**Æterna Zentaris Inc.**

Consolidated Financial Statements

**December31, 2006, 2005 and 2004**

(expressedin thousands of US dollars)

----

|            | **PricewaterhouseCoopers**           |
|------------|--------------------------------------|
| ** ** | **LLP/s.r.l./s.e.n.c.r.l.**          |
| ** ** | **Chartered  Accountants**           |
|       | Place de la  Cité, Tour Cominar |
|       | 2640 Laurier  Boulevard, Suite 1700  |
|       | Québec, Quebec                  |
|       | Canada G1V 5C2                       |
|       | Telephone +1  (418) 522 7001         |
|       | Facsimile +1  (418) 522 5663         |

 

**Report of IndependentAuditors**

**To the Shareholders of**

**Æterna Zentaris Inc.**

We have audited theconsolidated balance sheets of **Æterna Zentaris Inc.**as at December 31, 2006 and 2005 and the consolidated statements of operations,deficit, other capital and cash flows for each of the years in the three-yearperiod ended December 31, 2006. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

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

In our opinion, theseconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company as at December 31, 2006 and 2005 and theresults of its operations and its cash flows for each of the years in thethree-year period ended December 31, 2006 in accordance with Canadian generallyaccepted accounting principles.

**Chartered Accountants**

Quebec, Quebec, Canada

March 2, 2007, except asto Note 24(g) and (h) which is as of September 17, 2007

PricewaterhouseCoopers refers to the Canadian firm ofPricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l. and the other member firms ofPricewaterhouseCoopers International Limited, each of which is a separate andindependent legal entity.

1

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# **ÆternaZentaris Inc.**

Consolidated BalanceSheets

(expressed in thousandsof US dollars)
| ** **                                                       | ** ** | **As at December 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                                       | ** ** | **$**                                 | ** ** | **$** | ** ** |
| **Assets**                                                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
|                                                             |       |                                  |       |   |   |
| **Current assets**                                               | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Cash and cash  equivalents                                       |       | 9,356                                 |       | 12,381 |   |
| Short-term investments  (note 22)                                |       | 51,663                                |       | 22,480 |   |
| Accounts receivable                                              |       |                                  |       |   |   |
| Trade                                                            |       | 7,035                                 |       | 9,592 |   |
| Other (note 6)                                                   |       | 2,737                                 |       | 2,324 |   |
| Income taxes                                                     |       | 941                                   |       | 21 |   |
| Inventory (note 7)                                               |       | 5,367                                 |       | 5,500 |   |
| Prepaid expenses                                                 |       | 2,671                                 |       | 2,477 |   |
| Future income tax  assets (note 18)                              |       | 21,953                                |       | 2,163 |   |
| Current assets of  discontinued operations (note 2)              |       | —                                |       | 106,738 |   |
|                                                             |       |                                  |       |   |   |
|                                                             |       | 101,723                               |       | 163,676 |   |
|                                                             |       |                                  |       |   |   |
| **Investment in an  affiliated company** (note 2)                |       | 57,128                                |       | — |   |
| ** **                                                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Property, plant and  equipment**  (note 9)                     |       | 13,432                                |       | 14,107 |   |
|                                                             |       |                                  |       |   |   |
| **Deferred charges and other  long-term assets********(note 8)** |       | 1,354                                 |       | 1,520 |   |
|                                                             |       |                                  |       |   |   |
| **Intangible assets******(note  10)                              |       | 39,106                                |       | 41,354 |   |
|                                                             |       |                                  |       |   |   |
| **Goodwill**  (note 11)                                          |       | 10,748                                |       | 9,777 |   |
|                                                             |       |                                  |       |   |   |
| **Non-current assets of  discontinued operations**(note 2)       |       | —                                |       | 189,351 |   |
|                                                             |       |                                  |       |   |   |
|                                                             |       | 223,491                               |       | 419,785 |   |
| **Liabilities**                                                  | ** ** | ** **                            | ** ** | ** ** | ** ** |
|                                                             |       |                                  |       |   |   |
| **Current liabilities**                                          | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Accounts payable and  accrued liabilities (note 12)              |       | 10,021                                |       | 7,601 |   |
| Income taxes                                                     |       | —                                |       | 4,490 |   |
| Deferred revenues                                                |       | 5,570                                 |       | 4,622 |   |
| Current portion of  long-term debt                               |       | 719                                   |       | 719 |   |
| Current liabilities of  discontinued operations (note 2)         |       | —                                |       | 46,742 |   |
|                                                             |       |                                  |       |   |   |
|                                                             |       | 16,310                                |       | 64,174 |   |
|                                                             |       |                                  |       |   |   |
| **Deferred revenues**                                            |       | 8,468                                 |       | 11,087 |   |
| ** **                                                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Convertible term loans********(note  13)**                     |       | —                                |       | 28,440 |   |
| ** **                                                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Long-term debt** (note 14)                                     |       | 704                                   |       | 1,426 |   |
|                                                             |       |                                  |       |   |   |
| **Employee future benefits** (note 15)                           |       | 8,167                                 |       | 7,455 |   |
|                                                             |       |                                  |       |   |   |
| **Future income tax  liabilities**  (note 18)                    |       | 10,963                                |       | 8,628 |   |
|                                                             |       |                                  |       |   |   |
| **Non-current liabilities of  discontinued operations** (note 2) |       | —                                |       | 189,044 |   |
|                                                             |       |                                  |       |   |   |
|                                                             |       | 44,612                                |       | 310,254 |   |
| **Shareholders’ Equity**                                    | ** ** | ** **                            | ** ** | ** ** | ** ** |
|                                                             |       |                                  |       |   |   |
| **Share capital** (note 16)                                      |       | 168,466                               |       | 130,344 |   |
|                                                             |       |                                  |       |   |   |
| **Other capital**                                                |       | 6,226                                 |       | 10,474 |   |
|                                                             |       |                                  |       |   |   |
| **Deficit**                                                      |       | (10,114                               | )          | (43,224 | ) |
|                                                             |       |                                  |       |   |   |
| **Cumulative translation  adjustment**                           |       | 14,301                                |       | 11,937 |   |
|                                                             |       |                                  |       |   |   |
|                                                             |       | 178,879                               |       | 109,531 |   |
|                                                             |       |                                  |       |   |   |
|                                                             |       | 223,491                               |       | 419,785 |   |
|                                                             |       |                                  |       |   |   |
| **Subsequent event** (note 2)                                    |       |                                  |       |   |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

**Approved by the Board ofDirectors**
|              |  Director |                      |  |  Director |
|--------------|----------------|---------------------------|--|----------------|
| Jurgen Ernst |           | Gérard Limoges,  FCA |

2

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**Æterna Zentaris Inc.**

Consolidated Statementsof Deficit

(expressed in thousandsof US dollars)
| ** **                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                    | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                                                    | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance  – Beginning of year**                                         |       | 43,224                                      |       | 53,795 |   | 49,370 |   |
|                                                                          |       |                                        |       |   |   |   |   |
| Loss on  settlement of the equity portion of convertible term loans (note 13) |       | 280                                         |       | — |   | — |   |
| Net loss (earnings)  for the year                                             |       | (33,390                                     | )          | (10,571 | ) | 4,425 |   |
|                                                                          |       |                                        |       |   |   |   |   |
| **Balance  – End of year**                                               |       | 10,114                                      |       | 43,224 |   | 53,795 |   |

 

## ConsolidatedStatements of Other Capital

(expressed in thousandsof US dollars)
| ** **                                                     | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                     | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance  – Beginning of year**                          |       | 10,474                                      |       | 6,059 |   | 5,088 |   |
|                                                           |       |                                        |       |   |   |   |   |
| Conversion  option related to convertible term loans (note 13) |       | (6,339                                      | )          | 2,129 |   | — |   |
| Stock-based  compensation costs (note 16e)                     |       | 2,120                                       |       | 2,286 |   | 1,075 |   |
| Exercise of  stock options (note 16c)                          |       | (29                                         | )          | — |   | (104 | ) |
|                                                           |       |                                        |       |   |   |   |   |
| **Balance  – End of year**                                |       | 6,226                                       |       | 10,474 |   | 6,059 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

3

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**Æterna Zentaris Inc.**

Consolidated Statementsof Operations

(expressed in thousandsof US dollars, except share and per share data)
| ** **                                                      | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                                    |       | 41,392                                      |       | 47,204 |   | 42,972 |   |
| ** **                                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  expenses**                                         |       |                                        |       |   |   |   |   |
| Cost of sales                                                   |       | 11,747                                      |       | 8,596 |   | 7,992 |   |
| Selling, general  and administrative                            |       | 17,235                                      |       | 15,281 |   | 13,137 |   |
| Research and  development costs                                 |       | 28,652                                      |       | 27,075 |   | 23,431 |   |
| Research and  development tax credits and grants                |       | (1,564                                      | )          | (536 | ) | (845 | ) |
| Depreciation and  amortization                                  |       |                                        |       |   |   |   |   |
| Property, plant and equipment                                   |       | 2,972                                       |       | 1,796 |   | 1,958 |   |
| Intangible assets                                               |       | 6,457                                       |       | 4,575 |   | 4,178 |   |
|                                                            |       |                                        |       |   |   |   |   |
|                                                            |       | 65,499                                      |       | 56,787 |   | 49,851 |   |
|                                                            |       |                                        |       |   |   |   |   |
| **Loss  from operations**                                       |       | (24,107                                     | )          | (9,583 | ) | (6,879 | ) |
|                                                            |       |                                        |       |   |   |   |   |
| **Other  revenues (expenses)**                                  | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest income**                                             |       | 1,446                                       |       | 1,238 |   | 1,286 |   |
| Interest expense                                                |       |                                        |       |   |   |   |   |
| Long-term debt and convertible term loans                       |       | (1,287                                      | )          | (6,979 | ) | (4,150 | ) |
| Other                                                           |       | (163                                        | )          | (38 | ) | (69 | ) |
| Foreign exchange  gain (loss)                                   |       | 298                                         |       | (88 | ) | (491 | ) |
| Gain on disposal  of a long-term investment                     |       | 409                                         |       | — |   | — |   |
|                                                            |       |                                        |       |   |   |   |   |
|                                                            |       | 703                                         |       | (5,867 | ) | (3,424 | ) |
| ** **                                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Share  in the results of an affiliated company**              |       | 1,575                                       |       | — |   | — |   |
|                                                            |       |                                        |       |   |   |   |   |
| **Loss  before income taxes**                                   |       | (21,829                                     | )          | (15,450 | ) | (10,303 | ) |
|                                                            |       |                                        |       |   |   |   |   |
| **Income  tax recovery (expense)**(note 18)                     |       | 29,129                                      |       | (493 | ) | (273 | ) |
|                                                            |       |                                        |       |   |   |   |   |
| **Net  earnings (loss) from continuing operations**             |       | 7,300                                       |       | (15,943 | ) | (10,576 | ) |
|                                                            |       |                                        |       |   |   |   |   |
| **Net  earnings from discontinued operations** (note 2)         |       | 26,090                                      |       | 26,514 |   | 6,151 |   |
|                                                            |       |                                        |       |   |   |   |   |
| **Net  earnings (loss) for the year**                           |       | 33,390                                      |       | 10,571 |   | (4,425 | ) |
|                                                            |       |                                        |       |   |   |   |   |
| **Net  earnings (loss) per share from continuing operations**   |       |                                        |       |   |   |   |   |
| Basic and  diluted                                              |       | 0.14                                        |       | (0.35 | ) | (0.23 | ) |
|                                                            |       |                                        |       |   |   |   |   |
| **Net  earnings (loss) per share**                              | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                           |       | 0.64                                        |       | 0.23 |   | (0.10 | ) |
|                                                            |       |                                        |       |   |   |   |   |
| Diluted                                                         |       | 0.62                                        |       | 0.23 |   | (0.10 | ) |
|                                                            |       |                                        |       |   |   |   |   |
| **Weighted  average number of shares outstanding****(note 20)** | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                           |       | 52,099,290                                  |       | 46,139,814 |   | 45,569,176 |   |
|                                                            |       |                                        |       |   |   |   |   |
| Diluted                                                         |       | 52,549,260                                  |       | 46,139,814 |   | 45,569,176 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

4

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**Æterna Zentaris Inc.**

Consolidated Statementsof Cash Flows

(expressed in thousandsof US dollars)
| ** **                                                                       | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                       | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| **Cash flows from operating activities**                                         | ** ** |                                        |       |   |   |   | ** ** |
| Net earnings (loss) for the year                                                 |       | 33,390                                      |       | 10,571 |   | (4,425 | ) |
| Net earnings from discontinued operations                                        |       | (26,090                                     | )          | (26,514 | ) | (6,151 | ) |
|                                                                             |       |                                        |       |   |   |   |   |
| Net earnings (loss) from continuing operations                                   |       | 7,300                                       |       | (15,943 | ) | (10,576 | ) |
| Items not affecting cash and cash equivalents                                    |       |                                        |       |   |   |   |   |
| Depreciation and  amortization                                                   |       | 9,429                                       |       | 6,371 |   | 6,136 |   |
| Stock-based  compensation costs                                                  |       | 2,120                                       |       | 2,286 |   | 1,071 |   |
| Future income taxes                                                              |       | (29,262                                     | )          | 424 |   | (5,596 | ) |
| Gain on disposal of a  long-term investment                                      |       | (409                                        | )          | — |   | — |   |
| Share in the results of  an affiliated company                                   |       | (1,575                                      | )          | — |   | — |   |
| Employee future  benefits                                                        |       | (115                                        | )          | 2,338 |   | 712 |   |
| Deferred charges                                                                 |       | (841                                        | )          | 2,707 |   | (2,198 | ) |
| Deferred revenues                                                                |       | (3,258                                      | )          | (10,291 | ) | 13,389 |   |
| Accretion on  convertible term loans                                             |       | 1,227                                       |       | 4,479 |   | 1,514 |   |
| Foreign exchange loss  (gain) on long-term items denominated in foreign currency |       | (587                                        | )          | 375 |   | (19 | ) |
| Change in non-cash operating working capital items (note 17)                     |       | 255                                         |       | 3,856 |   | (5,273 | ) |
|                                                                             |       |                                        |       |   |   |   |   |
| Net cash used in continuing operating activities                                 |       | (15,716                                     | )          | (3,398 | ) | (840 | ) |
| Net cash provided by discontinued operating activities                           |       | 23,673                                      |       | 16,332 |   | 10,681 |   |
|                                                                             |       |                                        |       |   |   |   |   |
| Net cash provided by operating activities                                        |       | 7,957                                       |       | 12,934 |   | 9,841 |   |
|                                                                             |       |                                        |       |   |   |   |   |
| **Cash flows from financing activities**                                         |       |                                        |       |   |   |   |   |
| Repayment of long-term debt                                                      |       | (749                                        | )          | (684 | ) | (605 | ) |
| Issuance of shares pursuant to the exercise of stock options                     |       | 81                                          |       | 130 |   | 1,282 |   |
| Share issue expenses                                                             |       | (112                                        | )          | (108 | ) | (127 | ) |
|                                                                             |       |                                        |       |   |   |   |   |
| Net cash provided by (used in) continuing financing activities                   |       | (780                                        | )          | (662 | ) | 550 |   |
| Net cash provided by (used in) discontinued financing activities                 |       | (7,794                                      | )          | 89,587 |   | 24,541 |   |
|                                                                             |       |                                        |       |   |   |   |   |
| Net cash provided by (used in) financing activities                              |       | (8,574                                      | )          | 88,925 |   | 25,091 |   |
|                                                                             |       |                                        |       |   |   |   |   |
| **Cash flows from investing activities**                                         |       |                                        |       |   |   |   |   |
| Purchase of short-term investments                                               |       | (79,300                                     | )          | (25,945 | ) | (17,518 | ) |
| Proceeds from the sale of short-term investments                                 |       | 49,264                                      |       | 26,775 |   | 28,531 |   |
| Proceeds from the sale of a long-term investment                                 |       | 1,387                                       |       | — |   | — |   |
| Business acquisitions, net of cash and cash equivalents acquired  (note 5)       |       | (32                                         | )          | (37 | ) | — |   |
| Purchase of property, plant and equipment                                        |       | (1,894                                      | )          | (1,318 | ) | (1,539 | ) |
| Acquisition of amortizable intangible assets                                     |       | (5                                          | )          | (589 | ) | (81 | ) |
|                                                                             |       |                                        |       |   |   |   |   |
| Net cash provided by (used in) continuing investing activities                   |       | (30,580                                     | )          | (1,114 | ) | 9,393 |   |
| Net cash provided by (used in) discontinued investing activities                 |       | 11,930                                      |       | (94,468 | ) | (39,333 | ) |
|                                                                             |       |                                        |       |   |   |   |   |
| Net cash used in investing activities                                            |       | (18,650                                     | )          | (95,582 | ) | (29,940 | ) |
|                                                                             |       |                                        |       |   |   |   |   |
| **Effect of exchange rate changes on cash and cash  equivalents**                |       | 1,356                                       |       | (2,748 | ) | 1,458 |   |
|                                                                             |       |                                        |       |   |   |   |   |
| **Net change in cash and cash equivalents**                                      |       | (17,911                                     | )          | 3,529 |   | 6,450 |   |
|                                                                             |       |                                        |       |   |   |   |   |
| **Cash and cash equivalents – Beginning of year**                           |       | 27,267                                      |       | 23,738 |   | 17,288 |   |
|                                                                             |       |                                        |       |   |   |   |   |
| **Cash and cash equivalents – End of year**                                 |       | 9,356                                       |       | 27,267 |   | 23,738 |   |
|                                                                             |       |                                        |       |   |   |   |   |
| **Cash and cash equivalents related to:**                                        |       |                                        |       |   |   |   |   |
| Continuing operations                                                            |       | 9,356                                       |       | 12,381 |   | 13,568 |   |
| Discontinued operations                                                          |       | —                                      |       | 14,886 |   | 10,170 |   |
|                                                                             |       | 9,356                                       |       | 27,267 |   | 23,738 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

