**Exhibit
      99.2**




Management’s
        Discussion
 and
        Analysis of Financial Condition
 and
        Results of Operations
 
 This
        discussion should be read in conjunction with the information contained in
        Axcan’s consolidated financial statements and the related notes thereto. All
        amounts are in U.S. dollars.
  OVERVIEW
 
 Axcan
        is a leading speciality pharmaceutical company concentrating in the field
        of
        gastroenterology, with operations in North America and Europe. Axcan markets
        and
        sells pharmaceutical products used in the treatment of a variety of
        gastrointestinal diseases and disorders. The Company seeks to expand its
        gastrointestinal franchise by 1) in-licensing products and acquiring products
        or
        companies; 2) developing additional products and expanding indications for
        existing products; 3) increasing sales of products it currently markets;
        and 4)
        expanding geographically. Axcan’s current products include ULTRASE, PANZYTRAT
        and VIOKASE for the treatment of certain gastrointestinal symptoms, related
        to
        cystic fibrosis in the case of ULTRASE and PANZYTRAT; URSO/URSO 250, URSO
        FORTE/URSO DS and DELURSAN for the treatment of certain cholestatic liver
        diseases; SALOFALK and CANASA for the treatment of certain inflammatory
        bowel diseases; and CARAFATE/SULCRATE for the treatment of gastric duodenal
        ulcers. Axcan has a number of pharmaceutical projects in all phases of
        development. During the fourth quarter, the Company has decided not to pursue
        the clinical development of ITAX for the treatment of Functional Dyspepsia
        because of the additional findings from the Phase III North American study
        which
        showed that ITAX did not meet its co-primary endpoints. The termination of
        the
        development of ITAX generated additional research and development expenses
        of
        $4.3 million for that quarter. These expenses were incurred to terminate
        certain
        supply agreements related to the manufacturing of the product’s active
        pharmaceu-tical
        ingredient. Additional costs associated with the close out of ongoing clinical
        trials will be recorded in the financial statements in future quarters as
        they
        are incurred.
  As
        a result of the recent budgetary initiatives implemented by the French
        government, which resulted in the delisting of a number of pharmaceutical
        products from government formularies, including LACTEOL, and the re-pricing
        of
        other pharmaceuticals, including TAGAMET and TRANSULOSE, according to the
        reference pricing guidelines set forth in the *Tarif
        Forfaitaire de Respon-sabilité* ,
        management reassessed the appropriate carrying value of its French subsidiary’s
        intangible assets with a finite life, mainly those associated with TAGAMET
        and
        TRANSULOSE. The Company’s earnings for the year ended September 30, 2006 include
        a onetime charge, which was incurred in the second fiscal quarter, in the
        amount
        of $5.8 million, which corresponds to a write-down for the partial impairment
        of
        the carrying value of these intangible assets. This charge is equal to the
        excess of the carrying value of these intangible assets, including items
        such as
        trademarks and other capitalized costs associated with these products, over
        the
        estimated fair value.
  In
        connection with a reorganization of its international operations due to the
        French government’s budgetary initiatives, the Company has also undertaken a
        reduction of its workforce in Europe. To this end, on May 2, 2006, the Company’s
        French subsidiary communicated a
 **2**MD
              & A
  reorganization
        plan to the employee representatives in France aimed at reducing its workforce.
        This plan, which was accepted by the employee representatives and the relevant
        labour unions, will allow our French organization to increase the focus of
        its
        sales and marketing activities on gastroenterologists. Prior to the
        reorganization, the Company’s French subsidiary also focused on sales and
        marketing of our products to general practitioners prescribing a high number
        of
        gastroenterology products. In connection with this reorganization,
        the Company recorded a one-time restructuring charge of $1.7 million in the
        three-month period ended June 30, 2006. The charge to earnings for the cost
        of
        the plan includes items such as transition assistance, legal fees and cash
        severance costs as well as other administrative charges.
  For
        the year ended September 30, 2006, revenue was $292.3 million, operating
        income
        was $57.8 million and net income was $39.1 million. Revenue from sales of
        Axcan’s products in the United States was $201.8 million (69.0% of total
        revenue) for the year ended September 30, 2006, compared to $159.7 million
        (63.5% of total revenue) for fiscal 2005 and $166.7 million for fiscal 2004.
        In
        Canada, revenue was $38.0 million (13.0% of total revenue) for the year ended
        September 30, 2006, compared to $34.4 million (13.7% of total revenue) for
        fiscal 2005 and $28.0 million for fiscal 2004. In Europe, revenue was $52.1
        million (17.8% of total revenue) for the year ended September 30, 2006, compared
        to $57.1 million (22.7% of total revenue) for fiscal 2005 and $48.7 million
        for
        fiscal 2004.
  Axcan’s
        revenue has historically been and continues to be principally derived from
        sales
        of pharmaceutical products to large pharmaceutical wholesalers and large
        pharmacy chains. Axcan utilizes a “pull-through” marketing approach that is
        typical of pharmaceutical companies. Under this approach, Axcan’s sales
        representatives demonstrate the features and benefits of its products to
        gastroenterologists who may write their patients prescriptions for Axcan’s
        products. The patients, in turn, take the prescriptions to pharmacies to
        be
        filled. The pharmacies then place orders with the wholesalers or, in the
        case of
        large pharmacy chains, their distribution centres, to whom Axcan sells its
        products.
  Axcan’s
        expenses are comprised primarily of selling and administrative expenses
        (including marketing expenses), cost of goods sold (including royalty payments
        to those companies from whom Axcan licenses some of its commercialized
        products), research and development expenses as well as depreciation and
        amortization.
  Axcan’s
        annual and quarterly operating revenues are primarily affected by three factors:
        the level of acceptance of Axcan’s products by gastroenterologists and their patients;
        the ability of Axcan to convince practitioners to use Axcan’s products for
        approved indications; and wholesaler buying patterns.
  Historically,
        wholesalers’ business models in the U.S. were dependent on drug price inflation.
        Their profitability and gross margins were directly tied to the speculative purchasing
        of pharmaceutical products at pre-increase prices, and the selling of their
        product inventory to their customers at the increased price. This inventory
        price arbitrage accounted for a predominant portion of compensation of
        wholesalers for their distribution services and had a dramatic effect on
        wholesaler buying patterns as they invested in inventories in anticipation
        of
        generating higher gross margins from manufacturer price increases. More
        recently, pharmaceutical manufacturers have not been increasing drug prices
        as
        frequently, and the percentage increases have been lower. For these and other
        reasons, some wholesalers have changed their business model to a fee-for-service
        arrangement where manufacturers pay wholesalers a fee for inventory management
        and other services. These fees typically are a percentage of the wholesaler’s
        purchases from the manufacturer or a fixed charge per piece or per unit.
        The
        fee-for-service approach results in wholesalers’ compensation being more stable,
        and volume-based as opposed to price-increase based.
  As
        a result of the move to a fee-for-service business model, many wholesalers
        are
        no longer investing in inventory ahead of anticipated price increases and
        are
        reducing their inventories from their historical levels. Under the new model,
        the consequence of manufacturers using wholesalers is that they now realize
        the
        benefit of price increases more rapidly in return for paying wholesalers
        for the
        services they provide, on a fee-for-service basis. This change in wholesaler’s
        business model affected Axcan’s revenue since fiscal 2005, and the resulting
        distribution services agreement (“DSA”) fees, for the year ended September 30,
        2006, were deducted from gross sales. In the year ended September 30, 2006,
        the
        company chose to adopt the classification of these fees as a deduction from
        sales in accordance with industry practice. In the previous year, these fees
        were included in selling and administrative expenses. Fees associated with
        these
        agreements incurred in the year ended September 30, 2005, were not
        material.
  Most
        importantly, the level of patient and physician acceptance of Axcan’s products,
        as well as the availability of similar therapies, which may be less effective
        but also less expensive than some of Axcan’s products, impact Axcan’s revenues
        by driving the level and timing of prescriptions for its products.
 
