Exhibit 4

LOGO

Solid
Growth

Annual Report 2004

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GRAPHIC

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TABLE OF CONTENT

COMPANY
PROFILE  3

MESSAGE
TO SHAREHOLDERS  4

PRODUCT
PIPELINE  8

ATRIUM  14

Highlights 2004

MOST
SIGNIFICANT EVENT OF THE YEAR: SUCCESSFUL COMPLETION OF THE SEVEN PHASE II TRIALS PROGRAM OF CETRORELIX, OUR LEAD COMPOUND IN ENDOCRINE THERAPY, FOR ENDOMETRIOSIS, UTERINE MYOMA, AND BENIGN
PROSTATE HYPERPLASIA (BPH).

FEBRUARY

MARCH

APRIL

MAY

JUNE

AUGUST

SEPTEMBER

OCTOBER

NOVEMBER

DECEMBER

SUBSEQUENT TO YEAR END

2Æterna
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Æterna Zentaris

| |  |                                                                                                                                                                                                                                                       
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | ÆTERNA ZENTARIS IS AN EMERGING INTERNATIONAL BIOPHARMACEUTICAL COMPANYHEADQUARTERED IN QUEBEC CITY. WE ARE INVOLVED IN THE DISCOVERY, DEVELOPMENT AND MARKETING OF DRUGS WITHIN THREE
THERAPEUTIC AREAS: ONCOLOGY, ENDOCRINOLOGY, AND ANTI-INFECTIVES.
| |  | THROUGH THE COMPANY'S PROPRIETARY DRUG DISCOVERY UNIT AND GLOBAL SCIENTIFIC NETWORK, ÆTERNA ZENTARIS PRODUCES A CONTINUAL FLOW OF INNOVATIVE COMPOUNDS THAT TREAT DISEASES WITH LOW
SURVIVAL RATES AND LIMITED THERAPEUTIC OPTIONS.                   
| |  | THE COMPANY ALSO HOLDS MAJORITY OWNERSHIP (61.1%) OF ATRIUM BIOTECHNOLOGIES,AN INTERNATIONAL DEVELOPER, MANUFACTURER AND MARKETER OF ADDED VALUE PRODUCTS FOR THE COSMETIC, CHEMICAL,
PHARMACEUTICAL AND NUTRITION INDUSTRIES.                        

OUR
NEW NAME Following the acquisition of German-based Zentaris GmbH in 2002, the Company changed its name from Æterna Laboratories Inc. to Æterna
Zentaris Inc. in May, 2004.

The
new name emphasizes the evolution of Æterna Zentaris into an international company with a global network of partners and a wide-ranging pipeline that extends from
preclinical compounds to proven and marketed products.

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GRAPHIC

A YEAR OF DEVELOPMENT AND GROWTH:In 2004, our long-term strategy for creating shareholder and stakeholder value achieved a
number of significant milestones. The year clearly demonstrated the established worth and steadily growing potential of our pipeline. In fact, the Company made important advances at every stage of the
process that characterizes success in the biopharmaceutical industry: in the laboratory, in clinical testing, in alliance-making, in acquisitions, and above all, in accessing the marketplace.

Today,
in many countries of the world, the products of Æterna Zentaris are treating patients. At the same time, with numerous other products under development to treat a diversity of
diseases and conditions, the Company is coming closer to the patient.

STRATEGIC VISION:As a result of the strategic plan implemented over the last three years, we have achieved our fundamental business goal
of offering compounds at all stages of clinical and preclinical development. Together with increasing revenues generated by our two already marketed products, Cetrotide® and
Impavido®, this strategy ensures both the short-term vitality and long-term value creation capability of the Company.

We
are one of the few companies in the biopharmaceutical sector that benefits from a multi-track line of scientific inquiry. In fact, Æterna Zentaris is now developing products through
five therapeutic approaches, aimed at treating multiple forms of cancer, hormonal disorders, and infectious disease. Moreover, as we pursue acquisitions, we are constantly evaluating potential
complements to our therapeutic approaches and products to increase the efficacy or broaden the application of our proprietary compounds.

Another
key element of the Æterna Zentaris strategy involves our network of alliances. By entering into partnerships with resourceful biotech and pharmaceutical companies, we have blazed a
path whereby the development costs of our compounds are largely borne by our partners, while we retain strategic rights compatible with our long-term vision.

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MOVING DRUGS THROUGH THE PIPELINE:

OUR MAIN R&D ACHIEVEMENT IN CLINICAL DEVELOPMENT FOR 2004 WAS THE SUCCESSFUL COMPLETION OF OUR SEVEN PHASE II TRIALS PROGRAM OF CETRORELIX FOR ENDOMETRIOSIS, UTERINE MYOMA, AND
BENIGN PROSTATE HYPERPLASIA (BPH).

Cetrorelix,
already marketed under the name Cetrotide® forin vitrofertilization, enjoys a high safety profile for versions going into
advanced clinical testing mainly in gynaecology. As we are approaching the final phase of development, our partner Solvay Pharmaceuticals will pursue further clinical trials of the drug for
endometriosis.

Our
other main R&D highlight for the year just ended, involved our lead oncology compound, perifosine, which targets multiple cancers. Phase I data on perifosine in combination with
radiotherapy pointed at notable efficacy and has paved the way for Keryx Biopharmaceuticals, our North American partner for this product, to commence Phase II trials against various cancers.
Encouraging data was also disclosed on a Keryx Phase II monotherapy trial for soft tissue sarcoma. As part of this ongoing clinical development program, we will also conduct our own
Phase II trials combining perifosine with radiotherapy. Our recent acquisition of Echelon Biosciences in Salt Lake City provides a complementary strategic fit for perifosine; the ensuing
synergy should enhance our understanding of the product's mechanism of action while pursuing development of other strategic signal transduction inhibitors like PI3K inhibitors. This acquisition is our
first in the U.S. and represents a significant step in establishing our presence in this most important market.

Other
compounds also progressed through the pipeline. With our partner Spectrum Pharmaceuticals, we have taken our promising compound for the treatment of hormone-dependent cancers and proliferative
disorders, D-63153, into Phase II clinical studies. With our partner Ardana Bioscience, we have taken teverelix, our compound for the treatment of prostate cancer and BPH, into
Phase II.

In
April, we initiated a Phase I trial with EP-1572, a novel, orally-administered compound which can directly stimulate growth hormone secretion from the pituitary gland. Potential
indications for this compound include treatment of growth hormone deficiency disorders in adults and children (short stature), frailty of the elderly, as well as metabolic complications associated
with critical illnesses, such as AIDS-associated cachexia, cancer, and trauma. We also advanced AN-152 into clinical development by initiating a Phase I trial for
patients with ovarian, endometrial or breast cancer. With this trial, all of our five therapeutic approaches have reached the clinical development stage.

These
milestones exemplify our ability to move compounds systematically through our pipeline, and thereby steadily build value for the Company and its shareholders.

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PROMISING PRECLINICAL ACTIVITY:In 2004, as part of our continuing strategy to strengthen our portfolio in oncology and endocrinology, we
obtained worldwide exclusive rights to pursue the development and marketing of another novel class of compounds from Dr. Andrew Schally and his group at Tulane University. These compounds
called growth hormone-releasing hormone (GH-RH) antagonists have potential as anti-cancer agents and endocrine disorder treatment.

The
most prominent preclinical advances in our pipeline involve our development of second generation versions of established compounds. With our partner Solvay, for example, we have begun
investigating the efficacy of luteinizing hormone releasing hormone (LHRH) antagonist peptidomimetics for the treatment of solid tumors and endocrine disorders. These new chemical entities are second
generation versions of our highly successful cetrorelix. Whereas cetrorelix is now injectable, we feel that this new development program should, in the years ahead, enable us to make it orally
bioavailable. Solvay is intent on maintaining and furthering its market leadership in this area. Impressed with both the track record of cetrorelix and the expertise of our laboratory, Solvay has
asked Æterna Zentaris to develop this more potent, more easily administered successor compound. Finally, we began investigating ghrelin antagonists which are emerging as promising novel
therapies targeting obesity, cancer, diabetes, and cardiovascular disease.

THE COMPANY'S NEW NAME:In May of 2004, we formally adopted our new name of Æterna Zentaris Inc. We believe that the
name more readily indicates our international stature. Moreover, given the results obtained with our compounds and the integrated nature of our operations from the discovery stage to the marketplace,
the name also underlines the suitability and precision of our Company's new motto:Committed to Cure.

SECURE FINANCIAL POSITION:

A WINNING COMBINATION ENCOMPASSING OUR BIOPHARMACEUTICAL SECTOR AND ATRIUM.

Over
the course of 2004, consolidated revenues reached $233 million and we registered a positive consolidated cash flow from our operations of close to $13 million. As of
December 31, 2004, our cash and short term position stood at nearly $58 million.

In
the biopharmaceutical sector, we managed to control our burn-rate with the support of our partners and with revenues generated by our marketed products.

Atrium
Biotechnologies, represents a strategic profitable subsidiary which, in the last few years, has generated substantial and constant increasing revenue. Atrium's continued growth in 2004
necessitated added executive talent and the implementation of a new two division structure to manage this growth and to allow for the nonstop broadening of the company's international expansion.

6Æterna
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GROWTH STRATEGY AND GOALS:

ÆTERNA ZENTARIS IS READY AND POISED TO EXPAND. DURING 2005, WE WILL DEVELOP ADDITIONAL COMPOUNDS WHILE ACTIVELY CONTINUING OUR GROWTH
STRATEGY THROUGH ACQUISITIONS. OUR ACQUISITION PROGRAM IS TARGETED MOSTLY AT ONCOLOGY COMPANIES. PURSUING SYNERGISTIC TECHNOLOGY THAT ENHANCES THE EFFICACY OF OUR COMPOUNDS WILL LEVER OUR ESTABLISHED
EXPERTISE AND AUGMENT THE VALUE OF OUR PROPRIETARY TECHNOLOGY.

As well, we plan to enter new alliances to develop treatments for endocrine disorders. In this field, we shall continue to implement our proven model of partnering, which
involves licensing our compounds to multinationals and receiving in return compensation on signature, milestone payments, and royalties on sales. However, as mentioned above, in relation to
a trial of perifosine that we are undertaking with our own resources, it is the company's intent, in the field of oncology, to begin developing anti-cancer agents with our own resources.

Therefore,
as part of our strategy of becoming a fully integrated biopharmaceutical company, we are preparing for the establishment of our own sales forces in Europe and North America for oncology and
anti-infectives. With our own sales force in place, we could reap greater return from the marketing of our products. While we continue to partner the products from our other platforms, the
initial focus of our sales team will be on the Company's commercially-attractive compounds in oncology.

A SOLID PRESENCE IN THE BIOPHARMACEUTICAL INDUSTRY:Soundness and strength in the biopharmaceutical environment are signified above all by
a diversified pipeline. We have achieved such a pipeline through dedicated and breakthrough work in the laboratory, and through judicious acquisitions and effective alliances. The result is a deeply
rooted company with sound risk management which enhances our appeal to investors and partners, and opens the door to a still greater flow of novel development projects.

We
would like to take this opportunity to thank all the employees and stakeholders of Æterna Zentaris for their commitment and confidence. Together, we can look forward to many more
exciting milestones of achievement and reward.

|                                        |  |                                       
|--------------------------------------- |  | --------------------------------------
|SIG                                     |  | SIG                                   
|Gilles Gagnon, MSc, MBA President & CEO |  | Éric Dupont, PhD Chairman of the Board

Æterna ZentarisAnnual Report
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THE AETERNA ZENTARIS PRODUCT PIPELINE:

Five therapeutic approaches:

AT ÆTERNA ZENTARIS,BASIC RESEARCH AND DRUG DEVELOPMENT DONE EITHER IN ITS OWN LABORATORIES OR THROUGH COLLABORATIONS WITH SCIENTIFIC
PARTNERS, RELY ON THE FOLLOWING FIVE THERAPEUTIC APPROACHES:

1. LHRH Antagonists    2. Signal Transduction Inhibitors    3. Cytotoxic Conjugates and Cytotoxics
4. Tubulin Inhibitors/Vascular Targeting Agents    5. Growth Hormone Modulators

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Two Value Drivers

ROOTED IN ESTABLISHED
SCIENCE,LOOKING AHEAD WITH RESOLUTION, WE HAVE SET OUR SIGHT
ON A NUMBER OF BREAKTHROUGH THERAPEUTICS.

1. LHRH Antagonists    2. Signal Transduction Inhibitors

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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.LHRH ANTAGONISTS:PRODUCTS THAT TARGET ENDOCRINE DISEASE AND MULTIPLE FORMS OF HORMONE DEPENDENT CANCER In Clinical Development CETRORELIXDuring the past year, we successfully completed a seven Phase II trial program of our multi-indicated compound in endocrine therapy, cetrorelix. Three trials
were in endometriosis, three in benign prostate hyperplasia (BPH), and one in uterine myoma. The results from all the studies were positive, with the most statistically significant data obtained from trials in endometriosis and BPH. If not treated,
BPH can develop in some cases, into prostate cancer. Our partner, Solvay Pharmaceuticals, encouraged by the results and confident of further success, has made a payment to Æterna Zentaris of four million euros to signal its ongoing
participation. Cetrorelix is already marketed forin vitrofertilization under the brand-name Cetrotide®. D-63153This fourth generation compound for the treatment of hormone- dependent cancers and proliferative disorders is now in Phase II for prostate cancer. Rights
for North America and India have been licensed to Spectrum Pharmaceuticals for all indications. Æterna Zentaris received a cash and equity payment on signature, will receive payments as development and regulatory milestones are reached, and
will receive royalties on potential sales. The Company has retained this compound's marketing rights for the rest of the world. TEVERELIXWorldwide intellectual property rights to this compound currently in Phase II trials for the treatment of prostate cancer and BPH have been assigned to Ardana
Bioscience of Scotland. Æterna Zentaris received a substantial upfront payment, will receive fixed annual guaranteed payments in 2005 and 2006, and will receive royalty income from potential sales. |  | GRAPHICCETROTIDE® (CETRORELIX)
Cetrotide® was the first luteinizing hormone-releasing hormone (LHRH) antagonist treatment approved forin vitrofertilization. It is administered to women to prevent premature
ovulation in order to increase fertility success rate. Infertility problems are found in 15% of couples in developed countries. Cetrotide® is the only treatment in its class to offer a choice of two highly effective dosage strengths which enable
precise control. Due to its immediate onset of action, Cetrotide® permits a simplified, more convenient, and shorter treatment. It involves fewer injections and causes less side-effects than other forms ofin vitrofertilization treatment.

