the Company regainedexclusive worldwide (ex-Japan) rights for cetrorelix in all indications,including endometriosis and uterine myoma, without any financial compensationpayable to Solvay.

 

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**Æterna Zentaris Inc.**

Notesto Consolidated Financial Statements

December31, 2008, 2007 and 2006

(tabularamounts in thousands of US dollars,

exceptshare/option and per share/option data and as otherwise noted)

 

Revenues recognized under the agreement withSolvay for the years ended December 31, 2007 and 2006 were approximately$2,000,000 and $1,200,000, respectively.

 

Corresponding research and development costsincurred under the agreement for the years ended December 31, 2007 and2006 were approximately $1,900,000 and $600,000, respectively.

 

*Spectrum*

 

In 2004, the Company entered into a licensingand collaboration agreement with Spectrum for ozarelix, a LHRH antagonist.Under the terms of the agreement, the Company granted Spectrum an exclusivelicense to develop and commercialize ozarelix for all potential indications inNorth America (including Canada and Mexico) as well as in India. The agreementprovides, among other things, availability of data generated by both partiesfree of charge. Upon signature of this agreement, the Company receivedapproximately $2,400,000 as an upfront payment, of which approximately$1,200,000 was paid in cash and the balance paid through the issuance of sharesof the capital of Spectrum. The Company is entitled to receive payments of upto an aggregate of approximately $24,400,000 upon Spectrum’s successfulachievement of clinical development and regulatory milestones, in addition toroyalties (scale-up royalties from high single to low double-digit) onpotential net sales. In consideration of the amounts paid by Spectrum underthis agreement, Spectrum is entitled to receive fifty percent of any upfront,milestone payments and royalties received from any research and collaborationagreement signed by the Company for the development and commercialization ofozarelix in Japan.

 

Revenues recognized under the agreement withSpectrum for the years ended December 31, 2008, 20067 and 2006 wereapproximately $678,000, $1,900,000 and $2,900,000, respectively.

 

Corresponding research and development costsincurred under the agreement for the years ended December 31, 2008, 2007and 2006 were approximately $255,000, $600,000 and $1,700,000, respectively.

 

*Tulane Educational Fund*

 

In 2002, the Company signed licenseagreements with the Tulane Educational Fund (“Tulane”) with regard to varioussubstances, including cetrorelix. Under the agreements, we obtained exclusiveworldwide licenses to use Tulane’s patents to develop, manufacture, market anddistribute these substances.

 

The agreement provides the payment by theCompany of single-digit royalties on future worldwide net sales for allindications, except BPH, where it provides the payment of low single-digitroyalties. Tulane is entitled to receive a low double-digit royalty on any lumpsum, periodic or other cash payments received by the Company fromsub-licensees.

 

Costs incurred under the agreement withTulane for the years ended December 31, 2008, 2007 and 2006 wereapproximately $311,000 $100,000 and $300,000, respectively.

 

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## **Item 19.**                            Exhibits

 