 **3**MD
              & A
 
 **CRITICAL
          ACCOUNTING POLICIES**
 Axcan’s
        consolidated financial statements are prepared in accordance with generally
        accepted accounting principles in the United States of America (“U.S. GAAP”),
        applied on a consistent basis. Axcan’s critical accounting policies include the
        use of estimates, revenue recognition, the recording of research and development
        expenses and the determination of the useful lives or fair value of goodwill
        and
        intangible assets. Some of Axcan’s critical accounting policies require the use
        of judgment in their application or require
        estimates of inherently uncertain matters. However, a change in the facts
        and
        circumstances of an underlying transaction could significantly change the
        application of Axcan’s accounting policies to that transaction, which could have
        an effect on our financial statements. Discussed below are those policies
        that
        management believes are critical and require the use of complex judgment
        in
        their application.
  Use
        of Estimates
 The
        preparation of financial statements in accordance with U.S. GAAP requires
        management to make estimates and assumptions that affect the recorded amounts
        of
        assets and liabilities, the disclosure of contingent assets and liabilities
        as
        of the date of financial statements and the disclosure of recognized amounts
        of
        revenues and expenses during the year. Significant estimates and assumptions
        made by management include the allowance for accounts receivable and
        inventories, reserves for product returns, rebates, chargebacks and DSA fees,
        the classification of intangible assets between finite and indefinite life,
        useful lives of long-lived assets, the expected cash flows used in evaluating
        long-lived assets, goodwill and investments for impairment, contingency
        provisions, the establishment of worldwide provision for income taxes and
        other
        accrued charges. These estimates are made using historical and other information
        available to management. The Company reviews all significant estimates affecting
        the financial statements on a recurring basis and records the effect of any
        adjustments when necessary. Actual results could differ from those estimates
        based upon future events, which could include, among other risks, changes
        in
        regulations governing the manner in which we sell our products, changes in
        health care environment and managed care consumption patterns.
  Revenue
        Recognition
 Revenue
        is recognized when the product is shipped to the Company’s customer, provided
        the Company has not retained any significant risks of ownership or future
        obligations with respect to the product shipped. Provisions for sales discounts
        and estimates for charge-backs, managed care and Medicaid rebates, product
        returns and DSA fees are established as a reduction of product sales revenues
        at
        the time such revenues are recognized. These revenue reductions are based
        on management’s
        best estimates at the time of sale which are based on historical experience
        adjusted to reflect known changes in the factors that impact such reserves.
        These revenue reductions are generally reflected as an addition to accrued
        expenses.
  We
        do not provide any form of price protection to our wholesale customers and
        permit product returns only if the product is returned within 12 months of
        expiration. Credit for returns is issued to the original purchaser at current
        net pricing less 10%. Accrued liabilities include reserves of $7.8 million
        and
        $7.5 million as of September 30, 2006, and September 30, 2005, respectively
        for
        estimated product returns.
  In
        the United States, we establish and maintain reserves for amounts payable
        by us
        to managed care organizations and state Medicaid programs for the reimbursement
        of portions of the retail price of prescriptions filled that are covered
        by
        these programs. The Company establishes and maintains reserves for amounts
        payable by us to wholesale distributors for the difference between their
        regular
        sale price and the contract price for the products sold to our contract
        customers. The amounts are recognized as revenue reductions at the time of
        sale
        based on our best estimate of the product’s utilization by these managed care
        and state Medicaid patients and sales to our contract customers, using
        historical experience adjusted to reflect known changes in the factors that
        impact such reserves. Accrued liabilities include reserves of $12.0 million
        and
        $4.8 million as of September 30, 2006, and September 30, 2005, respectively,
        for
        estimated rebates and chargebacks.
  During
        the second quarter of fiscal 2006, the reserve for product returns decreased
        by
        $1.6 million, and the reserves for chargebacks and contract rebates increased
        by
        $4.4 million as a result of a refinement in the method used in the calculation
        for such reserves. The refinement was implemented based on industry best
        practices as well as additional information that was not available to the
        Company in prior periods. The remaining increases in reserves for products
        returns and estimated rebates and chargebacks are due to the increase in
        revenue.
  If
        the levels of chargebacks, fees pursuant to DSAs, managed care and Medicaid
        rebates, product returns and discounts fluctuate significantly and/or if
        our
        estimates do not adequately reserve for these reductions of net product
        revenues, our reported revenue could be negatively affected.
 **4** MD
              & A
  Goodwill
        and Intangible Assets
 In
        the past, the Company acquired products and businesses that include goodwill,
        trademarks, license agreements and other identifiable intangible assets.
        Axcan’s
        goodwill and intangible assets are stated at cost, less accumulated
        amortization. Since October 1, 2001, the Company no longer amortizes goodwill
        and intangible assets with an indefinite life. However, management
        assesses the impairment of goodwill and intangible assets at least annually
        and
        whenever events or changes in circumstances indicate that the carrying amounts
        of these assets may not be recoverable, by comparing the carrying value of
        the
        unamortized portion of goodwill and intangible assets to the future benefits
        of
        the Company’s activities, expected sales of pharmaceutical products or the
        estimated market value of the business associated with these assets. Should
        there be a permanent impairment in value or if the unamortized balance exceeds
        recoverable amounts, a write-down will be recognized, for the current year.
        To
        date, Axcan has not recognized any significant impairment in value on goodwill
        and intangible assets with an indefinite life.
  Intangible
        assets with a finite life are amortized over their estimated useful lives
        according to the straight-line method at annual rates varying from 4% to
        15%.
        The straight-line method of amortization is used because it reflects, in
        the
        opinion of management, the pattern in which the intangible assets with a
        finite
        life are used. In determining the useful life of intangible assets, the Company
        considers many factors including the intention of management to support the
        asset on a long-term basis by maintaining the level of expenditure necessary
        to
        support the asset, the use of the asset, the existence and expiration date
        of a
        patent, the existence of a generic or competitor version of the product and
        any
        legal or regulatory provisions that could limit the use of the asset. Axcan
        had
        not recognized any significant impairment in value of intangible assets with
        a
        finite life prior to the three-month period ended March 31, 2006, during
        which
        Axcan recognized a write-down of $5.8 million on a French product line including
        TAGAMET and TRANSULOSE, following budgetary initiatives implemented by the
        French government which adversely affected the estimated future sales of
        these
        products.
  As
        a result of acquisitions of product rights and other identifiable intangible
        assets, we included $375.7 million and $388.9 million as net intangible assets
        on our consolidated balance sheets as of September 30, 2006, and September
        30,
        2005, respectively. Acquisitions of intangible assets for the year ended
        September 30, 2006, include $4.5 million for the final milestone payment
        due in
        connection with the purchase of the rights of
 
