**Exhibit
      99.3**




**TABLE
                        OF CONTENTS**Management’s
                        Report
                    17Management’s
                        Report on Internal Control Over Financial Reporting
                    18Report
                        of Independent Registered Public Accounting Firm
                    19Financial
                        StatementsConsolidated
                        Balance Sheets
                    20Consolidated
                        Operations
                    21Consolidated
                        Shareholders’ Equity and Comprehensive Income
                    22Consolidated
                        Cash Flows
                    23Notes
                        to Consolidated Financial Statements
                    24
 CONSOLIDATED
        FINANCIAL STATEMENTS **17**
 
 
 **MANAGEMENT’S
        REPORT**
 
 The
        consolidated financial statements of Axcan Pharma Inc. and subsidiaries
        (collectively the “Company”) and the other financial information included in
        this annual report are the responsibility of the Company’s
        management.
  These
        consolidated financial statements and the other financial information have
        been
        prepared by management in accordance with accounting principles generally
        accepted in the United States of America. This responsibility includes the
        selection of appropriate accounting principles and methods in the circumstances
        and the use of careful judgement in establishing reasonable accounting
        estimates.
  Management
        maintains internal control systems designed among other things, to provide
        reasonable assurance that the Company’s assets are adequately safeguarded and
        that the accounting records are a reasonable basis to prepare relevant and
        reliable financial information.
  The
        Audit Committee is composed solely of external directors. This Committee
        meets
        with the external auditors and management to discuss matters relating to
        the
        audit, internal control and financial information. The Committee also reviews
        the consolidated quarterly and annual financial statements.
  These
        consolidated financial statements have been audited by Raymond Chabot Grant
        Thornton LLP, whose report indicating the scope of their audits and their
        opinion on the consolidated financial statements is presented
        hereafter.
  
 The
        Board of Directors has approved the Company’s financial statements on the
        recommendation of the Audit Committee.
  Frank
                  A.G.M. Verwiel, M.D.
                President
                  and
                Chief
                  Executive Officer
              Steve
                  Gannon
                Senior
                  Vice President, Finance
                and
                  Chief Financial Officer
 
 Mont-Saint-Hilaire,
        Quebec, Canada November 30, 2006
 
 
 **18** CONSOLIDATED
        FINANCIAL STATEMENTS
   **MANAGEMENT’S
        REPORT ON INTERNAL CONTROL OVER FINANCIAL
        REPORTING**
 
 Management
        is responsible for establishing and maintaining adequate internal control
        over
        financial reporting for the Company. Internal control over financial reporting
        is a process designed to provide reasonable assurance regarding the reliability
        of our financial reporting and the preparation of financial statements for
        external purposes in accordance with accounting principles generally accepted
        in
        the United States of America. Internal control over financial reporting includes
        maintaining records that in reasonable detail accurately and fairly reflect
        our
        transactions; providing reasonable assurance that transactions are recorded
        as
        necessary for the preparation of our financial statements; providing reasonable
        assurance that receipts and expenditures of the Company are made under the
        authorization of management and directors of the Company; and providing
        reasonable assurance that unauthorized acquisition, use or disposition of
        Company assets that could have a material effect on our financial statements
        would be prevented or detected on a timely basis. Because of its inherent
        limitations, internal control over financial reporting is not intended to
        provide absolute assurance that a misstatement of our financial statements
        would
        be prevented or detected.
  Management
        conducted an evaluation of the effectiveness of our internal control over
        financial reporting based on the framework in *Internal
        Control - Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission.
        Based
        on this evaluation, management concluded that the Company’s internal control
        over financial reporting was effective as of September 30, 2006.
 
 Frank
                    A.G.M. Verwiel, M.D.
                  President
                    and
                  Chief
                    Executive Officer
                Steve
                    Gannon
                  Senior
                    Vice President, Finance
                  and
                    Chief Financial Officer
 Mont-Saint-Hilaire,
        Quebec, Canada November 30, 2006
 
 
 CONSOLIDATED
        FINANCIAL STATEMENTS **19**
   **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
        FIRM**
 
 To
        the Board of Directors and Shareholders of Axcan Pharma Inc.
  We
        have audited the consolidated balance sheets of Axcan Pharma Inc. and
        subsidiaries as at September 30, 2006 and 2005 and the consolidated statements
        of operations, shareholders’ equity and comprehensive income and cash flows for
        each of the years in the three-year period ended September 30, 2006. These
        financial statements are the responsibility of the Company’s management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform an audit to obtain reasonable assurance whether the financial
        statements are free of material misstatement. The Company is not required
        to
        have, nor were we engaged to perform an audit of its internal control over
        financial reporting. Our audits included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit includes examining,
        on a test basis, evidence supporting the amounts and disclosures in the
        financial statements. An audit also includes assessing the accounting principles
        used and significant estimates made by management, as well as evaluating
        the
        overall financial statement presentation. We believe that our audits provide
        a
        reasonable basis for our opinion.
  In
        our opinion, the consolidated financial statements referred to above present
        fairly, in all material respects, the financial position of Axcan Pharma
        Inc and
        subsidiaries as at September 30, 2006 and 2005 and the results of their
        operations and their cash flows for each of the years in the three-year period
        ended September 30, 2006 in conformity with accounting principles generally
        accepted in the United States of America.
  As
        discussed in Note 2 to consolidated financial statements, effective October
        1,
        2005, the Company adopted the provisions of Statement of Financial Accounting
        Standard No. 123(R). “ *Share-Based
        Payment* ”
        applying the modified prospective method.
 
 
 
 Raymond
        Chabot Grant Thornton LLP
 Chartered
        Accountants
 
 Montreal,
        Quebec, Canada
 November
        30, 2006
 
 
 **20** CONSOLIDATED
        FINANCIAL STATEMENTS
   **CONSOLIDATED
        BALANCE SHEETS**
 
 September
                  30
              
              
              
              **2006**
              
              2005(in
                  thousands of U.S. dollars, except share related data)
              
              
              
              
              
              **$**
              
              
              $**ASSETS**Current
                  assetsCash
                  and cash equivalents
              
              
              
              
              
              **55,830**
              
              
              79,969Short-term
                  investments, available for sale (Note 5)
              
              
              
              
              
              **117,151**
              
              
              17,619Accounts
                  receivable, net (Note 6)
              
              
              
              
              
              **30,939**
              
              
              37,587Income
                  taxes receivable
              
              
              
              
              
              **8,987**
              
              
              8,351Inventories
                  (Note 7)
              
              
              
              
              
              **37,349**
              
              
              36,016Prepaid
                  expenses and deposits
              
              
              
              
              
              **3,699**
              
              
              1,771Deferred
                  income taxes (Note 8)
              
              
              
              
              
              **8,423**
              
              
              9,044Total
                  current assets
              
              
              
              
              
              **262,378**
              
              
              190,357Property,
                  plant and equipment, net (Note 9)
              
              
              
              
              
              **28,817**
              
              
              31,673Intangible
                  assets, net (Note 10)
              
              
              
              
              
              **375,680**
              
              
              388,921Goodwill,
                  net (Note 11)
              
              
              
              
              
              **27,467**
              
              
              27,467Deferred
                  debt issue expenses, net
              
              
              
              
              
              **1,475**
              
              
              2,577Deferred
                  income taxes (Note 8)
              
              
              
              
              
              **-**
              
              
              412Total
                  assets
              
              
              
              
              
              **695,817**
              
              
              641,407
  **LIABILITIES**Current
                  liabilitiesAccounts
                  payable and accrued liabilities (Note 13)
              
              
              
              
              
              **60,733**
              
              
              52,990Income
                  taxes payable
              
              
              
              
              
              **2,099**
              
              
              3,247Instalments
                  on long-term debt
              
              
              
              
              
              **681**
              
              
              1,497Deferred
                  income taxes (Note 8)
              
              
              
              
              
              **1,104**
              
              
              602Total
                  current liabilities
              
              
              
              
              
              **64,617**
              
              
              58,336Long-term
                  debt (Note 14)
              
              
              
              
              
              **125,565**
              
              
              126,332Deferred
                  income taxes (Note 8)
              
              
              
              
              
              **38,211**
              
              
              39,135Total
                  liabilities
              
              
              
              
              
              **228,393**
              
              
              223,803Commitments
                  and contingencies (Note 21)
   **SHAREHOLDERS’
                  EQUITY**Capital
                  stock (Note 15)Preferred
                  shares, without par value; unlimited shares authorized;no
                  shares issued
              
              
              
              
              
              **-**
              
              
              -Series
                  A preferred shares, without par value; shares authorized:14,175,000;
                  no shares issued
              
              
              
              
              
              -
              
              
              -Series
                  B preferred shares, without par value; shares authorized:12,000,000;
                  no shares issued
              
              
              
              
              
              -
              
              
              -Common
                  shares, without par value; unlimited shares authorized;45,800,581
                  issued and outstanding as at September 30, 2006 and45,682,175
                  as at September 30, 2005
              
              
              
              
              
              **262,786**
              
              
              261,714Retained
                  earnings
              
              
              
              
              
              **177,906**
              
              
              138,787Additional
                  paid-in capital
              
              
              
              
              
              **4,967**
              
              
              1,329Accumulated
                  other comprehensive income
              
              
              
              
              
              **21,765**
              
              
              15,774Total
                  shareholders’ equity
              
              
              
              
              
              **467,424**
              
              
              417,604Total
                  liabilities and shareholders’ equity
              
              
              
              
              
              **695,817**
              
              
              641,407The
                  accompanying notes are an integral part of the consolidated financial
                  statements.
  On
                  behalf of the Board,Léon
                  F. Gosselin
              
              Dr.
                  Claude SauriolDirector
              
              Director
 
 
 CONSOLIDATED
        FINANCIAL STATEMENTS **21**
   **CONSOLIDATED
        OPERATIONS**
 
 **Years
                  ended September 30**
              
              **2006**
              
              2005
              
              2004(in
                  thousands of U.S. dollars, except share related data)
              
              **$**
              
              $
              
              $Revenue
              
              **292,317**
              
              251,343
              
              243,634Cost
                  of goods sold(a)
              
              
              **72,772**
              
              
              71,534
              
              
              54,247Selling
                  and administrative expenses(a)
              
              
              **93,338**
              
              
              85,997
              
              
              76,365Research
                  and development expenses(a)
              
              
              **39,789**
              
              
              31,855
              
              
              19,866Depreciation
                  and amortization
              
              
              **22,823**
              
              
              21,532
              
              
              16,359Partial
                  write-down of intangible assets
              
              
              **5,800**
              
              
              -
              
              
              -**234,522**
              
              
              210,918
              
              
              166,837Operating
                  income
              
              
              **57,795**
              
              
              40,425
              
              
              76,797Financial
                  expenses
              
              
              **6,988**
              
              
              7,140
              
              
              6,885Interest
                  income
              
              
              **(5,468**
              **)**
              
              (1,340
              )
              
              (756
              )Gain
                  on foreign currency
              
              
              **(1,110**
              **)**
              
              (213
              )
              
              (313
              )**410**
              
              
              5,587
              
              
              5,816Income
                  before income taxes
              
              
              **57,385**
              
              
              34,838
              
              
              70,981Income
                  taxes (Note 8)
              
              
              **18,266**
              
              
              8,413
              
              
              22,253NET
                  INCOME
              
              
              **39,119**
              
              
              26,425
              
              
              48,728Income
                  per common shareBasic
              
              
              **0.86**
              
              
              0.58
              
              
              1.08Diluted
              
              
              **0.79**
              
              
              0.56
              
              
              0.96Weighted
                  average number of common sharesBasic
              
              
              **45,741,419**
              
              
              45,617,703
              
              
              45,286,199Diluted
              
              
              **55,064,496**
              
              
              55,219,202
              
              
              55,031,184
 
 (a) Exclusive
        of depreciation and amortization
  The
        accompanying notes are an integral part of the consolidated
 financial
        statements and note 16 presents additional information
 on
        consolidated operations.
 