5

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**Æterna Zentaris Inc.**

Notes to Consolidated Financial Statements

**December 31, 2006, 2005 and 2004**

(tabular amounts inthousands of US dollars, except share/option and per share/option data and asotherwise noted)

**1**                      Incorporation and nature of activities

Æterna Zentaris Inc. (“Æterna Zentaris” or the “Company”),incorporated under the Canada Business Corporations Act, is a growing globalbiopharmaceutical company focused on endocrine therapy and oncology with provenexpertise in drug discovery, development and commercialization.

**2**                      Sales of an interest in Atrium Biotechnologies Inc.and subsequent to year-end distribution of the remaining interest

During 2006, the Company completed a lengthy anddetailed review process whereby it examined a number of strategic alternativesfor how best to pursue and implement its business plan of becoming a “pure play”biopharmaceutical company with a focus on endocrine therapy and oncology. Amongthe alternatives considered was the divestiture of Æterna Zentaris’ interest inAtrium Biotechnologies Inc. (“Atrium”) and the resulting focus on advancing itsdevelopment pipeline.

On September 19, 2006, the Company initiated aSecondary Offering to sell 3,485,000 Atrium Subordinate Voting Shares at aprice of CAN$15.80 per share.

On October 18, 2006, the Company closed this SecondaryOffering for net proceeds of $45 million. The gain on the disposal of thisinvestment amounted to $29,248,000 including $1,643,000 related to cumulativetranslation adjustments.

Concurrently with the closing of the SecondaryOffering and in accordance with the articles of Atrium, the Company’s remainingAtrium Multiple Voting Shares were automatically converted into AtriumSubordinate Voting Shares on a one-for-one basis such that the Companysubsequently owned 11,052,996 Atrium Subordinate Voting Shares representingapproximately 36.1% of the issued and outstanding shares of Atrium. The Companyalso announced its intent to distribute this remaining interest to all itsshareholders. As of that date, Atrium was excluded from the consolidation sincethe Company’s control ceased. Furthermore, all historical operations and cashflows recorded through the consolidation of Atrium until that date have beenreported as discontinued operations and therefore, these operations and cashflows will be presented as such in the future in the statement of operationsand in the statement of cash flows. The Company’s remaining interest in Atriumis now presented as a long-term investment, accounted for using the equitymethod.

On December 15, 2006, the Company’s shareholdersapproved a reduction in the stated capital of the Company in an amount equal tothe fair market value of its remaining interest in Atrium for the purpose ofeffecting a special distribution in kind of all 11,052,006 subordinate votingshares of Atrium held by the Company. On January 2, 2007, Æterna Zentaris’shareholders received approximately 0.2079 of an Atrium subordinate votingshare for each one of their common shares.

This special distribution will be accounted for as anonreciprocal transfer to shareholders measured at the carrying value of theinvestment in Atrium on the date of the distribution. As the specialdistribution will be considered as a taxable transaction for the Company andtreated as a reduction of the stated capital for tax purposes, the sharecapital of the Company will be reduced by the fair value of the Atrium sharesdistributed, the long-term investment in Atrium will be removed from thebalance sheet and the difference, taking into account the related income taxesand cumulative translation adjustment, will be recorded as Other Capital.

6

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For the years endedDecember 31, 2006, 2005 and 2004, previously consolidated revenues and expensesof Atrium, representing the former Active Ingredients & Specialty ChemicalsSegment as well as the Health & Nutrition Segment, have been reclassifiedfrom continuing operations to discontinued operations.
|                                                          | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                               | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                             |       | 239,535                                     |       | 200,863 |   | 136,240 |   |
|                                                     |       |                                        |       |   |   |   |   |
| **Earnings  before the following items**                 |       | 28,360                                      |       | 21,414 |   | 17,146 |   |
|                                                     |       |                                        |       |   |   |   |   |
| Gain on disposal  of Atrium shares                       |       | 29,248                                      |       | — |   | — |   |
| Income tax  expense (a)                                  |       | (19,923                                     | )          | (6,838 | ) | (6,093 | ) |
| Gain (loss) on  dilution of investments (b)              |       | (628                                        | )          | 19,002 |   | (74 | ) |
|                                                     |       |                                        |       |   |   |   |   |
| **Earnings  before non-controlling interest**            |       | 37,057                                      |       | 33,578 |   | 10,979 |   |
| ** **                                               | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Non-controlling  interest**                            |       | (10,967                                     | )          | (7,064 | ) | (4,828 | ) |
| ** **                                               | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  earnings from discontinued operations**           |       | 26,090                                      |       | 26,514 |   | 6,151 |   |
| ** **                                               | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  earnings per share from discontinued operations** | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                    |       | 0.50                                        |       | 0.57 |   | 0.13 |   |
|                                                     |       |                                        |       |   |   |   |   |
| Diluted                                                  |       | 0.48                                        |       | 0.57 |   | 0.13 |   |

 

----

(a)               In 2006, an amount of $7,006,000 isrelated to the gain on disposal of Atrium shares and an amount of $5,692,000 isrelated to future income tax liabilities on unremitted earnings of Atrium.

(b)              Gain (loss) on dilution of investments

Following the exercise ofAtrium’s stock options, Atrium issued 627,500 subordinate voting shares betweenJanuary 1 and October 18, 2006. As a consequence, a loss on dilution amountingto $628,000 was recognized.

On April 6, 2005, Atriumcompleted its Initial Public Offering through the issuance of 4,166,667subordinate voting shares at a price of CAN$12.00 per share for total gross proceedsof $40,957,000 (CAN$50,000,000). Immediately prior to the closing of theaforementioned offering, Atrium completed the acquisition of thenon-controlling interest in Unipex Finance S.A.S. for an amount of $7,289,000.This amount was settled through the issuance of 741,584 subordinate votingshares of Atrium at the offering price of CAN$12.00 per share. Moreover,pursuant to the acquisition of Douglas Laboratories by Atrium in December 2005,Atrium issued 917,532 subordinate voting shares at a price of CAN$10.95 pershare. Following the exercise of Atrium’s stock options during 2005, Atriumalso issued 387,000 subordinate voting shares at an average price of CAN$2.28for total proceeds of $884,000. As a consequence of these transactions, theCompany’s economic interest in Atrium decreased from 61.1% to 48.46%,generating a gain on dilution of investments amounting to $19,002,000.

7

----

On October 27, 2004, pursuant to the issuance of 145,000 subordinatevoting shares of Atrium, a loss on dilution amounting to $74,000 wasrecognized.

Major classes of assets and liabilities as of December 31, 2005 havebeen reclassified and are presented as discontinued operations as follows:
|                                                         | ** ** | **$**      | ** ** |
|---------------------------------------------------------|------------|------------|------------|
| ** **                                              | ** ** | ** ** | ** ** |
| **Assets**                                              |       |       |       |
|                                                    |       |       |       |
| **Current  assets**                                     |       |       |       |
| Cash                                                    |       | 14,886     |       |
| Other current  assets                                   |       | 91,852     |       |
|                                                    |       |       |       |
| **Current  assets of discontinued operations**          |       | 106,738    |       |
|                                                    |       |       |       |
| **Intangible  assets**                                  |       | 68,027     |       |
| ** **                                              |       |       |       |
| **Goodwill**                                            |       | 109,392    |       |
| ** **                                              |       |       |       |
| **Other  long-term assets**                             |       | 11,932     |       |
|                                                    |       |       |       |
| **Non-current  assets of discontinued operations**      |       | 189,351    |       |
|                                                    |       |       |       |
|                                                    |       | 296,089    |       |
|                                                    |       |       |       |
| **Liabilities**                                         |       |       |       |
|                                                    |       |       |       |
| **Current  liabilities of discontinued operations**     |       | 46,742     |       |
|                                                    |       |       |       |
| **Long-term  debt**                                     |       | 105,877    |       |
| ** **                                              |       |       |       |
| **Non-controlling  interest**                           |       | 64,531     |       |
| ** **                                              |       |       |       |
| **Other  long-term liabilities**                        |       | 18,636     |       |
|                                                    |       |       |       |
| **Non-current  liabilities of discontinued operations** |       | 189,044    |       |
|                                                    |       |       |       |
|                                                    |       | 235,786    |       |

 

8

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**3**                      Summary of significant accounting policies

**Basis ofpresentation**

These financialstatements have been prepared in accordance with Canadian generally acceptedaccounting principles. These financial statements differ in certain respectsfrom those prepared in accordance with United States generally acceptedprinciples (US GAAP) and do not provide certain disclosures which would befound in US GAAP financial statements, as permitted by the regulations of theSecurities and Exchange Commission of the United States. These recognition andmeasurement differences are described in note 24 “Summary of differencesbetween generally accepted accounting principles in Canada and in the UnitedStates”. The significant accounting policies, which have been consistentlyapplied, are summarized as follows:

**Basis of consolidation**

These consolidated financial statements include allcompanies in which the Company, directly or indirectly has more than 50% of thevoting rights or over which it exercises control. Companies are included in theconsolidation from the date that control is transferred to the Company whilecompanies sold are excluded from the consolidation from the date that controlceases. The purchase method of accounting is used to account for acquisitions.Intercompany transactions, balances and unrealized gains and losses ontransactions between the companies included in the basis of consolidation areeliminated.

**Investments in affiliated companies**

Investments in companies over which the Company is toexercise significant influence, generally participation of between 20% and 50%of the voting rights, but over which it does not exercise control, areaccounted for by using the equity method. The Company’s share of its affiliatedresults of operations is recognized in the statement of operations.

**Accounting estimates**

The preparation of financial statements in conformitywith Canadian generally accepted accounting principles requires management tomake estimates and assumptions that affect the amounts of assets andliabilities reported in the financial statements. Those estimates andassumptions also affect the disclosure of contingencies at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe years. Significant estimates include the allowance for doubtful accounts,provisions for obsolete inventory, future income tax assets and liabilities,the useful lives of property, plant and equipment and intangible assets, thevaluation of intangible assets and goodwill, the fair value of options grantedand employee future benefits and certain accrued liabilities. Actual resultscould differ from those estimates.

9

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**Foreign currency translation**

*Reporting currency and self-sustaining subsidiaries*

The Company uses the US dollar as its reportingcurrency. Assets and liabilities of subsidiaries whose functional currency isother than the US dollar are translated using the exchange rate in effect atthe balance sheet date. Revenues and expenses are translated at the averagerate in effect during the year. Gains and losses are included in the cumulativetranslation adjustment account in shareholders’ equity.

*Foreign currency transactions and integratedforeign subsidiaries*

The financial statements of integrated foreignoperations and transactions denominated in currencies other than the functionalcurrency are remeasured into the functional currency using the temporal method.Under this method, monetary assets and liabilities are remeasured at theexchange rate in effect on the date of the balance sheet. Non-monetary assetsand liabilities are remeasured at historical rates, unless such assets andliabilities are carried at market, in which case, they are translated at theexchange rate in effect on the date of the balance sheet. Revenues and expensesare remeasured at the monthly average exchange rate. Gains and losses resultingfrom such remeasurement are reflected in the statements of operations.

**Cash and cash equivalents**

Cash and cash equivalents consist of cash on hand andbalances with banks, exclusive of bank advances, as well as all highly liquidshort-term investments. The Company considers all highly liquid short-terminvestments having a term of less than three months at the acquisition date tobe cash equivalents.

**Short-term investments**

Short-term investments, which are valued at the lowerof amortized cost and market value, consist mainly of bonds which do not meetthe Company’s definition of cash and cash equivalents.

**Inventory**

Inventory is valued at the lower of cost and marketvalue. Cost is determined using the first in, first out basis. Cost of finishedgoods and work in progress includes raw materials, labour and manufacturingoverhead under the absorption costing method. Market value is defined as replacementcost for raw materials and as net realizable value for finished goods and workin progress.

10

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**Property, plant and equipment anddepreciation**

Property, plant and equipment are recorded at cost,net of related government grants and accumulated depreciation. Depreciation iscalculated using the following methods and annual rates:
|                        | ** ** | **Methods**                          | ** ** | **Annual rates  %** | ** ** |
|------------------------|------------|--------------------------------------|------------|--------------------------|------------|
| ** **             | ** ** | ** **                           | ** ** | ** **               | ** ** |
| Building               |       | Straight-line                        |       | 4 and 5                  |       |
| Equipment              |       | Declining balance and  straight-line |       | 20                       |       |
| Office furniture       |       | Declining balance and  straight-line |       | 10 and 20                |       |
| Computer  equipment    |       | Straight-line                        |       | 25 and 33 1¤3       |       |
| Automotive  equipment  |       | Straight-line                        |       | 20                       |       |
| Leasehold improvements |       | Straight-line                        |       | Remaining lease term     |       |

 

**Deferredcharges**

Deferred charges relateto deferred upfront payments made by a subsidiary in connection with researchand development collaborations and to financing charges. These deferred chargesare included in the statement of operations over the progress of the researchand development work related to the contracts and over the term of theconvertible term loans, respectively.