 PHOTOFRIN.
        Estimated annual amortization expense for intangible assets with a finite
        life,
        which have a weighted average remaining amortization period of approximately
        17
        years, for the next five fiscal years, is approximately $17.2 million.
  Also
        as a result of acquisitions, we included $27.5 million of goodwill on our
        consolidated balance sheets as of September 30, 2006, and September 30,
        2005.
  Research
        and Development Expenses
 Research
        and development expenses are charged to operations in the year they are
        incurred. Acquired in-process research and development having no alternative
        future use is written off at the time of acquisition. The cost of intangibles
        that are acquired from others for a particular research and development project,
        with no alternative use, is written off at the time of acquisition.
  ACQUISITION
        OF PRODUCTS
 On
        November 18, 2003, the Company acquired the rights to a group of products
        from
        Aventis Pharma S.A. (“Aventis”). The $145.0 million purchase price was paid out
        of Axcan’s cash on hand. These products are CARAFATE and BENTYL for the U.S.
        market and SULCRATE, BENTYLOL and PROCTOSEDYL for the Canadian market
        (collectively, “AVAX” product line).
  On
        December 10, 2002, the Company acquired the rights to the Ursodiol 250 mg
        tablets DELURSAN for the French market from Aventis, for a cash purchase
        price
        of $22.8 million.
  On
        December 3, 2002, the Company acquired the worldwide rights to the PANZYTRAT
        enzyme product line from Abbott for a cash purchase price of $45.0 million.
  During
        a transition period ended during the 2005 fiscal year, the seller in certain
        of
        these acquisition transactions acted as selling agent for the management
        of
        these products. For the year ended September 30, 2005, sales of some of these
        products were still managed in part by the sellers. Axcan included in its
        revenue the net sales from such products less corresponding cost of goods
        sold
        and other seller related expenses. Consequently, although net sales of such
        products for the year ended September 30, 2005, were $2.4 million ($7.7 million
        in 2004), the Company only included in its revenue an amount of $0.9 million
        ($4.7 million in 2004) representing the net sales less cost of goods sold
        and
        other seller related expenses.
 **5**MD & A
  **RESULTS
                    OF OPERATIONS**The
                    following table sets forth, for the years indicated,the
                    percentage of revenue represented by items inAxcan’s
                    consolidated statements of operations:
 For
                      the years ended September 30
                  
                  
                  **2006**
                  
                  
                  2005
                  
                  
                  2004**%**
                  
                  
                  %
                  
                  
                  %Revenue
                  
                  
                  **100.0**
                  
                  
                  100.0
                  
                  
                  100.0Cost
                      of goods sold (a)
                  
                  
                  **24.9**
                  
                  
                  28.5
                  
                  
                  22.2Selling
                      and administrative expenses (a)
                  
                  
                  **31.9**
                  
                  
                  34.2
                  
                  
                  31.4Research
                      and development expenses (a)
                  
                  
                  **13.6**
                  
                  
                  12.7
                  
                  
                  8.2Depreciation
                      and amortization
                  
                  
                  **7.8**
                  
                  
                  8.6
                  
                  
                  6.7Partial
                      write-down of intangible assets
                  
                  
                  **2.0**
                  
                  
                  -
                  
                  
                  -**80.2**
                  
                  
                  84.0
                  
                  
                  68.5Operating
                      income
                  
                  
                  **19.8**
                  
                  
                  16.0
                  
                  
                  31.5Financial
                      expenses
                  
                  
                  **2.4**
                  
                  
                  2.8
                  
                  
                  2.8Interest
                      income
                  
                  
                  **(1.9**
                  **)**
                  
                  (0.5
                  )
                  
                  (0.3
                  )Gain
                      on foreign exchange
                  
                  
                  **(0.4**
                  **)**
                  
                  (0.1
                  )
                  
                  (0.1
                  )**0.1**
                  
                  
                  2.2
                  
                  
                  2.4Income
                      before income taxes
                  
                  
                  **19.7**
                  
                  
                  13.8
                  
                  
                  29.1Income
                      taxes
                  
                  
                  **6.3**
                  
                  
                  3.3
                  
                  
                  9.1Net
                      income
                  
                  
                  **13.4**
                  
                  
                  10.5
                  
                  
                  20.0(a)
                      Exclusive of depreciation and amortization
 **QUARTERLY
                    RESULTS**(amounts
                    in thousands of dollars, except share related data)
 Net
                      income per shareQuarter
                  
                  Revenue
                  
                  Net
                      income
                  
                  Basic
                  
                  Diluted$
                  
                  
                  $
                  
                  
                  $
                  
                  
                  $**2006**
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ******First**
                  ****
                  ****
                  **70,639**
                  ****
                  ****
                  **9,245**
                  ****
                  ****
                  **0.20**
                  ****
                  ****
                  **0.19**
                  ******Second**
                  ****
                  ****
                  **72,770**
                  ****
                  ****
                  **8,322**
                  ****
                  ****
                  **0.18**
                  ****
                  ****
                  **0.17**
                  ******Third**
                  ****
                  ****
                  **76,657**
                  ****
                  ****
                  **13,280**
                  ****
                  ****
                  **0.29**
                  ****
                  ****
                  **0.26**
                  ******Fourth**
                  ****
                  ****
                  **72,251**
                  ****
                  ****
                  **8,272**
                  ****
                  ****
                  **0.18**
                  ****
                  ****
                  **0.17**
                  ********
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****
                  ****2005First
                  