 
 **22** CONSOLIDATED
        FINANCIAL STATEMENTS
   **CONSOLIDATED
        SHAREHOLDERS’ EQUITY AND COMPREHENSIVE
        INCOME**
 
 **Years
                  ended September 30**
              
              **2006**
              
              2005
              
              2004(in
                  thousands of U.S. dollars, except share related data)**COMMON
                  SHARES (number)**Balance,
                  beginning of year
              
              **45,682,175**
              
              45,562,336
              
              45,004,320Shares
                  issued pursuant to the stock incentive plans for cash
              
              **118,406**
              
              119,839
              
              558,016Balance,
                  end of year
              
              **45,800,581**
              
              45,682,175
              
              45,562,336**$**
              
              
              $
              
              
              $**COMMON
                  SHARES**Balance,
                  beginning of year
              
              
              **261,714**
              
              
              260,643
              
              
              255,743Shares
                  issued pursuant to the stock incentive plans for cash
              
              
              **1,072**
              
              
              1,071
              
              
              4,900Balance,
                  end of year
              
              
              **262,786**
              
              
              261,714
              
              
              260,643**RETAINED
                  EARNINGS**Balance,
                  beginning of year
              
              
              **138,787**
              
              
              112,362
              
              
              63,634Net
                  income
              
              
              **39,119**
              
              
              26,425
              
              
              48,728Balance,
                  end of year
              
              
              **177,906**
              
              
              138,787
              
              
              112,362**ADDITIONAL
                  PAID-IN CAPITAL**Balance,
                  beginning of year
              
              
              **1,329**
              
              
              -
              
              
              -Stock-based
                  compensation expense
              
              
              **3,554**
              
              
              -
              
              
              -Income
                  tax deductions on stock options exercise
              
              
              **84**
              
              
              1,329
              
              
              -Balance,
                  end of year
              
              
              **4,967**
              
              
              1,329
              
              
              -**ACCUMULATED
                  OTHER COMPREHENSIVE INCOME**Balance,
                  beginning of year
              
              
              **15,774**
              
              
              19,071
              
              
              11,634Foreign
                  currency translation adjustments
              
              
              **5,991**
              
              
              (3,297
              )
              
              7,437Balance,
                  end of year
              
              
              **21,765**
              
              
              15,774
              
              
              19,071Total
                  shareholders’ equity
              
              
              **467,424**
              
              
              417,604
              
              
              392,076**COMPREHENSIVE
                  INCOME**Foreign
                  currency translation adjustments
              
              
              **5,991**
              
              
              (3,297
              )
              
              7,437Net
                  income
              
              
              **39,119**
              
              
              26,425
              
              
              48,728Total
                  comprehensive income
              
              
              **45,110**
              
              
              23,128
              
              
              56,165The
                  accompanying notes are an integral partof
                  the consolidated financial statements.
 
 
 CONSOLIDATED
        FINANCIAL STATEMENTS **23**
 
 **CONSOLIDATED
        CASH FLOWS**
 
 **Years
                  ended September 30**
              
              **2006**
              
              2005
              
              2004(in
                  thousands of U.S. dollars)
              
              **$**
              
              $
              
              $**OPERATING
                  ACTIVITIES**Net
                  income
              
              
              **39,119**
              
              
              26,425
              
              
              48,728Non-cash
                  itemsAmortization
                  of deferred debt issue expenses
              
              
              **1,117**
              
              
              1,100
              
              
              1,144Other
                  depreciation and amortization
              
              
              **22,823**
              
              
              21,532
              
              
              16,359Partial
                  write-down of intangible assets
              
              
              **5,800**
              
              
              -
              
              
              -Loss
                  (gain) on disposal and write-down of equipment
              
              
              **1,064**
              
              
              -
              
              
              (5
              )Stock-based
                  compensation expense
              
              
              **3,554**
              
              
              -
              
              
              -Foreign
                  currency fluctuation
              
              
              **(739**
              **)**
              
              (84
              )
              
              342Deferred
                  income taxes
              
              
              **516**
              
              
              (3,261
              )
              
              6,625Share
                  in net loss of joint ventures
              
              
              -
              
              
              -
              
              
              455Changes
                  in working capital items (Note 17)
              
              
              **11,080**
              
              
              22,033
              
              
              (50,288
              )Cash
                  flows from operating activities
              
              
              **84,334**
              
              
              67,745
              
              
              23,360**INVESTING
                  ACTIVITIES**Acquisition
                  of short-term investments
              
              
              **(117,151**
              **)**
              
              (14,519
              )
              
              (20,936
              )Disposal
                  of short-term investments
              
              
              **17,619**
              
              
              12,822
              
              
              138,074Disposal
                  of investments
              
              
              -
              
              
              -
              
              
              1,876Acquisition
                  of property, plant and equipment
              
              
              **(4,038**
              **)**
              
              (6,330
              )
              
              (13,409
              )Disposal
                  of property, plant and equipment
              
              
              -
              
              
              -
              
              
              405Acquisition
                  of intangible assets
              
              
              **(4,569**
              **)**
              
              (51
              )
              
              (149,628
              )Disposal
                  of intangible assets
              
              
              -
              
              
              -
              
              
              917Cash
                  flows from investing activities
              
              
              **(108,139**
              **)**
              
              (8,078
              )
              
              (42,701
              )**FINANCING
                  ACTIVITIES**Long-term
                  debt
              
              
              **634**
              
              
              -
              
              
              2,212Repayment
                  of long-term debt
              
              
              **(2,322**
              **)**
              
              (1,857
              )
              
              (3,842
              )Deferred
                  debt issue expenses
              
              
              -
              
              
              (589
              )
              
              -Issue
                  of shares
              
              
              **1,072**
              
              
              1,071
              
              
              4,900Cash
                  flows from financing activities
              
              
              **(616**
              **)**
              
              (1,375
              )
              
              3,270Foreign
                  exchange gain (loss) on cash held in foreign currencies
              
              
              **282**
              
              
              (302
              )
              
              277**Net
                  increase (decrease) in cash and cash equivalents**
              
              
              **(24,139**
              **)**
              
              57,990
              
              
              (15,794
              )Cash
                  and cash equivalents, beginning of year
              
              
              **79,969**
              
              
              21,979
              
              
              37,773Cash
                  and cash equivalents, end of year
              
              
              **55,830**
              
              
              79,969
              
              
              21,979The
                  accompanying notes are an integral partof
                  the consolidated financial statements.
 
 
 **24** CONSOLIDATED
        FINANCIAL STATEMENTS
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 **1.
          GOVERNING
          STATUTES AND NATURE OF OPERATIONS**
 Axcan
        Pharma Inc. is incorporated under the Canada Business Corporations Act. The
        Company is involved in the research, development, production and distribution
        of
        pharmaceutical products, mainly in the field of gastroenterology.
  **2.
        CHANGES IN ACCOUNTING POLICIES**
  a)
        Year ended September 30, 2006 Accounting
        for the conversion of an instrument that became convertible upon the issuer’s
        exercise of a call option
 
 During
        the June 2006 meeting of the Emerging issues Task Force (“EITF”) a consensus was
        reached on EITF Issue 05-1, “ *Accounting
        for the Conversion of an Instrument that Became Convertible upon the Issuer’s
        Exercise of a Call option* ”,
        that the issuance of equity securities to settle a debt instrument (pursuant
        to
        the instrument’s original conversion terms) that became convertible upon the
        issuer’s exercise of a call option should be accounted for as a conversion if
        the debt instrument contained a substantive conversion feature as of its
        issuance date. That is, no gain or loss should be recognized related to the
        equity securities issued to settle the instrument. The issuance of equity
        securities to settle a debt instrument that became convertible upon the issuer’s
        exercise of a call option should be accounted for as a debt extinguishment
        if
        the debt instrument did not contain a substantive conversion feature as of
        its
        issuance date. That is, the fair value of the equity securities issued should
        be
        considered a component of the reacquisition price of the debt. This Issue
        applies to all conversions within the scope of this Issue that result from
        the
        exercise of call options and is effective in interim or annual reporting
        periods
        beginning after June 28, 2006, irrespective of whether the instrument was
        entered into prior or subsequent to Board ratification of this Issue. This
        change in accounting policies did not have an impact on the financial statements
        for the year ended September 30, 2006.
 
 **Other-than-temporary
        impairment**
 In
        November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
        Staff Position (“FSP”) No. 115-1 and 124-1, “ *The
        Meaning of Other-Than-Temporary Impairment and Its Application to Certain
        Investments* ”
        (“FSP No. 115-1”), which provides guidance on determining when investments in
        certain debt and equity securities are considered impaired, whether that
        impairment is other-than-temporary, and on measuring such impairment loss.
        FSP
        No. 115-1 also includes accounting considerations subsequent to the recognition
        of other-than-temporary impairment and requires certain disclosures about
        unrealized losses that have not been recognized as other-than-temporary
        impairments. FSP No. 115-1 is required to be applied to reporting periods
        beginning after December 15, 2005 and was required to be adopted by the Company
        in the second quarter of 2006. The Company adopted FSP No. 115-1 beginning
        on
        January 1, 2006, and the adoption of FSP No. 115-1 did not have a material
        impact on the Company’s consolidated financial statements.
  
 **Accounting
        changes and error corrections**
 In
        May 2005, the FASB issued Statement of Financial Accounting Standard (“SFAS”)
        No. 154 “ *Accounting
        Changes and Error Corrections* ”
        which provides guidance on the accounting for and reporting of accounting
        changes and correction of errors. This statement changes the requirements
        for
        the accounting for and reporting of a change in accounting principle and
        applies
        to all voluntary changes in accounting principle. It also applies to changes
        required by an accounting pronouncement in the unusual instance that the
        pronouncement does not include specific transition provisions. This statement
        is
        effective for accounting changes and corrections of errors made in fiscal
        years
        beginning after December 15, 2005. The adoption of this statement did not
        have
        an effect on the Company’s consolidated financial statements.
 
 
 CONSOLIDATED
        FINANCIAL STATEMENTS **25**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 **2.
        CHANGES IN ACCOUNTING POLICIES (continued)**
  
 a)
        Year ended September 30, 2006 (continued) Share-based payment
 
 In
        December 2004, the FASB issued SFAS No. 123(R), “ *Share-Based
        Payment* ”.
        SFAS No. 123(R) requires all entities to recognize compensation cost for
        share-based awards, including options, granted to employees. The Statement
        eliminates the ability to account for share-based compensation transactions
        using Accounting Principles Board Opinion ("APB") No. 25, “ *Accounting
        for Stock Issued to Employees* ”,
        and generally requires instead that such transactions be accounted for using
        a
        fair-value based method. Public companies are required
 
 to
        measure stock-based compensation classified as equity by valuing the instrument
        the employee receives at its grant-date fair value. Previously such awards
        were
        measured at intrinsic value under both APB No. 25 and SFAS No. 123,
“ *Accounting
        for Stock-Based Compensation* ”.
        The Company applied the Statement beginning in fiscal 2006 using the modified
        prospective transition approach. If this change in accounting policy had
        been
        applied to the previous fiscal years, the Company’s net income, basic income per
        share and diluted income per share for the years ended September 30, 2005
        and
        2004 would have been reduced on a pro-forma basis as follows:
 
 2005
              
              
              2004$
              
              
              $
 
 Net
                  income as reported
              
              
              26,425
              
              
              48,728Less:
                  Total stock-based compensation expenses determinedunder
                  fair value based method, net of income taxes
              
              
              4,274
              
              
              4,286Pro-forma
                  net income
              
              
              22,151
              
              
              44,442Basic
                income per
                shareAs
                  reported
              
              
              0.58
              
              
              1.08Pro-forma
              
              
              0.49
              
              
              0.98Diluted
                income per
                shareAs
                  reported
              
              
              0.56
              
              
              0.96Pro-forma
              
              
              0.48
              
              
              0.96
 
 In
        October 2005, the FASB issued FSP No. 123(R)-2 “ *Practical
        Accommodation to the Application of Grant Date as Defined in FASB Statement
        No.
        123(R)* ”,
        to provide guidance on determining the grant date for an award as defined
        in
        SFAS No. 123(R). This FSP stipulates that assuming all other criteria in
        the
        grant date definition are met, a mutual understanding of the key terms and
        conditions of an award to an individual employee is presumed to exist upon
        the
        award’s approval in accordance with the relevant corporate governance
        requirements, provided that the key terms and conditions of an award cannot
        be
        negotiated by the recipient with the employer because the award is a unilateral
        grant, and are expected to be communicated to an individual recipient within
        a
        relatively short time period from the date of approval. The Company has applied
        the principles set forth in this FSP upon its adoption of SFAS No.
        123(R).
  In
        November 2005, the FASB issued FSP No. 123(R)-3 “ *Transition
        Election to Accounting for the Tax Effects of Share-Based Payment
        Awards* ”.
        This FSP requires an entity to follow either the transition guidance for
        the
        additional-paid-in-capital pool as prescribed in SFAS No. 123(R), or the
        alternative transition method as described in the FSP. An entity that adopts
        SFAS No. 123(R) using the modified prospective application may make a one-time
        election to adopt the transition method described in this FSP. This FSP became
        effective in November 2005 and the Company elected to adopt the transition
        method described in this FSP.
  In
        February 2006, the FASB issued FSP No. 123(R)-4 “ *Classification
        of Options and Similar Instruments Issued as Employees Compensation that
        Allow
        for Cash Settlement upon the Occurrence of a Contingent Event* ”.
 