**Intangibleassets**

Intangible assets withfinite useful lives consist of patents and trademarks, customer relationshipsas well as technology and other. Patents and trademarks represent costs,including professional fees, incurred for the filing of patents and theregistration of trademarks for product marketing and manufacturing purposes,net of related government grants and accumulated amortization. Intangibleassets with finite useful lives are amortized on a straight-line basis overtheir estimated useful lives of eight to fifteen years for patents, ten yearsfor trademarks and customer relationships, and from three to seven years fortechnology and other.

**Goodwill**

Goodwill represents theexcess of the purchase price over the fair values of the net assets of entitiesacquired at the respective dates of acquisition. Goodwill is not amortized andis subject to an annual impairment test, or more frequently if events orchanges in circumstances indicate that it might be impaired. Testing forimpairment is accomplished mainly by determining whether the fair value of areporting unit, based upon discounted cash flows, exceeds the net carryingamount of that reporting unit as of the assessment date. If the fair value isgreater than the carrying amount, no impairment is necessary. In the event thatthe carrying amount exceeds the sum of the discounted cash flows, a second testmust be performed whereby the fair value of the segment’s goodwill must beestimated to determine if it is less than its carrying amount. Fair value ofgoodwill is estimated in the same way as goodwill is determined at the date ofthe acquisition in a business combination, that is, the excess of the fairvalue of the reporting unit over the fair value of the identifiable net assetsof the reporting unit.

11

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**Impairmentof long-lived assets**

Property, plant andequipment and intangible assets with finite lives are reviewed for impairmentwhen events or circumstances indicate that costs may not be recoverable.Impairment exists when the carrying value of the asset is greater than theundiscounted future cash flows expected to be provided by the asset. The amountof impairment loss, if any, is the excess of its carrying value over its fairvalue, which fair value is determined based upon discounted cash flows orappraised values, depending on the nature of assets.

**Employeefuture benefits**

One of the Company’ssubsidiaries maintains defined contribution and unfunded defined benefit plansas well as other benefit plans for its employees. Its obligations are accruedunder employee benefit plans and the related costs. In this regard, thefollowing policies have been adopted:

·                      Thecost of pension and other benefits earned by employees is actuariallydetermined using the projected unit credit method and benefit method proratedon length of service and management’s best estimate of salary escalation,retirement ages of employees and employee turnover.

·                      Thenet actuarial gain (loss) of the benefit obligation is recorded in thestatement of operations as it arises.

Fordefined contribution plans, the pension expenses recorded in the statement ofoperations is the amount of contribution the Company is required to pay forservices rendered by employees.

**Deferredrevenues**

Deferred revenues relateto upfront payments received by a subsidiary in connection with researchcooperation agreements. These revenues are included in the statement ofoperations based on the progress of the research and development work relatedto the contracts.

**Revenuerecognition**

The Company is currentlyin a phase in which potential products are being further developed or marketedjointly with strategic partners. The existing licensing agreements usuallyforesee one-time payments (upfront payments), payments for research anddevelopment services in the form of cost reimbursements, milestone payments androyalty receipts for licensing and marketing product candidates. Revenuesassociated with those multiple-element arrangements are allocated to thevarious elements based on their relative fair value.

12

----

License fees representing non-refundable paymentsreceived upon the execution of license agreements are recognized as revenueupon execution of the license agreements when the Company has no significantfuture performance obligations and collectibility of the fees is assured.Upfront payments received at the beginning of licensing agreements are notrecorded as revenue when received but are amortized based on the progress tothe related research and development work. Milestone payments, which aregenerally based on developmental or regulatory events, are recognized asrevenue when the milestones are achieved, collectibility is assured, and whenthere are no significant future performance obligations in connection with themilestones. In those instances where the Company has collected upfront ormilestone payments but has ongoing future obligations related to thedevelopment of the drug product, revenue recognition is deferred and amortizedover the period of its future obligations.

Royalty revenue is recorded when the amount of theroyalty fee is determinable and collection is reasonably assured.

Revenues from sales of products are recognized, net ofestimated sales allowances and rebates, when title passes to customers, whichis at the time goods are shipped, when there are no future performanceobligations, when the purchase price is fixed and determinable, and collectionis reasonably assured.

**Stock-based compensation costs**

Since January 1, 2003, the Company accounts for allforms of employee stock-based compensation using the fair value-based method.Stock-based compensation costs are amortized to expense over the vestingperiods.

Prior to this date, no stock-based compensation costswere recognized for grants of stock-based awards to employees. However, theCompany is required to disclose pro forma information with respect to netearnings (loss) and net earnings (loss) per share as if stock-basedcompensation costs were recognized in the financial statements for allreporting years using the fair value-based method for outstanding stock optionsgranted during 2002 (note 16).

**Income taxes**

The Company follows the liability method of accountingfor income taxes. Under this method, future income tax assets and liabilitiesare determined according to differences between the carrying amounts and taxbases of the assets and liabilities. Future income tax assets and liabilitiesare measured using substantively enacted and enacted tax rates expected toapply in the years in which the differences are expected to reverse.

The Company establishes a valuation allowance againstfuture income tax assets if, based on available information, it is not morelikely than not that some or all of the future income tax assets will berealized.

**Research and development costs**

Research costs are expensed as incurred. Developmentcosts are expensed as incurred except for those which meet generally acceptedcriteria for deferral, which are capitalized and amortized against operationsover the estimated period of benefit. No costs have been deferred during anyperiods.

13

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**Research and development tax credits and grants**

The Company is entitled to scientific research andexperimental development (“SR&ED”) tax credits granted by the Canadianfederal government (“Federal”) and the government of the Province of Québec (“Provincial”).Federal SR&ED tax credits are earned on qualified Canadian SR&EDexpenditures at a rate of 20% and can only be used to offset Federal incometaxes otherwise payable. Refundable Provincial SR&ED tax credits aregenerally earned on qualified SR&ED salaries, subcontracting and universitycontract expenses incurred in the Province of Québec, at a rate of 17.5%.

SR&ED tax credits and grants are accounted forusing the cost reduction method. Accordingly, tax credits and grants arerecorded as a reduction of the related expenses or capital expenditures in theperiod the expenses are incurred. The refundable portion of SR&ED taxcredits is recorded in the year in which the related expenses or capitalexpenditures are incurred and the non-refundable portion of SR&ED taxcredits and grants is recorded at such time, provided the Company hasreasonable assurance the credits or grants will be realized.

**Earnings (loss) per share**

Basic net earnings (loss) per share are (is)calculated using the weighted average number of common shares outstandingduring the year.

Diluted net earnings(loss) per share are (is) calculated based on the weighted average number ofcommon shares outstanding during the year, plus the effects of dilutive commonshare equivalents such as options and convertible term loans. This methodrequires that diluted net earnings (loss) per share be calculated using thetreasury stock method, as if all common share equivalents had been exercised atthe beginning of the reporting period, or period of issuance, as the case maybe, and that the funds obtained thereby were used to purchase common shares ofthe Company at the average trading price of the common shares during theperiod.

**4**                      New accounting standards

In January 2005, the CICA issued four new accountingstandards in relation with financial instruments: Section 3855 “FinancialInstruments – Recognition and Measurement”, Section 3865 “Hedges”, Section 1530“Comprehensive Income” and Section 3251 “Equity”.

Section 3855 expands on Section 3860 “FinancialInstruments – Disclosure and Presentation”, by prescribing when a financialinstrument is to be recognized on the balance sheet and at what amount. It alsospecifies how financial instrument gains and losses are to be presented.

Section 3865 provides alternative treatments toSection 3855 for entities which choose to designate qualifying transactions ashedges for accounting purposes. It replaces and expands on Accounting GuidelineAcG-13 “Hedging Relationships”, and the hedging guidance in Section 1650 “ForeignCurrency Translation” by specifying how hedge accounting is applied and whatdisclosures are necessary when it is applied.

14

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Section 1530 “Comprehensive Income” introduces a newrequirement to temporarily present certain gains and losses outside net income.

Consequently, Section 3250 “Surplus” has been revisedas Section 3251 “Equity”.

**Recognition of financial assets and liabilities**

*Short-term investments*

The short-term investments will be classified asavailable-for-sale investments. The Company will continue to recognizetransactions on the settlement date.

These investments will be recognized at fair value.Unrealized gains and losses will be recognized, net of income taxes, if any, in“Accumulated other comprehensive income”. Upon the disposal or impairment ofthese investments, these gains or losses will be reclassified in theconsolidated statement of operations.

*Effective interest rate method*

Premiums and discounts on short-term investments andlong-term debt will be accounted for using the effective interest rate method.

*Transition*

The recognition, derecognition and measurement methodsused as well as the hedge accounting policies used to prepare the consolidatedfinancial statements of periods prior to the effective date of the newstandards were unchanged and, therefore those financial statements will not berestated.

Sections 1530, 3251, 3855 and 3865 will be adopted bythe Company on January 1, 2007. As of this date, the Company will recognize allof its financial assets and liabilities in the consolidated balance sheetaccording to their classification. Any adjustment made to a previous carryingamount will be recognized as an adjustment to the balance of deficit at thatdate or as the opening balance of a separate item in “Accumulated othercomprehensive income”, net of income taxes, if any.

The following items will be recognized as anadjustment to the opening balance of “Accumulated other comprehensive income”,net of income taxes:

·                      Thedifference between the carrying amount and the fair value of investmentsclassified as available for sale;

·                      Reclassificationof the unrealized foreign currency translation adjustments.

15

----

*Effective interest rate method*

The impact of the use of the effective interest ratemethod will be recognized as an adjustment to the opening balance of deficit,net of income taxes, if any.

These transitionadjustments will not have a material impact on the Company’s consolidatedbalance sheet.

**5**                      Business acquisition

Echelon Biosciences Inc. (“Echelon”)

On January 1, 2005, theCompany completed the acquisition of 100% of the issued and outstanding commonshares of Echelon for a total consideration of $2,935,522, of which an amountof $36,718 including all acquisition-related costs, was paid cash, net of cashand cash equivalents acquired of $161,734, and the balance was paid through theissuance of 443,905 common shares of the Company, the price per sharecorresponds to the weighted moving average trading prices of the Company forthe last fifteen consecutive trading days ending on December 31, 2004. Theacquisition is subject to contingent payments specified in the agreement for anapproximate amount of $3,500,000 of which an amount of $2,900,000 will bepayable in shares and the balance of $600,000 payable in cash at the latest inJanuary 2008 once the conditions will have been met. During 2005, an amount of$196,000 has been recorded as contingent consideration payable, thus having theeffect of increasing goodwill. This amount has been settled through a cashpayment of $32,000 and the issuance of 23,789 common shares of the Company.

This company, based inthe United States, focuses on the transduction signalling technology.

16

----

The allocated values of the net assets acquired are asfollows:
|                                     | ** ** | **$**      | ** ** |
|-------------------------------------|------------|------------|------------|
| ** **                          | ** ** | ** ** | ** ** |
| Assets                              |       |       |       |
| Current assets                      |       | 750        |       |
| Property, plant and  equipment      |       | 445        |       |
| Intangible assets                   |       |       |       |
| Customer relationships              |       | 909        |       |
| Patents and trademarks              |       | 100        |       |
| Technologies                        |       | 1,364      |       |
| Other long-term assets              |       | 111        |       |
|                                |       |       |       |
|                                |       | 3,679      |       |
|                                |       |       |       |
| Liabilities                         |       |       |       |
| Current liabilities                 |       | 781        |       |
| Long-term liabilities               |       | 81         |       |
| Future income tax  liabilities      |       | 832        |       |
|                                |       |       |       |
|                                |       | 1,694      |       |
|                                |       |       |       |
| Net identifiable assets acquired    |       | 1,985      |       |
|                                |       |       |       |
| Goodwill                            |       | 951        |       |
|                                |       |       |       |
| Purchase price                      |       | 2,936      |       |
| Less:                               |       |       |       |
| Cash and cash  equivalents acquired |       | 162        |       |
| Shares issued                       |       | 2,737      |       |
|                                |       |       |       |
| Net cash used  for the acquisition  |       | 37         |       |

 

Patents and trademarks,customer relationships and technologies are amortized on a straight-line basisover their estimated useful lives of five to seven years.

Goodwill and intangibleassets are not deductible for income tax purposes.

**6**                      Other receivables
|                                                  | ** ** | **As at December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2006 **                        | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **$**                                 | ** ** | **$** | ** ** |
| ** **                                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Interest                                         |       | 592                                   |       | 401 |   |
| Grants *                                         |       | 857                                   |       | 1,415 |   |
| Research and development tax credits recoverable |       | 103                                   |       | — |   |
| Commodity taxes                                  |       | 880                                   |       | 351 |   |
| Other                                            |       | 305                                   |       | 157 |   |
|                                             |       |                                  |       |   |   |
|                                             |       | 2,737                                 |       | 2,324 |   |

 

----

*                      Thesegrants represent a holdback of a contribution from a federal program calledTechnology Partnerships Canada (“TPC”). The Company received a contributionequivalent to 30% of the eligible expenses incurred by the Company in thedevelopment of an angiogenesis inhibitor in oncology, dermatology andophthalmology. Since the pharmaceutical development has been terminated, theCompany does not expect to make any reimbursements in connection with thisprogram.

17

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**7**                      Inventory
|                  | ** ** | **As at December 31,** | ** ** |
|------------------|------------|---------------------------------------|------------|
| ** **       | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **       | ** ** | **$**                                 | ** ** | **$** | ** ** |
| ** **       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Raw materials    |       | 3,233                                 |       | 3,598 |   |
| Work in progress |       | 1,070                                 |       | 1,077 |   |
| Finished goods   |       | 1,064                                 |       | 825 |   |
|             |       |                                  |       |   |   |
|             |       | 5,367                                 |       | 5,500 |   |

 

**8**                      Deferred charges and other long-termassets
|                                                  | ** ** | **As at December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **$**                                 | ** ** | **$** | ** ** |
| ** **                                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Deferred charges                                 |       | 1,151                                 |       | 595 |   |
| Investments at cost, disposed of during the year |       | —                                |       | 925 |   |
| Other                                            |       | 203                                   |       | — |   |
|                                             |       |                                  |       |   |   |
|                                             |       | 1,354                                 |       | 1,520 |   |

 

18

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**9**                      Property, plant and equipment

|                           | ** ** | **As at December 31,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| ** **                | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                | ** ** | **Cost **                        | ** ** | **Accumulated  depreciation ** | ** ** | **Cost ** | ** ** | **Accumulated  depreciation** | ** ** |
| ** **                | ** ** | **$**                                 | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Land                      |       | 52                                    |       | — |   | 52 |   | — |   |
| Building                  |       | 11,031                                |       | 3,280 |   | 11,054 |   | 2,844 |   |
| Equipment                 |       | 12,793                                |       | 8,338 |   | 11,013 |   | 5,973 |   |
| Office furniture          |       | 665                                   |       | 505 |   | 658 |   | 467 |   |
| Computer equipment        |       | 1,091                                 |       | 871 |   | 872 |   | 745 |   |
| Automotive equipment      |       | 32                                    |       | 30 |   | 70 |   | 53 |   |
| Leasehold improvements    |       | 990                                   |       | 198 |   | 594 |   | 124 |   |
|                      |       |                                  |       |   |   |   |   |   |   |
|                      |       | 26,654                                |       | 13,222 |   | 24,313 |   | 10,206 |   |
| Less:                     |       |                                  |       |   |   |   |   |   |   |
| Accumulated  depreciation |       | 13,222                                |       |   |   | 10,206 |   |   |   |
|                      |       |                                  |       |   |   |   |   |   |   |
| Net amount                |       | 13,432                                |       |   |   | 14,107 |   |   |   |

 

In 2006, following thedecision to terminate the pharmaceutical development of one of its products,the Company has recorded an impairment on related manufacturing equipment inorder to bring it down to its fair value, which is based on management’s bestestimate of the resale value. Accordingly, an amount of $1,060,856 has beenrecorded as an impairment loss included in depreciation of property, plant andequipment.