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12Æterna
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|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.SIGNAL TRANSDUCTION INHIBITORS:BREAKING NEW GROUND IN TARGETED TUMOR THERAPY BY DEALING WITH CANCER AT THE MOLECULAR LEVEL WITH NON-TOXIC
TREATMENTS In Clinical Development PERIFOSINEEncouraging results of a Phase I study of perifosine in combination with radiotherapy were disclosed at the ASCO conference in June. In addition to the
responses, one major benefit was that perifosine did not induce any suppression of the bone marrow. These results pave the way for Æterna Zentaris to start its own trials of perifosine in combination with radiotherapy at the National Cancer
Institute in the Netherlands.
The conclusions of a Phase II clinical trial conducted in partnership with Keryx Biopharmaceuticals and involving perifosine given as a single agent, showed evidence of anti-tumour activity in patients suffering from soft tissue sarcoma. Keryx
is currently conducting other Phase II trials in monotherapy with perifosine for multiple types of cancer. MILTEFOSINE (IMPAVIDO®)Miltefosine has successfully completed a Phase III trial targeting the cutaneous form of leishmaniasis (a parasitic skin disease), and is
on track to obtain regulatory approval in South America. It is currently marketed in India for the visceral form of leishmaniasis (black fever) under the brand-name Impavido®. GRAPHIC    THERE ARE 2.4 MILLION NEW CASES ANNUALLY IN
             PROSTATE, BREAST, HEAD AND NECK, AND
             PANCREATIC CANCER, AS WELL AS SARCOMA
             AND MELANOMA
            THERE ARE 12 MILLION PEOPLE SUFFERING FROM
             LEISHMANIASIS WORLDWIDE WITH 1.5 MILLION
             NEW CASES REPORTED ANNUALLY |  | GRAPHICIMPAVIDO® (MILTEFOSINE)
Impavido® is the first marketed oral therapy for visceral leishmaniasis, a parasitic infection, also known as black fever. According to the World Health Organization, the disease is endemic in 88 countries with nearly 350 million people
at risk. An estimated 12 million people currently suffer from the condition with 1 million to 1.5 million new cases reported annually. Leishmaniasis is a very virulent tropical disease, second only to malaria. If untreated, the
visceral form will be lethal. The cure rate of Impavido® is 95%, and has been proven less toxic than current therapies. Additionally, since the current injectable therapies require patient, hospitalization, an oral drug such as Impavido®,
which can be administered once daily for 28 days, clearly represents a more convenient treatment for patients as well as an important means for incurring substantial savings in healthcare costs. Impavido® has been marketed in India since 2003 through cooperation with German Remedies. In November of 2004, Æterna Zentaris obtained marketing approval for Impavido® in Germany from the German Food and
Drug Agency (BfarM). This approval also enables Æterna Zentaris to receive a Free Sales Certificate (FSC), which can provide the basis for registration in countries where leishmaniasis is endemic, such as Colombia and
Pakistan.

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Atrium: 2004 sales
exceeded $177 million.

2004 AND SUBSEQUENT TO YEAR-END HIGHLIGHTS

ACQUISITIONof Pure Encapsulations of Sudbury, Massachusetts, which develops, manufactures and markets high quality finished products in
health and nutrition for healthcare professionals, a growing specialized sector generating annual sales of over US$1 billion in the United States alone

ACQUISITIONof MultiChem, a privately-held Canadian company that markets active ingredients and specialty chemicals

LAUNCHINGof 20 new products

SIGNINGof 5 new marketing partnerships

RECIPIENTof the 50 Best Managed Corporations Award as a leading Canadian corporation for a third consecutive year

RECIPIENTof the Profit 100 Award for a third consecutive year. The Award recognizes Canadian companies registering the best growth
in the last five years

CONTINUED GROWTH

SINCE ITS CREATION IN 2000, ATRIUM HAS DEMONSTRATED ITS ABILITY TO CONSTANTLY OUTPERFORM THE INDUSTRY. IN THAT SHORT TIME SPAN, SALES HAVE SOARED FROM
$8 MILLION TO $177 MILLION, A COMPOUNDED ANNUAL INCREASE OF 117%, WHILE ITS EARNINGS FROM OPERATIONS HAVE A COMPOUNDED ANNUAL INCREASE OF 59%, FROM $4.1 MILLION TO $26.1 MILLION.

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Atrium

ATRIUM BIOTECHNOLOGIES IS A LEADING DEVELOPER, MANUFACTURER AND MARKETER OF VALUE-ADDED PRODUCTS FOR THE COSMETICS, PHARMACEUTICAL,
CHEMICAL AND NUTRITION INDUSTRIES. ATRIUM FOCUSES PRIMARILY ON GROWING SEGMENTS OF THE HEALTH AND PERSONAL CARE MARKETS WHICH ARE BENEFITING FROM THE TRENDS TOWARDS HEALTHY LIVING AND THE AGEING OF
THE POPULATION.

ATRIUM MARKETS A BROAD PORTFOLIO OF ACTIVE INGREDIENTS AND SPECIALTY CHEMICALS, AS WELL AS HEALTH AND NUTRITION FINISHED PRODUCTS THROUGH ITS HIGHLY
SPECIALIZED SALES AND MARKETING NETWORK IN MORE THAN 35 COUNTRIES, PRIMARILY IN NORTH AMERICA, EUROPE AND ASIA.

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MESSAGE FROM THE PRESIDENT

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At
Atrium, 2004 has been a year of sustained growth and development. Compared to last year, our sales increased by 47% to $177 million, we launched 20 new products, signed 5 new
commercial partnerships and pursued our acquisition program.

As
a matter of fact, our main achievement of 2004 was the acquisition of Boston-based Pure Encapsulations which develops, manufactures and markets high quality finished products in health and
nutrition sold to an important network of healthcare professionals in the United States. This acquisition allowed us to substantially increase our line of products and sales in this most
strategic market. In January 2005, we also acquired MultiChem, a Canadian marketer of active ingredients and specialty chemicals. These two acquisitions were part of our 2004 strategy to better
control access to the North American market as we had done in Europe a year earlier.

In
order to adequately manage the sustained growth of the past few years and to meet the upcoming challenges, we hired seasoned executives with complementary and new expertise to complete our
management team. With the same due regard for sound management and efficiency, we created two distinct divisions for our company activities: the Active Ingredients & Specialty Chemicals
Division and the Health & Nutrition Division. The changes in both structure and personnel will allow us to generate added company growth. Finally, we judiciously used our financial leverages in
order to pursue our growth plan throughout 2004.

The
key to our sustained success lies within our six distinctive core strengths. First, we offer value-added products addressing specific needs in high-growth niche markets such as the
health and personal care industry which is predicted to grow at a double-digit pace in the foreseeable future. We also benefit from long-standing and privileged relationships with industry
leaders. This situation, coupled with our broad product portfolio and state-of-the-art logistics system, puts us in a position to become a preferred supplier of a
growing number of products to our customers.



Fourth, we have a strong financial track record of delivering highly profitable growth generated at the organic level as well as through acquisitions. In just five years,
revenue has increased from $8 million to over $177 million while earnings from operations progressed from $4.1 million to $26.1 million. Moreover, the seven acquisitions we
made over the last five years are relevant examples of our proven acquisition and integration strategy in a highly fragmented marketplace. Once acquired, these products and/or companies are carefully
integrated into our organization by a multidisciplinary team in collaboration with the local staff to build on their strengths. Last, we can count on an experienced and committed management team that
possesses extensive development, finance, manufacturing and international marketing experience in each of our sectors of activity.

We
are convinced that with all of these elements in place, we will be in a position to achieve our 2005 growth strategy goals with the focus on three key elements: make additional acquisitions in
Europe and North America in order to better control access to these markets; complete our geographical coverage by mainly targeting Asia; and introduce new products either from our own
biotechnological platform or through acquisitions. Attaining these objectives would enable us to increase our presence in our strategic markets and, therefore, strengthen our position as a leader in
our activity sectors.

In
closing, I would like to thank all our employees for the determined work and dynamism they displayed throughout the year.

SIG

Luc
Dupont, President and CEO

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Company Structure
and Product Pipeline

IN LATE 2004, IN ORDER TO MAXIMIZE THE COMPANY'S INTERNATIONAL EXPANSION, ATRIUM DECIDED TO STRUCTURE THE COMPANY INTO TWO DIVISIONS:

 Active Ingredients & Specialty Chemicals     Health & Nutrition

GRAPHIC

YVAN SERGERIE, Vice President International, Sales and Marketing, Health and Nutrition Division /RICHARD
BORDELEAU, President, Health & Nutrition Division /CHARLES BOULANGER, President, Active Ingredients and Specialty
Chemicals Division/SERGE YELLE, PhD, Vice President, Business Development /MANON DESLAURIERS, Vice
President, Legal and Corporate Affairs, and Secretary /JOCELYN HARVEY, CA, Vice President, Mergers and Acquisitions /JOHN
DEMPSEY, Vice President, Finance and Chief Financial Officer

ACTIVE INGREDIENTS AND SPECIALTY CHEMICALS DIVISIONThis division develops, manufactures and markets over 1,500 value-added active
ingredients and specialty chemicals for the cosmetic, pharmaceutical, nutrition and chemical sectors, while also providing scientific, technical and regulatory support to some 2,000 customers
including leading companies such as Aventis-Sanofi-Synthélabo, Estée Lauder, l'Oréal and Nestlé. Our portfolio includes
additives, preservatives, excipients, specialty lipids, polymers and antioxidants geared to a market that yields above average growth annually.

HEALTH AND NUTRITION DIVISIONThis division focuses on the development, manufacturing and marketing of more than 350 high quality
vitamins, minerals, specialized nutrition and health products to a network of some 30,000 healthcare professionals in the United States. According to Nutrition Business Journal, between
2000 and 2003, this market segment in the United States had an annual growth rate of more than 10%. In addition to the strong growth associated with trends towards healthy living and ageing of
the population, we will also capitalize on the increasing awareness from governmental authorities of the economic benefits linked to a healthier society.

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Æterna Zentaris:

AN INVESTMENT OPPORTUNITY

BRANCHING OUT, GROWING WITH A DETERMINED VISION, ÆTERNA ZENTARIS STANDS ENTRENCHED AND TALL ON THE CANADIAN BIOPHARMACEUTICAL STAGE.

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LOGO

Financial
Report 2004

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Management's Discussion and Analysis of Financial Condition and Results of Operations

The following analysis provides a review of Company's results of operations, financial condition and cash flows for the three-year
period ended December 31, 2004. This discussion should be read in conjunction with the information contained in Æterna Zentaris Inc.'s annual consolidated financial
statements and related notes for the years ended on December 31, 2004, 2003 and 2002. Our consolidated financial statements are reported in Canadian dollars and have been prepared in accordance
with generally accepted accounting principles in Canada, or Canadian GAAP. Significant differences in measurement and disclosure from generally accepted accounting principles in the
United States, or U.S. GAAP, are set out in note 24 of our consolidated financial statements.

COMPANY OVERVIEW

Æterna Zentaris Inc. ("Æterna Zentaris" or "the Company"), formerly Æterna Laboratories Inc., is an oncology and
endocrine therapy focused biopharmaceutical company with proven expertise in drug discovery, development and marketing. The Company's broad 20 product pipeline leverages five different
therapeutic approaches, including Luteinizing Hormone Releasing Hormone (LHRH) antagonists and signal transduction inhibitors. The lead LHRH antagonist compound, cetrorelix, is currently marketed for in vitrofertilization under the brand name Cetrotide®, and has successfully completed a broad Phase II program in
endometriosis and benign prostatic hyperplasia (BPH). The lead signal transduction inhibitor compound, perifosine, is an orally-active AKT inhibitor that is in several Phase II trials for
multiple cancers.

Æterna
Zentaris also owns 61.1% of its subsidiary Atrium Biotechnologie Inc. ("Atrium"), a leading developer, manufacturer and marketer of value-added products for the
cosmetics, pharmaceutical, chemical and nutrition industries focused primarily on growing segments of the health and personal care markets which are benefiting from the trends towards healthy living
and the aging of the population. Atrium markets a broad portfolio of active ingredients, specialty chemicals and Health & Nutrition finished products through a highly specialized sales and
marketing network in more than 35 countries, primarily in North America, Europe and Asia. As of February 17, 2005, Atrium filed a preliminary prospectus in each of the provinces of
Canada in connection with an initial public offering of subordinate voting shares. The proceeds from the treasury offering will be used by Atrium primarily to pursue its acquisition strategy and for
general corporate purposes.

The
Company operates in three segments of operations which are: (i) Biopharmaceutical; (ii) Active Ingredients & Specialty Chemicals; and (iii) Health and
Nutrition.

Æterna
Zentaris, along with its wholly-owned subsidiary Zentaris GmbH, constitute the Biopharmaceutical segment. In addition, subsequent to the year 2004, the Company
added to its Biopharmaceutical segment Echelon Biosciences Inc. ("Echelon") by acquiring all of its issued and outstanding shares.

To
better address the needs of its customers, our subsidiary, Atrium, reorganized its business during the year under two business segments: (i) the Active Ingredients &
Specialty Chemicals Division; and (ii) the Health & Nutrition Division. The Active Ingredients & Specialty Chemicals Division offers value-added products that include
high-value proprietary active ingredients developed, acquired or in-licensed by Atrium. Through the Health & Nutrition Division, Atrium develops, manufactures and
markets proprietary Health & Nutrition finished products.

Æterna
Zentaris' growth strategy is based on improving and leveraging its extensive product portfolio and being active in in-licensing and acquisition of
strategic compounds. Its long-term growth strategy includes the establishment of a sales force to become an integrated biopharmaceutical company. The Company also intends to remain a
strategic shareholder of Atrium and to support its business growth.