                  
                  61,583
                  
                  
                  7,754
                  
                  
                  0.17
                  
                  
                  0.16Second
                  
                  
                  63,364
                  
                  
                  5,425
                  
                  
                  0.12
                  
                  
                  0.12Third
                  
                  
                  59,409
                  
                  
                  4,097
                  
                  
                  0.09
                  
                  
                  0.09Fourth
                  
                  
                  66,987
                  
                  
                  9,149
                  
                  
                  0.20
                  
                  
                  0.19
  **YEAR
            ENDED SEPTEMBER 30, 2006**
 **COMPARED
            TO YEAR ENDED**
 **SEPTEMBER
            30, 2005**
  Revenue For
              the year ended September 30, 2006, revenue was $292.3
              million compared to $251.3 million for the preceding fiscal
              year, an increase of 16.3%. This increase in revenue
              primarily resulted from higher sales in the United
              States. The end-customer prescription demand resulted
              in positive growth for most of our products sold in
              the United States, which was reflected in sales to our major
              wholesalers as they work towards reaching their targeted
              inventory levels. Although sales have increased, major
              wholesalers in the United States reduced their average
              inventory levels in fiscal 2005 to a range of between
              8 to 12 weeks. During fiscal 2006, wholesalers maintained
              inventory at the lower end of this estimated range.
  Revenue
              is stated net of deductions for product returns, chargebacks,
              contract rebates, discounts, DSA fees and other
              allowances of $58.6 million (16.7% of gross revenue)
              for the year ended September 30, 2006, and $39.4
              million (13.6% of gross revenue) for the year ended September
              30, 2005. This increase of total deductions as
              a percentage of gross revenue is primarily due to an increase
              in chargebacks, contract rebates reserves and DSA
              fees. During the second quarter of fiscal 2006, the reserve
              for chargebacks and contract rebates was increased
              as a result of a refinement in the method used in
              the calculation for such reserves. The refinement was implemented
              based on best industry practices as well as
              additional information that was not available to the Company
              in prior periods. The increase is also due to the
              DSA fees resulting from the change of some wholesalers to
              a fee-for-service business model for the year ended
              September 30, 2006.
  **Product
                Sales**
 Key
                sales figures for fiscal 2006 are as follows:
  •  
                Sales of pancreatic enzymes (ULTRASE, PANZYTRAT and
                VIOKASE) amounted to $58.8 million, an increase of
                0.2% over fiscal 2005 sales of pancreatic enzymes.
 •  
                Sales of ursodiol (URSO/URSO 250, URSO FORTE/URSO
                DS and DELURSAN) increased 25.2% to $75.4
                million. This increase is mainly due to the impact of
                instability of wholesaler inventory levels in 2005.
 •  
                Sales of mesalamine (CANASA and SALOFALK) amounted
                to $69.6 million, a 61.1% increase from the
                prior year. This increase is also mainly due to the
                impact of instability of wholesaler inventory levels
                in 2005.
 •  
                Sales of the AVAX product line amounted to $50.3
                million, an increase of 12.8% over the previous fiscal
                year.
 •   Sales
                of PHOTOFRIN and other products in North America amounted to $11.6
                million, a
                17.1% decrease from the prior year.
 •  
Sales
                of other products in Europe, mainly LACTEOL and TAGAMET, amounted
                to $26.1
                million, an 11.2% decrease over the prior year. This decrease is
                mainly due to
                lower sales of LACTEOL following the delisting of the product  from
                government formularies in France.
 **6**MD
                  & A
  **Cost
        of Goods Sold**
 
 Cost
        of goods sold consists principally of the costs of raw materials, royalties
        and
        manufacturing costs. Axcan outsources most of its manufacturing requirements.
        For the year ended September 30, 2006, cost of goods sold increased $1.3
        million
        (1.8%) to $72.8 million from $71.5 million for the preceding fiscal year.
        As a
        percentage of revenue, cost of goods sold for the year ended September 30,
        2006
        decreased as compared to the preceding fiscal year from 28.5% to 24.9% .
        This
        decrease in the cost of goods sold as a percentage of revenue was due mainly
        to
        the increase in sales of products with a higher margin and the fact that
        cost of
        goods sold for the year ended September 30, 2005 included $4.7 million related
        to the write-down of inventory of finished goods for one product line sold
        in
        the United States.
  Selling
        and Administrative Expenses
 Selling
        and administrative expenses consist principally of salaries and other costs
        associated with Axcan’s sales force and marketing activities. For the year ended
        September 30, 2006, selling and administrative expenses increased $7.3 million
        (8.5%) to $93.3 million from $86.0 million for the preceding fiscal year.
  The
        increase for the year ended September 30, 2006 is net of a reduction in expenses
        of $2.9 million following the reversal of a pending legal settlements accrual
        during the second quarter of fiscal 2006. The Company’s subsidiary Axcan
        Scandipharm Inc. (“Axcan Scandipharm”), had been named, along with other third
        parties, as a defendant in several legal proceedings related to the product
        line
        it markets under the name ULTRASE. In addition, the product line’s manufacturer
        and other defendant companies had claimed a right to recover amounts paid
        defending and settling these claims. The parties agreed to settle their dispute
        through binding arbitration. The Company accrued $2.9
 million
        to cover any future settlements in connection with the indemnification claim
        and
        the lawsuits discussed above. Following a series of decisions rendered by
        the
        arbitrator in favour of Axcan Scandipharm, the Company reassessed its exposure,
        and the accrual for these claims was reversed in the three-month period ended
        March 31, 2006, thus reducing the selling and administrative expenses by
        $2.9
        million for the year ended September 30, 2006.
 
 The
        adoption of the new accounting rule concerning the compensation cost for
        share
        based awards resulted in an increase in selling and administrative expenses
        of
        $3.0 million (3.5%) for the year ended September 30, 2006. The increase is
        also
        due to consulting fees for regulatory compliance related to Sarbanes-Oxley,
        incremental marketing expenses in preparation of new products launches,
        additional marketing efforts on our current products and the Company’s French
        subsidiary’s restructuring charge of $1.7 million in the third
        quarter.
  **Research
        and Development Expenses**
 Research
        and development expenses consist principally of fees paid to outside parties
        that Axcan uses to conduct clinical studies and to submit governmental approval
        applications on its behalf as well as the salaries and benefits paid to its
        personnel involved in research and development projects. Research and
        development expenses increased $7.9 million (24.8%) to $39.8 million for
        the
        year ended September 30, 2006, from $31.9 million for the preceding fiscal
        year.
        This increase was mainly due to the termination of the development of ITAX
        for
        the treatment of Functional Dyspepsia, which generated additional research
        and
        development expenses of $4.3 million. These expenses were incurred to terminate
        certain supply agreements related to the manufacturing of the product’s active
        pharmaceutical ingredient. Additional costs associated with the close out
        of
        ongoing clinical trials will be recorded in the financial statements in future
        quarters as they are incurred. In addition, the Company incurred during the
        fourth quarter $1.5 million in up-front licensing fees associated with a
        co-development agreement signed with AGI Therapeutics Ltd., for the development
        of AGI-010, a compound for the treatment of gastro-esophageal reflux disease
        and
        nocturnal acid breakthrough.
  **Depreciation
        and Amortization**
 Depreciation
        and amortization consists principally of the amortization of intangible assets
        with a finite life. Intangible assets include trademarks, trademark licenses
        and
        manufacturing rights. Depreciation and amortization increased $1.3 million
        (6.0%) to $22.8 million for the year ended September 30, 2006, from $21.5
        million for the preceding fiscal year. This increase is mainly due to the
        amortization of LACTEOL and ADEKs which were reclassified from intangible
        assets
        with an indefinite life to intangible assets with a finite life on October
        1,
        2005.
 **7**MD
              & A
 **Partial
        Write-down of Intangible Assets**
 As
        a result of budgetary initiatives implemented by the French government, which
        resulted in the delisting of a number of pharmaceutical products from government
        formularies and the re-pricing of other pharmaceutical products, the Company
        reviewed the appropriate carrying value and useful life of its French
        subsidiary’s intangible assets. During the three-month period ended March 31,
        2006, a partial write-down of $5.8 million was recognized on a French line
        of
        products including TAGAMET and TRANSULOSE, as the carrying value of the
        intangible assets associated with these products, totalling $18.7 million
        prior
        to the write-down, exceeded their estimated fair value as management expects
        a
        negative effect on TAGAMET and TRANSULOSE future sales.
  **Financial
        Expenses**
 Financial
        expenses consist principally of interest and fees paid in connection with
        money
        borrowed for acquisitions. Financial expenses decreased $0.1 million (1.4%)
        to
        $7.0 million for the year ended September 30, 2006, from $7.1 million for
        the
        preceding fiscal year.
  **Income
        Taxes**
 For
        the year ended September 30, 2006, income taxes amounted to $18.3 million
        compared to $8.4 million for the preceding fiscal year. The effective tax
        rates
        were 31.8% for the year ended September 30, 2006 and 24.1% for the year ended
        September 30, 2005. This increase in effective tax rate is due in part to
        the
        research and development tax credits, deducted from the income taxes expense,
        in
        the amount of $2.5 million or 4.4 percentage points of the effective tax
        rate
        for the year ended September 30, 2006, compared to $2.6 million or 7.6
        percentage points of the effective tax rate for the preceding fiscal year.
        This
        increase in effective tax rate before the deduction of research and development
        tax credits is mainly due to the fact that a greater part of our taxable
        income
        came from the United States where the income tax rate is higher.
  The
        Company is currently being audited by Canada Revenue Agency, mainly on transfer
        pricing issues, for fiscal year 2002 to fiscal year 2004. The Company has
        estimated that, based on discussions held with Canada Revenue Agency relative
        to
        this audit and on the information currently at hand, its current estimate
        of tax
        provision is reasonable. In the event that it becomes probable that there
        will
        be an unfavourable outcome to the audit and the Company can reasonably estimate
        the assessment that may be levied, then the Company will record a charge
        for the
        estimated assessment.
 