**10**               Intangible assets

|                                | ** ** | **As at December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|
| ** **                     | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **Cost **                        | ** ** | **Accumulated  amortization ** | ** ** | **Cost ** | ** ** | **Accumulated  amortization** | ** ** |
| ** **                     | ** ** | **$**                                 | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                     | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Patents and trademarks         |       | 57,203                                |       | 20,002 |   | 51,646 |   | 12,621 |   |
| Customer relationships         |       | 938                                   |       | 188 |   | 940 |   | 94 |   |
| Technology and other           |       | 2,025                                 |       | 870 |   | 1,953 |   | 470 |   |
|                           |       |                                  |       |   |   |   |   |   |   |
|                           |       | 60,166                                |       | 21,060 |   | 54,539 |   | 13,185 |   |
|                           |       |                                  |       |   |   |   |   |   |   |
| Less: Accumulated amortization |       | 21,060                                |       |   |   | 13,185 |   |   |   |
|                           |       |                                  |       |   |   |   |   |   |   |
| Net amount                     |       | 39,106                                |       |   |   | 41,354 |   |   |   |

 

In 2006, following the decision to terminate the pharmaceuticaldevelopment of certain products, the Company recorded an impairment on certainpatents and trademarks. Accordingly, an amount of $1,815,172 has been recordedas an impairment loss included in amortization of intangible assets.

19

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**11**               Goodwill

The change in thecarrying value is as follows:
|                                      | ** ** | **$**      | ** ** |
|--------------------------------------|------------|------------|------------|
| ** **                           | ** ** | ** ** | ** ** |
| **Balance as at December 31, 2004**  |       | 9,646      |       |
|                                 |       |       |       |
| Acquisition (note 5)                 |       | 951        |       |
|                                 |       |       |       |
| Impact of foreign exchange rate      |       | (820       | )          |
|                                 |       |       |       |
| **Balance as at December 31, 2005**  |       | 9,777      |       |
|                                 |       |       |       |
| Impact of foreign exchange rate      |       | 971        |       |
|                                 |       |       |       |
| **Balance  as at December 31, 2006** |       | 10,748     |       |

 

**12**               Accounts payable and accrued liabilities
|                                                  | ** ** | **As at December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2006 **                        | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **$**                                 | ** ** | **$** | ** ** |
| ** **                                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Trade payable                                    |       | 7,019                                 |       | 4,001 |   |
| Advance payment related to a licensing agreement |       | —                                |       | 728 |   |
| Salaries and employee benefits                   |       | 460                                   |       | 482 |   |
| Other accrued liabilities                        |       | 2,542                                 |       | 2,390 |   |
|                                             |       |                                  |       |   |   |
|                                             |       | 10,021                                |       | 7,601 |   |

 

20

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**13**               Convertible term loans

On February 14 and 17, 2006, the Solidarity Fund QFL(the “Fund”) and SGF Santé inc. (“SGF”) have respectively exercised their rightto early convert the entirety of their convertible term loans in the principalamount of CAN$12.5 million each that they had extended to the Company in April2003 and that were to mature on March 31, 2006. In accordance with the terms ofthe convertible term loans, and additional arrangements between the Company,the Fund and SGF, Æterna Zentaris has issued to each of the loan holders3,477,544 of its common shares upon conversion of their loans, representing theprincipal and interest due to the stated maturity date under the loans, basedon the conversion price that had been agreed upon in the loan agreements.

For accounting purposes, the convertible term loansare separated between debt and equity, the equity portion representing thevalue of the holders’ conversion options. As a consequence of this transaction,the Company recorded a loss on settlement of long-term debt amounting to$599,190, representing an inducement to the original terms of the loanagreements. An amount of $280,000 has been recorded in the statement ofdeficit, and the remainder has been charged to expense in the statement ofoperations and has been included in the accretion on convertible term loans inthe statement of cash flows.

**14**               Long-term debt
|                                                                                                                                                                                                             | ** ** | **As at December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                                                                  | ** ** | **2006 **                        | ** ** | **2005** | ** ** |
| ** **                                                                                                                                                                                                  | ** ** | **$**                                 | ** ** | **$** | ** ** |
|                                                                                                                                                                                                        |       |                                  |       |   |   |
| Loan from the federal and provincial governments,  (CAN$1,600 in 2006; CAN$2,400 in 2005) non-interest bearing, payable in five  annual equal and consecutive instalments since July 2004                   |       | 1,373                                 |       | 2,064 |   |
| Promissory note, bearing interest at a rate of  5.67%, payable in monthly instalments including principal and interest,  collateralized by the laboratory equipment of a subsidiary, maturing in June  2008 |       | 50                                    |       | 81 |   |
|                                                                                                                                                                                                        |       |                                  |       |   |   |
|                                                                                                                                                                                                        |       | 1,423                                 |       | 2,145 |   |
| Less:                                                                                                                                                                                                       |       |                                  |       |   |   |
| Current portion                                                                                                                                                                                             |       | 719                                   |       | 719 |   |
|                                                                                                                                                                                                        |       |                                  |       |   |   |
|                                                                                                                                                                                                        |       | 704                                   |       | 1,426 |   |

 

The principal instalmentsdue on long-term debt for the next two years amount to $719,490 in 2007 and$703,688 in 2008.

21

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**15**               Employee future benefits

Our subsidiary in Germanyprovides unfunded defined benefit pension plans and unfunded postemploymentbenefit plans for some groups of employees. Provisions for pension obligationsare established for benefits payable in the form of retirement, disability andsurviving dependant pensions.

The following tableprovides a reconciliation of the changes in the plans’ accrued benefitsobligations:
|                                                  | ** ** | **Pension benefit plans** | ** ** | **Other benefit plans** | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                       | ** ** | **2006**                            | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **$**                               | ** ** | **$**                             | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                       | ** ** | ** **                          | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Obligation – Beginning of year              |       | 6,932                               |       | 5,634                             |       | 4,486 |   | 523 |   | 398 |   | 393 |   |
|                                             |       |                                |       |                              |       |   |   |   |   |   |   |   |   |
| Current service cost                             |       | 293                                 |       | 200                               |       | 200 |   | 39 |   | 23 |   | 23 |   |
| Interest cost                                    |       | 293                                 |       | 269                               |       | 253 |   | 22 |   | 19 |   | 21 |   |
| Actuarial loss (gain)                            |       | (674                                | )          | 1,748                             |       | 342 |   | 53 |   | 182 |   | 27 |   |
| Benefits paid                                    |       | (64                                 | )          | (65                               | )          | (60 | ) | (70 | ) | (43 | ) | (94 | ) |
| Effect of foreign currency exchange rate changes |       | 767                                 |       | (854                              | )          | 413 |   | 53 |   | (56 | ) | 28 |   |
|                                             |       |                                |       |                              |       |   |   |   |   |   |   |   |   |
| Obligation – End of year                    |       | 7,547                               |       | 6,932                             |       | 5,634 |   | 620 |   | 523 |   | 398 |   |
|                                             |       |                                |       |                              |       |   |   |   |   |   |   |   |   |
| Expenses  (recovery) recognized                  |       | (88                                 | )          | 2,217                             |       | 795 |   | 114 |   | 224 |   | 71 |   |

 

The significant actuarialassumptions adopted to determine the Company’s accrued benefits obligations areas follows:
|                                | ** ** | **Pension benefit plans** | ** ** | **Other benefit plans** | ** ** |
|--------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| **Actuarial assumptions** | ** ** | **2006**                            | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **%**                               | ** ** | **%**                             | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** | **%** | ** ** |
| ** **                     | ** ** | ** **                          | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate for expenses     |       | 4.00                                |       | 5.25                              |       | 5.25 |   | 4.00 |   | 5.25 |   | 5.25 |   |
| Discount rate for liabilities  |       | 4.50                                |       | 4.00                              |       | 5.25 |   | 4.50 |   | 4.00 |   | 5.25 |   |
| Pension benefits increase      |       | 1.25                                |       | 1.25                              |       | 1.25 |   | 1.25 |   | 1.25 |   | 1.25 |   |
| Rate of  compensation increase |       | 2.75 to 3.75                        |       | 2.75 to 3.75                      |       | 2.75 to 3.75 |   | 2.75 |   | 2.75 |   | 2.75 |   |

 

The last actuarialreports give effect to the pension and postemployment benefit obligations as atDecember 31, 2006. The next actuarial reports are planned for December 2007.

**Definedcontribution plans**

Total expenses amount to$263,810 in 2006 ($215,788 in 2005 and $175,699 in 2004) for definedcontribution pension plans.

22

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The Company also sponsorsa 401K plan in its U.S. subsidiary. Under this plan, the Company may contributea discretionary amount equal to a percentage of employee contributions to theplan and may also make discretionary profit sharing contribution. During theyears ended December 31, 2006 and 2005, the Company did not record anycontribution.

Total cash payments foremployee future benefits in 2006, consisting of cash contributed by the Companyto its defined contribution plans as well as direct payments to retiredemployees, amount to $398,340 ($323,382 in 2005 and $330,144 in 2004).

**16**               Share capital

(a)               Authorized

Unlimited number ofshares of the following classes:

Common, voting andparticipating, one vote per share

Preferred, first and second ranking, issuable in series, with rightsand privileges specific to each class.

As at December 31, 2006,there are no preferred shares issued and outstanding.

(b)              Issued
|                                                                                      | ** ** | **As at December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                           | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                           | ** ** | **Number**                            | ** ** | **Amount ** | ** ** | **Number** | ** ** | **Amount ** | ** ** | **Number** | ** ** | **Amount** | ** ** |
| ** **                                                                           | ** ** | ** **                            | ** ** | **$** | ** ** | ** ** | ** ** | **$** | ** ** | ** ** | ** ** | **$** | ** ** |
|                                                                                 |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| **Common shares**                                                                    |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Balance – Beginning of year                                                     |       | 46,139,814                            |       | 130,344 |   | 45,670,909 |   | 127,585 |   | 45,330,992 |   | 126,326 |   |
| Conversion of  convertible term loans (note 13)                                      |       | 6,955,088                             |       | 37,786 |   | — |   | — |   | — |   | — |   |
| Issued pursuant to the  stock option plan                                            |       | 22,000                                |       | 110 |   | 25,000 |   | 130 |   | 339,917 |   | 1,386 |   |
| Issued pursuant to the  acquisition of Echelon (note 5)                         |       | 23,789                                |       | 163 |   | 443,905 |   | 2,737 |   | — |   | — |   |
| Issued pursuant to the  acquisition of a patent from a senior officer (note 21) |       | 28,779                                |       | 175 |   | — |   | — |   | — |   | — |   |
| Share issue expenses                                                                 |       | —                                |       | (112 | ) | — |   | (108 | ) | — |   | (127 | ) |
|                                                                                 |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Balance –  End of year                                                     |       | 53,169,470                            |       | 168,466 |   | 46,139,814 |   | 130,344 |   | 45,670,909 |   | 127,585 |   |

 

23

----

(c)               Common share issues

Pursuant to the exerciseof stock options, the Company issued, during fiscal 2006, 22,000 common sharesfor total proceeds of $81,000. Consequently, stock-based compensation costs of$29,000 relating to those exercised options have been reclassified from othercapital to share capital.

Pursuant to the exerciseof stock options, the Company issued, during fiscal 2004, 339,917 common sharesat an average price of $3.77 per share for proceeds of $1,282,000.Consequently, stock-based compensation costs of $104,000 relating to thoseexercised options have been reclassified from other capital to share capital.

(d)              Shareholder right plan

On March 29, 2004, theCompany adopted a shareholder right plan (the “Rights Plan”). The rights issuedto the shareholders under the Rights Plan will be exercisable, under certainconditions, only when a person or entity, including any related party(ies),acquires or announces his (its) intention to acquire more than twenty (20)percent of the outstanding common shares of the Company (as such, shares may beredesignated or reclassified) without complying with the “permitted bid”provisions of the Rights Plan or without approval of the Company’s Board ofDirectors. Should such an acquisition occur, each right would, upon exercise,entitle a holder, other than the person pursuing the acquisition together withits related party(ies), to purchase common shares of the Company at a fifty(50) percent discount to the market price of the Company’s shares at that time.

(e)               Company’s stock option plan

In December 1995, theCompany’s Board of Directors adopted a stock option plan (the “Stock OptionPlan”) for its directors, senior executives, employees and other collaboratorsproviding services to the Company. The number of shares that are issuable underthe Stock Option Plan shall not exceed 4,543,744. Options granted under theStock Option Plan expire after a maximum period of ten years following the dateof grant. Options granted under the Stock Option Plan generally vest over athree-year period.

24

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The following tablesummarizes the stock option activity under the Stock Option Plan:
|                                         | ** ** | **2006**   | ** ** | **2005**                                                 | ** ** | **2004**   | ** ** |
|-----------------------------------------|------------|------------|------------|----------------------------------------------------------|------------|------------|------------|
| ** **                              | ** ** | **Number** | ** ** | **Weighted   average  exercise   price ** | ** ** | **Number** | ** ** | **Weighted   average   exercise   price ** | ** ** | **Number** | ** ** | **Weighted   average   exercise   price** | ** ** |
| ** **                              | ** ** | ** ** | ** ** | **(CAN$)**                                               | ** ** | ** ** | ** ** | **(CAN$)** | ** ** | ** ** | ** ** | **(CAN$)** | ** ** |
|                                    |       |       |       |                                                     |       |       |       |   |   |   |   |   |   |
| Balance – Beginning of year        |       | 3,843,592  |       | 6.16                                                     |       | 3,480,592  |       | 6.58 |   | 3,197,435 |   | 6.02 |   |
| Granted                                 |       | 45,000     |       | 6.41                                                     |       | 686,500    |       | 5.63 |   | 913,000 |   | 8.06 |   |
| Exercised                               |       | (22,000    | )          | 3.98                                                     |       | (25,000    | )          | 6.31 |   | (339,917 | ) | 4.99 |   |
| Expired                                 |       | (346,000   | )          | 7.68                                                     |       | (65,000    | )          | 8.34 |   | (2,050 | ) | 7.04 |   |
| Forfeited                               |       | (30,500    | )          | 6.21                                                     |       | (233,500   | )          | 10.31 |   | (287,876 | ) | 6.97 |   |
|                                    |       |       |       |                                                     |       |       |       |   |   |   |   |   |   |
| Balance – End of year              |       | 3,490,092  |       | 6.02                                                     |       | 3,843,592  |       | 6.16 |   | 3,480,592 |   | 6.58 |   |
|                                    |       |       |       |                                                     |       |       |       |   |   |   |   |   |   |
| Options  exercisable – End of year |       | 2,736,099  |       | 5.88                                                     |       | 2,260,930  |       | 6.17 |   | 1,743,429 |   | 6.90 |   |

 

The following tablesummarizes the stock options outstanding as at December 31, 2006:
|                                     | ** ** | **Options outstanding** | ** ** | **Options currently   exercisable**                         | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------------------------------------------------|------------|
| **Exercise price (CAN$)** | ** ** | **Number**                   | ** ** | **Weighted   average   remaining   contractual  life** | ** ** | **Weighted   average   exercise   price ** | ** ** | **Number** | ** ** | **Weighted   average   exercise   price** | ** ** |
| ** **                          | ** ** | ** **                   | ** ** | ** **                                                            | ** ** | **(CAN$)** | ** ** | ** ** | ** ** | **(CAN$)** | ** ** |
|                                |       |                         |       |                                                                  |       |   |   |   |   |   |   |
| 3.75 to 5.00                        |       | 932,593                      |       | 6.70                                                                  |       | 3.93 |   | 932,593 |   | 3.93 |   |
| 5.01 to 7.00                        |       | 1,337,166                    |       | 7.43                                                                  |       | 5.68 |   | 881,664 |   | 5.70 |   |
| 7.01 to 10.90                       |       | 1,220,333                    |       | 7.13                                                                  |       | 8.01 |   | 921,842 |   | 8.03 |   |
|                                |       |                         |       |                                                                  |       |   |   |   |   |   |   |
|                                |       | 3,490,092                    |       | 7.13                                                                  |       | 6.02 |   | 2,736,099 |   | 5.88 |   |

 

Following the one-timedistribution of the Company’s remaining interest in Atrium on January 2, 2007and as contemplated under the Stock Option Plan (see note 2), the Board ofDirectors of the Company approved an equitable adjustment to all unexercisedoptions outstanding pursuant to the Stock Option Plan. The adjustment was areduction in the exercise price of all outstanding stock options of CAN$2.02per common share.