Æterna ZentarisFinancial
Statements 2004

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HIGHLIGHTS

Consolidated results-at-a-glance

|                                   |  | Years ended December 31, |  
|---------------------------------- |  | ------------------------ | -
|
|Revenues                           |  | 233,248                  |  
|R&D, net of tax credits and grants |  | 30,367                   |  
|Earnings (loss) from operations    |  | 17,170                   |  
|Net loss                           |  | (5,759                   | )

In
theBiopharmaceutical segment, our strategic objectives for 2004 were mainly focused on maximizing marketed compound revenues, signing
new licensing and collaboration agreements, introducing new products in our portfolio and on obtaining timely results from our clinical studies. The following summarizes major milestones for each
strategic objective.

Maximizing marketed compound revenues

We announced in December that we received German Food and Drug Agency (BfarM) market approval for miltefosine (Impavido®), the first-ever
orally-administered therapy for visceral and cutaneous leishmaniasis, a parasitic disease estimated to affect millions of people worldwide. The approval enabled us to market Impavido® in
Germany, as well as to receive a Free Sales Certificate (FSC), which can provide the basis for registration in countries where leishmaniasis is endemic, such as Colombia and Pakistan.

Impavido®,
or miltefosine, is an alkylphospholipid that has been marketed in India since 2003 through cooperation with German Remedies (a member of Zydus Cadila).
Visceral and cutaneous leishmaniasis is a parasitic infection also known as black fever which affects millions of people and is, according to the World Health Organization ("WHO"), endemic in
88 countries in the world with nearly 350 million people at risk. It is estimated that 12 million people currently suffer from this disease with
1 million-1.5 million new cases reported annually. Leishmaniasis is a very virulent tropical disease, second only to malaria.

We
obtained significant revenues from Serono our world (ex-Japan) partner for the marketing of Cetrotide®, or cetrorelix, for in vitrofertilization. We believe that cetrorelix will be subject to
further clinical development in benign indications with the collaboration
of Solvay Pharmaceuticals B.V. ("Solvay"), Nippon Kayaku and Shionogi. These indications include endometriosis which affects 10% to 20% of women of child-bearing age, representing a market
estimated at more than US$800 million a year, as well as BPH which affects approximately 33 million men and which represents a market of more than US$1.7 billion.

Licensing and collaboration agreements

We entered into an expanded agreement on April 2, 2004 for the LHRH antagonist, teverelix, with Ardana Bioscience, a specialty pharmaceutical company
located in Edinburgh, Scotland. Ardana acquired full worldwide rights to the teverelix compound and the underlying microcrystalline suspension technology, including all related intellectual property.
In return, we received upfront payments and are eligible to guaranteed payments both totalling €12 million until 2006, as well as potential future royalties on sales of
teverelix or any other LHRH antagonist that could be combined with the microcrystalline suspension technology.

On
August 12, 2004, we entered into a licensing and collaboration agreement for D-63153 with Spectrum Pharmaceuticals, Inc. ("Spectrum") (NASDAQ: SPPI),
an oncology-focused pharmaceutical company based in the United States. This product is a LHRH antagonist that has the potential to treat hormone-dependent cancers as well as benign,
proliferative disorders. The agreement came as we regained worldwide rights to D-63153 from Baxter Healthcare as a result of recent organizational changes and restructuring at
Baxter's, and following a mutual understanding between the two companies aimed at maximizing the value of D-63153.

Æterna ZentarisFinancial Statements
20041

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In
return of the grant of this exclusive license to develop and commercialize D-63153 for all potential indications in North America (including Canada and Mexico) and
India, we received an upfront payment, at signature, which included cash and equity of Spectrum. We are also eligible to receive payments upon achievement of certain development and regulatory
milestones, in addition to royalties on potential net sales. We retained exclusive rights for the rest of the world and will share with Spectrum upfront and milestone payments, royalties or profits
from potential sales in Japan.

Introducing new products in the portfolio

In January 2004, we announced that we entered into an extensive collaboration agreement with Solvay to codevelop novel, low molecular weight and
orally-bioavailable peptidomimetic LHRH antagonists. Potential indications include endometriosis, BPH, as well as malignant disorders such as breast and prostate cancer.

As
part of the agreement, Solvay obtained exclusive worldwide rights to all gynecological indications as well as to BPH, and we retained exclusive rights to all other indications
including oncology. The contract also provides us to receive, upon signature, an amount of $5 million resulting from an upfront payment, as well as proceeds from the coverage of past
development costs. In addition, the agreement foresees for Solvay to fund further preclinical and clinical development activities to be performed by us, up to a fixed amount and to make milestone
payments.

Following
our ongoing interest in the area of LHRH antagonists, a drug discovery project aiming at the identification of peptidomimetic leads was initiated a few years ago. Such leads
are expected to act on the LHRH receptor similar to decapeptides, however, with the crucial benefit of oral bioavailability. Having achieved proof-of-principle regarding oral
bioavailability, we expect to have a preclinical development candidate available in the course of this year.

Subsequent
to the year 2004, we completed in January 2005 the acquisition of all issued and outstanding shares of Echelon, a privately-held biopharmaceutical company
based in Salt Lake City, Utah, USA.

Echelon's
product pipeline is focused on the rapidly emerging field of transduction signalling technology. It has early therapeutic leads (mostly direct PI3K inhibitors) against some
forms of cancer and is in a position to deliver new highlyeffective oncology therapeutics. The focus is also on small molecule agonists and antagonists to lipid-protein signalling interactions which
are new and important therapeutic targets.

Obtaining timely clinical trial results

We announced statistically significant positive results from a completed Phase II clinical program designed to evaluate cetrorelix, a LHRH antagonist, in
three different indications: endometriosis, presurgical treatment of uterine myoma and BPH. These results showed that patients can benefit from a targeted and controlled decrease in sex hormones,
including estrogen and testosterone. The positive results of seven Phase II trials, which also demonstrated good tolerability in all these indications, will form the basis for further
development of cetrorelix with Solvay, our exclusive worldwide partner (ex-Japan) and with Shionogi and Nippon Kayaku, our corresponding partners in Japan. This major achievement generated
€4 million in milestone payments from Solvay.

Furthermore,
we announced in June that our product, perifosine, an orally-active AKT inhibitor for the treatment of cancer, showed encouraging results in a Phase I trial in
combination with radiotherapy. We also mentioned our intention to initiate a clinical program for perifosine through the ongoing collaboration with the Netherlands Cancer Institute of Amsterdam. In
collaboration with the US NCI and as part of a large screening program in Phase I and II, our North American partner, Keryx Biopharmaceuticals ("Keryx") (NASDAQ: KERX), located in the
United States, identified encouraging signs of anti-tumor activities and initiated several single-agent and combination studies testing perifosine as a treatment for various forms
of cancer.

In
theHealth & Nutrition segment, the integration of acquired Pure Encapsulations, Inc. ("Pure") in March 2004 is
now completed. Pure is a company based in Sudbury, Massachusetts, in the United States, which focuses mainly on the development, manufacturing and marketing of nutritional supplements geared
toward physicians and other healthcare professionals. Pure acquisition complements Atrium's actual products in this segment. This acquisition, combined with Atrium's internal growth has enabled our
subsidiary to increase its earnings from operations in this segment by 188.1% to $12.1 million for 2004 in comparison with $4.2 million in 2003.

2Æterna
ZentarisFinancial Statements 2004

---



In
theActive Ingredients & Specialty Chemicals segment, we continued to improve our earnings from operations in this competitive
segment from $10.2 million in 2003 to $14.0 million in 2004. We also announced in January 2005 the closing of the acquisition of the operating assets of MultiChem Import
Export Inc. and MultiChem Trading Inc. ("MultiChem") for a total amount of $22.8 million. Founded in 1985, MultiChem is a privately-held Canadian company specialized
in the marketing of Active Ingredients & Specialty Chemicals. It has a portfolio of over 400 products sold to more than 500 customers in Canada and the North Eastern
United States through its offices in Montreal and Toronto. For the twelve-month period ended November 30, 2004, MultiChem sales exceeded $65 million. The MultiChem acquisition
allows us to significantly increase our presence on the North American market.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with the Canadian Generally Accepted Accounting Principles ("GAAP"), and access to a summary of differences
between Canadian and US GAAP is possible by consulting note 24 of our annual 2004 financial statements. These accounting principles require that management makes estimates that could have an
impact on assets and liabilities in the financial statements. Actual results could differ from these estimates. The significant accounting policies which the Company believes are the most critical to
aid in fully understanding and evaluating its reported financial results include the following:

Revenue recognition and deferred revenues

The biopharmaceutical segment is currently in a phase in which potential products are being further developed or marketed jointly with strategic partners. The
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.

In
December 2003, the CICA Emerging Issues Committee (EIC) issued Abstracts No. 141 "Revenue Recognition" and No. 142 "Revenue Arrangements with Multiple
Deliverables". The latter is based on Issue No. 00-21 entitled "Revenue Arrangements with Multiple Deliverables" issued in May 2003 by the Emerging Issues Task Force of the
Financial Accounting Standards Board ("FASB") in the United States. EIC's 141 and 142 provide clarification guidelines for determining when and how revenue from the sale of goods and
services must be recognized. The Company prospectively adopted these guidelines for contracts signed after January 1, 2004 and consequently revenues associated with multiple-element
arrangements are attributed to the various elements based on their relative fair value.



Research and development costs

All research and development ("R&D") costs which do not meet generally accepted criteria for deferral are expensed as incurred. Development costs which meet
generally accepted criteria for deferral are capitalized and amortized against earnings over the estimated period of benefit. To date, no costs have been deferred.

Æterna ZentarisFinancial Statements
20043

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Impairment of long-lived assets and goodwill

Property, plant and equipment and intangible assets with finite lives are reviewed for impairment annually or when events or circumstances indicate that costs 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. Finite-lived assets are written down for any impairment in value of the unamortized portion. As at December 31, 2004, there were no
events or circumstances indicating that the carrying value may not be recoverable.

Intangible
assets with indefinite lives are tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired. Impairment exists when
the carrying amount of the intangible asset exceeds its fair value.

Finally,
goodwill is tested annually, or more frequently if impairment indicators arise, for impairment in relation to the fair value of each reporting unit to which goodwill applies and
the value of other assets in that reporting unit. An impairment charge is recorded for any goodwill that is considered impaired.

Accounting for income tax expense

We operate in multiple jurisdictions, and our earnings are taxed pursuant to the tax laws of these jurisdictions. Our effective tax rate may be affected by the
changes in, or interpretations of, tax laws in any given jurisdiction, utilization of net operating losses and tax credit carry forwards, changes in geographical mix of income and expense, and changes
in management's assessment of matters, such as the ability to realize future tax assets. As a result of these considerations, we must estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating our actual current tax exposure, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.
These differences result in future tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our future tax assets will be recovered
from future taxable income and establish a valuation allowance for any amounts we believe it will be more likely than not be recoverable. Establishing or increasing a valuation allowance increases our
income tax expense.

Significant
management judgment is required in determining our provision for income taxes, our income tax assets and liabilities, and any valuation allowance recorded against our net
income tax assets. We recorded a valuation allowance as at December 31, 2004, due to uncertainties related to our ability to utilize some of our income tax assets. The valuation allowance was
based on our estimates of taxable income by jurisdiction in which we 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 these estimates in future periods, we may need to amend our valuation allowance, which could materially impact our financial position and results of operations.

Stock-based compensation plans

On January 1, 2002, Æterna Zentaris adopted the recommendations issued by the CICA and, at that time, we had chosen not to use the fair value
method to account for the stock-based compensation costs arising from awards to employees. The fair value method was only used for stock-based payments made in exchange for goods and services with non
employees. Effective January 1, 2003, we decided to adopt the fair value method on a prospective basis, as permitted under the amendments made to the recommendations during 2003. According to
this method, all stock-based compensations granted during 2003 and beyond will be recorded in the corresponding period without restatement of prior years. However, Æterna Zentaris is still
required to provide pro forma disclosures relating to net loss and net loss per share as if stock-based compensation costs had been recognized in the financial statements using the fair value
method for options granted to employees in 2002.

The
following points detail the changes in critical accounting policies that have occurred since our most recent annual report:

Generally accepted accounting principles

In July 2003, the CICA issued new Handbook Section 1100 "Generally Accepted Accounting Principles" ("GAAP"), which is effective for fiscal years
beginning on or after October 1, 2003. This new section defines GAAP, establishes the relative authority of various types of CICA Accounting Standards Board pronouncements, says what to do when
the Handbook does not cover a particular situation and clarifies the role of "industry practice" in setting GAAP. The Company adopted this new standard on January 1, 2004 without having any
significant effect on the Company's financial statements.

4Æterna
ZentarisFinancial Statements 2004

---



General standards of financial statement presentation

In
July 2003, the CICA issued new Handbook Section 1400 "General Standards of Financial Statement Presentation" which is effective for fiscal years beginning on or after
October 1, 2003. This new section confirms that the financial statements of an entity must present fairly in accordance with Canadian Generally Accepted Accounting Principles its financial
position, results of operations and cash flows. The Company adopted this new standard on January 1, 2004 without having any significant impact on the Company's financial statements.

Hedging relationships

The
CICA has issued Accounting Guideline 13 "Hedging Relationships", which establishes certain conditions regarding when hedge accounting may be applied and which is effective for fiscal years
beginning on or after January 1, 2004. AcG 13 addresses the identification, designation, documentation, and effectiveness of hedging transactions for the purposes of applying hedge
accounting. It also establishes conditions for applying or discontinuing hedge accounting. Under this new guideline, the Company is also required to document its hedging transactions and explicitly
demonstrate that the hedges are sufficiently effective in order to continue hedge accounting for positions hedged with derivatives. Any derivative instrument that does not qualify for hedge accounting
will be reported on a mark-to-market basis in earnings. The Company adopted this guideline as at January 1, 2004 without having any significant impact on the Company's
financial statements.