 
 **26** CONSOLIDATED
        FINANCIAL STATEMENTS
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 **2.
        CHANGES IN ACCOUNTING POLICIES (continued)**
  a)
        Year ended September 30, 2006 (continued) Share-based payment
        (continued)
 
 This
        FSP stipulates that options and other similar instruments issued as employee
        compensation that allowed for cash settlement upon occurrence of a contingent
        event that is outside the employee’s control be classified as equity until it
        becomes probable that the event will occur. The Company has applied this
        FSP
        upon its adoption.
  **Inventory
        costs**
 In
        November 2004, the FASB issued SFAS No. 151 “ *Inventory
        Costs, an Amendment of ARB No. 43, Chapter 4.* ”
 
 SFAS
        No. 151 clarifies the accounting for abnormal amounts of idle facility expense,
        freight, handling costs and wasted material and requires that such items
        be
        recognized as current-period charges regardless of whether they meet the
        criterion of “so abnormal”. In addition, SFAS No. 151 requires that allocation
        of fixed production overheads to the costs of conversion be based on the
        normal
        capacity of the production facilities. The adoption of this statement did
        not
        have an effect on the Company’s balance sheets or statements of operations,
        shareholders’ equity or cash flows.
  b)
        Year ended September 30, 2005 Effect of contingently convertible instruments
        on
        diluted earnings per share
 
 During
        the September 2004 meeting of the EITF a consensus was reached on EITF Issue
        04-8, “ *The
        Effect of Contingently Convertible Instruments on Diluted Earnings per
        Share* ”.
        The EITF 04-8 requires companies to include certain convertible instruments,
        that were previously excluded, into their calculations of diluted earnings
        per
        share. The EITF concluded that Issue 04-8 is effective for periods ending
        after
        December 15, 2004, and must be applied by restating all periods during which
        time the applicable convertible instruments were outstanding. The common
        shares
        issuable under the 4.25% convertible subordinated notes issued in 2003, are
        therefore included in the Company’s diluted income per share calculation. For
        the year ended September 30, 2004, the weighted number of common shares
        outstanding used in the calculation of the diluted income per share has been
        increased from 52,787,964 to 55,031,184 and the diluted income per share
        has
        been reduced from $0.98 to $0.96.
 
 c)
        Year ended September 30, 2004
 
 **Disclosure
        of information about capital structure**
 In
        April 2004, the FASB issued FSP No. 129-1, “ *Disclosure
        Requirements under FASB Statement No. 129, Disclosure of Information about
        Capital Structure, Relating to Contingently Convertible
        Securities* ”
        to provide disclosure guidance for contingently convertible securities,
        including those instruments with contingent conversion requirements that
        have
        not been met and otherwise are not required to be included in the computation
        of
        diluted earnings per share. The FSP addresses concerns that disclosures relating
        to contingently convertible securities are inconsistent between companies
        or may
        be inadequate. FSP No. 129-1 states that to comply with the requirements
        of SFAS
        No. 129, the significant terms of the conversion features of the contingently
        convertible security should be disclosed to enable users of financial statements
        to understand the circumstances of the contingency and the potential impact
        of
        conversion. The Company evaluated the impact of this pronouncement and has
        enhanced its disclosures as required.
  **Consolidation
        of variable interest entities**
 In
        January 2003, the FASB issued Interpretation (“FIN”) No. 46, “ *Consolidation
        of Variable Interest Entities, an interpretation for Accounting Research
        Bulletin No. 51* .”
        FIN No. 46 requires certain variable interest entities, or VIEs, to be
        consolidated by the primary beneficiary of the entity if the equity investors
        in
        the entity do not have the characteristics of a controlling financial interest
        or do not have sufficient equity at risk for the entity to finance its
        activities without additional subordinated financial support from other parties.
        FIN No. 46 is effective for all VIEs created or acquired after January 31,
        2003.
        For VIEs created or acquired prior to February 1, 2003, the provisions of
        FIN
        No. 46 must be applied for the first interim or annual period beginning after
        December 15, 2003.
  The
        Company currently has no contractual relationship or other business relationship
        with a variable interest entity and therefore the adoption of FIN No. 46
        did not
        have an effect on the Company’s consolidated financial statements.
 
 CONSOLIDATED
        FINANCIAL STATEMENTS **27**
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 2.
        CHANGES IN ACCOUNTING POLICIES (continued)
 
 d)
              Standards
                  applicable for the year ending September 30, 2007 and then
                  after
 
 **Effects
        of prior year misstatements when quantifying misstatements in current year
        financial statements**
 In
        September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108 that
        expresses the staff’s views regarding the process of quantifying financial
        statement misstatements. This bulletin is effective for any interim period
        of
        the first fiscal year ending after November 15, 2006. The adoption of this
        bulletin will not have a material effect on the Company’s consolidated financial
        statements.
  **Fair
        value measurements**
 In
        September 2006, the FASB issued SFAS No. 157, “ *Fair
        Value Measurements* ”.
        SFAS No. 157 replaces the different definitions of fair value in the accounting
        literature with a single definition. It defines fair value as the price that
        would be received to sell an asset or paid to transfer a liability in an
        orderly
        transaction between market participants at the measurement date. SFAS No.
        157 is
        effective for fair-value measurements already required or permitted by other
        standards for financial statements issued for fiscal years beginning after
        November 15, 2007 and interim periods within those fiscal years. The Company
        is
        currently evaluating the impact of the adoption of the provisions of SFAS
        No.
        157 on the consolidated financial statements.
  **Accounting
        for uncertainty in income taxes**
 In
        July 2006, the FASB issued FIN No. 48, “ *Accounting
        for Uncertainty in Income Taxes* ”,
        effective for fiscal years beginning after December 15, 2006. FIN No. 48
        describes the accounting for income taxes by prescribing the minimum recognition
        threshold a tax position must meet before being recognized in the financial
        statements. The Interpretation also provides guidance on derecognition,
        measurement, classification, interest and penalties, accounting in interim
        periods, disclosure and transition. The Company is currently evaluating the
        impact of the adoption of this new section on the consolidated financial
        statements.
 
 **Taxes
        collected from customers and remitted to governmental
        authorities**
 During
        the June 2006 meeting of the EITF a consensus was reached on EITF Issue 06-3,
        “ *How
        Taxes Collected from Customers and Remitted to Governmental Authorities Should
        Be Presented in the Income Statement (That Is, Gross versus Net
        Presentation)* .”
        The Task Force reached a consensus that this Issue applies to any tax assessed
        by a governmental authority that is both imposed on and concurrent with a
        specific revenue producing transaction between a seller and customer.
        Accordingly, taxes such as sales, use, value added, and some excise taxes
        may be
        within the scope of this Issue. The Task Force reached a consensus that the
        income statement presentation (gross or net) of such taxes is an accounting
        policy decision that should be disclosed. In addition, a company should disclose
        in interim and annual financial statements the amount of such taxes reported
        on
        a gross basis, if significant. This Issue is effective for interim and annual
        reporting periods beginning after December 15, 2006. The Company is currently
        evaluating the consolidated operations statement presentation
        choice.
 
 3.
        ACCOUNTING POLICIES
  **Basis
        of presentation**
 The
        Company has prepared these consolidated financial statements in U.S. dollars
        and
        in accordance with accounting principles generally accepted in the United
        States
        of America (“U.S. GAAP”). The Company has disclosed in note 22 the summary of
        differences between generally accepted accounting principles in the United
        States and in Canada.
  **Accounting
        estimates**
 The
        preparation of financial statements in accordance with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the recorded amounts of assets and liabilities and disclosure of
        contingent assets and liabilities as of the date of the financial statements
        and
        recognized amounts of revenues and expenses during the year. Significant
        estimates and assumptions made by management include allowances for accounts
        receivable and inventories, reserves for product returns, rebates,
        chargebacks
 
 **28** CONSOLIDATED
        FINANCIAL STATEMENTS
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **September
        30**  (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 3.
        ACCOUNTING POLICIES (continued)
  Accounting
        estimates (continued) and distribution service agreement fees, the
        classification of intangible assets between finite life and indefinite life,
        the
        useful lives of long-lived assets, the expected cash flows used in evaluating
        long-lived assets, goodwill and investments for impairment, pending legal
        settlements, the establishment of worldwide provision for income taxes including
        the realizability of deferred tax assets and the allocation of the purchase
        price of acquired assets and businesses. The estimates are made using the
        historical information and various other expected factors related to each
        circumstances, available to management. The Company reviews all significant
        estimates affecting the financial statements on a recurring basis and records
        the effect of any adjustments when necessary. Actual results could differ
        from
        those estimates based upon future events, which could include, among other
        risks, changes in regulations governing the manner in which the Company sells
        its products, changes in health care environment and managed care consumptions
        patterns.
  **Principles
        of consolidation**
 These
        financial statements include the accounts of Axcan Pharma Inc. and its
        subsidiaries, the most important being Axcan Scandipharm Inc. (“Axcan
        Scandipharm”), Axcan Pharma U.S. Inc. and Axcan Pharma S.A. Significant
        intercompany transactions have been eliminated in consolidation.
  **Revenue
        recognition**
 Revenue
        is recognized when the product is shipped to the Company's customers, provided
        the Company has not retained any significant risks of ownership or future
        obligations with respect to the product shipped. Provisions for sales discounts
        and estimates for charge-backs, managed care and Medicaid rebates, products
        returns and distribution service agreement fees are established as a reduction
        of product sales revenues at the time such revenues are recognized. These
        revenue reductions are established by the Company at the time of sale based
        on
        historical experience adjusted to reflect known changes in the factors that
        impact such reserves. In certain circumstances, returns or exchange of products
        are allowed under the Company’s policy and provisions are maintained
        accordingly. These revenue reductions are generally reflected as an addition
        to
        accrued expenses. Amounts received from customers as prepayments for products
        to
        be shipped in the future are reported as deferred revenue.
 
 **Cash
        and cash equivalents**
 The
        Company includes in cash and cash equivalents cash and all highly liquid
        short-term investments with initial maturities of three months or less.
  **Short-term
        investments**
 The
        Company classifies its short-term investments as available-for-sale. These
        investments are recorded at their fair value, unrealized gains or losses
        are
        reported as comprehensive income (loss) in shareholders’ equity. As at September
        30, 2006, 2005 and 2004 there were no material unrealized gains or losses.
  **Accounts
        receivable**
 The
        majority of the Company’s accounts receivable are due from companies in the
        pharmaceutical industry. Credit is extended based on evaluation of a customers’
financial condition and, generally, collateral is not required. Accounts
        receivable are due within 30 to 60 days and are stated at amounts due from
        customers net of an allowance for doubtful accounts. Accounts outstanding
        longer
        than the contractual payment terms are considered past due. The Company
        determines its allowance by considering a number of factors, including the
        length of time trade accounts receivable are past due, the Company’s previous
        loss history, the customer’s current ability to pay its obligation to the
        Company, and the condition of the general economy and the industry as a whole.
        The Company writes off accounts receivable when they become uncollectible,
        and
        payments subsequently received on such receivables are credited to the bad
        debts
        expenses.
  **Inventory
        valuation**
 Inventories
        of raw materials and packaging material are valued at the lower of cost and
        replacement cost. Inventories of work in progress and finished goods are
        valued
        at the lower of cost and net realizable value. Cost is determined by the
        first-in, first-out method. Cost for work in progress and finished goods
        includes raw materials, direct labour, subcontracts and an allocation for
        overhead. Allowances are maintained for slow-moving inventories based on
        the
        remaining shelf life of products and estimated time required to sell such
        inventories. Obsolete inventory and rejected products are written off to
        cost of
        goods sold.
 
 
 CONSOLIDATED
        FINANCIAL STATEMENTS **29**
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 3.
        ACCOUNTING POLICIES (continued)
  **Research
        and development**
 Research
        and development expenses are charged to operations in the year they are
        incurred. Acquired in-process research and development having no alternative
        future use is written off at the time of acquisition. The cost of intangibles
        that are purchased from others for a particular research and development
        project
        that have no alternative future use are written off at the time of
        acquisition.
  