25

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**Assumptionsused in determining stock-based compensation costs**

The table below shows theassumptions used in determining stock-based compensation costs under theBlack-Scholes option pricing model:
|                         | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| ** **              | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                    |       |                                        |       |   |   |   |   |
| Dividend yield          |       | Nil                                         |       | Nil |   | Nil |   |
| Expected volatility     |       | 58.1                                        | %          | 62.1 | % | 64.2 | % |
| Risk-free interest rate |       | 4.06                                        | %          | 3.92 | % | 3.48 | % |
| Expected life  (years)  |       | 5.77                                        |       | 5.80 |   | 4.30 |   |

 

Had compensation costsbeen determined using the fair value method at the date of grant for awardsgranted in 2002 under this stock option plan, the Company’s pro forma netearnings (loss), basic and diluted net earnings (loss) per share after givingeffect to the grant of these options in 2002 are:
|                                         | ** ** | **Years Ended December31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **2005 **                        | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **$**                                 | ** ** | **$** | ** ** |
|                                    |       |                                  |       |   |   |
| Pro forma net earnings (loss)           |       | 10,429                                |       | (4,542 | ) |
| Pro forma net earnings (loss) per share |       |                                  |       |   |   |
| Basic                                   |       | 0.23                                  |       | (0.10 | ) |
| Diluted                                 |       | 0.23                                  |       | (0.10 | ) |

 

**17**               Statements of cash flows
|                                                    | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Change in non-cash operating working capital items |       |                                        |       |   |   |   |   |
| Accounts receivable                                |       | 2,623                                       |       | 1,245 |   | (7,194 | ) |
| Inventory                                          |       | 660                                         |       | (591 | ) | (171 | ) |
| Prepaid expenses                                   |       | 288                                         |       | (811 | ) | 243 |   |
| Accounts payable and  accrued liabilities          |       | 1,955                                       |       | 4,652 |   | (1,079 | ) |
| Income taxes                                       |       | (5,271                                      | )          | (639 | ) | 2,928 |   |
|                                               |       |                                        |       |   |   |   |   |
|                                               |       | 255                                         |       | 3,856 |   | (5,273 | ) |

 

26

----

 
|                               | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                    | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                    | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Additional information**    |       |                                        |       |   |   |   |   |
| Interest paid                 |       |                                        |       |   |   |   |   |
| From continuing  operations   |       | 4                                           |       | 34 |   | 68 |   |
| From  discontinued operations |       | 7,784                                       |       | 1,908 |   | 1,794 |   |
| Income taxes paid             |       |                                        |       |   |   |   |   |
| From continuing  operations   |       | 5,756                                       |       | 709 |   | 2,965 |   |
| From  discontinued operations |       | 8,698                                       |       | 6,084 |   | 4,301 |   |

 

**18**               Income taxes

The reconciliation of the combined Canadian federaland Québec provincial income tax rate to the income tax expense (recovery) fromcontinuing operations is as follows:
|                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                       | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Combined federal and  provincial statutory income tax rate       |       | 32.02                                       | %          | 31.02 | % | 31.02 | % |
|                                                             |       |                                        |       |   |   |   |   |
| Income tax recovery  based on statutory income tax rate          |       | $                                           | (6,990     | ) | $ | (4,792 | ) | $ | (3,196 | ) |
| Change in valuation  allowance                                   |       | (22,792                                     | )          | 5,547 |   | 2,544 |   |
| Accretion on  convertible term loans                             |       | 258                                         |       | 1,448 |   | 469 |   |
| Stock-based  compensation costs                                  |       | 679                                         |       | 739 |   | 333 |   |
| Difference in statutory  income tax rate of foreign subsidiaries |       | (995                                        | )          | 124 |   | 244 |   |
| Change in enacted rate  used                                     |       | (2,428                                      | )          | (2,780 | ) | — |   |
| Tax loss consolidation  strategy (note 21)                  |       | 2,376                                       |       | 827 |   | — |   |
| Other                                                            |       | 763                                         |       | (620 | ) | (121 | ) |
|                                                             |       |                                        |       |   |   |   |   |
|                                                             |       | $                                           | (29,129    | ) | $ | 493 |   | $ | 273 |   |

 

27

----

 
|                                                  | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax expense (recovery) is represented by: |       |                                        |       |   |   |   |   |
| Current                                          |       | $                                           | 133        |   | $ | 69 |   | $ | 5,869 |   |
| Future                                           |       | (29,262                                     | )          | 424 |   | (5,596 | ) |
|                                             |       |                                        |       |   |   |   |   |
|                                             |       | $                                           | (29,129    | ) | $ | 493 |   | $ | 273 |   |
|                                             |       |                                        |       |   |   |   |   |
| Current                                          |       |                                        |       |   |   |   |   |
| Domestic                                         |       | $                                           | —     |   | $ | — |   | $ | — |   |
| Foreign                                          |       | 133                                         |       | 69 |   | 5,869 |   |
|                                             |       |                                        |       |   |   |   |   |
|                                             |       | $                                           | 133        |   | $ | 69 |   | $ | 5,869 |   |
|                                             |       |                                        |       |   |   |   |   |
| Future                                           |       |                                        |       |   |   |   |   |
| Domestic                                         |       | $                                           | (25,036    | ) | $ | — |   | $ | — |   |
| Foreign                                          |       | (4,226                                      | )          | 424 |   | (5,596 | ) |
|                                             |       |                                        |       |   |   |   |   |
|                                             |       | $                                           | (29,262    | ) | $ | 424 |   | $ | (5,596 | ) |
|                                             |       |                                        |       |   |   |   |   |
|                                             |       | $                                           | (29,129    | ) | $ | 493 |   | $ | 273 |   |

 

28

----

Significant components offuture income tax assets and liabilities are as follows:

|                                                  | ** ** | **As at December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **$**                                 | ** ** | **$** | ** ** |
| ** **                                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Future income tax  assets                        |       |                                  |       |   |   |
| Current                                          |       |                                  |       |   |   |
| Deferred  revenues                               |       | 2,303                                 |       | 1,913 |   |
| Inventory                                        |       | 157                                   |       | 250 |   |
| Operating losses  carried forward (a)            |       | 17,996                                |       | — |   |
| Research and  development costs (a)              |       | 1,497                                 |       | — |   |
|                                             |       |                                  |       |   |   |
|                                             |       | 21,953                                |       | 2,163 |   |
|                                             |       |                                  |       |   |   |
| Long-term                                        |       |                                  |       |   |   |
| Research and  development costs                  |       | 11,584                                |       | 13,833 |   |
| Share issue  expenses                            |       | 229                                   |       | 355 |   |
| Operating losses  carried forward                |       | 7,101                                 |       | 21,857 |   |
| Property, plant  and equipment                   |       | 1,455                                 |       | 1,317 |   |
| Intangible  assets and goodwill                  |       | 206                                   |       | — |   |
| Employee future  benefits                        |       | 966                                   |       | 1,176 |   |
| Deferred  revenues                               |       | 3,658                                 |       | 4,732 |   |
| Other                                            |       | —                                |       | 175 |   |
|                                             |       |                                  |       |   |   |
|                                             |       | 25,199                                |       | 43,445 |   |
|                                             |       |                                  |       |   |   |
| Valuation allowance                              |       | (13,463                               | )          | (35,719 | ) |
|                                             |       |                                  |       |   |   |
|                                             |       | 11,736                                |       | 7,726 |   |
|                                             |       |                                  |       |   |   |
|                                             |       | 33,689                                |       | 9,889 |   |
|                                             |       |                                  |       |   |   |
| Future income tax  liabilities                   |       |                                  |       |   |   |
| Long-term                                        |       |                                  |       |   |   |
| Accounts  receivable                             |       | 11                                    |       | 35 |   |
| Investment in an  affiliated company (a)         |       | 5,829                                 |       | — |   |
| Property, plant  and equipment                   |       | 154                                   |       | 144 |   |
| Deferred charges  and other long-term assets     |       | 604                                   |       | 249 |   |
| Intangible  assets                               |       | 15,396                                |       | 15,926 |   |
| Investment tax  credits                          |       | 629                                   |       | — |   |
| Other                                            |       | 76                                    |       | — |   |
|                                             |       |                                  |       |   |   |
|                                             |       | 22,699                                |       | 16,354 |   |
|                                             |       |                                  |       |   |   |
| **Future  income tax assets (liabilities), net** |       | 10,990                                |       | (6,465 | ) |
| ** **                                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Classified as follows:                           |       |                                  |       |   |   |
| Future income  tax assets                        |       | 21,953                                |       | 2,163 |   |
| Future income  tax liabilities                   |       | (10,963                               | )          | (8,628 | ) |
|                                             |       |                                  |       |   |   |
|                                             |       | 10,990                                |       | (6,465 | ) |

 

----

(a)              The future incometax assets and liabilities will be realized on January 2, 2007 following thedistribution of the remaining shares held in Atrium.

29

----

As at December 31,2006, the Company has non-refundable research and development tax credits of$5,683,000 which can be carried forward to reduce Canadian federal income taxespayable and expire from 2011 to 2016. No tax benefit has been accounted for inconnection with those credits.

As at December 31, 2006,the Company had available operating losses in Canada. The following tablesummarizes the year of expiry of these operating losses by tax jurisdiction:
|                              | ** ** | **Canada**  | ** ** |
|------------------------------|------------|-------------|------------|
| **Year of expiry** | ** ** | **Federal** | ** ** | **Provincial** | ** ** |
| ** **                   | ** ** | **$**       | ** ** | **$** | ** ** |
| ** **                   | ** ** | ** **  | ** ** | ** ** | ** ** |
| 2008                         |       | 6,181       |       | — |   |
| 2009                         |       | 17,301      |       | 11,563 |   |
| 2010                         |       | 17,427      |       | 17,107 |   |
| 2014                         |       | 7,906       |       | 7,760 |   |
| 2015                         |       | 5,496       |       | 5,155 |   |
|                         |       |        |       |   |   |
|                         |       | 54,311      |       | 41,585 |   |

 

Furthermore, the Companyhad available operating losses in Germany amounting to $16.8 M for which thereis no expiry date.

The carryforwards and thetax credits claimed could be subjected to a review and a possible adjustment bytax authorities.

**19**               Segment information for continuing operations

Subsequentto the divestiture in Atrium, the Company operates in one single businesssegment, being the biopharmaceutical segment.

**Informationby geographic region**

Revenues by geographic region are detailed as follows:
|                | ** ** | **Years Ended December 31,** | ** ** |
|----------------|------------|---------------------------------------------|------------|
| ** **     | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **     | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
| ** **     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Canada         |       | 92                                          |       | 150 |   | — |   |
| United States  |       | 5,910                                       |       | 6,189 |   | 853 |   |
| Europe         |       |                                        |       |   |   |   |   |
| Switzerland    |       | 20,829                                      |       | 19,605 |   | 21,381 |   |
| United Kingdom |       | 5,336                                       |       | 6,801 |   | 5,008 |   |
| Netherlands    |       | 1,760                                       |       | 11,731 |   | 14,559 |   |
| Other          |       | 1,125                                       |       | 505 |   | 544 |   |
| Japan          |       | 6,194                                       |       | 134 |   | 396 |   |
| Other          |       | 146                                         |       | 2,089 |   | 231 |   |
|           |       |                                        |       |   |   |   |   |
|           |       | 41,392                                      |       | 47,204 |   | 42,972 |   |

 

30

----

Revenues have been allocated to geographic regionsbased on the country of residence of the related customers.

Customers who represent more than 10% of sales are asfollows:
|            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| ** ** | ** ** | **%**    | ** ** | **%**    | ** ** | **%**    | ** ** |
|       |       |     |       |     |       |     |       |
| Customer 1 |       | 49       |       | 42       |       | 45       |       |
| Customer 2 |       | 12       |       | 14       |       | 12       |       |
| Customer 3 |       | 3        |       | 25       |       | 34       |       |

 

Long-lived assets bygeographic region are detailed as follows:

|               | ** ** | **Years Ended December 31,** | ** ** |
|---------------|------------|---------------------------------------------|------------|
| ** **    | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **    | ** ** | **$**                                       | ** ** | **$** | ** ** |
| ** **    | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Canada        |       | 8,821                                       |       | 12,045 |   |
| United States |       | 3,436                                       |       | 3,930 |   |
| Germany       |       | 51,029                                      |       | 49,263 |   |
|          |       |                                        |       |   |   |
|          |       | 63,286                                      |       | 65,238 |   |

 

Long-lived assets consistof property, plant and equipment, intangible assets and goodwill.