 The
        income tax expense (in thousands of dollars) and corresponding tax rate are
        summarized in the following tables:
 
 For
                  the years ended September 30
              
              **2006**
              
              2005**$**
              
              
              $**Income
                  tax expense**Income
                  tax
              
              
              **20,813**
              
              
              11,032Research
                  and development tax credits
              
              
              **(2,547**
              **)**
              
              (2,619
              )Income
                  tax expense
              
              
              **18,266**
              
              
              8,413For
                  the years ended September 30
              
              
              **2006**
              
              
              2005**%**
              ****
              
              %**Income
                  tax rate**Income
                  tax
              
              
              **36.2**
              
              
              31.7Research
                  and development tax credits
              
              
              **(4.4**
              **)**
              
              (7.6
              )Effective
                  tax rate
              
              
              **31.8**
              
              
              24.1
 
 **Net
        Income**
 Net
        income was $39.1 million or $0.86 of basic income per share and $0.79 of
        diluted
        income per share, for the year ended September 30, 2006, compared to $26.4
        million or $0.58 of basic income per share and $0.56 of diluted income per
        share
        for the preceding year. Net income for the year ended September 30, 2006
        takes
        into account the expensing of stock-based compensation which amounted to
        $3.6
        million. Had stock-based compensation been recorded in the prior year, the
        impact on net income for the year ended September 30, 2005 would have been
        $4.3
        million or $0.09 of basic income per share and $0.08 of diluted income per
        share, thus reducing net income to $22.2 million or $0.49 of basic income
        per
        share and $0.48 of diluted income per share. The change in net income for
        the
        year ended September 30, 2006 resulted mainly from an increase in revenue
        of
        $41.0 million and an increase in interest income of $4.2 million, which were
        offset partly by a $23.6 million increase in operating expenses and an increase
        in income taxes of $9.9 million. The weighted average number of common shares
        outstanding used to establish the basic per share amounts increased from
        45.6
        million for the year ended September 30, 2005 to 45.7 million for the year
        ended
        September 30, 2006, following the exercise of options previously granted
        pursuant to Axcan’s stock incentive plans. The weighted average number of common
        shares used to establish the diluted per share amounts decreased from 55.2
        million for the year ended September 30, 2005 to 55.1 million for the year
        ended
        September 30, 2006.
 **8**MD
            & A
   **YEAR
        ENDED SEPTEMBER 30, 2005 COMPARED TO YEAR ENDED SEPTEMBER 30,
        2004**
 
 **Revenue**
 For
        the year ended September 30, 2005, revenue was $251.3 million compared to
        $243.6
        million for the preceding fiscal year, an increase of 3.2% . This increase
        in
        revenue primarily resulted from higher sales in Canada and Europe partly
        offset
        by lower sales in the United States following an announced intention from
        major
        wholesalers to reduce their inventory levels.
  Revenue
        is stated net of deductions for product returns, chargebacks, contract rebates,
        discounts and other allowances of $39.4 million (13.6% of gross revenue)
        in
        fiscal 2005, and $28.8 million (10.6 % of gross revenue) in fiscal 2004.
        This
        increase of total deductions as a percentage of gross revenue is primarily
        due
        to an increase in returns and chargebacks in fiscal 2005.
  **Product
        Sales**
 Key
        sales figures for fiscal 2005 are as follows:
 
 •
              Sales
                  of pancreatic enzymes (ULTRASE, PANZYTRAT and VIOKASE) amounted
                  to $58.7
                  million, an increase of 2.5% over fiscal 2004 sales of pancreatic
                  enzymes.
 •
              Sales
                  of ursodiol (URSO/URSO 250, URSO FORTE/URSO DS and DELURSAN) increased
                  7.3% to $60.2 million.
 •
              Sales
                  of mesalamine (CANASA and SALOFALK) amounted to $43.2 million,
                  a 14.1%
                  decrease from the prior year. This discrepancy was caused by larger
                  than
                  usual wholesaler orders in the last quarter of fiscal 2004, which
                  resulted
                  in a 92% increase in sales of fiscal 2004 compared to the prior
                  fiscal
                  year. Often, customers will buy in advance of pre-announced price
                  increases or in anticipation of a price increase, thus shifting
                  revenue
                  from one period to another.
 •
              Sales
                  of the AVAX product line amounted to $44.6 million, an increase
                  of 6.7%
                  over the previous fiscal year.
 •
              Sales
                  of PHOTOFRIN and other products in North America amounted to $14.0
                  million, a 6.9% increase from the prior
                  year.
 •
              Sales
                  of other products in Europe, mainly LACTEOL and TAGAMET, amounted
                  to $29.4
                  million, a 19.0% increase over the prior year. This increase is
                  mainly due
                  to higher sales of LACTEOL.
 
 **Cost
        of Goods Sold**
 For
        the year ended September 30, 2005, cost of goods sold increased $17.3 million
        (31.9%) to $71.5 million from $54.2 million for the preceding fiscal year.
        As a
        percentage of revenue, cost of goods sold for the year ended September 30,
        2005
        increased as compared to the
        preceding fiscal year from 22.2% to 28.5% . This increase in the cost of
        goods
        sold as a percentage of revenue was due mainly to the write-down of inventory
        of
        finished goods with less than twelve months of shelf life, an increase in
        sales
        of products with a lower margin and a reduction in sales of products with
        a
        higher margin. Cost of goods sold for the year ended September 30, 2005,
        includes $4.7 million related to the write-down of inventory of finished
        goods
        for one product line sold in the United States.
  **Selling
        and Administrative Expenses**
 Selling
        and administrative expenses increased $9.6 million (12.6%) to $86.0 million
        for
        the year ended September 30, 2005, from $76.4 million for the preceding fiscal
        year. This increase is mainly due to an increase in our sales force in
        preparation for additional products to be marketed, including ITAX, additional
        marketing efforts on our current products, increased distribution cost following
        the signing of a new agreement with a major wholesaler and consulting fees
        for
        Information Technology implementation and regulatory compliance.
  **Research
        and Development Expenses**
 Research
        and development expenses increased $12.0 million (60.3%) to $31.9 million
        for
        the year ended September 30, 2005, from $19.9 million for the preceding fiscal
        year. This increase is mainly due to the Phase III development of ITAX, acquired
        in August 2003, for the treatment of functional dyspepsia. Phase III is the
        most
        expensive stage of clinical development.
  **Depreciation
        and Amortization**
 Depreciation
        and amortization increased $5.1 million (31.1%) to $21.5 million for the
        year
        ended September 30, 2005, from $16.4 million for the preceding fiscal year.
        The
        increase is mainly due to the amortization of the AVAX product line acquired
        from Aventis on November 18, 2003, and of PANZYTRAT which was reclassified
        from
        intangible assets with an indefinite life to intangible assets with a finite
        life on October 1, 2004.
  **Financial
        Expenses**
 Financial
        expenses increased $0.2 million (2.9%) to $7.1 million for the year ended
        September 30, 2005, from $6.9 million for the preceding fiscal
        year.
  **Income
        Taxes**
 Income
        taxes amounted to $8.4 million for the year ended September 30, 2005, compared
        to $22.3 million for the preceding fiscal year. The effective tax rates
        were
 