 **Depreciation
        and amortization**
 Property,
        plant and equipment and intangible assets with a finite life are reported
        at
        cost, less accumulated depreciation and are depreciated or amortized over
        their
        estimated useful lives according to the straight-line method at the following
        annual rates:
 
 Buildings
              4
                  to 10%Furniture
                  and equipment
              10
                  to 20%Computer
                  equipment
              20
                  to 50%Automotive
                  equipment
              20
                  to 25%Leasehold
                  and building improvements
              10
                  to 20%Trademarks,
                  trademark licensesand
                  manufacturing rights
              4
                  to 15%
 
 Depreciation
        or amortization commences when an asset is substantially completed and becomes
        available for productive commercial use.
  Goodwill
        and intangible assets with indefinite life are not amortized since October
        1,
        2001.
  Deferred
        debt issue expenses are amortized on a straight-line basis over the terms
        of the
        debts, until 2008.
  **Impairment
        of long lived-assets**
 The
        value of goodwill and intangible assets with indefinite life are subject
        to an
        annual impairment test and the intangible assets with definite life and property
        plant and equipment are subject to an impairment test whenever events or
        changes
        in circumstances indicate that the carrying amounts of these assets may not
        be
        recoverable. The Company compares the carrying value of the unamortized portion
        of property, plant and equipment and intangible assets with definite life
        to the
        future benefits of the Company’s activities or expected sales of pharmaceutical
        products. For goodwill and intangible assets with indefinite life, the test
        is
        based on the comparison of the fair value of the asset with its carrying
        amount.
        Should there be a permanent impairment in value, a write-down will be recognized
        for the current year to reflect the assets at fair value.
 
 **Income
        taxes**
 Income
        taxes are calculated based on the liability method. Under this method, deferred
        income tax assets and liabilities are recognized as estimated taxes for recovery
        or settlement arising from the recovery or settlement of assets and liabilities
        recorded at their financial statement carrying amounts. Deferred income tax
        assets and liabilities are measured based on enacted tax rates and laws at
        the
        date of the financial statements for the years in which the temporary
        differences are expected to reverse. A valuation allowance is provided for
        the
        portion of deferred tax assets that is more likely than not to remain
        unrealized. Adjustments to the deferred income tax asset and liability balances
        are recognized in net income as they occur.
  **Stock-based
        compensation**
 Since
        October 1, 2005, stock-based compensation is measured according to SFAS No.
        123(R) by valuing the instrument the employee receives at its grant date
        fair
        value. Prior to October 1, 2005, the Company accounted for share-based employee
        compensation including stock options, using the method prescribed in APB
        No. 25
“ *Accounting
        for Stock Issued to employees* ”
        and SFAS No. 123 “ *Accounting
        for Stock-Based Compensation* ”.
        Under the provision of APB No. 25 and SFAS No. 123 the compensation cost
        was
        recognized using the intrinsic value and pro-forma disclosure of net income
        and
        income per share had to be presented in the financial statements as if the
        fair
        value method had been applied.
  **Selling
        and administrative expenses**
 Selling
        and administrative expenses include shipping and handling expenses, other
        than
        distribution service agreement fees, and advertising expenses. Distribution
        service agreement fees are deducted from revenue.
  **Foreign
        currency translation**
 The
        current rate method of translation of foreign currencies is followed for
        subsidiaries, or joint ventures considered financially and operationally
        self-sustaining. Therefore, all gains and losses arising from the translation
        of
        the financial statements of subsidiaries or joint ventures are deferred in
        a
        cumulative foreign currency translation adjustments account reported as a
        component of accumulated other comprehensive income in shareholders’
equity.
 
 
 **30** CONSOLIDATED
        FINANCIAL STATEMENTS
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 3.
        ACCOUNTING POLICIES (continued)
  **Foreign
        currency translation (continued)**
 For
        the operations in Canada and the United States of America, monetary assets
        and
        liabilities in currency other than U.S. dollars are translated into U.S.
        dollars, the functional currency of the Company, at the exchange rates in
        effect
        at the balance sheet date whereas other assets and liabilities are translated
        at
        exchange rates in effect at transaction dates. Revenue and operating expenses
        in
        foreign currency are translated at the average rates in effect during the
        year,
        except for depreciation and amortization, translated at historical rates.
        Gains
        and losses are included in net income for the year.
  
 **Income
        per share**
 Basic
        income per share is calculated using the weighted average number of common
        shares outstanding during the year and relevant shares issuable under stock
        incentive plans. The treasury shares method is to be used for determining
        the
        dilution effect of options. The dilutive effect of convertible subordinated
        notes is determined using the “if-converted” method.
 
 4.
        ACQUISITIONS
 
 **Product
        acquisitions**
 On
        November 18, 2003, the Company acquired the rights to a group of products
        from
        Aventis Pharma S.A. (“Aventis”) for a cash purchase price of $145,000,000. The
        acquired products are CARAFATE and BENTYL for the U.S. market and SULCRATE,
        BENTYLOL and PROCTOSEDYL for the Canadian market.
 
 On
        December 10, 2002, the Company acquired the rights to the Ursodiol 250 mg
        tablets DELURSAN for the French market, for a cash purchase price of 22,300,000
        Euros ($22,800,000) from Aventis. On December 3, 2002, the Company acquired
        the
        worldwide rights to the PANZYTRAT enzyme product line from Abbott for a cash
        purchase price of $45,000,000.
  During
        a transition period ended during the year ended September 30, 2005, the sellers
        acted as Axcan’s agents for the management of sales of some of these products.
        For the year ended September 30, 2005, a portion of the sales of these products
        was still managed by the sellers. The Company included in its revenue the
        net
        sales from such products less corresponding cost of goods sold and other
        seller
        related expenses. Consequently, although net sales of such products of the
        year
        ended September 30, 2005 were $2,431,789 ($7,667,940 in 2004), the Company
        only
        included in its revenue an amount of $949,866 ($4,685,673 in 2004) representing
        the net sales less cost of goods sold and other seller related
        expenses.
 
 5.
        SHORT-TERM INVESTMENTS
  As
        at September 30, 2006, short-term investments include short-term notes
        (short-term notes, mutual funds and debt securities in 2005). One short-term
        note represents approximately 11% (two short-term notes for 56% in 2005)
        of the
        Company’s total short-term investments. Interest rates on short-term investments
        vary from 2.02% to 5.25% (2.356% to 3.402% in 2005).
 
 
 CONSOLIDATED
        FINANCIAL STATEMENTS **31**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 6.
                  ACCOUNTS RECEIVABLE
  **2006**
              
              2005**$**
              
              
              $Trade
                  accounts, net of allowance for doubtful accountsof
                  $143,501 ($575,000 in 2005)(a)
              
              
              **30,650**
              
              
              37,186Taxes
                  receivable
              
              
              **47**
              
              
              45Other
              
              
              **242**
              
              
              356**30,939**
              
              
              37,587
 
 The
        Company believes that there is no unusual exposure associated with the
        collection of these accounts receivable.
 
 (a)
              As
                  at September 30, 2006, the accounts receivable include amounts
                  receivable
                  from three major customers which represent approximately 44% (48%
                  in 2005)
                  of the Company's total accounts receivable (see Note
                  19).
 
 7.
                  INVENTORIES
  **2006**
              
              2005**$**
              
              
              $Raw
                  materials and packaging material
              
              
              **15,979**
              
              
              18,710Work
                  in progress
              
              
              **1,413**
              
              
              1,547Finished
                  goods
              
              
              **19,957**
              
              
              15,759**37,349**
              
              
              36,016
 
 
 **32** CONSOLIDATED
        FINANCIAL STATEMENTS
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 **8.
        INCOME TAXES**
 
 The
        deferred income tax assets and liabilities result from differences between
        the
        tax value and book value of the following items:
 
 **2006**
              
              2005$
              
              $Short-term
                  deferred income tax assetsInventories
              
              
              **3,203**
              
              
              4,187Accounts
                  payable and accrued liabilities
              
              
              **5,220**
              
              
              3,755Pending
                  legal settlements
              
              
              -
              
              
              1,102**8,423**
              
              
              9,044Long-term
                  deferred income tax assetsShare
                  issue expenses
              
              
              -
              
              
              412-
              
              
              
              
              
              412Short-term
                  deferred income tax liabilitiesAccounts
                  receivable
              
              
              **410**
              
              
              409Prepaid
                  expenses and deposits
              
              
              **694**
              
              
              193**1,104**
              
              
              602Long-term
                  deferred income tax liabilitiesProperty,
                  plant and equipment
              
              
              **1,584**
              
              
              2,381Intangible
                  assets
              
              
              **34,072**
              
              
              34,341Goodwill
              
              
              **720**
              
              
              682Long-term
                  debt
              
              
              -
              
              
              627Research
                  and development expenses
              
              
              **1,835**
              
              
              1,104**38,211**
              
              
              39,135
  Income
                  taxes included in the statement of operations are as
                  follows:
  **2006**
              ****
              2005
              
              2004**$**
              
              $
              
              $Current
              
              
              **17,750**
              
              
              11,674
              
              
              15,628DeferredCreation
                  and reversal of temporary differences
              
              
              **580**
              
              
              (3,054
              )
              
              6,625Change
                  in promulgated rates
              
              
              **(64**
              **)**
              
              (207
              )
              
              -**516**
              
              
              (3,261
              )
              
              6,625**18,266**
              
              
              8,413
              
              
              22,253DomesticCurrent
              
              
              **(68**
              **)**
              
              (2,734
              )
              
              (338
              )Deferred
              
              
              **1,120**
              
              
              (941
              )
              
              2,756**1,052**
              
              
              (3,675
              )
              
              2,418ForeignCurrent
              
              
              **17,818**
              
              
              14,408
              
              
              15,966Deferred
              
              
              **(604**
              **)**
              
              (2,320
              )
              
              3,869**17,214**
              
              
              12,088
              
              
              19,835**18,266**
              
              
              8,413
              
              
              22,253
 
 
 CONSOLIDATED
        FINANCIAL STATEMENTS **33**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 **8.
        INCOME TAXES (continued)**
 
 The
        Company's effective income tax rate differs from the combined statutory federal
        and provincial income tax rate in Canada (31.77% for 2006, 31.02% for 2005
        and
        31.52% for 2004). This difference arises from the following:
 
 **2006**
              
              
              
              2005
              
              
              
              2004**%**
              ****
              **$**
              
              %
              
              $
              
              %
              
              $Combined
                  basic rate applied topre-tax
                  income
              
              
              **31.77**
              ****
              ****
              **18,231**
              
              
              31.02
              
              
              10,807
              
              
              31.52
              
              
              22,373Increase
                  (decrease) in taxes resulting from:Large
                  corporations tax
              
              
              -
              
              
              -
              
              
              0.17
              
              
              60
              
              
              0.04
              
              
              29Change
                  in promulgated rates
              
              
              **(0.11**
              **)**
              ****
              **(64**
              **)**
              
              (0.59
              )
              
              (207
              )
              
              -
              
              
              -Difference
                  with foreign tax rates
              
              
              **1.46**
              ****
              ****
              **837**
              
              
              (0.73
              )
              
              (255
              )
              
              (2.47
              )
              
              (1,752
              )Non-deductible
                  items
              
              
              **5.11**
              ****
              ****
              **2,935**
              
              
              4.51
              
              
              1,570
              
              
              1.79
              
              
              1,268Non-taxable
                  items and other
              
              
              **(1.96**
              **)**
              ****
              **(1,126**
              **)**
              
              (2.71
              )
              
              (943
              )
              
              (0.65
              )
              
              (460
              )Foreign
                  withholding taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2.76
              
              
              1,958Investment
                  tax credits
              
              
              **(4.44**
              **)**
              ****
              **(2,547**
              **)**
              
              (7.52
              )
              
              (2,619
              )
              
              (1.64
              )
              
              (1,163
              )**31.83**
              ****
              ****
              **18,266**
              
              
              24.15
              
              
              8,413
              
              
              31.35
              
              
              22,253
 
 No
        provision has been made for income taxes on the undistributed earnings of
        the
        Company’s foreign subsidiaries as at September 30, 2006, which the Company
        intends to indefinitely reinvest.
 