The following tablepresents revenues by source:

|                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **           | ** ** | **$**    | ** ** | **$**    | ** ** | **$**    | ** ** |
|                 |       |     |       |     |       |     |       |
| Revenues             |       |     |       |     |       |     |       |
| Sales and  royalties | ** ** | 27,716   |       | 23,643   |       | 19,479   |       |
| License fees         | ** ** | 13,652   |       | 23,530   |       | 23,493   |       |
| Other                | ** ** | 24       |       | 31       |       | —   |       |
|                 |       |     |       |     |       |     |       |
|                 | ** ** | 41,392   |       | 47,204   |       | 42,972   |       |

 

31

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**20****     Earnings (loss) per share**

The following table setsforth the computation of basic and diluted net earnings (loss) per share:
|                                                                                                                                                                                                                    | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                                                                                                         | ** ** | **$**      | ** ** | **$**      | ** ** | **$**      | ** ** |
| ** **                                                                                                                                                                                                         |       |       |       |       |       |       |       |
| **Net earnings (loss) from  continuing operations**                                                                                                                                                                |       | 7,300      |       | (15,943    | )          | (10,576    | )          |
| ** **                                                                                                                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net earnings from discontinued  operations**                                                                                                                                                                     |       | 26,090     |       | 26,514     |       | 6,151      |       |
|                                                                                                                                                                                                               |       |       |       |       |       |       |       |
| Impact of assumed  conversion of dilutive stock options of Atrium                                                                                                                                                  |       | (754       | )          | (552       | )          | (156       | )          |
| ** **                                                                                                                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net earnings from discontinued operations,  adjusted for dilution effects**                                                                                                                                      |       | 25,336     |       | 25,962     |       | 5,995      |       |
| ** **                                                                                                                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net earnings (loss) adjusted  for dilution effects**                                                                                                                                                             |       | 32,636     |       | 10,019     |       | (4,581     | )          |
| ** **                                                                                                                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic weighted average number  of shares outstanding**                                                                                                                                                           |       | 52,099,290 |       | 46,139,814 |       | 45,569,176 |       |
|                                                                                                                                                                                                               |       |       |       |       |       |       |       |
| Dilutive effect of  stock options                                                                                                                                                                                  |       | 449,970    |       | 286,868    |       | 417,453    |       |
|                                                                                                                                                                                                               |       |       |       |       |       |       |       |
| **Diluted weighted average number  of shares outstanding**                                                                                                                                                         |       | 52,549,260 |       | 46,426,682 |       | 45,986,629 |       |
|                                                                                                                                                                                                               |       |       |       |       |       |       |       |
| **Items excluded from the calculation of diluted  net earnings (loss) per share because the exercise price was greater than the  average market price of the common shares or due to their anti-dilutive  effect** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock options                                                                                                                                                                                                      |       | 1,893,539  |       | 2,169,697  |       | 1,563,259  |       |
| Common shares which would be issued following the  conversion of the convertible term loans                                                                                                                        |       | 776,237    |       | 6,043,564  |       | 5,396,040  |       |

 

For the years endedDecember 31, 2005 and 2004, the diluted amounts per share were the same amountsas the basic amounts per share since the dilutive effect of stock options andconvertible term loans was not included in the calculation; otherwise, the effectwould have been anti-dilutive. Accordingly, the diluted amounts per share forthose years were calculated using the basic weighted average number of sharesoutstanding.

32

----

**21**               Related party transactions
|                                                     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                          | ** ** | **$**    | ** ** | **$**    | ** ** | **$**    | ** ** |
|                                                |       |     |       |     |       |     |       |
| Administrative revenues                             |       | 35       |       | 33       |       | 128      |       |
| Lease revenues                                      |       | 304      |       | 248      |       | 214      |       |
| Subcontracting revenues  and sales of raw materials |       | 66       |       | 92       |       | 340      |       |
| Subcontracting expenses                             |       | 44       |       | 337      |       | —   |       |
| Patent acquired from a  senior officer (note 16)    |       | 175      |       | —   |       | —   |       |

 

These above transactionswith our former subsidiary Atrium and a senior officer are in the normal courseof operations. They are measured at the exchange amount, which is the amount ofconsideration established and agreed upon by the related parties. The price ofthe shares issued for the acquisition of the patent was based on the closingtrading price of the Company’s shares on February 28, 2006, being the daybefore the signing of the agreement.

The transactions withAtrium include amounts that occurred before October 18, 2006 and that werepreviously eliminated from the consolidated financial statements but which willcontinue to occur after the disposal.

At the end of the year,amounts due to and (from) the former subsidiary are payable (redeemable) ondemand and have resulted from the transactions mentioned above.

*Tax lossconsolidation strategy*

On September 15, 2005,the Company obtained a one-day loan of $129 million from a financialinstitution to advance $129 million to its former subsidiary Atrium by way of asubordinate 7% interest-bearing promissory note. This note is unsecured andpayable on demand.

On the same day, Atriumacquired $129 million in preferred shares from 4296672 Canada Inc., awholly-owned subsidiary of the Company. The dividend rate on the preferredshares was 7.05%. 4296672 Canada Inc. used the proceeds to advance $129 millionto the Company through an interest-free loan, payable on demand. Then, thefunds were used by the Company to repay the daylight loan to the financialinstitution.

With respect to thatarrangement that terminated in October 2006, when the Company ceased to be thecontrolling shareholder of Atrium, we had received a tax ruling delivered byCanada Revenue Agency. All transactions have been eliminated during the consolidationprocess and income tax savings resulting from the interest expense deductionhave been presented as discontinued operations.

On December 22, 2004, theCompany sold a technology to its former subsidiary, Atrium, in consideration ofthe issuance by Atrium of 537,996 subordinate voting shares. This transactionhas been accounted for at the carrying amount of the net assets sold, beingnil.

33

----

Under the amendedagreement, the Company will pay Atrium up to $1,287,000 (CAN$1,500,000) of feesrelated to the registration, repositioning and marketing of the product. Atotal amount of $715,000 has been recorded in 2005 and 2004 and the remainderhas been recorded and paid in 2006.

**22**               Financial instruments

**Short-terminvestments**
|                                                                                                                                                                                                                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                                                                                                                                                | ** ** | **$**    | ** ** | **$**    | ** ** |
|                                                                                                                                                                                                                                                      |       |     |       |     |       |
| Discount notes and commercial paper, bearing  interest at effective annual rates ranging from 4.29% to 4.31% in 2006 and at  an annual rate of 2.98% in 2005, maturing on different dates from March to  June 2007, in 2006 and in February 2006, in 2005 |       | 8,649    |       | 631      |       |
| Bonds, bearing interest at effective annual rates  ranging from 2.81% to 4.43% in 2006 and from 2.0% to 4.33% in 2005, maturing  on different dates from March 2007 to November 2008 in 2006 and from January  2006 to September 2007 in 2005             |       | 43,014   |       | 20,348   |       |
| Mutual fund units                                                                                                                                                                                                                                         |       | —   |       | 1,501    |       |
|                                                                                                                                                                                                                                                      |       |     |       |     |       |
|                                                                                                                                                                                                                                                      |       | 51,663   |       | 22,480   |       |

 

**Fair value**

Cash and cash equivalents, accounts receivable andaccounts payable and accrued liabilities are financial instruments whose fairvalue approximates their carrying value due to their short-term maturity. Thefair value of short-term and long-term investments is $51,702,449 ($22,655,602in 2005), and nil ($1,065,520 in 2005) respectively. The fair value oflong-term debt and convertible term loans has been established by discountingthe future cash flows at an interest rate corresponding to that which theCompany would currently be able to obtain for loans with similar maturity datesand terms. The approximate fair value of long-term debt and convertible termloans is respectively $1,342,000 and nil ($1,969,000 and $29,334,000 in 2005).

**Foreign currency risk**

Since the Company operateson an international scale, it is exposed to currency risks as a result ofpotential exchange rate fluctuations. As at December 31, 2006 and 2005, thereare no significant forward exchange contracts outstanding.

34

----

**Credit risk**

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

Generally, the Company does not require collateral orother security from customers for trade accounts receivable; however, credit isextended following an evaluation of creditworthiness. In addition, the Companyperforms on-going credit reviews of all its customers and establishes anallowance for doubtful accounts when accounts are determined to beuncollectible. Allowance for doubtful accounts amounted to $7,000 and $10,000as at December 31, 2006 and 2005, respectively.

**Interest rate risk**

The Company’s exposure tointerest rate risk is as follows:
| Cash and cash equivalents                 |   | Variable interest rate  |
|-------------------------------------------|--------|-------------------------|
| Short-term  investments                   |   | Fixed interest rate     |
| Accounts  receivable                      |   | Non-interest bearing    |
| Accounts payable  and accrued liabilities |   | Non-interest bearing    |
| Long-term debt                            |   | As described in note 14 |

 

**23**               Commitments and guarantee

The Company is committedto various operating leases for its premises totalling $2,280,000 in 2007,$1,894,000 in 2008, $1,680,000 in 2009 $1,641,000 in 2010 and $1,437,000 in2011.

The Company is alsocommitted to some service and manufacturing contracts totalling $5,478,000 in2007, $2,180,000 in 2008, $1,179,000 in 2009 and $88,000 in 2010.

InOctober 2004, the Company entered into a $2.3 M (€1.75 M) bank guarantee infavour of one of its landlords in Germany with respect to the Company’s leaseobligation. This guarantee will mature in 2009.

 

**24****               Summaryof differences between generally accepted accounting principles in Canada andin the United States.**

As a company listed onthe NASDAQ Global Market, the Company is required to reconcile its financialstatements for significant measurement differences between generally acceptedaccounting principles as applied in Canada (Canadian GAAP) and those applied inthe United States (U.S. GAAP). Furthermore, additional significant disclosuresrequired under U.S. GAAP and Regulation S-X of the Securities and ExchangeCommission in the United States (SEC) are also provided in the accompanyingfinancial statements and notes. The following summarizes the significantquantitative differences between Canadian and U.S. GAAP, as well as othersignificant disclosures required under U.S. GAAP and Regulation S-X of the SECnot already provided in the accompanying financial statements.

The following summary setsout the material adjustments to the Company’s reported net earnings (loss), netearnings (loss) per share and shareholders’ equity which would be made toconform with U.S. GAAP:

**Statementsof Operations**
|                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
|                                                               |       |                                        |       |   |   |   |   |
| Net earnings  (loss) for the year under Canadian GAAP              |       | 33,390                                      |       | 10,571 |   | (4,425 | ) |
| Accretion on  convertible term loans                               | (c)        | 502                                         |       | 4,479 |   | 1,514 |   |
| Loss on  conversion of convertible term loans                      | (c)        | (280                                        | )          | — |   | — |   |
| Amortization of  in-process R&D                                | (a)        | 2,348                                       |       | 1,610 |   | 1,605 |   |
| Other                                                              | (b)        | (10                                         | )          | (32 | ) | (120 | ) |
| Deferred taxes                                                     | (d)        | (749                                        | )          | — |   | — |   |
| Income tax  effects of the above adjustments                       |       | (939                                        | )          | (658 | ) | (656 | ) |
|                                                               |       |                                        |       |   |   |   |   |
| Net earnings  (loss) for the year under U.S. GAAP                  |       | 34,262                                      |       | 15,970 |   | (2,082 | ) |
|                                                               |       |                                        |       |   |   |   |   |
| Out of which:                                                      |       |                                        |       |   |   |   |   |
|                                                               |       |                                        |       |   |   |   |   |
| Net earnings  (loss) from continuing operations                    |       | 8,172                                       |       | (10,544 | ) | (8,158 | ) |
| Net earnings  from discontinued operations                         |       | 26,090                                      |       | 26,514 |   | 6,076 |   |
|                                                               |       |                                        |       |   |   |   |   |
| Basic net  earnings (loss) per share                               |       | 0.66                                        |       | 0.34 |   | (0.05 | ) |
| From continuing  operations                                        |       | 0.16                                        |       | (0.23 | ) | (0.18 | ) |
| From  discontinued operations                                      |       | 0.50                                        |       | 0.57 |   | 0.13 |   |
|                                                               |       |                                        |       |   |   |   |   |
| Diluted net  earnings (loss) per share                             |       | 0.64                                        |       | 0.34 |   | (0.05 | ) |
| From continuing  operations                                        |       | 0.16                                        |       | (0.23 | ) | (0.18 | ) |
| From  discontinued operations                                      |       | 0.48                                        |       | 0.57 |   | 0.13 |   |
|                                                               |       |                                        |       |   |   |   |   |
| **Weighted  average number of shares outstanding under U.S. GAAP** |       |                                        |       |   |   |   |   |
| Basic                                                              |       | 52,099,290                                  |       | 46,139,814 |   | 45,569,176 |   |
|                                                               |       |                                        |       |   |   |   |   |
| Diluted                                                            |       | 52,549,260                                  |       | 46,139,814 |   | 45,569,176 |   |

 

35

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**Reconciliation of shareholders’ equity to conformto U.S. GAAP**

The following summary sets out the significant differences between theCompany’s reported shareholders’ equity under Canadian GAAP as compared to U.S.GAAP. Please see corresponding explanatory notes for additional information.
| ** **                                                  | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                                                  | ** ** | **$**                                       | ** ** | **$** | ** ** |
|                                                        |       |                                        |       |   |   |
| Shareholders’ equity in accordance with Canadian  GAAP |       | 178,879                                     |       | 109,531 |   |
| Adjustment of convertible term loans                        | (c)        | —                                      |       | (992 | ) |
| In-process R&D                                          | (a)        | (14,348                                     | )          | (15,128 | ) |
| Other                                                       |       | 39                                          |       | 346 |   |
| Deferred tax effect                                         | (d)        | 5,134                                       |       | 6,040 |   |
|                                                        |       |                                        |       |   |   |
|                                                        |       | 169,704                                     |       | 99,797 |   |

 

**Statement of comprehensive income**
| ** **                                                       | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                       | ** ** | **$**                                       | ** ** | **$** | ** ** | **$** | ** ** |
|                                                             |       |                                        |       |   |   |   |   |
| Net earnings  (loss) for the year under U.S. GAAP                |       | 34,262                                      |       | 15,970 |   | (2,082 | ) |
| Other  comprehensive income (loss)                               |       |                                        |       |   |   |   |   |
|                                                             |       |                                        |       |   |   |   |   |
| Foreign currency  translation adjustments                        |       | 3,011                                       |       | (7,660 | ) | 3,993 |   |
|                                                             |       |                                        |       |   |   |   |   |
| Change in fair  value of investments                             | (e)        | (274                                        | )          | (139 | ) | 379 |   |
|                                                             |       |                                        |       |   |   |   |   |
| Change in fair  value of interest rate swap, net of income taxes | (f)        | 78                                          |       | (78 | ) | — |   |
|                                                             |       |                                        |       |   |   |   |   |
| Comprehensive income                                             |       | 37,077                                      |       | 8,093 |   | 2,290 |   |

 

Accumulated other comprehensive income, net of related income taxes,consists of the following:
| ** **                                | ** ** | **As at December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|
| ** **                                | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **$**                                 | ** ** | **$** | ** ** |
|                                      |       |                                  |       |   |   |
| Foreign currency  translation adjustments |       | 12,826                                |       | 9,815 |   |
| Unrealized gains  on investments          |       | 39                                    |       | 313 |   |
| Interest rate  swap                       |       | —                                |       | (78 | ) |
|                                      |       |                                  |       |   |   |
| Accumulated other  comprehensive income   |       | 12,865                                |       | 10,050 |   |

 