CONSOLIDATED RESULTS OF OPERATIONS

The
following table sets forth certain Canadian GAAP consolidated financial data in thousands of Canadian dollars, except per share data.

|                                           |  | Years ended December 31, |  
|------------------------------------------ |  | ------------------------ | -
|
|Revenues                                   |  | 233,248                  |  
|                                           |  |                          |  
|Operating expenses                         |  |                          |  
|Cost of sales                              |  | 134,535                  |  
|Selling, general and administrative        |  | 42,198                   |  
|R&D, net of tax credit and grants          |  | 30,367                   |  
|Depreciation and amortization              |  | 8,978                    |  
|                                           |  |                          |  
|                                           |  | 216,078                  |  
|                                           |  |                          |  
|Earnings (loss) from operations            |  | 17,170                   |  
|Interest income                            |  | 1,359                    |  
|Interest and financial expenses            |  | (8,168                   | )
|Foreign exchange loss                      |  | (920                     | )
|                                           |  |                          |  
|Earnings (loss) before income taxes        |  | 9,441                    |  
|Income tax expense                         |  | (8,285                   | )
|                                           |  |                          |  
|Earnings (loss) before the following items |  | 1,156                    |  
|Gain (loss) on dilution of investments     |  | (631                     | )
|Non-controlling interest                   |  | (6,284                   | )
|                                           |  |                          |  
|Net loss for the year                      |  | (5,759                   | )
|                                           |  |                          |  
|Basic and diluted net loss per share       |  | (0.13                    | )
|                                           |  |                          |  
|Consolidated balance sheets data           |  |                          |  
|                                           |  |                          |  
|Total assets                               |  | 349,228                  |  
|                                           |  |                          |  
|Long-term liabilities                      |  | 156,671                  |  
|                                           |  |                          |  

Æterna ZentarisFinancial Statements
20045

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Revenues

Revenues for 2004 were $233.2 million compared to $166.4 million for 2003 and $101.2 million for 2002. The increases from year over year come
mainly from the acquisitions of Zentaris in 2002, Interchemical and Chimiray in 2003 and from the acquisition of Pure in 2004 as well as the internal growth. We expect continued growth in revenue for
2005 as we acquired all the assets of MultiChem and all outstanding shares of Echelon in January 2005.

Operating expenses

Cost of salesfor 2004 was $134.5 million, an increase of $36.5 million compared to
$98 million for 2003. The cost of sales for 2002 was $77.4 million. The increase in cost of sales is directly related to the sales increase generated by the acquisitions made in late
2002, as well as in 2003 and 2004. The acquisitions of MultiChem assets and Echelon in January 2005 and having a full year of operating results of Pure, acquired in March 2004, should
increase our cost of sales for 2005.

Selling, general and administrative (SG&A) expensesfor the year ended December 31, 2004 were $42.2 million, an increase of
$13.1 million compared to $29.1 million for the same period in 2003. For the year ended December 31, 2002, SG&A expenses were $17.8 million. The increase in SG&A expenses
over the years is primarily due to business acquisitions. In addition, the increase in 2004 is also due to increased in stock-based compensation costs and insurance costs as well as to
non-recurring expenses related to the Company name change. We expect SG&A expenses to continue to increase since we already acquired MultiChem and Echelon at the beginning of 2005 and we
intend to pursue our business acquisition program during the year.

R&D expenses, net of tax credits and grants (R&D)for the year ended December 31, 2004 were $30.4 million, a decrease of
$13.7 million compared to $44.1 million for the same period in 2003, reflecting the realignment of the clinical development program initiated in December 2003, including the focus
on R&D with respect to perifosine, cetrorelix and earlier stage products. For the year ended December 31, 2002, R&D expenses were $24.1 million. The increase between 2002 and 2003 is due
to the acquisition of Zentaris in late December 2002. We expect R&D expenses to increase in 2005, due to the recent acquisition of Echelon, the emphasis on clinical development of existing
products, in particular perifosine, as well as on certain product candidates at preclinical stage.

Depreciation and amortization (D&A) expensefor 2004 was $9.0 million, a decrease of $0.4 million compared to
$9.4 million for 2003. For the year ended December 31, 2002, D&A expense was $2.4 million. The increase in D&A expense between 2002 and 2003 is mainly attributable to amortization
of intangible assets arising from the acquisition of Zentaris in late 2002.

Earnings from operationsfor 2004 were $17.2 million, an increase of $31.5 million compared to an operating loss of
$14.3 million for 2003. Loss from operations was $20.6 million in 2002. The increase in earnings from operations in 2004 is principally due to income generated by
non-recurrent milestone payments related to cetrorelix Phase II positive results, the realignment of the clinical development program initiated in December 2003 as well as by
Atrium's earnings from operations generated by the acquisition of Pure in March 2004 combined with the achieved internal growth. The decrease in loss from operations between 2002 and 2003 was
mostly due to the income generated by the subsidiary Atrium and the acquisition of Zentaris in late December 2002. The acquisition of MultiChem assets in January 2005 by Atrium combined
with a full year of operating results of Pure, acquired in March 2004, should increase our earnings from operations for 2005 and this increase is expected to be offset by the increased R&D
expenses combined with lower amounts of revenue from non-recurrent milestone payments expected in 2005.

Interest incomefor 2004, 2003 and 2002 were respectively $1.4 million, $2.1 million and $3.1 million. The decrease
in interest income is principally due to decrease in interest yield offered on investment, as well as the use of our liquidity for business acquisitions over the years.

6Æterna
ZentarisFinancial Statements 2004

---



Interest expensefor 2004 was $8.2 million in comparison to $4.8 million in 2003 and $0.5 million in 2002. The
year-over-year increase is mainly due to the expense related to the convertible term loans that were issued at the end of the first quarter of 2003 and to the increased debt level
resulting from the acquisition of Pure in 2004. In addition, the Company elected during the second quarter of 2004, as permitted under the convertible term loan agreements, to add to the principal
amount all corresponding unpaid accrued interest as of March 31, 2004 of a total amount of $3.0 million. In connection with the Pure acquisition, we also increased our
long-term debt by $40 million. Because of the capitalization of unpaid accrued interest and since the debt portion of the convertible term loans are accounted for as discounted
loans and are increasing in accretion, we expect financial expenses to continue to increase in 2005.

Foreign exchange lossesfor 2004 were $0.9 million in comparison to $1.6 million in 2003 and $0.2 million in 2002. The variations
are attributable to the impact of the strengthening Canadian dollar and Euro on our working capital denominated in US dollars.

Income tax expensefor 2004 was $8.3 million in comparison to $5.9 million for the same period last year and $4.4 million in 2002.
The year-over-year increase is directly related to increase of taxable income of our subsidiaries. We recorded an income tax expense related to earnings generated by all our
subsidiaries. For our Canadian operations in the Biopharmaceutical segment, we have to establish a valuation allowance to reduce future income tax assets as it is, at this time, unlikely that some or
all of the future income tax assets will be realized.

We
incurred aloss on dilutionin 2004 for an amount of $0.6 million in comparison to a loss of $0.1 million in 2003 and to a gain of
$0.4 million in 2002. The losses are attributable to the issuance of shares in subsidiaries pursuant to the exercise of stock options and the gain in 2002 is attributable to an issuance of
Atrium shares to one of its officer.

Non-controlling interestfor fiscal 2004 amounted to $6.3 million in comparison to $3.6 million for 2003 and 2002.
Noncontrolling interest consists of minority interest in Atrium and its subsidiaries. The increase is directly attributable to the corresponding increase of net earnings of Atrium and its
subsidiaries.

Net lossfor 2004 was $5.8 million or $0.13 per basic and diluted share, compared to a net loss of $28.1 million or $0.65 per basic and
diluted share for 2003 and $25.8 million or $0.67 per basic and diluted share for 2002. The improvement in 2004 net loss reflects higher net earnings from accretive acquisitions in the two
segments operated by Atrium, as well as the realignment of the clinical development program initiated in December 2003, non-recurring milestone payments received in 2004 related to
cetrorelix Phase II positive results and revenue from the termination of a licensing agreement with Baxter Healthcare on D-63153.

The
weighted average number of shares outstanding used to calculate the basic and diluted net loss per share for 2004 was 45.6 million shares as compared to 43 million shares for 2003.
This increase reflects the issuance of common shares following the exercise of stock options.

Total Assets

Total
assets, which were $295.8 million as at December 31, 2003, reached $349.2 million as at December 31, 2004. This $53.4 million increase is mainly attributable
to the acquisition of Pure in March 2004. Additional information on segment assets is provided in note 20 of the annual consolidated financial statements.

Æterna ZentarisFinancial Statements
20047

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BIOPHARMACEUTICAL SEGMENT RESULTS

|                                           |                     | Years ended December 31, |       
|------------------------------------------ | ------------------- | ------------------------ | ------
|
|Revenues                                   |                     |                          |       
|                                           | Sales and royalties |                          | 25,355
|                                           | License fees        |                          | 30,577
|                                           |                     |                          |       
|                                           |                     | 55,932                   |       
|                                           |                     |                          |       
|R&D expense, net of tax credits and grants |                     | 29,397                   |       
|Loss from operations                       |                     | (8,954                   | )     

Revenuesfor the year ended December 31, 2004, of the Biopharmaceutical segment were $55.9 million, an increase of
$9.8 million, compared to $46.1 million for the same period in 2003. Revenues are derived from sales and royalties on Cetrotide® (cetrorelix) and Impavido®
(miltefosine), as well as milestone payments, R&D contract fees and amortization of upfront payments received to date. Revenue from R&D contract fees and from the amortization of upfront payments is
derived mainly from the ongoing development of cetrorelix and teverelix under existing collaboration agreements with our licensing partners Solvay and Ardana respectively. The revenue increase in 2004
is mainly attributable to a non-recurring $6.5 million milestone payment gained from our partner Solvay for cetrorelix in the second quarter of 2004. The remainder is attributable
to a termination payment gained from Baxter Healthcare for D-63153 and to amortization of additional deferred revenues. In 2002, revenues were $0.3 million and were generated
by our subsidiary Zentaris, acquired in late December 2002.

Our
segment revenues are expected to slightly decrease in 2005 as we are not expecting to receive any important nonrecurring milestone payment this year. However, additional sales are
expected to be generated from the acquisition of Echelon.

R&D expenses, net of tax credits and grantsfor the year ended December 31, 2004 were $29.4 million, a decrease of
$14.4 million compared to $43.8 million for the same period in 2003, reflecting the realignment of the clinical development program initiated in December 2003, including the focus
on the development of perifosine, cetrorelix and earlier stage products. For the year ended December 31, 2002, R&D expenses were $23.7 million. The increase between 2002 and 2003 is due
to the acquisition of Zentaris in late December 2002. We expect R&D expenses to increase in 2005 due to the acquisition of Echelon in January 2005, emphasis on clinical development of
existing products, as well as on certain product candidates at preclinical stage.

Loss from operationsfor 2004 was $9.0 million, a decrease of $19.7 million compared to an operating loss of
$28.7 million for 2003. The operating loss was $32.9 million in 2002. The decrease in loss from operations in 2004 is principally due to the increase of revenues and to the realignment
of the clinical development program initiated in December 2003. The decrease in loss from operations between 2002 and 2003 was mostly due to the income generated by Zentaris following its
acquisition in late December 2002.

ACTIVE INGREDIENTS & SPECIALTY CHEMICALS SEGMENT RESULTS

|                         |  | Years ended December 31,
|------------------------ |  | ------------------------
|
|Revenues                 |  | 144,983                 
|Earnings from operations |  | 14,045                  

Note:
not provided because this information is not available and is not reasonably determinable.

8Æterna
ZentarisFinancial Statements 2004

---



Revenuesof the Active Ingredients and Specialty Chemicals segment were $145.0 million for fiscal 2004, representing an increase of
$33.9 million or 30.5% over fiscal 2003 revenues of $111.1 million. Revenues for 2003 increased $18.4 million or 19.8% over fiscal 2002. These increases came primarily from
newly-acquired Chimiray, Interchemical, Siricie and ADF Chimie and from growth in our proprietary active ingredients portfolio, offset by a rebalancing of Unipex's product portfolio to focus on
higher-margin products.

Earnings from operationswere $14.0 million for fiscal 2004, representing an increase of $3.8 million or 37.3% over 2003 of
$10.2 million. Most of this increase came from Chimiray, Interchemical and Siricie. The balance of the increase is attributable to internal growth and the increased focus on higher-margin
products.

HEALTH & NUTRITION SEGMENT RESULTS

|                         |  | Years ended December 31,
|------------------------ |  | ------------------------
|
|Revenues                 |  | 32,333                  
|Earnings from operations |  | 12,079                  

Note:
not provided because this information is not available and is not reasonably determinable.

Revenuesof the Health & Nutrition segment were $32.3 million for fiscal 2004, representing an increase of
$23.1 million or 251.1% over fiscal 2003 revenues of $9.2 million. This increase came primarily from newly-acquired Pure and from growth in our proprietary product portfolio. Revenues
for 2003 were $9.2 million, representing an increase of $1.1 million or 13.6% over fiscal 2002 revenues of $8.1 million. This increase comes from growth in our proprietary product
portfolio only.

Earnings from operationswere $12.1 million for fiscal 2004, representing an increase of $7.9 million or 188.1% over fiscal
2003 of $4.2 million. Most of this increase came from the acquisition of Pure. The balance of the increase is attributable to internal growth and the increased focus on higher-margin products.

LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES

Our operations and our capital expenditures are mainly financed through cash flows from operating activities, the use of our liquidity, as well as the issuance of
debt and common shares.

Our
consolidated cash and short-term position remains at $58 million as of December 31, 2004. This represents a $6.3 million decrease in comparison to
our financial position as at December 31, 2003. In our Biopharmaceutical segment alone, we had $43 million of cash and short-term position at the end of 2004.

In
addition, we did not renew in 2004 a €1 million line of credit which has never been used. On the other hand, at the beginning of 2005, we refinanced part of
Atrium's long-term debt through a revolving credit facility, renewable annually, for an authorized amount of $75 million. The Company believes that these liquidities, combined with
the new credit facility and the cash flows from operations, will be adequate to meet operating cash requirements for the foreseeable future. However, possible additional operating losses and/or
possible investment in or acquisition of complementary businesses or products may require additional financing.

The
variation of our liquidity by activities is explained below, on a consolidated basis.