 **9.
                  PROPERTY, PLANT AND EQUIPMENT**
  **2006****Accumulated**
              ****
              ****
              ********
              ****
              **Cost**
              ****
              ****
              **depreciation**
              ****
              ****
              **Net**
              ********
              ****
              ****
              **$**
              ****
              
              **$**
              ****
              
              **$**
              ****Land
              ****
              ****
              **1,823**
              ****
              ****
              **-**
              ****
              ****
              **1,823**
              ****Buildings
              ****
              ****
              **22,306**
              ****
              ****
              **4,794**
              ****
              ****
              **17,512**
              ****Furniture
                  and equipment
              ****
              ****
              **15,421**
              ****
              ****
              **10,431**
              ****
              ****
              **4,990**
              ****Automotive
                  equipment
              ****
              ****
              **65**
              ****
              ****
              **48**
              ****
              ****
              **17**
              ****Computer
                  equipment
              ****
              ****
              **12,895**
              ****
              ****
              **8,435**
              ****
              ****
              **4,460**
              ****Leasehold
                  and building improvements
              ****
              ****
              **103**
              ****
              ****
              **88**
              ****
              ****
              **15**
              ********
              ****
              ****
              **52,613**
              ****
              ****
              **23,796**
              ****
              ****
              **28,817**
  **34**
          CONSOLIDATED FINANCIAL STATEMENTS
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS****September
                  30**(Amounts
                  in the tables are stated in thousands of U.S. dollars, except share
                  related data)
  **9.
                  PROPERTY, PLANT AND EQUIPMENT (continued)**
  2005AccumulatedCost
              
              depreciation
              
              Net$
              
              
              $
              
              
              $Land
              
              
              2,097
              
              
              -
              
              
              2,097Buildings
              
              
              21,265
              
              
              3,509
              
              
              17,756Furniture
                  and equipment
              
              
              15,612
              
              
              8,599
              
              
              7,013Automotive
                  equipment
              
              
              65
              
              
              34
              
              
              31Computer
                  equipment
              
              
              10,248
              
              
              5,484
              
              
              4,764Leasehold
                  and building improvements
              
              
              93
              
              
              81
              
              
              1249,380
              
              
              17,707
              
              
              31,673
  Acquisitions
                  of property, plant and equipment amount to $3,476,308 ($5,997,554
                  in 2005
                  and $14,288,431 in 2004).The
                  cost and accumulated depreciation of equipment under capital leases
                  amount
                  to $6,091,700 and $3,271,948,respectively
                  ($5,195,119 and $2,300,375, respectively in 2005).
  **10.
                  INTANGIBLE ASSETS******
              ****
              ****
              **2006**
              ********
              ****
              ****
              ****
              ****
              **Accumulated**
              ****
              ****
              ****
              ********
              ****
              **Cost**
              ****
              ****
              **amortization**
              ****
              ****
              **Net**
              ********
              ****
              ****
              **$**
              ****
              
              **$**
              ****
              
              **$**
              ****Trademarks,
                  trademark licenses and manufacturing rights with a:
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****Finite
                  life
              ****
              ****
              **347,117**
              ****
              ****
              **59,404**
              ****
              ****
              **287,713**
              ****Indefinite
                  life
              ****
              ****
              **100,342**
              ****
              ****
              **12,375**
              ****
              ****
              **87,967**
              ********
              ****
              ****
              **447,459**
              ****
              ****
              **71,779**
              ****
              ****
              **375,680**
  2005Cost
              
              
              Accumulatedamortization
              
              
              Net$
              
              
              $
              
              
              $Trademarks,
                  trademark licenses and manufacturing rights with a:Finite
                  life
              
              
              334,749
              
              
              45,841
              
              
              288,908Indefinite
                  life
              
              
              112,430
              
              
              12,417
              
              
              100,013447,179
              
              
              58,258
              
              
              388,921
 
 
 CONSOLIDATED
        FINANCIAL STATEMENTS **35**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 10.
                  INTANGIBLE ASSETS (continued)Further
                  to budgetary initiatives implemented by the
              On
                  October 1, 2004, the cost of the product PANZYTRAT,French
                  government, which resulted in the delisting of a
              amounting
                  to $56,817,802, has been transferred fromnumber
                  of pharmaceutical products from government
              intangible
                  assets with an indefinite life to intangibleformularies
                  and re-pricing of other pharmaceutical
              assets
                  with a finite life following changes in the regula-products,
                  the Company reviewed the appropriate
              tory
                  rules applicable to this product and is amortizedcarrying
                  value and useful life of its French subsidiary’s
              over
                  a 25-year period.intangible
                  assets. The cost of the product LACTEOL hasconsequently
                  been transferred from intangible assets
              Acquisitions
                  of intangible assets amount to $4,569,407with
                  an indefinite life to intangible assets with a finite
              ($51,103
                  in 2005 and $149,627,653 in 2004). The currentlife.
                  The net cost of LACTEOL as of October 1, 2005,
              intangible
                  assets with a finite life have a weighted-which
                  amounted to $11,347,600, is therefore amortized
              average
                  remaining amortization period of approximatelyover
                  a 15-year period. During the year ended September
              17
                  years (17 years as of September 30, 2005).30,
                  2006, a partial write-down of $5,800,000 was recog-nized
                  on a French line of products including TAGAMET
              The
                  annual amortization expenses without taking intoand
                  TRANSULOSE, as the carrying value of the intangible
              account
                  any future acquisitions expected for the yearsassets
                  associated with these products exceeded their
              2007
                  through 2011 are as follows:estimated
                  fair value.
              
              $2007
              17,166On
                  October 1, 2005, the net cost of ADEKs, amounting
              2008
              17,166to
                  $2,172,965, has also been transferred from intangible
              2009
              17,166assets
                  with an indefinite life to intangible assets with a
              2010
              17,166finite
                  life following changes in market conditions and is
              2011
              17,166amortized
                  over a 15-year period.
  11.
                  GOODWILL
  **2006**
              
              2005$
              
              $Cost
              
              
              **31,073**
              
              
              31,073Accumulated
                  amortization
              
              
              **3,606**
              
              
              3,606Net
              
              
              **27,467**
              
              
              27,467
 
 
 **36** CONSOLIDATED
        FINANCIAL STATEMENTS
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 **12.
        AUTHORIZED LINE OF CREDIT**
  
 The
        Company has a credit agreement relative to a $125,000,000 financing. The
        credit
        agreement consists of a 364-day extendible revolving facility with a two-year
        term-out option maturing on September 20, 2009 (September 21, 2008 in 2005).
        The
        term-out option provides for quarterly instalments equal to 8.57% of the
        amount
        then outstanding on the facility with a final instalment of 40%.
  The
        Company’s credit facility is secured by a first priority security interest on
        all present and future acquired assets of the Company and its material
        subsidiaries, and provides for the maintenance of certain financial ratios.
        Among the restrictions imposed by the credit facility is a covenant limiting
        cash dividends, share repurchases (other
        than redeemable shares issuable in connection with a permitted acquisition)
        and
        similar distributions to shareholders to 10% of the Company’s net income for the
        preceding fiscal year.
  The
        interest rate varies, depending on the Company's leverage, between 25 basis
        points and 100 basis points over the Canadian prime rate or U.S. base rate
        and
        between 125 basis points and 200 basis points over the LIBOR rate or bankers’
acceptances. The line of credit also provides for a stand-by fee of between
        25
        and 37.5 basis points. The credit facility may be drawn in U.S. dollars,
        in
        Canadian dollars or in Euro equivalents. As at September 30, 2006 and 2005
        there
        was no amount outstanding under the line of credit.
 **13.
          ACCOUNTS PAYABLE AND ACCRUED LIABILITIES**
  **2006**
              
              2005**$**
              
              $Accounts
                  payable
              
              
              **12,043**
              
              
              14,808Contract
                  rebates, product returns and accrued chargebacks
              
              
              **20,726**
              
              
              12,886Accrued
                  interest on subordinated notes
              
              
              **2,447**
              
              
              2,447Accrued
                  royalty fees
              
              
              **5,508**
              
              
              5,584Accrued
                  salaries
              
              
              **2,929**
              
              
              2,202Accrued
                  bonuses
              
              
              **4,368**
              
              
              2,637Accrued
                  research and development expenses
              
              
              **6,588**
              
              
              5,207Other
                  accrued liabilities
              
              
              **6,124**
              
              
              4,319Pending
                  legal settlements
              
              
              -
              
              
              2,900**60,733**
              
              
              52,990
 
 
 CONSOLIDATED
                  FINANCIAL STATEMENTS
              **37**
   **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
  **September
                  30**(Amounts
                  in the tables are stated in thousands of U.S. dollars, except share
                  related data)
  **14.
                  LONG-TERM DEBT**
  **2006**
              
              2005**$**
              
              $Convertible
                  subordinated notes, 4.25%, interest payable semi-annuallystarting
                  October 15, 2003, convertible into 8,924,113 common
                  shares,maturing
                  April 15, 2008(a)
              
              
              **125,000**
              
              
              125,000Bank
                  loans, 3.80%, payable in quarterly instalments of
                  $194,400,principal
                  and interest, maturing in 2007
              
              
              -
              
              
              1,310Obligations
                  under capital leases, interest rates varying between3.81%
                  and 6.2% payable in monthly instalments, principal andinterest,
                  maturing on different dates until 2009
              
              
              **1,246**
              
              
              1,519**126,246**
              
              
              127,829Instalments
                  due within one year
              
              
              **681**
              
              
              1,497**125,565**
              
              
              126,332
  (a)The
                  noteholders may convert their notes during any
              period.
                  Finally, the noteholders may also convert theirquarterly
                  conversion period if the closing price per share
              notes
                  upon the occurrence of specified corporate trans-for
                  at least 20 consecutive trading days during the 30
              actions
                  or, if the company has called the notes forconsecutive
                  trading-day period ending on the first day of
              redemption.
                  Since April 20, 2006, the Company may atthe
                  conversion period exceeds 110% of the conversion
              its
                  option, redeem the notes, in whole or in part atprice
                  in effect on that thirtieth trading day. The note-
              redemption
                  prices varying from 101.70% to 100.85% ofholders
                  may also convert their notes during the five
              the
                  principal amount plus any accrued and unpaidbusiness-day
                  period following any 10 consecutive
              interest
                  to the redemption date. The notes also includetrading-day
                  period in which the daily average of the
              provisions
                  for the redemption of all the notes for cashtrading
                  prices for the notes was less than 95% of the
              at
                  the option of the Company following some changesaverage
                  conversion value for the notes during that
              in
                  tax treatment.
  As
                  at September 30, 2006, minimum instalments on long-term debt for
                  the next
                  years are as follows:
  Obligationsunder
              
              Othercapital
              
              long-termleases
              
              loans$
              
              
              $2007
              
              
              719
              
              
              -2008
              
              
              495
              
              
              125,0002009
              
              
              113
              
              
              -1,327Interest
                  included in the minimum lease payments
              
              
              811,246
  
 
 **38** CONSOLIDATED
        FINANCIAL STATEMENTS
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 **15.
        CAPITAL STOCK**
 
 Preferred
        shares
 
 The
        Company has an unlimited number of authorized preferred shares without par
        value, issuable in series, rights, privileges and restrictions determined
        at the
        creation date.
  Two
        series of preferred shares have been created as follows:
  Series
        A, shares authorized: 14,175,000 non-voting, annual preferential cumulative
        dividend of 5%, redeemable on or prior to June 8, 2001 at CAN$1.00 per share
        payable at the option of the Company in cash or by the issuance of common
        shares
        or in any combination of cash and common shares.
  Series
        B, shares authorized: 12,000,000 non-voting, redeemable on the fifth anniversary
        of their issuance at CAN$1.00 per share payable in cash or by the issuance
        of
        common shares at the option of the Company, convertible into common shares
        at
        the holder’s option on the basis of one common share for each 15 Series B
        preferred shares.
  Stock
        incentive plans
 