36

----

The following table summarizes the shareholders’equity activity under U.S. GAAP since December 31, 2003:
| ** **                                                 | ** ** | **Share  Capital** | ** ** | **Deficit** | ** ** | **Other  Capital** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Shareholders’  Equity** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|-------------|------------|--------------------|------------|-----------------------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **$**              | ** ** | **$**       | ** ** | **$**              | ** ** | **$**                                         | ** ** | **$**                          | ** ** |
| ** **                                                 |       |               |       |        |       |               |       |                                          |       |                           |       |
| **Balance  as at December 31, 2003**                       |       | 125,731            |       | (62,002     | )          | 4,844              |       | 13,555                                        |       | 82,128                         |       |
|                                                       |       |               |       |        |       |               |       |                                          |       |                           |       |
| Net loss as per  U.S. GAAP                                 |       | —             |       | (2,082      | )          | —             |       | —                                        |       | (2,082                         | )          |
| Stock-based  compensation costs                            |       | —             |       | —      |       | 1,085              |       | —                                        |       | 1,085                          |       |
| Variation in  fair value of investments                    |       | —             |       | —      |       | —             |       | 379                                           |       | 379                            |       |
| Exercise of  stock options                                 |       | 1,376              |       | —      |       | (104               | )          | —                                        |       | 1,272                          |       |
| Share issue  expenses                                      |       | (116               | )          | —      |       | —             |       | —                                        |       | (116                           | )          |
|                                                       |       |               |       |        |       |               |       |                                          |       |                           |       |
| Foreign currency  translation adjustments                  |       | —             |       | —      |       | —             |       | 3,993                                         |       | 3,993                          |       |
|                                                       |       |               |       |        |       |               |       |                                          |       |                           |       |
| **Balance  as at December 31, 2004**                       |       | 126,991            |       | (64,084     | )          | 5,825              |       | 17,927                                        |       | 86,659                         |       |
|                                                       |       |               |       |        |       |               |       |                                          |       |                           |       |
| Net earnings as  per U.S. GAAP                             |       | —             |       | 15,970      |       | —             |       | —                                        |       | 15,970                         |       |
| Stock-based  compensation costs                            |       | —             |       | —      |       | 2,286              |       | —                                        |       | 2,286                          |       |
| Variation in  fair value of investments                    |       | —             |       | —      |       | —             |       | (139                                          | )          | (139                           | )          |
| Variation in  fair value of interest rate swap             |       | —             |       | —      |       | —             |       | (78                                           | )          | (78                            | )          |
| Exercise of  stock options                                 |       | 130                |       | —      |       | —             |       | —                                        |       | 130                            |       |
| Issuance of  shares pursuant to a business acquisition     |       | 2,737              |       | —      |       | —             |       | —                                        |       | 2,737                          |       |
| Share issue  expenses                                      |       | (108               | )          | —      |       | —             |       | —                                        |       | (108                           | )          |
|                                                       |       |               |       |        |       |               |       |                                          |       |                           |       |
| Foreign currency  translation adjustments                  |       | —             |       | —      |       | —             |       | (7,660                                        | )          | (7,660                         | )          |
|                                                       |       |               |       |        |       |               |       |                                          |       |                           |       |
| **Balance  as at December 31, 2005**                       |       | 129,750            |       | (48,114     | )          | 8,111              |       | 10,050                                        |       | 99,797                         |       |
| ** **                                                 |       |               |       |        |       |               |       |                                          |       |                           |       |
| Net earnings as  per U.S. GAAP                             |       | —             |       | 34,262      |       | —             |       | —                                        |       | 34,262                         |       |
| Stock-based  compensation costs                            |       | —             |       | —      |       | 2,120              |       | —                                        |       | 2,120                          |       |
| Variation in  fair value of investments                    |       | —             |       | —      |       | —             |       | (274                                          | )          | (274                           | )          |
| Variation in  fair value of interest rate swap             |       | —             |       | —      |       | —             |       | 78                                            |       | 78                             |       |
| Exercise of  stock options                                 |       | 110                |       | —      |       | (29                | )          | —                                        |       | 81                             |       |
| Conversion of  convertible term loans                      |       | 30,403             |       | —      |       | —             |       | —                                        |       | 30,403                         |       |
| Issuance of  shares pursuant to:                           |       |               |       |        |       |               |       |                                          |       |                           |       |
| a contingent  consideration paid upon business acquisition |       | 163                |       | —      |       | —             |       | —                                        |       | 163                            |       |
| acquisition of a  patent from a senior officer             |       | 175                |       | —      |       | —             |       | —                                        |       | 175                            |       |
| Share issue  expenses                                      |       | (112               | )          | —      |       | —             |       | —                                        |       | (112                           | )          |
|                                                       |       |               |       |        |       |               |       |                                          |       |                           |       |
| Foreign currency  translation adjustments                  |       | —             |       | —      |       | —             |       | 3,011                                         |       | 3,011                          |       |
| ** **                                                 |       |               |       |        |       |               |       |                                          |       |                           |       |
| **Balance as at December 31,  2006**                  |       | 160,489            |       | (13,852     | )          | 10,202             |       | 12,865                                        |       | 169,704                        |       |

 

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**Balance Sheets**

The following tablesummarizes the significant differences between the balance sheet items underCanadian GAAP as compared to U.S. GAAP as at December 31, 2006 and 2005:
| ** **                     | ** ** | **As at December 31, 2006** | ** ** | **As at December 31, 2005** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                     | ** ** | **As  reported**                                | ** ** | **U.S.  GAAP**                                  | ** ** | **As  reported** | ** ** | **U.S.  GAAP** | ** ** |
| ** **                     | ** ** | **$**                                           | ** ** | **$**                                           | ** ** | **$** | ** ** | **$** | ** ** |
|                           |       |                                            |       |                                            |       |   |   |   |   |
| Intangible  assets             | (a)        | 39,106                                          |       | 24,758                                          |       | 41,354 |   | 26,156 |   |
|                           |       |                                            |       |                                            |       |   |   |   |   |
| Convertible term  loans        | (c)        | —                                          |       | —                                          |       | 28,440 |   | 29,432 |   |
|                           |       |                                            |       |                                            |       |   |   |   |   |
| Future income tax  liabilities | (a)        | 10,963                                          |       | 5,829                                           |       | 8,628 |   | 2,588 |   |

 

**Statements of cash flows**

For the years endedDecember 31, 2006, 2005 and 2004, there are no significant differencesbetween the statements of cash flows under Canadian GAAP as compared to U.S.GAAP.

**(a)           Research and development costs**

Under U.S. GAAP, in-process research and developmentacquired in a business combination is written off at the time of acquisition.Under Canadian GAAP, in-process research and development acquired in a businesscombination is capitalized and amortized over its estimated useful life.

**(b)           Other**

Other adjustments requiredwhen considering the significant differences between Canadian and U.S. GAAPinclude individually minor amounts related to the following items:

·             stock-basedcompensation costs adjustments related to variable accounting under U.S. GAAPfor grants made in 2002 that became completely vested in 2004;

·             financingcosts arising from the convertible notes (see (c) below) allocated to othercapital under Canadian GAAP that are amortized in earnings under U.S. GAAP;

·            organizationcosts deferred and amortized under Canadian GAAP that are expensed as incurredunder U.S. GAAP.

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**(c)           Convertible term loans**

Under Canadian GAAP, proceeds from the issuance ofconvertible term loans are allocated among long-term convertible term loans andshareholders’ equity, resulting in a debt discount that is amortized to expenseover the term of the loans. The financing costs related to those loans havebeen allocated on a pro-rata basis between deferred charges and other capital.Under U.S. GAAP, those costs are all included in deferred charges and amortizedover the term of the loans, and convertible term loans are totally consideredas long-term debt. Furthermore, under U.S. GAAP, the entire incrementalconsideration to induce conversion is recorded in earnings.

**(d)           Deferred taxes**

This adjustment reflectsthe accounting of an additional valuation allowance for U.S. GAAP purposesarising from different amounts of temporary differences under U.S. GAAP.

**(e)           Investments**

Investments, which are classified as available-for-salesecurities, include the Company’s investment in discount notes, commercialpaper and bonds for which the Company does not have the positive intent orability to hold to maturity and an investment in shares of a publicly tradedcompany. Under U.S. GAAP, available-for-sale securities are carried at fairvalue with unrealized gains and losses net of the related tax effects as partof other comprehensive income.

Under Canadian GAAP, these investments are valued atthe lower of amortized cost and market value.

**(f)            Interest rate swap**

Under Canadian GAAP, theCompany accounts for Atrium’s interest rate swap using the accrual method. U.S.GAAP requires all derivative instruments to be recognized at fair value on theconsolidated balance sheet. Under U.S. GAAP, this swap has been designated as acash flow hedge. Accordingly, the changes in fair value are recorded in othercomprehensive income until the related interest expense is recorded in income.

**(g)     Recently adopted and pending accounting pronouncements**

*FASB Statement No. 123R –Share-Based Payment (SFAS 123R)*

On December 16, 2004, theFinancial Accounting Standards Board (“FASB”) issued SFAS 123R which replacesFASB Statement No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation”,and eliminates the ability to account for share-based payment transactionsusing APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123Rcovers the accounting requirements for a wide range of share-based compensationarrangements. SFAS 123R requires that compensation cost for employeestock-based compensation be measured based on the grant-date fair value andrecognized in the financial statements over the vesting period (fair valuemethod).

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The Company adopted SFAS123R on January 1, 2006 using the modified prospective application method oftransition and its adoption had no significant impact on its consolidatedfinancial statements. On January 1, 2003, the Company had already adopted theprospective application method of transition of SFAS 123, which required thatall new awards granted to employees on or after January 1, 2003 be accountedfor at fair value. The fair value of awards granted was estimated using theBlack-Scholes option pricing model.

The following informationsummarizes the additional disclosures required with the adoption of SFAS 123R:
|                                     | ** ** | **Options outstanding** | ** ** | **Options currently   exercisable**          | ** ** |
|-------------------------------------|------------|------------------------------|------------|--------------------------------------------------------|------------|
| ** **                          | ** ** | ** **                   | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Exercise price (CAN$)** | ** ** | **Number**                   | ** ** | **Global   Intrinsic   Value   (CAN$)** | ** ** | **Number** | ** ** | **Global   Intrinsic  Value   (CAN$)** | ** ** |
|                                |       |                         |       |                                                   |       |   |   |   |   |
| 3.75 to 5.00                        |       | 932,593                      |       | 741,000                                                |       | 932,593 |   | 741,000 |   |
| 5.01 to 7.00                        |       | 1,337,166                    |       | —                                                 |       | 881,664 |   | — |   |
| 7.01 to 10.90                       |       | 1,220,333                    |       | —                                                 |       | 921,842 |   | — |   |
|                                |       | 3,490,092                    |       | 741,000                                                |       | 2,736,099 |   | 741,000 |   |

 

Thetotal intrinsic value for stock options exercised amounts to CAN$68,959 in2006, CAN$28,750 in 2005 and CAN$1,151,115 in 2004. There is no tax benefits realizedby the Company as the compensation cost related to stock options is notdeductible for income tax purposes.

The weighted averagegrant-date fair value of stock options granted during 2006, 2005 and 2004amounted to CAN$3.67, CAN$3.33 and CAN$4.87 respectively.

As at December 31, 2006,the total compensation cost related to nonvested stock options not yetrecognized amounted to $1,071,651. This amount is expected to be recognizedover a weighted average period of 1.34 year.

The Company settles stockoptions exercised through the issuance of common shares from treasury.

The factors considered indeveloping the assumptions used in the Black-Scholes option pricing modeldescribed in note 16 (e) are the following:

(a)   The risk-free interest rate is based on Canadian Treasury Bondconstant maturity interest rate whose term is consistent with the expected lifeof the stock options.

(b)   The historical volatility of the Company’s stock price as well asfuture expectations are used to establish the expected stock price volatility.

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(c)     The Company estimates theexpected life of stock options based upon employee’s historical data related tothe exercise of stock  options andpost-vesting employment terminations.

*FASB Statement No. 158 –Employer’s Accounting for Defined Benefit Pension and Other PostretirementPlans (SFAS 158)*

In September 2006, the FASBissued SFAS 158. This statement amends SFAS 87, “Employers’ Accounting forPensions”, and SFAS 106, “Employers’ Accounting for Post-Retirement BenefitsOther than Pensions”, to require recognition of the over funded or under fundedstatus of pension and other postretirement benefit plans on the balance sheet.Under SFAS 158, gains and losses, prior service costs and credits, and anyremaining transition amounts under SFAS 87 and SFAS 106 that have not yet beenrecognized through net periodic benefit cost will be recognized in OCI, net oftax effects, until they are amortized as a component of net periodic cost.

SFAS 158 is effective forthe fiscal year ending after December 15, 2006, except for the measurement dateprovisions, which are effective for fiscal years ending after December 15,2008. The Company adopted this standard on December 31, 2006 and its adoptionhad no impact on its consolidated financial statements.

In accordance with the assumptions used as at December31, 2006, the benefits expected to be paid in each of the next five fiscalyears will amount to $128,954 in 2007, $164,315 in 2008, $191,643 in 2009,$278,734 in 2010 and $385,588 in 2011. Furthermore, total benefits amounting to$2,434,444 are expected to be paid from 2012 to 2016.

Cash required in the next year to fund the plans willapproximate the amount of expected benefits.

*FASB Interpretation No. 48 –Accounting for Uncertainty in Income Taxes an interpretation of FASB StatementNo. 109 (FIN 48)*

In June 2006, the FASBissued FASB interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(“FIN 48”), an interpretation of FASB Statement No. 109, “Accounting for IncomeTaxes”. FIN 48 prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 requires that the Companyrecognize the impact of a tax position in the financial statements if thatposition is more likely than not of being sustained on audit, based on thetechnical merits of the position. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods and disclosure. The provisions of FIN 48 are effective beginningJanuary 1, 2007 with the cumulative effect of the change in accountingprinciple recorded as an adjustment  tothe opening balance of deficit. The Company has not yet evaluated its impact onits financial position or results of operations.

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*FASB Statement No. 157 –Fair Value Measurements (SFAS 157)*

In September 2006, the FASBissued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 definesfair value, establishes a framework for measuring fair value and expandsdisclosures regarding fair value measurements. SFAS 157 does not require anynew fair value measurements but rather eliminates inconsistencies in guidancefound in various prior accounting pronouncements. SFAS 157 is effective forfiscal years beginning after November 15, 2007. The Company is currentlyevaluating the impact SFAS 157 will have on its consolidated financial statements.

*FASB Statement No. 159 – The Fair Value Option forFinancial Assets and Financial Liabilities – Including an amendment of FASBStatement No. 115 (SFAS 159)*

On February 15, 2007, the FASB issued SFAS 159, “TheFair Value Option for Financial Assets and Financial Liabilities – Including anamendment of FASB Statement No. 115”, which permits entities to choose tomeasure many financial instruments and certain other items at fair value. Mostof the provisions of this statement apply only to entities that elect the fairvalue option. However, the amendment to SFAS 115, “Accounting for CertainInvestments in Debt and Equity Securities”, applies to all entities withavailable-for-sale and trading securities. This statement is effective forfiscal years beginning after November 15, 2007, but the Company has not yetdetermined if it will adopt this statement, nor the impact it might have on itsconsolidated financial statements. Should the Company decide to adopt SFAS 159,it will be adopted on January 1, 2008.

*EITF Issue No. 07-3 – Accounting for AdvancePayments for Goods or Services to be Received for Use in Future Research andDevelopment Activities (“EITF 07-3”)*

In June 2007, EITF 07-3 provides clarificationsurrounding the accounting for nonrefundable research and development advancepayments, whereby such payments should be recorded as an asset when the advancepayment is made and recognized as an expense when the research and developmentactivities are performed. EITF 07-3 is effective for interim and annualreporting periods beginning after December 15, 2007. The Company will adopt theprovisions of EITF 07-3 on January 1, 2008. The Company is currently assessingthe impact of EITF 07-3 on its results of operations and financial condition.