Operating Activities

Cash flows from our operations were $12.8 million during 2004 in comparison to cash flows used in our operations in 2003 and 2002 in the amount of
$14.5 million and $21.9 million respectively. This cash inflow is mainly attributable to non-recurrent upfront and milestone payments of nearly $21 million received
from our partners in the Biopharmaceutical segment and increased operating cash flows from Atrium. These cash inflows have been partly offset by timing differences in collection of some accounts
receivable. Cash flows generated by our operations in 2005 are expected to be lower than in 2004 since we do not expect to receive significant non-recurrent upfront and milestone payments
in 2005.

Æterna ZentarisFinancial Statements
20049

---



Financing Activities

For the year ended December 31, 2004, cash flows generated by financing activities were $33.8 million, mostly coming from the issuance of
long-term debt in the amount of $39.9 million. An amount of $9.3 million was used for the repayment of long-term debts and balance of purchase price. Following
the exercise of stock options in Æterna Zentaris and in one of our subsidiaries, we also received $3.2 million. In the corresponding period in 2003, the cash flows from financing
activities amounted to $17.9 million and were made up of cash received of $66.3 million from convertible term loans, the issuance of subordinate voting shares through a bought deal
closed in July 2003 and a new long-term debt incurred following the acquisition of Chimiray/Interchemical. In counterpart, we disbursed for financing activities an amount of
$48.4 million for the repayment of the promissory note, the balance of purchase price and payment of long-term debt. In 2002, cash flows from financing activities amounted to nearly
$100 million and are explained by the issuance of subordinate voting shares through a private placement of $57 million concluded in April 2002, and a promissory note of
$43 million issued for the acquisition of Zentaris in December 2002.

Investing Activities

Cash flows used in investing activities (excluding change in short-term investments) were $52.7 million for 2004, mainly for business
acquisitions. For 2003, cash flows used in investing activities (excluding change in short-term investments) amounted to $20.7 million. An amount of $18.9 million was used
for business acquisitions, while $1.8 million was used for the purchase of capital assets and intangible assets. In 2002, an amount of $45.3 million was used for acquisitions of
companies, intangible assets and product lines, as well as for distribution agreements for the Health & Nutrition segment. Furthermore, an amount of $5.1 million represented capital
investments mainly to increase the production capacity.

We
have certain contractual obligations and commercial commitments. The following table indicates our cash requirements to respect these obligations:

|                                   |  | Payments due by period
|---------------------------------- |  | ----------------------
|
|Long-term debt                     |  | 51,498                
|Convertible term loans             |  | 28,000                
|Balance of purchase price          |  | 2,553                 
|Operating leases                   |  | 11,240                
|Commercial commitments             |  | 6,098                 
|                                   |  |                       
|Total contractual cash obligations |  | 99,389                
|                                   |  |                       

In
October 2004, we also entered into a $2.9 million (€1.75 million) bank guarantee in favour of one of our future landlords in Germany. Liability
under this guarantee will only come into effect upon transfer into new rented premises, which is expected to be in 2005. This guarantee is only applicable upon failure on certain financial criteria
and will be in force for an initial rental period of four years.

OUTSTANDING SHARE DATA

Effective May 26, 2004, the Company created a new class of common shares. Each issued and outstanding subordinate voting shares were converted into common
shares at that date. Finally, the Company repealed the subordinate voting shares and multiple voting shares.

As
of March 10, 2005, there were 46,139,814 common shares issued and outstanding and there were 3,395,592 stock options outstanding. In addition, the convertible
term loans can be converted into common shares of the Company at a conversion price of $5.05 per common share up to a maximum of 6,955,089 shares.

10Æterna
ZentarisFinancial Statements 2004

---



Quarterly Summary Financial Information(Unaudited)
(in thousands of Canadian dollars, except per share data)

|                                                |  | Quarter ended
December 31,
2004
$ |   | Quarter ended
September 30,
2004
$ |   | Quarter ended
June 30,
2004
$ |  | Quarter ended
March 31,
2004
$ |  
|----------------------------------------------- |  | --------------------------------- | - | ---------------------------------- | - | ----------------------------- |  | ------------------------------ | -
|Revenues                                        |  | 53,541                            |   | 55,418                             |   | 65,840                        |  | 58,449                         |  
|Earnings from operations                        |  | 864                               |   | 5,545                              |   | 9,177                         |  | 1,584                          |  
|Net earnings (loss)(note 1)                     |  | (2,543                            | ) | (1,996                             | ) | 1,330                         |  | (2,550                         | )
|Basic and diluted net earnings (loss) per share |  | (0.06                             | ) | (0.04                              | ) | 0.03                          |  | (0.06                          | )

|
|

|                                     |  | Quarter ended
December 31,
2003
$ |   | Quarter ended
September 30,
2003
$ |   | Quarter ended
June 30,
2003
$ |   | Quarter ended
March 31,
2003
$ |  
|------------------------------------ |  | --------------------------------- | - | ---------------------------------- | - | ----------------------------- | - | ------------------------------ | -
|Revenues                             |  | 48,896                            |   | 37,829                             |   | 38,875                        |   | 40,813                         |  
|Earnings from operations             |  | (6,434                            | ) | (5,400                             | ) | (1,128                        | ) | (1,321                         | )
|Net loss(note 1)                     |  | (9,254                            | ) | (9,335                             | ) | (4,668                        | ) | (4,890                         | )
|Basic and diluted net loss per share |  | (0.20                             | ) | (0.20                              | ) | (0.11                         | ) | (0.12                          | )

Note 1:
Quarterly information from Q1 2003 to Q4 2003 has been restated for the effect of implementing the accounting policy for expensing stock-based compensation for all awards
granted after January 1, 2003. We recorded total stock-based compensation expense for the twelve-month period ended December 31, 2003 in the amount of $0.5 million.

FOURTH QUARTER RESULTS

Consolidated revenues for the fourth quarter 2004 were $53.5 million, an increase of 9.4% compared with total revenues of $48.9 million for the same
period in 2003. This increase is primarily due to the Atrium's acquisition of Pure in March 2004, combined with the Company's internal growth. Consolidated R&D expenses net of tax credits and
grants amounted to $7.1 million in the fourth quarter of 2004 compared with $12.3 million in the fourth quarter of 2003, reflecting the realignment of the clinical development program
initiated in December 2003.

Consolidated
earnings from operations for the fourth quarter 2004 were $0.9 million, compared with a loss from operations of $6.4 million for the fourth quarter 2003. The
Company's consolidated net loss was $2.5 million for the fourth quarter of 2004, or $0.06 per share, compared with a net loss of $9.3 million, or $0.20 per share, for the comparable
period in 2003.

Æterna ZentarisFinancial Statements
200411

---



OUTLOOK FOR 2005

BIOPHARMACEUTICAL SEGMENT

We expect Cetrotide® (cetrorelix), and Impavido® (miltefosine), to continue to generate significant revenues in 2005.

We
expect to continue to benefit from the support of existing partners for our R&D activities and to increase R&D spending in order to accelerate the development of perifosine and bring
certain products into clinical development.

As
part of our growth strategy, we intend to pursue additional partnerships, as well as acquisitions of additional technologies and/or businesses.

ACTIVE INGREDIENTS & SPECIALTY CHEMICALS, AS WELL AS HEALTH & NUTRITION SEGMENTS

Integration of acquired companies, continuation of internal growth and the pursuit of the acquisition strategy will be the main focus of these segments in 2005.

FINANCIAL AND OTHER INSTRUMENTS

Foreign Currency Risk

Since the Company operates on an international scale, it is exposed to currency risks as a result of potential exchange rate fluctuations. For the year ended
December 31, 2004, there were no significant operation using forward exchange contracts and no significant forward exchange contract is outstanding as of today.

Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents,
short-term investments and accounts receivable. Cash and cash equivalents are maintained with high-credit quality financial institutions. Short-term investments
consist primarily of bonds issued by high-credit quality corporations and institutions. Consequently, management considers the risk of non-performance related to cash and cash
equivalents and short-term investments to be minimal.

Generally,
the Company does not require collateral or other security from customers for trade accounts receivable; however, credit is extended following an evaluation of
creditworthiness. In addition, the Company performs on-going credit reviews of all its customers and establishes an allowance for doubtful accounts when accounts are determined to be
uncollectible.

Interest Rate Risk

We are exposed to market risk relating to changes in interest rates relating to our short term investments and variable rate debts. As at December 31,
2004, we have $34 million in long-term debts which, in effect, bear interest at floating rates.

RELATED PARTY TRANSACTIONS AND OFF BALANCE SHEET ARRANGEMENTS

There were no related party transactions and no off balance sheet arrangements.

RISK FACTORS

Risks associated with operations:



12Æterna
ZentarisFinancial Statements 2004

---





Cash flows and financial resources

We believe that we would be able to obtain long-term capital, if necessary, to support our corporate objectives, including the clinical development
program of our products. Our planned cash requirements may vary materially in response to a number of factors, including: R&D on our products; clinical trial results; increases in our manufacturing
capabilities; changes in any aspect of the regulatory process; and delays in obtaining regulatory approvals. Depending on the overall structure of current and future strategic alliances, we may have
additional capital requirements related to the further development of existing or future products.

The
development of our subsidiary, Atrium, may also require, in addition to the cash generated by its operations, other sources of financing. However, it is impossible to guarantee the
availability of additional financial resources or that it will be available under acceptable conditions.

We
have not entered into any significant forward currency contracts or other financial derivatives to hedge foreign exchange risk and, therefore, we are subject to foreign currency
transaction and translation gains and losses. Foreign
exchange risk is managed primarily by satisfying foreign denominated expenditures with cash flows or assets denominated in the same currency. However, with newly acquired companies operating in
foreign countries, we are more exposed to foreign currency risk. We are presently analysing the possibility of using financial derivatives to mitigate this risk, especially for transactions in US
currency.

Æterna ZentarisFinancial Statements
200413

---



Key personnel

Our success is also dependent upon our ability to attract and retain a highly qualified work force, and to establish and maintain close relations with research
centres. The competition in that regard is very severe. Our success is dependent to a great degree on our senior officers, scientific personnel and consultants. The failure to recruit qualified staff
and the loss of key employees could compromise the pace and success of product development.

Acquisition program

We intend to continue to acquire new technologies and/or businesses. There is no assurance that the Company will make certain acquisitions or that it will succeed
in integrating the newly-acquired technologies or businesses into its operations. The failure to successfully integrate the personnel and operations of businesses which we may acquire in the future
with ours could have a material adverse effect on our operations and results.

Volatility of share prices

Share prices are subject to changes because of numerous different factors related to its activity including reports of new information, changes in the Company's
financial situation, the sale of shares in the market, the Company's failure to obtain results in line with the expectations of analysts, an announcement by the Company or any of its competitors
concerning technological innovation, etc. During the past few years, shares of Æterna Zentaris, other biopharmaceutical companies and the investment market in general have been subjected
to extreme fluctuations that were unrelated to the operational results of the companies affected. There is no guarantee that the market price of the Company's shares will be protected from any such
fluctuations in the future.

Continuous disclosure

The Company is a reporting issuer under the securities legislation of all of the provinces of Canada and is registered in the United States and it is,
therefore, required to file continuous disclosure documents such as interim and annual financial statements, a proxy circular, an annual information form, material change reports and press releases
with such securities regulatory authorities. Copies of these documents may be obtained free of charge on request from the office of the Secretary of the Company or through the Internet at the
following addresses: www.aeternazentaris.com, http://sedar.com and http://www.sec.gov/edgar.shtml.

Safe harbour statement

Except for historical data, this report contains statements that, by their very nature, are projections involving time periods, risks and other factors, known or
unknown, which are beyond the Company's control.

Each
of these factors may produce results or performances that differ significantly from expectations. For example, the results of current clinical trials cannot be foreseen, nor can
changes in policy or actions taken by such regulatory authorities as the U.S. Food and Drug Administration and the Therapeutic Products Directorate of Health Canada, or any other organization
responsible for enforcing regulations in the pharmaceutical industry.

On
behalf of management,

GRAPHIC

Dennis Turpin, CAVice President and Chief Financial Officer
March 10, 2005

14Æterna
ZentarisFinancial Statements 2004

---



Management Report

The
following consolidated financial statements of Æterna Zentaris Inc. and all other financial information contained in this annual report are the responsibility of
management.

Management
has prepared the consolidated financial statements in accordance with Canadian generally accepted accounting principles. When it was possible to use different accounting
methods, management chose those that it felt were the most appropriate in the circumstances. The financial statements include amounts based on the use of estimates and best judgment. Management has
determined these amounts in a reasonable way in order to ensure that the financial statements are presented accurately in all important regards. Management has also prepared the financial information
presented elsewhere in the annual report, and has ensured that it is in accordance with the financial statements.

Management
maintains systems of internal accounting and administrative controls. The systems are used to provide a reasonable degree of certainty that the financial information is
relevant, reliable and accurate, and that the Company's assets are correctly accounted for and effectively protected.

The
Board of Directors is responsible for ensuring that management assumes its responsibilities with regard to the presentation of financial information, and has ultimate responsibility
for examining and approving the financial statements. The Board assumes this responsibility principally through its Audit Committee which is comprised of outside and non-management
directors. The Audit Committee met with management as well as with external auditors to discuss the internal monitoring system for presenting financial information, to address issues related to the
audit and the presentation of financial information, to ensure that all parties carry out their duties correctly, and to examine the financial statements and the report of the external auditors.

The
consolidated financial statements have been audited on behalf of shareholders by external auditors PricewaterhouseCoopers LLP for each of the years ended December 31,
2004, 2003 and 2002, in accordance with Canadian generally accepted accounting principles. The external auditors were given full and unrestricted access to the Audit Committee to discuss matters
related to their audit and the reporting of information.

The
Board of Directors has approved the Company's consolidated financial statements on the recommendation of the Audit Committee.

|GRAPHIC                                                      |  | GRAPHIC                                                    
|------------------------------------------------------------ |  | -----------------------------------------------------------
|Gilles Gagnon, MSc, MBAPresident and Chief Executive Officer |  | Dennis Turpin, CAVice President and Chief Financial Officer
|Quebec, Quebec Canada                                        |  |                                                            
|February 25, 2005                                            |  |                                                            

Æterna ZentarisFinancial Statements
200415

---



Report of Independent Auditors

TO THE SHAREHOLDERS OF
ÆTERNA ZENTARIS INC.