 24.1%
        for the year ended September 30, 2005 and 31.4% for the year ended September
        30,
        2004. The decrease in effective tax rate is mainly due to research and
        development tax credits, deducted from the income tax expense, of $2.6 million
        for the year ended September 30, 2005 compared to $1.2 million for the preceding
        fiscal year.
 **9**MD
            & A
  The
        income tax expense and corresponding tax rate are summarized in the following
        tables:
 
 For
                  the years ended September 30
              
              2005
              
              2004$
              
              
              $**Income
                  tax expense**Income
                  tax
              
              
              11,032
              
              
              23,416Research
                  and development tax credits
              
              
              (2,619
              )
              
              (1,163
              )Income
                  tax expense
              
              
              8,413
              
              
              22,253For
                  the years ended September 30
              
              
              2005
              
              
              2004%
              
              
              %**Income
                  tax rate**Income
                  tax
              
              
              31.7
              
              
              33.0Research
                  and development tax credits
              
              
              (7.6
              )
              
              (1.6
              )Effective
                  tax rate
              
              
              24.1
              
              
              31.4
 
 **Net
        Income**
 Net
        income was $26.4 million or $0.58 of basic income per share and $0.56 of
        diluted
        income per share, for the year ended September 30, 2005, compared to $48.7
        million or $1.08 of basic income per share and $0.96 of diluted income per
        share
        for the preceding year. The reduction in net income for the year ended September
        30, 2005 resulted mainly from an increase in revenue of $7.7 million, an
        increase in operating expenses totalling $44.1 million and a decrease in
        income
        taxes of $13.8 million. The weighted average number of common shares outstanding
        used to establish the basic per share amounts increased from 45.3
        million
        for the year ended September 30, 2004 to 45.6
        million
        for the year ended September 30, 2005, following
        the exercise of options previously granted pursuant to Axcan’s stock option
        plan. The weighted average number of common shares used to establish the
        diluted
        per share amounts increased from 55.0 million for the year ended September
        30,
        2004 to 55.2 million for the year ended September 30, 2005.
  **CANADIAN
        GAAP**
 The
        differences (in thousands of dollars) between U.S. and Canadian GAAP which
        affect net income for the years ended September 30, 2006 and 2005 are summarized
        in the following table:
 
 For
                  the years ended September 30
              
              **2006**
              
              2005**$**
              
              
              $Net
                  income in accordance with U.S. GAAP
              
              
              **39,119**
              
              
              26,425Write-off
                  of an intangible asset
              
              
              **(12,000**
              **)**
              
              -Implicit
                  interest on convertible notes
              
              
              **(5,064**
              **)**
              
              (4,631
              )Stock-based
                  compensation expense
              
              
              **-**
              
              
              (
                  4,590
              )Amortization
                  of new product acquisition costs
              
              
              **(54**
              **)**
              
              (54
              )Income
                  tax impact of the above adjustments
              
              
              **1,002**
              
              
              338Net
                  earnings in accordance with Canadian GAAP
              
              
              **23,003**
              
              
              17,488
 
 On
        March 5, 2003, the Company closed an offering of $125.0 million aggregate
        principal amount of 4.25% convertible subordinated notes due April 15, 2008.
        As
        a result of the terms of the notes, under Canadian GAAP, an amount of $24.2
        million was included in shareholders’ equity as equity component of the
        convertible debt and an amount of $100.8 million was included in long-term
        debt,
        as the liability component of the convertible notes. For the year ended
        September 30, 2006, implicit interest in the amount of $5.1 million ($4.6
        million in 2005) was accounted for and added to the liability
        component.
  Under
        Canadian GAAP, the effect of stock-based compensation has been accounted
        for
        using the fair value method since October 1, 2004. Under U.S. GAAP, the effect
        of stock-based compensation has been accounted for using the fair value method
        since October 1, 2005.
  Under
        Canadian GAAP, research and development expenses are stated net of related
        tax
        credits which generally constitute between 5% and 10% of the aggregate amount
        of
        such expenses. Under U.S. GAAP, these tax credits are applied against income
        taxes.
  Under
        U.S. GAAP, acquired in-process research is included in operations as at the
        date
        of acquisition if no alternative future use is established. Under Canadian
        GAAP,
        the acquired in-process research is deferred as intangible assets and amortized
        from the date of commencement of commercial production or written off if
        the
        research project for which it was acquired is terminated.
 
 **10**MD
              & A
  **LIQUIDITY
        AND CAPITAL RESOURCES**
 Axcan’s
        cash, cash equivalents and short-term investments increased $75.4 million
        (77.3%) to $173.0 million at September 30, 2006 from $97.6 million at September
        30, 2005. As of September 30, 2006, working capital was $197.8 million, compared
        to $132.0 million at September 30, 2005, an increase of $65.8 million (49.8%)
        .
        These increases were mainly due to the cash flows from operating activities
        of
        $84.3 million for the year ended September 30, 2006.
  Including
        cash, cash equivalents and short term investments at September 30, 2006,
        and the
        line of credit described below, Axcan had up to $298.0 million of cash
        available.
  Total
        assets increased $54.4 million (8.5%) to $695.8 million as of September 30,
        2006
        from $641.4 million as of September 30, 2005. Shareholders’ equity increased
        $49.8 million (11.9%) to $467.4 million as of September 30, 2006 from $417.6
        million as of September 30, 2005.
  Historically,
        Axcan has financed research and development, operations, acquisitions, milestone
        payments and investments out of the proceeds of public and private sales
        of its
        equity and convertible debt, cash flows from operating activities, and loans
        from joint venture partners and financial institutions. Since it went public
        in
        Canada in December 1995, Axcan has raised approximately $243.0 million from
        sales of its equity and $125.0 million from sales of convertible notes.
        Furthermore, Axcan has borrowed and since repaid funds from financial
        institutions to finance the acquisition of Axcan Scandipharm Inc. and from
        Schwarz Pharma Inc., a former joint venture partner, to finance the acquisition
        of URSO.
  Axcan’s
        research and development expenses totalled $31.9 million for fiscal 2005
        and
        $39.8 million for fiscal 2006. Axcan believes that its cash, cash equivalents
        and short-term investments, together with funds provided by operations, will
        be
        sufficient to meet its operating cash requirements, including the development
        of
        products through research and development activities, capital expenditures
        and
        repayment of its debt. Axcan believes that regulatory approvals of future
        products and extension of product indications, stemming from its research
        and
        development efforts, will significantly contribute to an increase in funds
        provided by operations. However, Axcan regularly reviews product and other
        acquisition opportunities and may therefore require additional debt or equity
        financing. Axcan cannot be certain that such additional financing, if required,
        will be available on acceptable terms, or at all.
 