**Exhibit Index**

 
| 1.1  |   | Restated  Certificate of Incorporation and Restated Articles of Incorporation of the  Registrant (incorporated by reference to Exhibit 1.1 of the Registrant’s  annual report on Form 20-F for the financial year ended December 31,  2007 filed with the Commission on March 28, 2008)                                                        |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.2  |   | Code  of General By-Laws adopted by the Registrant on November 29, 1995  (incorporated by reference to Exhibit 1.2 of the Registrant’s annual  report on Form 20-F for the financial year ended December 31, 2007  filed with the Commission on March 28, 2008)                                                                           |
| 2    |   | Amended  and Restated Shareholder Rights Plan Agreement between the Registrant and  Computershare Trust Company of Canada dated as of March 5, 2007  (incorporated by reference to Exhibit 2 of the Registrant’s annual  report on Form 20-F for the financial year ended December 31, 2008  filed with the Commission on March 28, 2008) |
| 4.1  |   | Stock  Option Plan of the Registrant                                                                                                                                                                                                                                                                                                                                    |
| 4.2  |   | Employment  Agreement dated July 18, 2007 between Paul Blake, M.D. and the  Registrant (incorporated by reference to Exhibit 4.2 of the Registrant’s  annual report on Form 20-F for the financial year ended December 31,  2007 filed with the Commission on March 28, 2008)                                                             |
| 4.3  |   | Service  Contract dated December 5, 2007 between Æterna Zentaris GmbH and Prof.  Juergen Engel, Ph.D. (incorporated by reference to Exhibit 4.3 of the  Registrant’s annual report on Form 20-F for the financial year ended December 31,  2007 filed with the Commission on March 28, 2008)                                         |
| 4.4  |   | Amendment  #1 to Service Contract dated September 1, 2008 between Æterna Zentaris  GmbH and Prof. Juergen Engel, Ph.D.                                                                                                                                                                                                                                        |
| 4.5  |   | Employment  Agreement dated September 1, 2008 between the Registrant and Prof.  Juergen Engel, Ph.D.                                                                                                                                                                                                                                                               |
| 4.6  |   | Employment  Agreement dated May 7, 2007 between the Registrant and Nicholas J.  Pelliccione (incorporated by reference to Exhibit 4.7 of the Registrant’s  annual report on Form 20-F for the financial year ended December 31,  2007 filed with the Commission on March 28, 2008)                                                        |
| 4.7  |   | Service  Contract dated May 18, 2006 among Æterna Zentaris GmbH, the Registrant  and Matthias Seeber                                                                                                                                                                                                                                                          |
| 4.8  |   | Amendment  #1 to Service Contract dated December 9, 2008 among Æterna Zentaris  GmbH, the Registrant and Matthias Seeber                                                                                                                                                                                                                                      |
| 4.9  |   | Amendment  to Amended Employment Agreement dated as of June 20, 2007 amont the  Registrant, Æterna Zentaris, Inc. and Dennis Turpin (incorporated by  reference to Exhibit 4.8 of the Registrant’s annual report on Form 20-F  for the financial year ended December 31, 2007 filed with the Commission  on March 28, 2008)     |
| 4.10 |   | Purchase  Agreement by and among Zentaris IVF GmbH, Æterna Zantaris GmbH, the  Registrant and Cowen Healthcare Royalty Partners L.P. dated November 11,  2008 (incorporated by reference to the Registrant’s report on Form 6-K  furnished to the Commission on November 24, 2008)                                                             |
| 4.11 |   | Development,  Commercialisation and License Agreement between Æterna Zentaris GmbH and  sanofi-aventis U.S. LLC dated March 5, 2009 (incorporated by reference  to Exhibit 99.2 to the Registrant’s report on Form 6-K furnished to  the Commission on March 17, 2009)                                                                    |
| 4.12 |   | Guarantee  agreement between the Registrant and sanofi-aventis U.S. LLC dated March 5,  2009 (incorporated by reference to Exhibit 99.3 to the Registrant’s  report on Form 6-K furnished to the Commission on March 17, 2009)                                                                                                                 |
| 8.1  |   | Subsidiaries  of the Registrant                                                                                                                                                                                                                                                                                                                                         |
| 11.1 |   | Code  of Ethical Conduct of the Registrant                                                                                                                                                                                                                                                                                                                              |
| 11.2 |   | Audit  Committee Charter of the Registrant                                                                                                                                                                                                                                                                                                                              |
| 12.1 |   | Certification  of the Principal Executive Officer pursuant to §302 of the Sarbanes-Oxley Act  of 2002                                                                                                                                                                                                                                                              |
| 12.2 |   | Certification  of the Principal Financial Officer pursuant to §302 of the Sarbanes-Oxley Act  of 2002                                                                                                                                                                                                                                                              |
| 13.1 |   | Certificate  of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                      |
| 13.2 |   | Certificate  of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                      |
| 15.1 |   | Consent  of the Registrant’s Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                         |

 

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**SIGNATURES**

 

The registrant herebycertifies that it meets all of the requirements for filing on Form 20-Fand that it has duly caused and authorized the undersigned to sign this annualreport on its behalf.

 

 
|   | ÆTERNA  ZENTARIS INC.                         |
|--------|----------------------------------------------------|
|   |                                               |
|   | /s/ Dennis  Turpin                                 |
|   |                                               |
|   | Dennis Turpin                                      |
|   | Senior Vice President and  Chief Financial Officer |

 

**Date:  March 30, 2009**

 

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