We have audited the consolidated balance sheets ofÆterna Zentaris Inc.as at
December 31, 2004 and 2003 and the consolidated statements of operations, deficit, other capital and cash flows for each of the years in the three-year period ended
December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In
our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2004 and 2003 and the
results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2004 in accordance with Canadian generally accepted accounting
principles.

Chartered Accountants

GRAPHIC

Quebec,
Quebec, Canada
February 25, 2005, except as to note 25c) dated March 10, 2005

16Æterna
ZentarisFinancial Statements 2004

---



Consolidated Balance Sheets(expressed in thousands of Canadian dollars)

|                                                    |               | As at December 31, |       
|--------------------------------------------------- | ------------- | ------------------ | ------
|
|ASSETS                                              |               |                    |       
|Current assets                                      |               |                    |       
|Cash and cash equivalents                           |               | 28,533             |       
|Short-term investments(note 22)                     |               | 29,557             |       
|Accounts receivable(note 5)                         |               |                    |       
|                                                    | Trade         |                    | 51,973
|                                                    | Other(note 6) |                    | 6,315 
|Inventory(notes 5 and 7)                            |               | 21,382             |       
|Prepaid expenses                                    |               | 3,068              |       
|Future income tax assets(note 19)                   |               | 3,906              |       
|                                                    |               |                    |       
|                                                    |               | 144,734            |       
|Property, plant and equipment(notes 9 and 18)       |               | 19,899             |       
|Deferred charges and other long-term assets(note 8) |               | 6,785              |       
|Intangible assets(notes 10 and 18)                  |               | 75,490             |       
|Goodwill(note 11)                                   |               | 86,137             |       
|Future income tax assets(note 19)                   |               | 16,183             |       
|                                                    |               |                    |       
|                                                    |               | 349,228            |       
|                                                    |               |                    |       
|LIABILITIES                                         |               |                    |       
|Current liabilities                                 |               |                    |       
|Accounts payable and accrued liabilities(note 12)   |               | 50,241             |       
|Income taxes                                        |               | 7,338              |       
|Balances of purchase price(note 4)                  |               | 2,553              |       
|Current portion of long-term debt                   |               | 12,133             |       
|                                                    |               |                    |       
|                                                    |               | 72,265             |       
|Deferred revenues                                   |               | 25,557             |       
|Convertible term loans(note 13)                     |               | 24,890             |       
|Long-term debt(note 14)                             |               | 39,365             |       
|Employee future benefits(note 15)                   |               | 7,502              |       
|Future income tax liabilities(note 19)              |               | 24,590             |       
|Non-controlling interest                            |               | 34,767             |       
|                                                    |               |                    |       
|                                                    |               | 228,936            |       
|                                                    |               |                    |       
|SHAREHOLDERS' EQUITY                                |               |                    |       
|Share capital(note 16)                              |               | 189,274            |       
|Other capital                                       |               | 8,741              |       
|Deficit                                             |               | (78,770            | )     
|Cumulative translation adjustment                   |               | 1,047              |       
|                                                    |               |                    |       
|                                                    |               | 120,292            |       
|                                                    |               |                    |       
|                                                    |               | 349,228            |       
|                                                    |               |                    |       
|Subsequent events(note 25)                          |               |                    |       

The
accompanying notes are an integral part of these consolidated financial statements.

Approved by the Board of Directors

|GRAPHIC                  |  | GRAPHIC                    
|------------------------ |  | ---------------------------
|Éric Dupont, PhDDirector |  | Gérard Limoges, FCADirector

Æterna ZentarisFinancial Statements
200417

---



Consolidated Statements of Deficit(expressed in thousands of Canadian dollars)

|                            |  | Years Ended December 31,
|--------------------------- |  | ------------------------
|
|Balance  Beginning of year |  | 73,011                  
|Net loss for the year       |  | 5,759                   
|                            |  |                         
|Balance  End of year       |  | 78,770                  
|                            |  |                         

Consolidated Statements of Other Capital(expressed in thousands of Canadian dollars)

|                                                             |  | Years Ended December 31,
|------------------------------------------------------------ |  | ------------------------
|
|Balance  Beginning of year                                  |  | 7,486                   
|Conversion option related to convertible term loans(note 13) |  |                        
|Stock-based compensation costs(note 16e)                     |  | 1,395                   
|Exercise of stock options(note 16c)                          |  | (140                    
|Issuance of warrants                                         |  |                        
|                                                             |  |                         
|Balance  End of year                                        |  | 8,741                   
|                                                             |  |                         

The
accompanying notes are an integral part of these consolidated financial statements.

18Æterna
ZentarisFinancial Statements 2004

---



Consolidated Statements of Operations(expressed in thousands of Canadian dollars, except share and per share data)

|                                                         |                                           | Years Ended December 31, |       
|-------------------------------------------------------- | ----------------------------------------- | ------------------------ | ------
|
|Revenues                                                 |                                           | 233,248                  |       
|                                                         |                                           |                          |       
|Operating expenses                                       |                                           |                          |       
|Cost of sales                                            |                                           | 134,535                  |       
|Selling, general and administrative                      |                                           | 42,198                   |       
|Research and development costs                           |                                           | 31,713                   |       
|Research and development tax credits and grants(note 18) |                                           | (1,346                   | )     
|Depreciation and amortization                            |                                           |                          |       
|                                                         | Property, plant and equipment             |                          | 3,190 
|                                                         | Intangible assets                         |                          | 5,788 
|                                                         |                                           |                          |       
|                                                         |                                           | 216,078                  |       
|                                                         |                                           |                          |       
|Earnings (loss) from operations                          |                                           | 17,170                   |       
|                                                         |                                           |                          |       
|Other revenues (expenses)                                |                                           |                          |       
|Interest income                                          |                                           | 1,359                    |       
|Interest expense                                         |                                           |                          |       
|                                                         | Long-term debt and convertible term loans |                          | (8,070
|                                                         | Other                                     |                          | (98   
|Foreign exchange loss                                    |                                           | (920                     | )     
|                                                         |                                           |                          |       
|                                                         |                                           | (7,729                   | )     
|                                                         |                                           |                          |       
|Earnings (loss) before income taxes                      |                                           | 9,441                    |       
|Income tax expense(note 19)                              |                                           | (8,285                   | )     
|                                                         |                                           |                          |       
|Earnings (loss) before the following items               |                                           | 1,156                    |       
|Gain (loss) on dilution of investments(note 4c, h and l) |                                           | (631                     | )     
|Non-controlling interest                                 |                                           | (6,284                   | )     
|                                                         |                                           |                          |       
|Net loss for the year                                    |                                           | (5,759                   | )     
|                                                         |                                           |                          |       
|Basic and diluted net loss per share(note 2)             |                                           | (0.13                    | )     
|                                                         |                                           |                          |       
|Weighted average number of shares outstanding(note 21)   |                                           | 45,569,176               |       
|                                                         |                                           |                          |       

The
accompanying notes are an integral part of these consolidated financial statements.

Æterna ZentarisFinancial Statements
200419

---



Consolidated Statements of Cash Flows(expressed in thousands of Canadian dollars)

|                                                                         |                                        | Years Ended December 31, |       
|------------------------------------------------------------------------ | -------------------------------------- | ------------------------ | ------
|
|Cash flows from operating activities                                     |                                        |                          |       
|Net loss for the year                                                    |                                        | (5,759                   | )     
|Items not affecting cash and cash equivalents                            |                                        |                          |       
|                                                                         | Depreciation and amortization          |                          | 8,978 
|                                                                         | Stock-based compensation costs         |                          | 1,556 
|                                                                         | Future income taxes                    |                          | (5,414
|                                                                         | Loss (gain) on dilution of investments |                          | 631   
|                                                                         | Non-controlling interest               |                          | 6,284 
|                                                                         | Employee future benefits               |                          | 915   
|                                                                         | Deferred charges                       |                          | (2,730
|                                                                         | Deferred revenues                      |                          | 17,426
|                                                                         | Accretion on convertible term loans    |                          | 1,970 
|Change in non-cash operating working capital items(note 17)              |                                        | (11,054                  | )     
|                                                                         |                                        |                          |       
|                                                                         |                                        | 12,803                   |       
|                                                                         |                                        |                          |       
|Cash flows from financing activities                                     |                                        |                          |       
|Issuance (repayment) of promissory note                                  |                                        |                         |       
|Net proceeds from the issuance of convertible term loans                 |                                        |                         |       
|Payments on balance of purchase price(note 4)                            |                                        | (1,537                   | )     
|Increase in long-term debt                                               |                                        | 39,883                   |       
|Repayment of long-term debt                                              |                                        | (7,806                   | )     
|Issuance of warrants                                                     |                                        |                         |       
|Issuance of shares                                                       |                                        | 1,695                    |       
|Share issue expenses                                                     |                                        | (161                     | )     
|Issuance of shares by a subsidiary                                       |                                        | 1,755                    |       
|                                                                         |                                        |                          |       
|                                                                         |                                        | 33,829                   |       
|                                                                         |                                        |                          |       
|Cash flows from investing activities                                     |                                        |                          |       
|Purchase of short-term investments                                       |                                        | (24,800                  | )     
|Proceeds from the sale of short-term investments                         |                                        | 37,133                   |       
|Purchase of long-term investment                                         |                                        | (825                     | )     
|Business acquisitions, net of cash and cash equivalents acquired(note 4) |                                        | (49,566                  | )     
|Acquisition of a product line                                            |                                        | (8                       | )     
|Purchase of property, plant and equipment                                |                                        | (2,124                   | )     
|Additions to intangible assets                                           |                                        | (164                     | )     
|                                                                         |                                        |                          |       
|                                                                         |                                        | (40,354                  | )     
|                                                                         |                                        |                          |       
|Net change in cash and cash equivalents                                  |                                        | 6,278                    |       
|Effect of exchange rate changes on cash and cash equivalents             |                                        | (159                     | )     
|Cash and cash equivalents  Beginning of year                            |                                        | 22,414                   |       
|                                                                         |                                        |                          |       
|Cash and cash equivalents  End of year                                  |                                        | 28,533                   |       
|                                                                         |                                        |                          |       
|Additional information                                                   |                                        |                          |       
|Interest paid                                                            |                                        | 2,424                    |       
|Income taxes paid                                                        |                                        | 9,457                    |       

The
accompanying notes are an integral part of these consolidated financial statements.

20Æterna
ZentarisFinancial Statements 2004

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Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002 (tabular amounts in thousands of Canadian dollars, except
share/option and per share/option data and as otherwise noted)

1.     INCORPORATION, NATURE OF ACTIVITIES AND CHANGE OF CORPORATE NAME



2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Percentage of interestSubsidiaries

2004
%

2003
%Zentaris GmbH ("Zentaris")

100.00

100.00Atrium Biotechnologies Inc. ("Atrium")

61.12

61.76Atrium Biotech USA Inc.

100.00

100.00Pure Encapsulations, Inc.

100.00

Siricie S.A.

100.00

100.00Unipex Finance S.A.S.

83.78

80.65Chimiray S.A.S.

100.00

100.00Unipex S.A.S.

100.00

100.00




Æterna ZentarisFinancial Statements
200421

---





Methods

Annual rates
%Building

Straight-line

5Equipment

Declining balance and straight-line

20Office furniture

Declining balance and straight-line

10 and 20Computer equipment

Straight-line

25 and 331/3Automotive equipment

Straight-line

20




22Æterna
ZentarisFinancial Statements 2004

---







Æterna ZentarisFinancial Statements
200423

---





24Æterna
ZentarisFinancial Statements 2004

---





3.     CHANGES IN ACCOUNTING POLICIES

a)    Standards applicable for fiscal year 2004



Æterna ZentarisFinancial Statements
200425

---



b)    New standards not yet adopted



4.     BUSINESS ACQUISITIONS



a)    Pure Encapsulations, Inc.



26Æterna
ZentarisFinancial Statements 2004

---



The
allocated values of the net assets acquired are as follows:

$AssetsCurrent assets

6,355Property, plant and equipment

1,506Intangible assetsTrademarks

16,088Customer relationships

1,073Other

126Liabilities

25,148Current liabilities

1,015Net identifiable assets acquired

24,133Goodwill

26,790Purchase price

50,923Less:Cash and cash equivalents acquired

1,443Balance of purchase price

3,277Net cash used for the acquisition

46,203




b)    Unipex Finance S.A.S.



c)     Loss on dilution of investments



d)    Interchemical S.A. and Chimiray S.A.



Æterna ZentarisFinancial Statements
200427

---



e)     Siricie S.A.