 **LINE
        OF CREDIT**
 The
        Company has a credit facility with a banking syndicate. The credit facility
        consists of a $125.0 million 364-day extendible revolving facility with a
        two-year term-out option maturing on September 20, 2009.
  The
        credit facility is secured by a first priority security interest on all present
        and future acquired assets of the Company and its material subsidiaries,
        and
        provides for the maintenance of certain financial ratios. Among the restrictions
        imposed by the credit facility is a covenant limiting cash dividends, share
        repurchases (other than redeemable
        shares issuable in connection with a permitted acquisition) and similar
        distributions to shareholders to 10% of the Company’s net income for the
        preceding fiscal year. As of September 30, 2006, Axcan was in compliance
        with
        all covenants under the credit facility.
  The
        interest rate varies, depending on the Company’s leverage, between 25 basis
        points and 100 basis points over the Canadian prime rate or U.S. base rate,
        and
        between 125 basis points and 200 basis points over the LIBOR rate or bankers’
acceptances. The line of credit also provides for a stand-by fee of between
        25
        and 37.5 basis points. The credit facility may be drawn in U.S. dollars,
        in
        Canadian dollars or Euro equivalents. As of September 30, 2006, there was
        no
        amount outstanding under this credit facility.
  **CONVERTIBLE
        SUBORDINATED NOTES AND OTHER LONG-TERM DEBT**
 Long-term
        debt, including instalments due within one year, totalled $126.2 million
        as of
        September 30, 2006 compared to $127.8 million as of September 30, 2005. As
        of
        September 30, 2006, the long-term debt included $1.2 million of obligations
        under capital leases and the $125.0 million 4.25% convertible subordinated
        notes
        due 2008, which were issued on March 5, 2003.
  The
        notes are convertible into 8,924,113 common shares during any quarterly
        conversion period if the closing price per share for at least 20 consecutive
        trading days during the 30 consecutive trading-day period ending on the first
        day of the conversion period exceeds 110% of the conversion price in effect
        on
        that thirtieth trading day. The notes are also convertible during the five
        business-day period following any 10 consecutive trading-day period in which
        the
        daily average of the trading prices for the notes was less than 95% of the
        average conversion value for the notes during that period. The noteholders
        may
        also convert their
        notes upon the occurrence of specified corporate transactions or if the Company
        has called the notes for redemption. Since April 20, 2006, the Company may,
        at
        its option, redeem the notes, in whole or in part at redemption prices varying
        from 101.70% to 100.85% of the principal amount plus any accrued and unpaid
        interest to the redemption date. The notes also include provisions for the
        redemption of all the notes for cash at the option of the Company following
        certain changes in tax treatment.
 **11**MD
            & A
  **CASH
        FLOWS**
 Cash
        flows provided by operating activities increased $16.6 million from $67.7
        million for the year ended September 30, 2005 to $84.3 million for the year
        ended
  September
        30, 2006. This increase is mainly due to the increase in net income of $18.5
        million before the partial write-down of intangible assets. Cash flows used
        by
        financing activities were $0.6 million for the year ended September 30, 2006.
        Cash flows used by investing activities for the year ended September 30,
        2006
        were $108.1 million mainly due to the net acquisition of short-term investments
        of $99.5 million and the cash used for the acquisition of property, plant
        and
        equipment and intangible assets for $8.6 million. Cash flows used by investing
        activities for the year ended September 30, 2005 were $8.1 million mainly
        due to
        the net acquisition of short-term investments of $1.7 million plus the cash
        used
        for the acquisition of property, plant and equipment for $6.3
        million.
  **OFF-BALANCE
        SHEET ARRANGEMENTS**
 Axcan
        does not have any transactions, arrangements and other relationships with
        unconsolidated entities that are likely to affect its operating results,
        its
        liquidity or capital resources. Axcan has no special purpose or limited purpose
        entities that provide off-balance sheet financing, liquidity or market or
        credit
        risk support, engage in leasing, hedging, research and development services,
        or
        other relationships that expose the Company to liability that is not reflected
        on the face of the consolidated financial statements.
  **CONTRACTUAL
        OBLIGATIONS**
 The
        following table summarizes Axcan’s significant contractual obligations (in
        thousands of dollars) as of September 30, 2006 and the effect such obligations
        are expected to have on our liquidity and cash flows in future years. This
        table
        includes our convertible subordinated notes discussed above and excludes
        amounts
        already recorded on the balance sheet as current liabilities at September
        30,
        2006 or certain other purchase obligations as discussed below:
 
 
 For
                  the years ending September 30,
              
              2007
              
              2008
              
              2009
              
              2010
              
              2011and
                thereafter$
              
              
              $
              
              
              $
              
              
              $
              
              
              $Long-term
                  debt
              
              
              681
              
              
              125,457
              
              
              108
              
              
              -
              
              
              -Operating
                  leases
              
              
              2,100
              
              
              1,144
              
              
              305
              
              
              66
              
              
              47Other
                  commitments
              
              
              2,590
              
              
              1,580
              
              
              994
              
              
              655
              
              
              4745,371
              
              
              128,181
              
              
              1,407
              
              
              721
              
              
              521
 
 Purchase
        orders for raw materials, finished goods and other goods and services are
        not
        included in the above table. Management is not able to determine the aggregate
        amount of such purchase orders that represent contractual obligations, as
        purchase orders may
        represent authorizations to purchase rather than binding agreements. For
        the
        purpose of this table, contractual obligations for purchase of goods or services
        are defined as agreements that are enforceable and legally binding on the
        Company and that specify all significant terms, including: fixed or minimum
        quantities to be purchased; fixed, minimum or variable price provisions;
        and the
        approximate timing of the transaction. Axcan’s purchase orders are based on
        current needs and are fulfilled by our vendors with relatively short timetables.
        The Company does not have significant agreements for the purchase of raw
        materials or finished goods specifying minimum quantities or set prices that
        exceed its short-term expected requirements. Axcan also enters into contracts
        for outsourced services; however, the obligations under these contracts are
        not
        significant and the contracts generally contain clauses allowing for
        cancellation without significant penalty except for a sales management services
        contract included in the above table. As milestone payments are primarily
        contingent on receiving regulatory approval for products under development,
        they
        do not have defined maturities.
  The
        expected timing of payment of the obligations discussed above is estimated
        based
        on current information. Timing of payments and actual amounts paid may be
        different depending on the time of receipt of goods or services, or for some
        obligations, changes to agreed-upon amounts.
 