*EITF Issue No. 07-1- Accounting for Collaborative AgreementsRelated to the Development and Commercialization of Intellectual Property*

The Emerging Issues Task Force is considering theaccounting for arrangements under which companies participate in thedevelopment and commercialization of intellectual property into commerciallyviable products. A company may receive revenues and incur costs under sucharrangements as well as make or received payments from the other participant inthe arrangement. The EITF is considering which arrangements should be consideredcollaborative arrangements for accounting purposes, how a company should reportrevenues and costs under such arrangements and how sharing payments should bepresented. While the EITF has not finalized a conclusion, the EITF tentativelyconcluded revenues earned and costs incurred by a company should be presentedgross or net depending on whether the company is the principal in thearrangement. The EITF continues to deliberate on these issues. The resolutionof these issues may have an impact on the presentation of revenues and costswithin the Company’s financial statements; however, the Company is not able todetermine any consequences until the EITF has completed the deliberations andissued final conclusions.

**(h)     Other disclosures**

*Research and developmenttax credits*

Under Canadian GAAP, all research and development taxcredits are recorded as revenues under research and development tax credits andgrants in the statements of operations. Under U.S. GAAP, tax credits that arerefundable against taxable income are recorded in the income taxes. These taxcredits amounted to $1,684,000 in 2006 and to nil in 2005 and 2004,respectively. This difference has no impact on the net earnings (loss) and thenet earnings (loss) per share figures for the reporting years.

Furthermore, under U.S. GAAP, the future income taxassets related to the unrecognized tax credits totalled $5,683,000 in 2006 and$9,534,000 in 2005. However, a valuation allowance corresponding to the same amountshas been accounted for in 2006 and 2005.

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*Rental expenses*

Rental expenses amounted to $1,925,000 in 2006,$1,455,000 in 2005 and $1,753,000 in 2004.

*Loss before income taxes*

The loss before income taxes from continuingoperations is allocated as follows:
|               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
| ** **    | ** ** | **$**    | ** ** | **$**    | ** ** | **$**    | ** ** |
| Canada        |       | (10,450  | )          | (16,018  | )          | (12,931  | )          |
| Germany       |       | (11,024  | )          | 1,110    |       | 2,628    |       |
| United States |       | (355     | )          | (542     | )          | —   |       |
|          |       |     |       |     |       |     |       |
|          |       | (21,829  | )          | (15,450  | )          | (10,303  | )          |

 

*Goodwill*

The main factors considered in establishing thepurchase price which resulted in the recognition of goodwill disclosed in note5 are the following: workforce, business model and human resources.

*Long-lived assets*

Under U.S. GAAP, long-lived assets by geographicregion only consist of property, plant and equipment which are detailed asfollows:
|               | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------|------------|----------|------------|----------|------------|
| ** **    | ** ** | **$**    | ** ** | **$**    | ** ** |
| Canada        |       | 8,798    |       | 10,656   |       |
| Germany       |       | 4,203    |       | 2,915    |       |
| United States |       | 431      |       | 536      |       |
|          |       |     |       |     |       |
|          |       | 13,432   |       | 14,107   |       |

 

*Amortization expense related to intangible assets*

The amortization expense for intangible assets in eachof the next five fiscal years will amount to $4,306,703 in 2007, $4,205,137 in2008, $4,182,475 in 2009, $4,134,046 in 2010 and $4,134,045 in 2011.

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*Available-for-sale securities*

The Company uses thespecific identification method in order to reclassify the gains or lossesrealized out of accumulated other comprehensive income into the statement ofoperations.

The gross realized gainsand gross realized losses included in the statement of operations, theunrealized holding gain or loss on available-for-sale securities as well as theamount of gains and losses reclassified out of accumulated other comprehensiveincome into statement of operations are as follows:
|                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **             | ** ** | **$**    | ** ** | **$**    | ** ** | **$**    | ** ** |
| Gross realized  gains  |       | 410      |       | 17       |       | 25       |       |
| Gross realized  losses |       | 21       |       | —   |       | 9        |       |
| Unrealized gains       |       | 126      |       | 197      |       | 449      |       |
| Unrealized  losses     |       | 67       |       | 67       |       | 6        |       |
| Gains  reclassified    |       | 390      |       | 269      |       | 149      |       |
| Losses reclassified    |       | 78       |       | —   |       | 73       |       |

 

Available-for-salesecurities maturity dates:
|                    | ** ** | **$**      | ** ** |
|--------------------|------------|------------|------------|
| ** **         | ** ** | ** ** | ** ** |
| Within one year    |       | 22,732     |       |
| One to five  years |       | 28,931     |       |
|               |       |       |       |
|               |       | 51,663     |       |

 

As at December 31, 2006,available-for-sale securities are comprised of:
|                                 | ** ** | **$**      | ** ** |
|---------------------------------|------------|------------|------------|
| ** **                      | ** ** | ** ** | ** ** |
| Government debt  securities     |       | 6,515      |       |
| Municipalities debt  securities |       | 11,591     |       |
| Corporate debt  securities      |       | 33,557     |       |
|                            |       |       |       |
|                            |       | 51,663     |       |

 

*Researchand collaboration agreements*

Aspart of our strategy to enhance our development capabilities and to fund, inpart, our capital requirements, we have entered into collaboration agreementswith several pharmaceutical companies, which we refer to as “our partners”.Pursuant to our collaboration, the Company received upfront payments, licensefees, milestone payments and has the potential to receive royalty payments inthe future. Upfront payments are typically non-refundable payments receivedupon the signature of an agreement and are amortized over the estimatedresearch and development (“R&D”) period. License fees are typicallycontractually obligated payments to fund R&D over the term of collaborationand include milestone payments, as well as R&D contract services. Milestonepayments are contingent payments made only upon achievement of specifiedmilestones, such as selection of candidates for drug development, thecommencement or termination of clinical trials or receipt of regulatoryapprovals and achievement of a certain level of sales. If drugs aresuccessfully developed and commercialized as a result of our collaborationagreements, we will receive royalty payments based upon net sales of thosedrugs developed under the collaboration. Finally, R&D contract servicesfees are research and development activities performed by the Company on behalfof our partners and for which the Company has the right to receivecompensation.

*ArdanaBioscience*

In2002, the Company entered into a license and collaboration agreement withArdana Bioscience Ltd (“Ardana”). Ardana was granted an exclusive worldwidelicense to develop and commercialize the growth hormone secretagogue (“EP 1572”).Ardana undertakes, at its own cost, all activities necessary to obtainregulatory and marketing approvals for the substance. In return, the Companyreceived €1.75 million (approximately $1.7 million) as upfront payment uponsigning of the agreement. The Company is also eligible to receive payments ofup to an aggregate of €7 million (approximately $9.2 million) upon Ardana'ssuccessful achievement of clinical development and regulatory milestones, inaddition to low double-digit royalties on future net worldwide net sales of EP1572.

Revenuesrecognized under the agreement for the years ended December 31, 2006, 2005 and2004 were $1.5 million, $1.8 million and $0.7 million, respectively. 

CorrespondingR&D costs incurred under the agreement for the years ended December 31,2006, 2005 and 2004 were nil, nil and $0.1 million, respectively.

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In2002, the Company granted an exclusive license to Ardana to develop andcommercialize teverelix, a LHRH antagonist, for all therapeutic uses worldwidewith the exception of Japan, Korea and Taiwan. On April 2, 2004, Ardanaacquired full worldwide rights and was assigned the intellectual propertyrights relating to teverelix and the underlying microcrystalline suspensiontechnology for the use of teverelix and any other potential LHRH antagonists.The Company received €3.25 million (approximately $3.2 million) in 2002 and €5million (approximately $6.1 million) in 2004 as upfront payments upon signatureof the agreement in 2002 and upon the assignment of the substance in 2004respectively. The agreement also provides, among other things, €7 million(approximately $9.2 million) of guaranteed payments until December 2006, €15million (approximately $19.8 million) upon successful achievement of a certainlevel of sales and low single-digit royalties on future worldwide net sales.

Revenuesrecognized under the agreement for the years ended December 31, 2006, 2005 and2004 were $3.6 million, $5.1 million and $4.3 million, respectively. 

CorrespondingR&D costs incurred under the agreement for the years ended December 31,2006, 2005 and 2004 were $0.3 million, $0.6 million and $0.7 million,respectively.

*KeryxBiopharmaceuticals*

Followingthe acquisition of AOI Pharma, Inc. in January 2004 by KeryxBiopharmaceuticals, Inc. (“Keryx”), Keryx has taken over the license andcollaboration agreement signed with AOI Pharma, Inc. in September 2002. Uponsignature of this agreement, the Company received $0.5 million as upfrontpayment. Keryx undertakes, at its own cost, all clinical activities necessaryto obtain regulatory and marketing approvals of perifosine, a signaltransduction inhibitor, for all uses in the United States, Canada and Mexico.The agreement provides, among other things, availability of data generated byboth parties free of charge. The Company is also eligible to receive paymentsof up to an aggregate of $18.3 million upon Keryx’'s successful achievement ofclinical development and regulatory milestones, in addition to scale-uproyalties (from high single to low double-digit) on future net sales in theUnited States, Canada and Mexico.

Revenuesrecognized under the agreement for the years ended December 31, 2006, 2005 and2004 were $0.7 million, $0.9 million and $0.9 million, respectively. 

CorrespondingR&D costs incurred under the agreement for the years ended December 31,2006, 2005 and 2004 were $0.9 million, $0.8 million and $0.9 million,respectively.

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*NipponKayaku*

In2006, we entered into a licensing and collaboration agreement with NipponKayaku Co. Ltd. (“Nippon Kayaku”). Under the terms of the agreement, we grantedNippon Kayaku an exclusive license to develop and market ozarelix, a LHRHantagonist, for all potential oncological indications in Japan. In return, theCompany received €1.5 million (approximately $1.9 million) as upfront paymentupon signature. The agreement provides, among other things, availability ofdata generated by both parties free of charge. The Company is eligible toreceive payments of up to an aggregate of €18 million (approximately $23.8million) upon Nippon Kayaku’s successful achievement of clinical development,regulatory milestones and a certain level of sales, in addition to lowdouble-digit royalties on potential net sales. Furthermore, as indicated belowregarding the Spectrum Pharmaceuticals, Inc. (“Spectrum”) R&D agreement,Spectrum is entitled to receive fifty percent of any upfront, milestonepayments and royalties received from any research and collaboration agreementsigned by the Company for the development and commercialization of ozarelix inJapan.

Revenuesrecognized and corresponding R&D costs incurred under the agreement for theyear ended December 31, 2006 were $0.2 million and 0.1 million respectively.

*Shionogi*

In1995, the Company entered into a research and collaboration agreement withShionogi (“Shionogi”). The Company granted Shionogi a license to develop, use,commercialize and manufacture cetrorelix, our LHRH antagonist, in Japan and forall human indications. Under the agreement, Shionogi is responsible, at its owncost, for all activities necessary to obtain regulatory and marketing approvalsfor cetrorelix. The agreement provides, among other things, availability ofdata generated by both parties free of charge. Upon signature of thisagreement, the Company received €1.3 million (approximately $1.4 million) asupfront payment and was eligible to receive milestone payments of up to anaggregate of €5.4 million (approximately $7.1 million) upon Shionogi’ssuccessful achievement of clinical development and regulatory milestones. Todate, the Company received €4.4 million (approximately $5.8 million) of thesemilestone payments. Since the development of cetrorelix is completed in the invitro fertilization (“IVF”), Control Ovarian Stimulation (“COS”) and AssistedReproductive Technology (“ART”) in Japan, the Company does not expect toreceive further development milestone payments.

Inaddition, upon commercialization of cetrorelix in BPH, the Company will beentitled to a manufacturing margin. 

Revenuesrecognized under the agreement for the years ended December 31, 2006, 2005 and2004 were $3.8 million, nil and $0.3 million, respectively. 

CorrespondingR&D costs incurred under the agreement for the years ended December 31,2006, 2005 and 2004 were $1 million, $0.3 million and $0.4 million,respectively.

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*SolvayPharmaceuticals*

In2002, the Company entered into a research and collaboration agreement withSolvay Pharmaceuticals Bv (“Solvay”). The Company granted Solvay an exclusivelicense to develop, use, commercialize and manufacture cetrorelix worldwide(ex-Japan) and for all indications excluding IVF/COS/ART.  Under the agreement, Solvay was responsible,at its own cost, for all activities necessary to obtain regulatory andmarketing approvals for cetrorelix in different indications including, uterinemyoma, endometriosis and benign prostatic hyperplasia (“BPH”). The agreementprovides, among other things, availability of data generated by both partiesfree of charge. Upon signature of this agreement, the Company received €6million (approximately $6.2 million) as upfront payment and was eligible toreceive milestone payments of up to an aggregate of €18 million (approximately$23.8 million) upon Solvay's successful achievement of clinical development andregulatory milestones, in addition to low double-digit royalties on futureworldwide (ex-Japan) net sales of cetrorelix. 

InDecember, 2005, Æterna Zentaris and Solvay amended the agreement whereas theCompany regained exclusive worldwide (ex-Japan) rights for cetrorelix for theBPH indication solely, without any financial compensation payable to Solvay.  Subsequent to year-end, in May 2007, theparties entered into a termination agreement whereby the Company regainedexclusive worldwide (ex-Japan) rights for cetrorelix in all indications,including endometriosis and uterine myoma, without any financial compensationpayable to Solvay. 

Revenuesrecognized under the agreement for the years ended December 31, 2006, 2005 and2004 were $1.2 million, $4.5 million and $10.2 million, respectively. 

CorrespondingR&D costs incurred under the agreement for the years ended December 31,2006, 2005 and 2004 were $0.6 million, $0.6 million and $3 million,respectively. 

*SpectrumPharmaceuticals*

In2004, the Company entered into a licensing and collaboration agreement withSpectrum for ozarelix, a LHRH antagonist. Under the terms of the agreement, theCompany granted Spectrum an exclusive license to develop and commercializeozarelix for all potential indications in North America (including Canada andMexico) as well as India. The agreement provides, among other things,availability of data generated by both parties free of charge. Upon signatureof this agreement, the Company received €2 million as upfront payment(approximately $2.4 million) of which an amount of €1 million was paid cash andthe balance paid through the issuance of shares of the capital of Spectrum. TheCompany is eligible to receive payments of up to an aggregate of €18.5 million(approximately $24.4 million) upon Spectrum's successful achievement ofclinical development and regulatory milestones, in addition to royalties(scale-up royalties from high single to low double-digit) on potential netsales. In consideration of the amounts paid by Spectrum under this agreement,Spectrum is entitled to receive fifty percent of any upfront, milestonepayments and royalties received from any research and collaboration agreementsigned by the Company for the development and commercialization of ozarelix inJapan.

Revenuesrecognized under the agreement for the years ended December 31, 2006, 2005 and2004 were $2.9 million, $2.6 million and $0.1 million, respectively.

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CorrespondingR&D costs incurred under the agreement for the years ended December 31,2006, 2005 and 2004 were $1.7 million, $2.6 million and $0.5 million,respectively.

*TulaneUniversity*

In2002, the Company signed license agreements with the Tulane Educational Fund (“Tulane”)with regard to various substances, including cetrorelix. Under the agreements,we obtained exclusive worldwide licenses to use Tulane's patents to develop,manufacture, market and distribute these substances. 

Theagreement provides the payment by the Company of single-digit royalties onfuture worldwide net sales for all indications, except BPH, where it provides thepayment of low single-digit royalties. Tulane is entitled to receive a lowdouble-digit royalty on any lump sum, periodic or other cash payments receivedby the Company from sub-licensees.

Costsincurred under the agreement for the years ended December 31, 2006, 2005 and2004 were $0.3 million, $0.4 million and $0.9 million, respectively.

**25****                ****Comparative figures**

Certain comparative figureshave been reclassified to conform with the current year presentation.

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