Subsidiaries

Interchemical S.A. and Chimiray S.A.
$

Siricie S.A.
$AssetsCurrent assets

17,973

1,130Property, plant and equipment

395

79Intangible assetsLicense and distribution agreements



200Other

4

Future income tax assets

531

7118,903

1,480LiabilitiesCurrent liabilities

15,197

Long-term liabilities

1,019

89816,216

898Net identifiable assets acquired

2,687

582Goodwill

16,002

1,458Purchase price

18,689

2,040Less:Cash and cash equivalents acquired

3,583

74Balance of purchase price

922

155Net cash used for the acquisition

14,184

1,811




f)     Product line acquired in 2002 by Atrium Biotech USA Inc.



g)     Unipex



28Æterna
ZentarisFinancial Statements 2004

---



h)    Gain (loss) on dilution of investments



i)     Zentaris



j)     ADF Chimie S.A. (merged with Unipex in 2002)



Æterna ZentarisFinancial Statements
200429

---





Zentaris
$

ADF Chimie S.A.
$AssetsCurrent assets

51,330

1,880Property, plant and equipment

2,934

7Intangible assets

66,943

Future income tax assets

14,891

136,098

1,887LiabilitiesCurrent liabilities

15,778

665Deferred revenues

12,438

Employee future benefits

5,886

Future income tax liabilities

28,043

62,145

665Net identifiable assets acquired

73,953

1,222Goodwill

11,594

1,093Purchase price

85,547

2,315Less:Cash acquired

3,646

548Balance of purchase price

39,748

438Net cash used for the acquisition

42,153

1,329




k)    Other acquisitions



l)     Gain on dilution of investments



30Æterna
ZentarisFinancial Statements 2004

---



5.     CREDIT FACILITIES



6.     OTHER RECEIVABLES

As at December 31,2004
$

2003
$Interest

522

846Grants

1,516

1,646Research and development tax credits recoverable

1,919

677Commodity taxes

769

1,146Other

1,589

1,3076,315

5,622


7.     INVENTORY

As at December 31,2004
$

2003
$Raw materials

2,084

6,572Work in progress

815

Finished goods

18,483

9,59721,382

16,169


8.     DEFERRED CHARGES AND OTHER LONG-TERM ASSETS

As at December 31,2004
$

2003
$Deferred charges

1,625

1,322Long-term receivable

3,087

Investments

2,073

6,785

1,322




Æterna ZentarisFinancial Statements
200431

---



9.     PROPERTY, PLANT AND EQUIPMENT

2004

2003Cost
$

Accumulated
depreciation
$

Cost
$

Accumulated
depreciation
$Land

453



452

Building

13,578

3,145

13,575

2,531Equipment

14,244

6,398

11,552

4,583Office furniture

1,424

840

1,253

696Computer equipment

2,362

1,863

1,941

1,552Automotive equipment

285

201

288

10032,346

12,447

29,061

9,462Less:Accumulated depreciation

12,447



9,462Net amount

19,899



19,599


10.   INTANGIBLE ASSETS

As at December 31,2004

2003Cost
$

Accumulated
amortization
$

Cost
$

Accumulated
amortization
$Finite useful livesPatents and trademarks

71,208

12,188

71,094

6,685Licenses and distribution agreements

1,203

271

1,203

99Customer relationships

962

80



Organization costs

286

190

189

189Software and Web sites development expenses

161

25



73,820

12,754

72,486

6,973Less: Accumulated amortization

12,754



6,973Net amount

61,066



65,513Indefinite useful livesTrademarks

14,424



75,490



65,513


32Æterna
ZentarisFinancial Statements 2004

---



11.   GOODWILL



Biopharmaceutical
$

Active Ingredients & Specialty Chemicals
$

Health & Nutrition
$

Total
$Balance as at December 31, 2002



22,734

1,518

24,252Acquisitions(note 4)



20,635

40

20,675Adjustment(note 4i)

11,594





11,594Impact of foreign exchange rate



4,663



4,663Balance as at December 31, 2003

11,594

48,032

1,558

61,184Acquisitions(note 4)



738

27,197

27,935Adjustments(1)



(252
)
8

(244
)Impact of foreign exchange rate



33

(2,771
)
(2,738
)Balance as at December 31, 2004

11,594

48,551

25,992

86,137


12.   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

As at December 31,2004
$

2003
$Trade payable

28,839

33,149Interest on convertible term loans

2,520

2,250Advance payment related to a licensing agreement

1,000

999Salaries and employee benefits

2,221

2,291Deferred revenues

9,247

5,564Other accrued liabilities

6,414

8,80950,241

53,062


13.   CONVERTIBLE TERM LOANS

As at December 31,2004
$

2003
$The liability portion of the convertible term loans, bearing interest at an annual rate of 12%, payable annually or at maturity at the Company's option for which moveable hypothecs on the assets of the Company, with the
exception of the building, equipment and shares of a subsidiary, have been given as collateral

24,890

19,920




Æterna ZentarisFinancial Statements
200433

---



14.   LONG-TERM DEBT

As at December 31,2004
$

2003
$Æterna ZentarisLoan from the federal and provincial governments, non-interest bearing, payable in five annual equal and consecutive instalments, beginning in July 2004

3,200

4,000Atrium and its subsidiariesLoan in the form of banker's acceptance, bearing interest at a rate based on the market rate plus an applicable margin calculated quarterly on the Atrium's North American operations. A moveable hypothec on all moveable
assets of Atrium and all the shares of Atrium's North American subsidiaries have been given as collateral, principal payable in quarterly instalments of $1,350,000 maturing in March 2007

22,950

Unsecured loan, bearing interest at a rate of 9% for the first year and 10% thereafter, principal payable in accretion annually from February 2005 and interest payable monthly from April 2004, maturing in
February 2009

13,407

Loan payable in euros and for which the shares of Unipex S.A.S. have been given as collateral, €2,286,735 in 2004 and 2003 bearing interest at EURIBOR rate plus 2.5%, interest payable annually, maturing in
October 2005

3,726

3,723Unsecured bank loans payable in euros€4,500,000 (€5,000,000 in 2003) bearing interest at EURIBOR rate plus 1%, principal payable in accretion annually from August 2004 and interest payable semi-annually from February 2004, maturing
in August 2008

7,331

8,140€411,335 (€526,696 in 2003) bearing interest at a rate of 4.45%, payable in quarterly instalments including principal and interest, maturing in January 2008

670

858€15,121 (€26,907 in 2003) bearing interest at a rate of 4.35%, payable in quarterly instalments including principal and interest, maturing in January 2006

25

44Balance of purchase price of €115,861 (€189,037 in 2003), non-interest bearing, payable in euros in monthly instalments of €6,098 ($10,100), maturing in July 2006

189

308Loan payable in euros, bearing interest at LIBOR rate plus 1% reimbursed during 2004



1,83651,498

18,909Less: Current portion

12,133

3,77739,365

15,132




34Æterna
ZentarisFinancial Statements 2004

---



15.   EMPLOYEE FUTURE BENEFITS



Pension and postemployment benefit plans

Other benefit plan2004
$

2003
$

2004
$

2003
$Obligation  Beginning of year

6,149

5,350

509

692Current service cost

283

277

30

21Interest cost

337

287

27

36Actuarial loss (gain)

390

187

35

(136
)Benefits paid

(78
)
(49
)
(123
)
(104
)Business acquisition

(57
)
95



Effect of foreign currency exchange rate changes



2



Obligation  End of year

7,024

6,149

478

509




Pension benefit plan

Other benefit planActuarial assumptions

2004
%

2003
%

2004
%

2003
%Discount rate

2.50 and 5.25

2.50 and 5.25

5.25

5.75Pension benefits increase

1.25

1.25

1.25

1.25Rate of compensation increase

0.5 to 3.75

0.5 to 3.75

2.75

2.75




16.   SHARE CAPITAL

a)    Authorized



Æterna ZentarisFinancial Statements
200435

---



b)    Issued

As at December 31,2004

2003

2002Number

Amount
$

Number

Amount
$

Number

Amount
$Multiple voting sharesBalance  Beginning of year





4,727,100

1,862

4,852,723

1,911Conversion of shares





(4,727,100
)
(1,862
)
(125,623
)
(49
)Balance  End of year









4,727,100

1,862Common shares (formerly Subordinate voting shares)Balance  Beginning of year

45,330,992

187,601

35,961,927

151,716

27,978,321

95,602Conversion of shares





4,727,100

1,862

125,623

49Issued pursuant to the stock option plan

339,917

1,834

141,965

1,030

257,983

1,189Issued pursuant to a private placement









7,600,000

56,253Issued pursuant to a bought deal





4,500,000

35,550



Share issue expenses



(161
)


(2,557
)


(1,377
)Balance  End of year

45,670,909

189,274

45,330,992

187,601

35,961,927

151,716Total share capital

45,670,909

189,274

45,330,992

187,601

40,689,027

153,578


c)     Common share issues



d)    Shareholder right plan



36Æterna
ZentarisFinancial Statements 2004

---



e)     Company's stock option plan



2004

2003

2002Number

Weighted average exercise price
$

Number

Weighted average exercise price
$

Number

Weighted average exercise price
$Balance  Beginning of year

3,197,435

6.02

2,949,872

6.96

2,877,671

7.05Granted

913,000

8.06

1,074,564

4.09

1,048,895

5.97Exercised

(339,917
)
4.99

(141,965
)
7.25

(257,983
)
4.61Expired

(2,050
)
7.04

(172,285
)
5.74

(382,129
)
6.19Forfeited

(287,876
)
6.97

(512,751
)
7.07

(336,582
)
7.35Balance  End of year

3,480,592

6.58

3,197,435

6.02

2,949,872

6.96Options exercisable  End of year

1,743,429

6.90

1,272,574

7.05

1,025,640

6.92




Options outstanding

Options currently exercisableExercise price

Number

Weighted average remaining contractual life

Weighted average exercise price
$

Number

Weighted average exercise price
$$3.75 to $7.00

1,702,759

8.12

4.76

866,924

5.15$7.01 to $10.00

1,611,833

6.99

8.03

759,669

8.22$10.01 to $14.35

166,000

3.52

11.16

116,836

11.253,480,592

7.38

6.58

1,743,429

6.90




Years Ended December 31,2004

2003

2002Dividend yield

Nil

Nil

NilExpected volatility

64.2%

64.3%

57.0%Risk-free interest rate

3.48%

3.96%

3.72%Expected life (years)

4.30

3.92

2.70Number of stock options granted

913,000

1,074,564

1,048,895Weighted average fair value of options granted ($)

4.28

2.03

2.29


Æterna ZentarisFinancial Statements
200437

---





Years Ended December 31,2004
$

2003
$

2002
$Pro forma net loss

5,912

29,368

26,039Pro forma basic and diluted net loss per share

0.13

0.68

0.67


f)     Atrium's stock option plan



2004

2003

2002Number

Weighted average exercise price
$

Number

Weighted average exercise price
$

Number

Weighted average exercise price
$Balance  Beginning of year

2,390,000

2.76

2,314,000

2.74

2,182,000

2.70Granted

2,031,000

4.21

120,000

3.07

240,000

3.07Exercised

(580,000
)
2.60

(8,000
)
2.50



Forfeited

(174,000
)
2.81

(36,000
)
2.82

(108,000
)
2.50Balance  End of year

3,667,000

3.59

2,390,000

2.76

2,314,000

2.74


38Æterna
ZentarisFinancial Statements 2004

---





Options outstanding

Options currently exercisableExercise price

Number

Weighted average remaining contractual life

Weighted average exercise price
$

Number

Weighted average exercise price
$$2.50

750,000

5.84

2.50

600,000

2.50$3.07

886,000

7.05

3.07

494,000

3.07$4.21

2,031,000

9.84

4.21



3,667,000

8.35

3.59

1,094,000

2.76




Years Ended
December 31,2004

2003Dividend yield

Nil

NilExpected volatility

Nil

NilRisk-free interest rate

3.77%

3.96%Weighted average expected life (years)

4.56

5.00Number of stock options granted

2,031,000

120,000Weighted average fair value of options granted ($)

0.67

0.55Compensation costs ($)

161,817

32,000


17.   STATEMENTS OF CASH FLOWS

Years Ended December 31,2004
$

2003
$

2002
$Change in non-cash operating working capital itemsAccounts receivable

(9,251
)
(1,071
)
(6,048
)Inventory

(1,679
)
3,670

(960
)Prepaid expenses

233

(956
)
(212
)Accounts payable and accrued liabilities

(4,246
)
(3,884
)
2,603Income taxes

3,889

(275
)
983(11,054
)
(2,516
)
(3,634
)


18.   GRANTS



Æterna ZentarisFinancial Statements
200439

---



19.   INCOME TAXES



Years Ended December 31,2004

2003

2002Combined federal and provincial statutory income tax rate


31.02%


33.05%


35.16%Income tax expense (recovery) based on statutory income tax rate

$
2,929

$
(6,129
)
$
(6,396
)Manufacturing and processing tax credit





678


1,162Change in valuation allowance


3,311


10,557


9,487Accretion on convertible term loans


611


386


Stock-based compensation costs


433


138


Difference in statutory income tax rate of foreign subsidiaries


1,156


224


(50
)Change in enacted rate





340


357Additional tax deduction





(113
)

(108
)Other


(155
)

(149
)

(27
)$
8,285

$
5,932

$
4,425Income tax expense is represented by:Current

$
13,699

$
3,859

$
2,565Future


(5,414
)

2,073


1,860$
8,285

$
5,932

$
4,425CurrentDomestic

$
519

$
855

$
574Foreign


13,180


3,004


1,991$
13,699

$
3,859

$
2,565FutureDomestic

$
211

$
1,462

$
1,836Foreign


(5,625
)

611


24$
(5,414
)
$
2,073

$
1,860$
8,285

$
5,932

$
4,425


40Æterna
ZentarisFinancial Statements 2004

---





As at December 31,2004
$

2003
$Future income tax assetsCurrentDeferred revenues

3,676

2,134Acquisition costs

58

470Other

172

3,906

2,604Long-termResearch and development costs

13,105

12,489Share issue expenses

717

1,173Operating losses carried forward

20,924

21,916Property, plant and equipment

916

289Intangible assets and goodwill

2,838

3,084Employee future benefits

726

509Deferred revenues

10,595

4,349Other

64

6349,885

43,872Valuation allowance

(33,702
)
(30,356
)16,183

13,51620,089

16,120Future income tax liabilitiesLong-termAccounts receivable

250

Property, plant and equipment

202

Deferred charges and other long-term assets

314

504Intangible assets

23,730

25,487Other

94

24,590

25,991Future income tax liabilities, net

(4,501
)
(9,871
)