 **12**MD
              & A
  **EFFECT
        OF RECENTLY ISSUED U.S. ACCOUNTING PRONOUNCEMENTS**
 In
        December 2004, the FASB issued SFAS No. 123(R), “ *Share-Based
        Payment* ”.
        SFAS No. 123(R) requires all entities to recognize compensation cost for
        share-based awards, including options, granted to employees. The Statement
        eliminates the ability to account for share-based compensation transactions
        using APB No. 25, “ *Accounting
        for Stock Issued to Employees* ”,
        and generally requires instead that such transactions be accounted for using
        a
        fair value-based method. Public companies are required to measure stock-based
        compensation classified as equity by valuing the instrument the employee
        receives at its grant-date fair value. Previously, such awards were measured
        at
        intrinsic value under both APB No. 25 and SFAS No. 123, “ *Accounting
        for Stock-Based Compensation* ”.
        The Company applied the Statement beginning in fiscal 2006 using the modified
        prospective transition approach. The adoption resulted in an increase in
        compensation cost of $3.6 million for the year ended September 30,
        2006.
  During
        the September 2004 meeting of the Emerging Issues Task Force (“EITF”) a
        consensus was reached on EITF Issue 04-8, “ *The
        Effect of Contingently Convertible Debt on Diluted Earnings per
        Share* ”.
        The EITF
        04-8 requires companies to include certain convertible debt and equity
        instruments, that were previously excluded, into their calculations of diluted
        earnings per share. The EITF concluded that Issue 04-8 would be effective
        for
        periods ending after December 15, 2004, and must be applied by restating
        all
        periods during which time the applicable convertible instruments were
        outstanding. The common shares issuable under the 4.25% convertible subordinated
        notes, issued in 2003 are therefore included in the Company’s diluted income per
        share calculation. For the year ended September 30, 2004, the weighted number
        of
        common shares used in the calculation of the diluted income per share has
        been
        increased from 52,787,967 to 55,031,184 and the diluted income per share
        has
        been reduced from $0.98 to $0.96.
  **EARNINGS
        COVERAGE**
 Under
        U.S. GAAP, for the twelve-month period ended September 30, 2006, our interest
        requirements amounted to $6.1 million on a pro-forma basis and our earnings
        coverage ratio, defined as the ratio of earnings before interest and income
        taxes to *pro-forma* interest
        requirements, was 10.40 to one.
 
 Under
        Canadian GAAP, for the twelve-month period ended September 30, 2006, our
        interest requirements amounted to $11.6 million on a *pro-forma* basis,
        and our earnings coverage ratio was 4.62 to one. The principal difference
        between the earnings coverage ratios under Canadian GAAP and U.S. GAAP is
        attributable to the inclusion of implicit interest of $5.5 million as required
        by Canadian GAAP.
  **RISK
        FACTORS**
 Axcan
        is exposed to financial market risks, including changes in foreign currency
        exchange rates and interest rates. Axcan does not use derivative financial
        instruments for speculative or trading purposes. Axcan does not use off-balance
        sheet financing or similar special purpose entities. Inflation has not had
        a
        significant impact on Axcan’s results of operations. Risks other than those
        described below can be found in “Part III - Business of Axcan” of the Company’s
        Annual Information Form.
  **Foreign
        Currency Risk**
 Axcan
        operates internationally; however, a substantial portion of the revenue and
        expense activities and capital expenditures are transacted in U.S. dollars.
        Axcan’s exposure to exchange rate fluctuation is reduced because, in general,
        Axcan’s revenues denominated in currencies other than the U.S. dollar are
        matched by a corresponding amount of costs denominated in the same currency.
        Axcan expects this matching to continue.
  **Interest
        Rate Risk**
 The
        primary objective of Axcan’s investment policy is the protection of capital.
        Accordingly, investments are made in high-grade government and corporate
        securities with varying maturities, but typically, less than 180 days.
        Therefore, Axcan does not have a material exposure to interest rate risk,
        and a
        100 basis-point adverse change in interest rates would not have a material
        effect on Axcan’s consolidated results of operations, financial position or cash
        flows. Axcan is exposed to interest rate risk on borrowings under the credit
        facility. The credit facility bears interest based on LIBOR, U.S. dollar
        base
        rate, Canadian dollar prime rate, or Canadian dollar bankers’ acceptances. Based
        on projected advances under the credit facility, a 100 basis-point adverse
        change in interest rates would not have a material effect on Axcan’s
        consolidated results of operations, financial position, or cash
        flows.
 
 **13**MD
            & A
 **Supply
        and Manufacture**
 Axcan
        depends on third parties for the supply of active ingredients and for the
        manufacture of the majority of its products. Although Axcan looks to secure
        alternative suppliers, Axcan may not be able to obtain the active ingredients
        or
        products from such third parties, the active ingredients or products may
        not
        comply with specifications, or the prices at which Axcan purchases them may
        increase and Axcan may not be able to locate alternative sources of supply
        in a
        reasonable time period, or at all. If any of these events occur, Axcan may
        not
        be able to continue to market certain of its products, and its sales and
        profitability would be adversely affected.
  **Volatility
        of Share Prices**
 The
        market price of Axcan’s shares is subject to volatility. Deviations in actual
        financial or scientific results, as compared to expectations of securities
        analysts who follow our activities, can have a significant effect on the
        trading
        price of Axcan’s shares.
  **Other**
 The
        Company does not believe that unfavourable decisions in any possible procedures
        related to any future tax assessment or any amount it might be required to
        pay
        will have a material adverse effect on the Company’s financial position, cash
        flows or overall trends in results of operations. There is the possibility
        of a
        material adverse impact on the results of operations of the period in which
        the
        matter is ultimately resolved, if it is resolved unfavourably, or in the
        period
        in which an unfavourable outcome becomes probable and reasonably
        estimable.
  **FORWARD-LOOKING
        STATEMENTS**
 This
        document contains forward-looking statements, which reflect the Company’s
        current expectations regarding future events. To the extent that any statements
        in this document contain information that is not historical, the statements
        are
        essentially forward-looking and are often identified by words such as
“anticipate”, “expect”, “estimate”, “intend”, “project”, “plan” and “believe”.
        These forward-looking statements include, but are not limited to, the expected
        sales growth of the Company’s products and the expected increase in funds from
        operations resulting from the Company’s research and development expenditures.
        The forward-looking statements involve risks and uncertainties. Actual events
        could differ materially from those projected herein and depend on a number
        of
        factors, including but not to
        the successful and timely completion of clinical studies, the difficulty
        of
        predicting FDA or other regulatory approvals, the commercialization of a
        drug or
        therapy after regulatory approval is received, the difficulty of predicting
        acceptance and demand for pharmaceutical products, the impact of competitive
        products and pricing, costs associated with new product development and launch,
        the availability of raw materials, the protection of our intellectual property,
        fluctuations in our operating results and other risks detailed from time
        to time
        in the Company’s filings with the Securities and Exchange Commission and the
        Canadian Securities Commissions. The reader is cautioned not to rely on these
        forward looking statements. The Company disclaims any obligation to update
        these
        forward-looking statements.
  This
        MD&A has been prepared as of November 30, 2006. Additional information on
        the Company is available through regular filing of press releases, quarterly
        financial statements and the Annual Information Form on the SEDAR
        website.
 
 On
        behalf of Management,
 
 
 **Steve
        Gannon**
 (signed)
 Senior
        Vice President, Finance
 and
        Chief Financial Officer