 In
        2006, the Company adopted a new stock incentive plan (the “2006 plan”) in
        replacement of its previous stock option plan and pursuant to which the Company
        will grant options to selected employees and directors
 
 of
        the Company. The 2006 plan provides that a maximum of 2,300,000 common shares
        are issuable pursuant to the exercise of options. The per share purchase
        price
        cannot be less than the fair market value of the common stock on the last
        trading day prior to the granting date and the option expires no later than
        seven years from that date. Options may be exercised over a period established
        at the granting date except for the annual options granted to outside directors
        which may be exercised one year after the granting date. At September 30,
        2006,
        there were 60,000 outstanding options that may become exercisable under the
        terms of the 2006 plan. These options may be exercised at a rate of 20% per
        year.
  Under
        the Company’s previous stock option plan established in 1995 (the “1995 plan”),
        a maximum of 4,500,000 common shares were issuable pursuant to the exercise
        of
        options. Options were granted at the fair market value of one common stock
        on
        the last trading day prior to the granting date. Options granted under the
        1995
        plan may be exercised at a rate of 20% per year and expire ten years after
        the
        granting date except for the annual options granted to outside directors
        which
        vested one year after the granting date. At September 30, 2006, there were
        2,997,084 outstanding options that are or may become exercisable under the
        terms
        of the 1995 plan.
  The
        changes to the number of stock options outstanding are as follows:
 
 2006
              
              
              
              2005
              
              
              
              2004**Number**
              
              **Weighted
                  average**
              
              Number
              
              Weighted
                  average
              
              Number
              
              Weighted
                  averageof**options**
              ****
              **exercise
                  price**
              
              of
                  options
              
              exercise
                  price
              
              of
                  options
              
              exercise
                  price**$**
              
              
              
              $
              
              
              
              $Balance,
                  beginningof
                  year
              
              
              **2,986,748**
              ****
              ****
              **12.87**
              
              
              2,600,556
              
              
              11.86
              
              
              2,681,840
              
              
              10.12Granted
              
              
              **416,714**
              ****
              ****
              **13.81**
              
              
              692,100
              
              
              16.19
              
              
              738,350
              
              
              15.44Exercised
              
              
              **(118,406**
              **)**
              ****
              **9.07**
              
              
              (119,839
              )
              
              8.93
              
              
              (558,016
              )
              
              8.78Cancelled
              
              
              **(227,972**
              **)**
              ****
              **14.77**
              
              
              (186,069
              )
              
              13.96
              
              
              (261,618
              )
              
              11.23Balance,
                  end of year
              
              
              **3,057,084**
              ****
              ****
              **13.01**
              
              
              2,986,748
              
              
              12.87
              
              
              2,600,556
              
              
              11.86Options
                  exercisableat
                  end of year
              
              
              **1,790,020**
              ****
              ****
              **11.93**
              
              
              1,409,939
              
              
              10.97
              
              
              954,459
              
              
              9.93
  
  CONSOLIDATED
                  FINANCIAL STATEMENTS
              **39**
   **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS****September
                  30**(Amounts
                  in the tables are stated in thousands of U.S. dollars, except share
                  related data)
  15.
                  CAPITAL STOCK (continued)
  Stock
                  incentive plans (continued)Stock
                  options outstanding at September 30, 2006 are as follows:
  **Options
                  outstanding**
              **Options
                  exercisable**
              ********
              ****
              ****
              ****
              ****
              ****
              ****
              **Weighted**
              ****
              ****
              ****
              ****
              ********
              ****
              ****
              ****
              ****
              ****
              ****
              **average**
              **Weighted**
              ****
              ****
              **Weighted**
              ********
              ****
              ****
              ****
              ****
              ****
              ****
              **remaining**
              **average**
              ****
              ****
              **average**
              ********
              Exercise
                  price
              **Number**
              **contractual
                  life**
              **exercise
                  price**
              **Number**
              ****
              **exercise
                  price**
              ********
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              **$**
              ****
              ****
              **$**
              ****$
              4.06
              -
              
              $
              5.00
              **10,000**
              **3.22**
              **4.06**
              **10,000**
              ****
              **4.06**
              ****$
              5.01
              -
              
              $
              7.00
              **22,900**
              **2.86**
              **6.71**
              **22,900**
              ****
              **6.71**
              ****$
              7.01
              -
              
              $
              10.00
              **640,050**
              **3.77**
              **8.64**
              **640,050**
              ****
              **8.64**
              ****$
              10.01
              -
              $
              13.00
              **659,510**
              **5.66**
              **11.75**
              **465,450**
              ****
              **11.69**
              ****$
              13.01
              -
              $
              16.00
              **1,050,274**
              **7.48**
              **13.94**
              **381,270**
              ****
              **13.91**
              ****$
              16.01
              -
              $
              19.00
              **586,850**
              **8.14**
              **16.90**
              **194,850**
              ****
              **17.31**
              ****$
              19.01
              -
              $
              19.99
              **87,500**
              **7.39**
              **19.99**
              **75,500**
              ****
              **19.99**
              ********
              ****
              ****
              ****
              ****
              ****
              **3,057,084**
              **6.38**
              **13.01**
              **1,790,020**
              ****
              **11.93**
  The
                  changes to the number of nonvested stock options for the year ended
                  September 30, 2006 are as follows:
  **Weighted**
              ********
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              **average**
              ********
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              **grant
                  date**
              ********
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              **Number**
              ****
              **fair
                  value**
              ********
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              **$**
              ********
              Balance,
                  beginning of year
              ****
              ****
              ****
              **1,576,809**
              ****
              **6.61**
              ********
              Granted
              ****
              ****
              ****
              ****
              ****
              ****
              **416,714**
              ****
              **6.41**
              ********
              Vested
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              **(534,139**
              **)**
              **6.47**
              ********
              Forfeited
              ****
              ****
              ****
              ****
              ****
              ****
              **(192,320**
              **)**
              **6.79**
              ********
              Balance,
                  end of year
              ****
              ****
              ****
              **1,267,064**
              ****
              **6.57**
 
 The
        Company has recorded $3,554,924 of compensation expenses relative to stock
        options for the year ended September 30, 2006 in accordance with SFAS No.
        123(R). The amount of expense has been reduced to take into account the
        estimated forfeitures. As of September 30, 2006, there was $7,106,966 of
        total
        unrecognized compensation costs related to stock options. These costs are
        expected to be recognized over a weighted average period of 3.1
        years.
  
 The
        weighted average fair value of granted stock options was $6.41, $7.01 and
        $6.80
        for the years ended September 30, 2006, 2005 and 2004.
 
 The
        fair value of each option award is estimated on the date of grant using the
        Black-Scholes valuation model and the assumptions noted in the following
        table.
        The expected life of options is based on observed historical exercise patterns.
        Groups of employees that have similar historical exercise patterns have been
        considered separately for valuation purposes. The expected volatility is
        based
        solely on historical volatility. The risk free interest rate is based on
        the
        implied yield on a U.S. or Canadian Treasury zero-coupon issue with a remaining
        term equal to the expected term of the option. The dividend yield reflects
        that
        the Company has not paid any cash dividends since inception and does not
        intend
        to pay any cash dividends in the foreseeable future.
 
 
 **40** CONSOLIDATED
        FINANCIAL STATEMENTS
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 **15.
        CAPITAL STOCK (continued)**
  Stock
        incentive plans (continued)
 
 **2006**
              
              2005
              
              2004Expected
                  term of options (years)
              
              
              **5.8**
              
              
              6
              
              
              6Expected
                stock price volatility
              
              
              **42**
              **%**
              
              42
              %
              
              42
              %Risk-free
                interest rate
              
              
              **4.28**
              **%**
              
              3.94
              %
              
              4.17
              %Expected
                dividend
              
              
              -
              
              
              -
              
              
              -
  Under
        the 2006 plan, the Company may grant restricted share units (“RSUs”) to
        directors and employees. The value of an RSU is always equal to the fair
        market
        value of one common share of the Company. The RSUs entitle the holders to
        receive common shares of the Company at the end of a vesting period. The
        total
        number of RSUs granted in 2006 was 40,950 with a fair value of $12.99 each.
        The
        RSUs granted in 2006 vest in equal portions each year over a three-year
        period.
  The
        Company may also grant deferred share units (“DSUs”) to directors or members of
        a select group of management. The value of a DSU is always equal to the fair
        market value of one common share of the Company.
  Since
        2006, directors receive an annual grant of units having a value of $15,000
        and
        each of the eligible persons may elect to receive a portion of their annual
        compensation in the form of DSUs. DSUs are credited with dividend equivalents
        when dividends are paid on the Company’s common shares. Directors may not
        receive any distribution in respect of the DSUs until they withdraw from
        the
        Board and members of management until cessation of employment. The amount
        of
        compensation deferred is converted into DSUs based on the fair market value
        of
        the common stock on the last trading day prior to the date of grant. At
        September 30, 2006, the Company’s directors held 10,009 DSUs.
 
 **16.
        FINANCIAL INFORMATION INCLUDED IN THE CONSOLIDATED STATEMENT OF
        OPERATIONS**
 
 a)
                  Financial expenses
  **2006**
              
              2005
              
              2004**$**
              
              $
              
              $Interest
                  on long-term debt
              
              **5,416**
              
              5,542
              
              5,614Bank
                  charges
              
              
              **154**
              
              
              165
              
              
              127Financing
                  fees
              
              
              **301**
              
              
              333
              
              
              -Amortization
                  of deferred debt issue expenses
              
              
              **1,117**
              
              
              1,100
              
              
              1,144**6,988**
              
              
              7,140
              
              
              6,885b)
                  Other information
  **2006**
              
              
              2005
              
              
              2004**$**
              
              
              $
              
              
              $Rental
                  expenses
              
              
              **1,989**
              
              
              1,148
              
              
              1,216Shipping
                  and handling expenses
              
              
              **5,097**
              
              
              4,901
              
              
              4,349Advertising
                  expenses
              
              
              **11,488**
              
              
              16,592
              
              
              15,155Depreciation
                  of property, plant and equipment
              
              
              **5,901**
              
              
              5,339
              
              
              3,720Amortization
                  of intangible assets
              
              
              **16,922**
              
              
              16,193
              
              
              12,639Share
                  in net loss of joint ventures
              
              
              -
              
              
              -
              
              
              455Stock-based
                  compensation expense
              
              
              **3,554**
              
              
              -
              
              
              -
  
 
 CONSOLIDATED
        FINANCIAL STATEMENTS **41**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
  16.
        FINANCIAL INFORMATION INCLUDED IN THE
        CONSOLIDATED STATEMENT OF OPERATIONS (continued)
 b)
        Other information (continued)
 
 The
        Company incurred professional fees with entities, in which directors of the
        Company are partner or shareholder, totalling $414,147 for the year ended
        September 30, 2006 ($400,396 in 2005 and $556,724 in 2004). These transactions
        were concluded in the normal course of operations, at the amount agreed to
        by
        related parties.
  In
        connection with a reorganization of its international operations due to
        budgetary initiatives implemented by the French government, the Company has
        undertaken a reduction of its workforce in Europe. To this end, in May 2006,
        the
        Company’s French subsidiary communicated
 
 a
        reorganization plan to the employee representatives in France aimed at reducing
        its workforce. As this plan was implemented, the Company recorded one-time
        restructuring charge of $1,738,755 during the year ended September 30, 2006.
        The
        restructuring charge include severance costs totalling $1,305,501 and
        professional and legal fees for transition assistance totalling $433,254.
        As at
        September 30, 2006, $1,035,270 has been paid for severance costs and $390,764
        for professional and legal fees. The balance payable of $312,721 will be
        paid
        during the year ending September 30, 2007.
 
 c)
        Income per common share
 
 The
        following table reconciles the numerators and denominators of the basic and
        diluted income per share computations.
 
 **2006**
              
              2005
              
              2004**$**
              
              $
              
              $Net
                  income available to common shareholdersBasic
              
              
              **39,119**
              
              
              26,425
              
              
              48,728Interest
                  and amortization of deferred debt issueexpenses
                  relating to the convertible subordinatednotes,
                  net of income taxes
              
              
              **4,328**
              
              
              4,257
              
              
              4,200Net
                  income available to common shareholders ona
                  diluted basis
              
              
              **43,447**
              
              
              30,682
              
              
              52,928**2006**
              
              
              2005
              
              
              2004Weighted
                  average number of common sharesWeighted
                  average number of common shares outstandingand
                  relevant shares issuable under stock incentive plans
              
              
              **45,741,419**
              
              
              45,617,703
              
              
              45,286,199Effect
                  of dilutive stock options and relevant shares issuableunder
                  stock incentive plans
              
              
              **398,964**
              
              
              677,386
              
              
              820,872Effect
                  of dilutive convertible subordinated notes
              
              
              **8,924,113**
              
              
              8,924,113
              
              
              8,924,113Adjusted
                  weighted average number of commonshares
                  outstanding
              
              
              **55,064,496**
              
              
              55,219,202
              
              
              55,031,184Number
                  of common shares outstanding as atNovember
                  29, 2006
              
              
              **45,868,785**
 
 Options
        to purchase 1,155,744 common shares (706,950 for 2005 and 283,000 for 2004)
        were
        outstanding but were not included in the computation of diluted income per
        share
        as the exercise price of the options was greater than the average market
        price
        of the common shares.
 