Canada

United StatesExpiry date

Federal
$

Provincial
$

$2007

109



2008

16,050

11,860

2009

20,163

18,283

2010

20,309

19,936

2014

7,572

7,382

2020 to 2024





59364,203

57,461

593


Æterna ZentarisFinancial Statements
200441

---





20.   SEGMENT INFORMATION



Years Ended December 31,2004
$

2003
$

2002
$Canada

2,003

951

1,301United States

27,897

6,395

4,671EuropeSwitzerland

27,828

20,424

France

134,742

101,046

83,915Other

34,017

29,458

6,450Asia

5,808

7,448

4,385Other

953

691

482233,248

166,413

101,204




Years Ended December 31,2004
$

2003
$Canada

17,187

18,785United States

42,163

1,578France

50,040

49,824Germany

72,136

76,109181,526

146,296




42Æterna
ZentarisFinancial Statements 2004

---





2004Biopharmaceutical
$

Active Ingredients & Specialty Chemicals
$

Health & Nutrition
$

Consolidated Adjustments
$

Total
$RevenuesSales and royalties

25,355

144,983

32,333



202,671License fees

30,577







30,57755,932

144,983

32,333



233,248Earnings (loss) from operations

(8,954
)
14,045

12,079



17,170Depreciation and amortization

7,988

576

414



8,978Capital expenditures

2,109

78

101



2,288Segment assets

182,500

105,587

53,465

(243
)
341,309




2003Biopharmaceutical
$

Active Ingredients & Specialty Chemicals
$

Health & Nutrition
$

Consolidated Adjustments
$

Total
$RevenuesSales and royalties

24,403

111,071

9,236



144,710License fees

21,703







21,70346,106

111,071

9,236



166,413Earnings (loss) from operations

(28,679
)
10,170

4,226



(14,283
)Depreciation and amortization

8,824

535

62



9,421Capital expenditures

1,723

48

51



1,822Segment assets

179,882

104,395

6,182

175

290,634




Æterna ZentarisFinancial Statements
200443

---





2002Biopharmaceutical
$

Active Ingredients & Specialty Chemicals / Health & Nutrition
$

Consolidated Adjustments
$

Total
$Revenues

315

100,889



101,204Earnings (loss) from operations

(32,890
)
12,324



20,566Depreciation and amortization

1,999

422



2,421Capital expenditures

95,488

1,353



96,841Segment assets

244,709

87,427

(1,168
)
330,968




21.   LOSS PER SHARE



2004

2003

2002Basic weighted average number of shares outstanding

45,569,176

42,993,432

38,584,537Diluted effect of stock options

417,453

118,953

142,098Diluted weighted average number of shares outstanding

45,986,629

43,112,385

38,726,635Items excluded from the calculation of diluted net loss per share because the exercise price was greater than the average market price of the common shares or due to their anti-dilutive effectStock options

1,563,259

1,281,183

1,298,349Common shares which would be issued following the conversion of the convertible term loans

5,396,040

3,712,871






44Æterna
ZentarisFinancial Statements 2004

---



22.   FINANCIAL INSTRUMENTS



2004
$

2003
$Mutual fund units

2,000

Discount notes and commercial paper, bearing interest at effective annual rates ranging from 2.81% to 3.13% in 2004 and from 2.44% to 3.49% in 2003, maturing on different dates from August 2005 to February 2006
in 2004 and from April 2004 to August 2005 in 2003

2,636

8,521Bonds, bearing interest at effective annual rates ranging from 2.0% to 4.79% in 2004 and from 2.31% to 4.79% in 2003, maturing on different dates from January 2005 to April 2007 in 2004 and from
February 2004 to April 2007 in 2003

24,921

33,43229,557

41,953




Cash and cash equivalents

Variable interest rateShort-term investments

Fixed interest rateAccounts receivable

Non-interest bearingUnused lines of credit

Prime rateAccounts payable and accrued liabilities

Non-interest bearingBalances of purchase price

Non-interest bearingConvertible term loans

As described in note 13Long-term debt

As described in note 14


23.   COMMITMENTS AND GUARANTEE



Æterna ZentarisFinancial Statements
200445

---



24.   SUMMARY OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND IN THE UNITED STATES



Years Ended December 31,2004
$

2003
$

2002
$Net loss for the year under Canadian GAAP



(5,759
)
(28,147
)
(25,782
)Stock-based compensation costs

a)

(12
)
(64
)
(254
)Accretion on convertible term loans

e)

1,970

1,245

In-process R&D, net of related future income taxes

c)



(16,276
)
Amortization of in-process R&D

c)

1,266

1,266

Financing costs allocated to other capital

e)

(46
)
(34
)
Organization costs

b)

(97
)


Amortization of organization costs

b)



45

87Net loss for the year under U.S. GAAP



(2,678
)
(41,965
)
(25,949
)Other comprehensive lossUnrealized gains on short-term investments

d)

543

94

885Less: Reclassification of adjustments for gains realized in net loss



(94
)
(885
)
(1,390
)Net unrealized losses (gains)



449

(791
)
(505
)Foreign currency translation adjustments



(2,998
)
3,277

580Comprehensive loss



(5,227
)
(39,479
)
(25,874
)Basic and diluted net loss per share under U.S. GAAP



(0.06
)
(0.98
)
(0.67
)Weighted average number of shares outstanding under U.S. GAAP



45,569,176

42,993,432

38,584,537


46Æterna
ZentarisFinancial Statements 2004

---





Years Ended December 31,2004
$

2003
$

2002
$Deficit in accordance with Canadian GAAP



(78,770
)
(73,011
)
(44,864
)Stock-based compensation costsCurrent year



(12
)
(64
)
(254
)Cumulative effect of prior years



(4,962
)
(4,898
)
(4,644
)Accretion on convertible term loansCurrent year

e)

1,970

1,245

Cumulative effect of prior years



1,245



In-process R&D, net of related future income taxesCurrent year

c)



(16,276
)
Cumulative effect of prior years



(16,276
)


Amortization of in-process R&D, net of related income taxesCurrent year

c)

1,266

1,266

Cumulative effect of prior years



1,266



Amortization of financing costs allocated to other capitalCurrent year

e)

(46
)
(34
)
Cumulative effect of prior years



(34
)


Organisation costs



(97
)


Amortization of organization costsCurrent year

b)



45

87Cumulative effect of prior years



173

128

41Deficit in accordance with U.S. GAAP



(94,277
)
(91,599
)
(49,634
)




As at December 31,2004
$

2003
$Share capital in accordance with Canadian GAAP

189,274

187,601Stock-based compensation costs related to stock option plan for underwriting compensation Cumulative effect of prior years

(896
)
(896
)Share capital in accordance with U.S. GAAP

188,378

186,705




As at December 31,2004
$

2003
$Other capital in accordance with Canadian GAAP



8,741

7,486Reclassification of convertible term loans



(6,325
)
(6,325
)Reclassification of financing costs related to convertible term loans



137

137Stock-based compensation costsCurrent year

a)

12

64Cumulative effect of prior years



4,962

4,898Stock-based compensation costs related to stock option plan for underwriting compensationCumulative effect of prior years



896

896Other capital in accordance with U.S. GAAP



8,423

7,156


Æterna ZentarisFinancial Statements
200447

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As at December 31,2004
$

2003
$Foreign currency translation adjustmentsBalance  Beginning of year

4,045

768Change during the year

(2,998
)
3,277Balance  End of year

1,047

4,045Unrealized gains (losses) on short-term investmentsBalance  Beginning of year

94

885Change during the year

449

(791
)Balance  End of year

543

94Accumulated other comprehensive income

1,590

4,139




As at December 31, 2004

As at December 31, 2003As reported
$

U.S. GAAP
$

As reported
$

U.S. GAAP
$Intangible assets

c)

75,490

52,153

65,513

40,132Convertible term loans

e)

24,890

28,000

19,920

25,000Future income tax liabilities

c)

24,590

15,094

25,991

15,620Shareholders' EquityShare capital



189,274

188,378

187,601

186,705Other capital

e)

8,741

8,423

7,486

7,156Deficit



(78,770
)
(94,277
)
(73,011
)
(91,599
)Cumulative translation adjustment



1,047



4,045

Accumulated other comprehensive income



1,590



4,139




a)    Stock-based compensation



48Æterna
ZentarisFinancial Statements 2004

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b)    Organization costs



c)     Research and development costs



d)    Short-term investments



e)     Convertible term loans



25.   SUBSEQUENT EVENTS

a)    Financing



b)    Acquisitions



Æterna ZentarisFinancial Statements
200449

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c)     Articles of Amendment



d)    Stock Option Plan



e)     Initial Public Offering of Shares



50Æterna
ZentarisFinancial Statements 2004

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Corporate Governance

GENERAL

The
responsibility to oversee the conduct of the business and to guide management of Æterna resides with the Board of Directors.

DIRECTORS

The
Board of Directors consists of nine members, including three officers and six external directors. In addition to the Board of Directors, two committees were formed to assist the Directors in their
responsibilities. These are the Audit Committee and the Corporate Governance Committee.

AUDIT COMMITTEE

The
Audit Committee is comprised of three external directors. The Audit Committee assists the Board of Directors by reviewing the Company's internal controls and auditing procedures, any relevant
accounting or regulatory matters and by recommending the appointment of external auditors.

CORPORATE GOVERNANCE COMMITTEE

The
Corporate Governance Committee consists of three directors, including two external directors. The Corporate Governance Committee is responsible for proposing all nominees to the Board and its
committees and for assessing performance of individual directors and the Board as a whole. The Corporate Governance Committee also reviews overall compensation issues for senior management, and
assesses the performance of the Chief Executive Officer and senior management.

The
Board believes that the Board and its Committees carry out effective governance of the Company's affairs. The Board will continue to review the Company's governance practices and will make changes
as required.

Æterna ZentarisFinancial Statements
200451

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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Directors Marcel Aubut, OC, QCQuebec, Quebec
Managing Partner Heenan Blaikie Aubut, Lawyers Stormy Byorum, MBA(1)New York, NY
Senior Managing Director Stephen Cori Capital Advisors Dr. Éric Dupont, PhD(2)Sainte-Pétronille
Île d'Orléans, Quebec
Chairman of the Board Æterna Zentaris Inc. Prof. Dr. Jürgen Engel, PhDFrankfurt, Germany
Executive Vice President,
Global Research & Development
and Chief Operating Officer Æterna Zentaris Inc. Jürgen Ernst, MBABrussels, Belgium
Administrator Gilles R. Gagnon, MSc, MBASherbrooke, Quebec
President and Chief Executive Officer Æterna Zentaris Inc. Dr. Pierre Laurin, PhD, OC(2)Verdun, Quebec
Executive in Residence H.E.C. Montreal Gérard Limoges, CM, FCA(1)Montreal, Quebec
Administrator Pierre MacDonald, MSc Comm(1)(2)Verdun, Quebec
President and Chief Executive Officer MacD Consult Inc. (1) Member of the Audit Committee(2) Member of the Corporate Governance Committee |  | Senior Officers Dr. Éric Dupont, PhDSainte-Pétronille
Île d'Orléans, Quebec
Chairman of the Board Æterna Zentaris Inc. Gilles R. Gagnon, MSc, MBASherbrooke, Quebec
President and Chief Executive Officer Æterna Zentaris Inc. Prof. Dr. Jürgen Engel, PhDFrankfurt, Germany
Executive Vice President, Global Research
and Development and Chief Operating Officer Æterna Zentaris Inc. Dr. Eckhard Günther, PhDFrankfurt, Germany
Vice President, Drug Discovery Æterna Zentaris Inc. Mario Paradis, CAQuebec, Quebec
Senior Director Finance and Corporate Secretary Æterna Zentaris Inc. Dr. Manfred Peukert, MDFrankfurt, Germany
Vice President, Medical Affairs Æterna Zentaris Inc. Dr. Matthias Rischer, PhDFrankfurt, Germany
Vice President, Pharmaceutical Development Æterna Zentaris Inc. Dennis Turpin, CAQuebec, Quebec
Vice President and Chief Financial Officer Æterna Zentaris Inc.

52Æterna
ZentarisFinancial Statements 2004

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|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Corporate
Information Head OfficeÆterna Zentaris Inc.
1405 Parc-Technologique Blvd.
Quebec, Quebec G1P 4P5
CANADA
Phone: (418) 652-8525
Fax: (418) 652-0881
E-mail: aeterna@aeternazentaris.com
Internet: www.aeternazentaris.com Ticker symbolsAEZ  The Toronto Stock Exchange (TSX)
AEZS  The Nasdaq Stock Market, Inc. (NASDAQ) Transfer Agent and RegistrarNational Bank Trust Inc.
1100 University Street
9th Floor
Montreal, Quebec H3B 2G7 AuditorsPricewaterhouseCoopers LLP
Place de la Cité
Tour Cominar
2640 Laurier Blvd.
Suite 1700
Quebec, Quebec G1V 5C2 Intellectual Property SolicitorsGoudreau Gage Dubuc
Stock Exchange Tower
800 Place Victoria
Suite 3400
Montreal, Quebec H4Z 1E9
Haynes and Boone, LLP
901 Main Street, Suite 3100
Dallas, TX 75202
U.S.A. Corporate SolicitorsOgilvy Renault
1981 McGill College, Suite 1100
Montreal, Quebec H3A 3C1
Arnold & Porter
399 Park Avenue
New York, NY 10022-4690
U.S.A. Annual MeetingMay 26, 2005, 10:30 a.m.
Ritz-Carlton Hotel
1228 Sherbrooke Street West
Montreal, Quebec H3G 1H6 |  | Scientific
Advisory Board External members Dr. Gerald Batist, MD, CM, FACPDirector of the McGill Center for Translational Research in Cancer, Chair and Professor, Department of Oncology and Medicine, McGill University, Jewish General Hospital, Montreal, Canada Dr. Frans M. J. Debruyne, MD, PhDProfessor and Chairman at the University Medical Center in Nijmegen, The Netherlands Dr. Alan H. DeCherney, MDProfessor at the David Geffen School of Medicine at
University of California Los Angeles, United States Dr. Prof. Klaus H.R. Diedrich, MD, PhDDirector of the Department of Gynecology and Obstetrics at the University Clinic in Luebeck, Germany Dr. Prof. René Frydman, MD, PhDHead of the Department of Gynecology and Obstetrics at the Hôpital Antoine Beclere, Paris, France Dr. Fernand Labrie, OC, OQ, MD, PhDHead, Centre hospitalier de l'Université Laval Research
Center (CHUL), Quebec, Canada Dr. Hartmut Michel, PhDDirector, Max-Planck Institute for Biophysics, Frankfurt, Germany. Nobel Prize laureate in chemistry, 1988. Dr. Glenn D. Prestwich, PhDFounder and Chief Scientific Officer, Board Member of Echelon Biosciences, Salt Lake City, United States Dr. Prof. Marcel Verheij, MD, PhDThe Netherlands Cancer Institute/Antoni van Leeuwenhoek Hospital in Amsterdam, The Netherlands

Æterna ZentarisFinancial Statements
200453

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