 
 **42** CONSOLIDATED
        FINANCIAL STATEMENTS
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 **17.
        FINANCIAL INFORMATION INCLUDED IN THE CONSOLIDATED STATEMENT OF CASH
        FLOWS**
 
 a)
                  Changes in working capital items
  **2006**
              
              2005
              
              2004**$**
              
              $
              
              $Accounts
                  receivable
              
              
              **7,338**
              
              
              8,648
              
              
              (27,795
              )Income
                  taxes receivable
              
              
              **(260**
              **)**
              
              1,610
              
              
              (3,773
              )Inventories
              
              
              **(402**
              **)**
              
              1,490
              
              
              (17,157
              )Prepaid
                  expenses and deposits
              
              
              **(1,812**
              **)**
              
              1,861
              
              
              (703
              )Accounts
                  payable and accrued liabilities
              
              
              **7,263**
              
              
              4,429
              
              
              3,191Income
                  taxes payable
              
              
              **(1,047**
              **)**
              
              3,995
              
              
              (4,051
              )**11,080**
              
              
              22,033
              
              
              (50,288
              )b)
                  Cash flows relating to interest and income taxes of operating
                  activities**2006**
              ****
              
              2005
              
              
              2004**$**
              
              
              $
              
              
              $Interest
                  received
              
              
              **4,562**
              
              
              1,256
              
              
              1,035Interest
                  paid
              
              
              **5,416**
              
              
              5,626
              
              
              6,122Income
                  taxes paid
              
              
              **19,568**
              
              
              6,984
              
              
              23,620
 
 **18.
        JOINT VENTURES**
 
 The
        Company’s interest in the joint ventures is accounted for by the equity method.
        During fiscal 2004, the Company wrote off its investment in these joint ventures
        for an amount of $511,233.
 
 **19.
        SEGMENTED INFORMATION**
 
 The
        Company considers that it operates in a single field of activity, the
        pharmaceutical industry.
  No
        customer represents more than 10% of the Company's revenue except for three
        major customers for which the sales represented 74.8% of revenue for the
        year
        ended September 30, 2006 (62.1% and 55.8% in 2005 and 2004) and are detailed
        as
        follows:
 
 2006
              
              2005
              
              2004%
              
              %
              
              %Customer
                  A
              
              
              39.0
              
              
              30.2
              
              
              18.4Customer
                  B
              
              
              24.4
              
              
              20.9
              
              
              24.3Customer
                  C
              
              
              11.4
              
              
              11.0
              
              
              13.174.8
              
              
              62.1
              
              
              55.8
 
 
 CONSOLIDATED
        FINANCIAL STATEMENTS **43**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 **19.
        SEGMENTED INFORMATION (continued)**
  Purchases
        from two suppliers represent approximately 42% of the cost of goods sold
        for the
        year ended September 30, 2006 (one for 15% in 2005 and 2004).
 
 The
        Company purchases its inventory from third party manufacturers, many of whom
        are
        the sole source of products for the Company. The failure of such manufacturers
        to provide an uninterrupted supply of products could adversely impact the
        Company’s ability to sell such products.
 
 The
                  Company operates in the following geographic segments:
  **2006**
              
              2005
              
              2004$
              
              $
              
              $RevenueCanadaDomestic
                  sales
              
              
              **37,956**
              
              
              34,412
              
              
              28,002Foreign
                  sales
              
              
              -
              
              
              -
              
              
              -United
                  StatesDomestic
                  sales
              
              
              **195,954**
              
              
              155,261
              
              
              162,810Foreign
                  sales
              
              
              **5,801**
              
              
              4,394
              
              
              3,921EuropeDomestic
                  sales
              
              
              **43,374**
              
              
              46,225
              
              
              43,830Foreign
                  sales
              
              
              **8,702**
              
              
              10,857
              
              
              4,846Other
              
              
              **530**
              
              
              194
              
              
              225**292,317**
              
              
              251,343
              
              
              243,634Property,
                  plant, equipment, intangible assets and goodwillCanada
              
              
              **36,409**
              
              
              39,506United
                  States
              
              
              **125,084**
              
              
              127,915Europe
              
              
              **239,323**
              
              
              252,509Other
              
              
              **31,148**
              
              
              28,131**431,964**
              
              
              448,061
 
 Revenue
        is attributed to geographic segments based on the country of origin of the
        sales.
 
 **20.
        FINANCIAL INSTRUMENTS**
  **Currency
        risk**
 The
        Company is exposed to financial risk arising from fluctuations in foreign
        exchange rates and the degree of volatility of the rates. The Company does
        not
        use derivative instruments to reduce its exposure to foreign currency risk.
        As
        of September 30, 2006, the financial assets totalling $203,872,919 include
        cash
        and cash equivalent and accounts receivable for CAN$3,814,612
 
 and
        11,097,255 Euros respectively (CAN$4,294,426 and 13,834,975 Euros in 2005).
        The
        financial liabilities totalling $186,979,096 include accounts payable and
        accrued liabilities and long-term debt for CAN$16,955,611 and 8,456,708 Euros
        respectively (CAN$10,865,290, and 13,723,991 Euros in 2005).
  
 
 **44** CONSOLIDATED
        FINANCIAL STATEMENTS
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 **20.
                  FINANCIAL INSTRUMENTS (continued)**
  Fair
                  value of the financial instruments on the balance sheetThe
                  estimated fair value of the financial instruments is as
                  follows:
  2006
              
              
              
              2005Carrying
              
              
              
              CarryingFair
                  value
              
              amount
              
              Fair
                  value
              
              amount$
              
              
              $
              
              
              $
              
              
              $AssetsCash
                  and cash equivalents
              
              
              55,830
              
              
              55,830
              
              
              79,969
              
              
              79,969Short-term
                  investments
              
              
              117,151
              
              
              117,151
              
              
              17,619
              
              
              17,619Accounts
                  receivable, net
              
              
              30,892
              
              
              30,892
              
              
              37,542
              
              
              37,542LiabilitiesAccounts
                  payable and accrued liabilities
              
              
              60,733
              
              
              60,733
              
              
              52,990
              
              
              52,990Long-term
                  debt
              
              
              132,500
              
              
              126,246
              
              
              132,870
              
              
              127,829
 
 The
        following methods and assumptions were used to calculate the estimated fair
        value of the financial instruments on the balance sheet.
 
 a)
        Financial instruments valued at carrying amount
 
 The
        estimated fair value of certain financial instruments shown on the balance
        sheet
        is equivalent to their carrying amount because they are realizable in the
        short-term or because their carrying amount approximates the fair value.
        These
        financial instruments include cash and cash equivalents, short-term investments,
        accounts receivable and accounts payable and accrued liabilities.
 
 b)
        Long-term debt
 
 The
        fair value of long-term debt has been established by discounting the future
        cash
        flows at interest rates corresponding to those the Company would have obtained
        at year end date for loans with similar maturity dates and terms. The fair
        value
        of the convertible subordinated notes is based on the trading price at the
        end
        of the year.
 
 **21.
                  COMMITMENTS AND CONTINGENCIES**
  a)
                  Commitments
  The
          Company has entered into non-cancelable operating leases
          and service agreements with fixed minimum payment obligations
          expiring on different dates until December
          2011 for the rental of office space, automotive equipment
          and other equipment and for sales management, research
          and development and other services.
 Minimum
            future payments under these commitments for
            the next five years are as follows:
 $2007
              4,6902008
              2,7242009
              1,2992010
              7212011
              5129,946
 The
          Company entered into an agreement with Nordmark Arzneimittel
          GmbH & Co to create a joint venture to develop
          patent-protected novel enzyme preparations. Under
          the terms of this agreement, the Company agreed to
          contribute up to a cumulative amount of $1,500,000 to
          the joint venture. As at September 30, 2006 and 2005, a
          total amount of $1,100,000 has been contributed by the
          Company. During the year ended September 30, 2006,
          the parties agreed to cease making contributions to
          the joint venture.
 b)
          Licensing agreements
  In
          May 2000, the Company entered into agreements with QLT
          PhotoTherapeutics Inc. (“QLT”) relating to the purchase
          of PHOTOFRIN which provided for milestone payments
          to be made by Axcan to QLT that could reach a
          maximum of CAN$20,000,000 upon receipt of certain
  
 CONSOLIDATED
        FINANCIAL STATEMENTS **45**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 **21.
        COMMITMENTS AND CONTINGENCIES (continued)**
 
 b)
        Licensing agreements (continued)
  regulatory
        approvals for specific or additional indication for
        PHOTOFRIN or other conditions. Each milestone payment
        had to be made at the option of the Company either
        in cash or in Series B preferred shares or in a combination
        of cash and preferred shares provided that at
        least one-half of the milestone payable had to be paid in
        cash. During the year 2006, the final milestone payment
        of CAN$5,000,000 ($4,495,999) was paid by Axcan.
        To date, the maximum of CAN$20,000,000 ($15,440,767)
        has been paid in cash and recorded in intangible
        assets with a finite life.
  In
        October 2000, the Company entered into a licensing agreement
        with the Children’s Hospital Research Foundation
        for a series of sulfated derivatives of ursodeoxycholigic
        acid compounds (“SUDCA”). Axcan has,
        as at September 30, 2006, paid $839,562 in cash. The
        Company also agreed to pay milestones for a maximum
        amount of $200,000 when SUDCA will b validated
        and a bonus when certain conditions are met; finally,
        Axcan agreed to pay royalties based on sales.
  In
        May 2002, the Company signed a co-development and licensing
        agreement with NicOx S.A. (“NicOx”) for NCX-1000,
        a nitric oxide-donating ursodiol derivative, for the
        treatment of chronic liver diseases including portal hypertension
        and Hepatitis “C”. Under the terms of this agreement,
        the Company has obtained from NicOx an exclusive
        license to commercialize NCX-1000 in Canada and
        Poland as well as an option to acquire the same exclusive
        rights for the United States market. The Company
        and NicOx will share the cost of the future development
        of NCX-1000 jointly through the completion of
        Phase II clinical studies. The Company will thereafter conduct
        the required Phase III clinical studies and be responsible
        for regulatory filings in the exclusively licensed
        territories. The Company agreed to pay NicOx options
        or milestone payments totalling up to $17,000,000 at
        various stages of development. An amount of $2,000,000
        has been paid in 2003. The Company also agreed
        to pay royalties of up to 12% on net sales of the product.
  On
        October 10, 2002, the Company acquired from Gentium
        S.p.A., an Italian company, exclusive rights to develop
        and market in North America, a patented 4
        gram rectal gel formulation of mesalamine (5-ASA) for the
        treatment of active distal ulcerative colitis. In return the
        Company agreed to make milestone payments totalling
        approximately $1,500,000, the majority of which payable
        upon approval in the United States. An amount of
        approximately $200,000 has been paid in 2003. The Company
        also agreed to pay a royalty of 4% on net sales for
        a ten-year period from product’s launch.
  On
        July 22, 2003, the Company acquired from Merz Pharmaceutical
        GmbH (“Merz”) an exclusive licence to use,
        develop and submit for approval of injectable and oral
        granule formulations containing L-ornithine and L-aspartate.
        In consideration of the rights and licenses granted
        by Merz under this agreement, the Company agreed
        to pay a royalty of 6% of net sales or 4% of net sales
        if the Company develops any patentable invention or
        improvement and Merz incorporates such invention or
        improvement into its products.
  In
        August 2003, the Company signed an agreement to acquire
        the exclusive license for North America, the European
        Union and Latin America to develop, manu- facture
        and market ITAX which provides for milestone payments
        for an amount of $20,000,000 upon regulatory submission
        and an amount of $45,000,000 upon regula- tory
        approval. The Company also agreed to pay royalties of
        9% of net sales from the date of first commercial sale until
        the expiration of the patent and 6% for ten years then
        after. As previously announced, the Company has ceased
        the development of ITAX for the treatment of Functional
        Dyspepsia during the year ended September 30,
        2006.
  On
        February 22, 2005, the Company signed a license agreement
        with Lisapharma S.p.A., an Italian company, to
        submit for approval and commercialize, in North America,
        products in gel sachet and tablet dosage forms that
        contain sucralfate as the main active ingredient. Under
        the agreement, the Company agreed to pay license
        fees of up to $2,000,000 over a period of a maximum
        of four years (until September 30, 2006 an amount
        of $1,000,000 has been recorded as expense) and
        make milestone payments totalling up to $3,000,000 upon
        regulatory approvals. The Company also agreed to pay
        royalties of 6% of net sales of products enjoying patent
        protection and 3% of net sales of products not enjoying
        patent protection for up to five years from a first
        commercial sale.
  On
        May 1, 2005, the Company signed a license and tech- nology
        agreement with Howard J. Smith & Associates PTY
        LTD (“HSA”) an Australian company, to develop and
 
 
 **46** CONSOLIDATED
        FINANCIAL STATEMENTS
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 **21.
        COMMITMENTS AND CONTINGENCIES (continued)**
 
 b)
        Licensing agreements (continued) market products for the treatment of viral
        hepatitis. The Company agreed to make milestone payments totalling up to
        $17,000,000 at various stages of development or commercialization. The Company
        also agreed to pay royalties of 4.5% of net sales in countries where an HSA
        patent is in force and 2.25% of net sales in countries where no HSA patent
        is in
        force for a maximum of ten years after the first commercial sale of a product
        in
        the relevant country.
  On
        September 25, 2006, the Company entered into a license and co-development
        agreement with AGI Therapeutics Research Ltd (“AGI”). Pursuant to this
        agreement, AGI and the Company will co-develop a controlled release omeprazole
        product (“AGI-010”) for the treatment of gastro-oesophageal reflux disease.
        Under the agreement, the Company and AGI agreed to share certain development
        expenses and the Company paid a $1,500,000 upfront fee, accounted for as
        a
        research and development expense. The Company may also be required to make
        specified milestone payments that could total up to $17,500,000 at various
        stages of development up to and including regulatory approvals. The Company
        finally agreed to pay royalties varying between 4% and 7.5% of net
        sales.
  c)
        Royalties
 
 The
        Company pays royalties on the sales of certain of its products to unrelated
        third parties under license and similar agreements, at rates ranging between
        1%
        and 6%.
  During
        the year ended September 30, 2006, the Company paid a total of $3,768,515
        ($3,695,087 in 2005 and $3,760,945 in 2004) in royalties in connection with
        the
        sales of its URSO, ULTRASE, PHOTOFRIN and ADEKs products. These royalties
        were
        charged to operations.
  d)
        Contingencies
 
 The
        subsidiary Axcan Scandipharm has been named as a defendant in several legal
        proceedings related to the products line it markets under the name ULTRASE.
        Of
        the 12 lawsuits to date, Axcan Scandipharm was dismissed from one, nonsuited
        in
        another and settled ten. These lawsuits were filed against Axcan Scandipharm
        and
        certain other named defendants, including the enzyme manufacturer, stemming
        from
        allegations that, among other things, Axcan Scandipharm's enzyme products
        caused
        colonic strictures. At this time, it is difficult to predict if there will
        be
        other claims or their number and because of the young age of the patients involved,
        Axcan Scandipharm’s product liability exposure for this issue in the United
        States will remain for a number of years. Axcan Scandipharm’s insurance carriers
        have defended the lawsuits to date and Axcan expects them to continue to
        defend
        Axcan Scandipharm (to the extent of its product liability insurance) should
        other lawsuits be filed in the future.
  In
        addition, the enzyme manufacturer and certain other companies had claimed
        a
        right to recover amounts paid defending and settling these claims as well
        as a
        declaration that Axcan Scandipharm and another named defendant must provide
        indemnification against future claims. This lawsuit was based on contractual
        and
        indemnity issues and the parties had agreed to settle their dispute through
        binding arbitration.
  As
        at September 30, 2005 and 2004, the Company had accrued $2,900,000 to cover
        any
        future settlements in connection with the indemnification claim and the lawsuits
        discussed above that may not be covered by, or exceed, applicable insurance
        proceeds. Following a series of decisions rendered by the arbitrator in favour
        of Axcan Scandipharm, the Company revaluated its exposure and this accrual
        was
        reversed in the year ended September 30, 2006 thus reducing the selling and
        administrative expenses by the same amount. While the Company believes that
        the
        insurance coverage and provisions taken to date are adequate, an adverse
        determination of present or future claims could exceed insurance coverage
        and
        amounts currently accrued.
  e)
        Employee benefit plan
 
 A
        subsidiary of the Company has a defined contribution plan (the “Plan”) for its
        U.S. employees. Participation is available to substantially all U.S. employees.
        Employees may contribute up to 15% of their gross pay or up to limits set
        by the
        U.S. Internal Revenue Service. During the year, the Board of Directors approved
        and the Company charged to operations a contribution to the Plan totalling
        $385,018 ($495,195 in 2005 and $268,757 in 2004).
  f)
        Other
 
 The
        Company is currently being audited by Canada Revenue Agency, mainly on transfer
        pricing issues, for fiscal year 2002 to fiscal year 2004. The Company has
        estimated that, based on discussions held with Canada Revenue Agency relative
        to
        this audit and on the information currently at hand, its current estimate
        of tax
        provisions is reasonable.
 
 
 CONSOLIDATED
        FINANCIAL STATEMENTS **47**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
  **22.
          SUMMARY
          OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE
          UNITED
          STATES AND IN CANADA**
 The
        consolidated financial statements have been prepared in accordance with U.S.
        GAAP which, in the case of the Company, conform in all material respects
        with
        Canadian GAAP, except as set forth below:
 
 **2006**
              
              2005
              
              2004**$**
              
              $
              
              $**Operations
                  adjustments**Net
                  income in accordance with U.S. GAAP
              
              
              **39,119**
              
              
              26,425
              
              
              48,728Write-off
                  of an intangible asset(2)
              
              
              **(12,000**
              **)**
              
              -
              
              
              -Amortization
                  of new product acquisition costs(2)
              
              
              **(54**
              **)**
              
              (54
              )
              
              (54
              )Stock-based
                  compensation expense(8)
              
              
              -
              
              
              (4,590
              )
              
              -Implicit
                  interest on convertible notes(4)
              
              
              **(5,064**
              **)**
              
              (4,631
              )
              
              (4,234
              )Income
                  tax impact of the above adjustments
              
              
              **1,002**
              
              
              338
              
              
              20Net
                  earnings in accordance with Canadian GAAP(7)
              
              
              **23,003**
              
              
              17,488
              
              
              44,460Earnings
                  per share in accordance with Canadian GAAPBasic
              
              
              **0.50**
              
              
              0.38
              
              
              0.98Diluted
              
              
              **0.50**
              
              
              0.38
              
              
              0.96
  **2006**
              
              
              
              2005**U.S.**
              ****
              **Canadian**
              
              U.S.
              
              Canadian**GAAP**
              ****
              **GAAP**
              
              GAAP
              
              GAAP**$**
              ****
              **$**
              
              $
              
              $Balance
                  sheet adjustmentsCurrent
                  assets
              
              
              **262,378**
              ****
              ****
              **262,378**
              
              
              190,357
              
              
              190,357Property,
                  plant and equipment
              
              
              **28,817**
              ****
              ****
              **28,817**
              
              
              31,673
              
              
              31,673Intangible
                  assets(2)
              
              
              **375,680**
              ****
              ****
              **375,936**
              
              
              388,921
              
              
              401,229Goodwill(3)
              
              
              **27,467**
              ****
              ****
              **28,862**
              
              
              27,467
              
              
              28,862Deferred
                  debt issue expenses
              
              
              **1,475**
              ****
              ****
              **1,475**
              
              
              2,577
              
              
              2,577Deferred
                  income tax asset
              
              
              -
              
              
              -
              
              
              412
              
              
              412Current
                  liabilities
              
              
              **64,617**
              ****
              ****
              **64,617**
              
              
              58,336
              
              
              58,336Long-term
                  debt(4)
              
              
              **125,565**
              ****
              ****
              **117,549**
              
              
              126,332
              
              
              113,250Deferred
                  income tax liability(2)(3)
              
              
              **38,211**
              ****
              ****
              **38,308**
              
              
              39,135
              
              
              40,234Shareholders’
                  equityEquity
                  component of convertible debt(4)
              
              
              -
              
              
              **24,239**
              
              
              -
              
              
              24,239Capital
                  stock(5)(6)
                  (8)
              
              
              **262,786**
              ****
              ****
              **274,675**
              
              
              261,714
              
              
              273,022Retained
                  earnings(2)(3)
                  (4) (5) (6) (8)
              
              
              **177,906**
              ****
              ****
              **135,809**
              
              
              138,787
              
              
              112,806Additional
                  paid-in capital(8)
              
              
              **4,967**
              ****
              ****
              **16,348**
              
              
              1,329
              
              
              13,293Accumulated
                  foreign currency translationadjustments(6)
              
              
              **21,765**
              ****
              ****
              **25,923**
              
              
              15,774
              
              
              19,930
 
 
 **48** CONSOLIDATED
        FINANCIAL STATEMENTS
   **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **September
        30**
 (Amounts
        in the tables are stated in thousands of U.S. dollars, except share related
        data)
 
 **22.**
              **SUMMARY
                  OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
                  IN THE
                  UNITED STATES AND IN CANADA
                  (continued)**
 
 (1)
              Under
                  U.S. GAAP, securities available for sale are recorded at their
                  fair market
                  value, unrealized gains or losses are recorded separately in shareholders’
                  equity.
 Under
                  Canadian GAAP, short-term investments are recorded at cost. As
                  at
                  September 30, 2006, there is no material unrealized gain or
                  loss.
  (2)
              Under
                  U.S. GAAP, acquired in-process research is included in operations
                  as at
                  the date of acquisition as no alternative future use is established.
                  Under
                  Canadian GAAP, the acquired in-process research is deferred and
                  amortized
                  from the date of commencement of commercial production. During
                  the year
                  ended September 30, 2006, the Company has decided not to pursue
                  further
                  development on ITAX resulting in a write-off of an intangible asset
                  for an
                  amount of $12,000,000 recognized under Canadian
                  GAAP.
  (3)
              Under
                  U.S. GAAP, some financial expenses were recorded when the minority
                  interest in Axcan Scandipharm was purchased. Under Canadian GAAP,
                  these
                  financial expenses were included in
                  goodwill.
  (4)
              Under
                  U.S. GAAP, the entire convertible subordinated notes are included
                  in
                  long-term debt. Under Canadian GAAP, the estimated value of the
                  right of
                  conversion is included in the shareholders' equity as equity component
                  of
                  convertible debt and implicit interest is charged to income each
                  year and
                  accounted for in the balance sheet as an accretion to the liability
                  component.
  (5)
              Under
                  U.S. GAAP, share issuance expenses are deducted from the consideration
                  received. Under Canadian GAAP, these expenses are charged directly
                  to
                  retained earnings.
 
 (6)
              Effective
                  October 1, 1999, the Company changed its measurement and reporting
                  currency from the Canadian dollar to the U.S. dollar. Under U.S.
                  GAAP,
                  comparative figures must be restated as if the change in measurement
                  and
                  reporting currency had been applied retroactively. Under Canadian
                  GAAP,
                  compar- ative figures were presented using the translation of convenience
                  method. At October 1, 1999, the change in measurement and reporting
                  currency presented in accordance with Canadian GAAP resulted in
                  an
                  increase in cumulative translation adjustment balance of $4,156,000,
                  and a
                  decrease in capital stock balance of $3,584,000 and retained earnings
                  balance of $572,000.
  (7)
              Under
                  U.S. GAAP, the research and development tax credits are applied
                  against
                  income taxes. Under Canadian GAAP, these tax credits would be applied
                  against research and development expenses. This difference had
                  no impact
                  on the consolidated net income.
  (8)
              Under
                  U.S. GAAP, stock-based compensation was measured at intrinsic value
                  and
                  the effect of using the fair value method was disclosed in the
                  summary of
                  significant accounting policies until September 30, 2005 and is
                  measured
                  using the fair value method since October 1, 2005. Under Canadian
                  GAAP,
                  stock- based compensation is measured using the fair value method
                  since
                  October 1, 2004. As of October 1, 2004, the retained earnings have
                  been
                  reduced by $12,353,000, the capital stock has been increased by
                  $4,100,233, the additional paid-in capital has been increased by
                  $8,722,767 and the income taxes receivable have been increased
                  by
                  $470,000.