First Quarter 2011 Management s Discussion and Analysis of Financial Condition and Results of Operations Highlights Perifosine

Management s Discussion and Analysis

of Financial Condition and Results of Operations

March 9, 2011: We announced that we had entered into an agreement with Yakult Honsha Co. Ltd. ( Yakult ) for the development, manufacture and commercialization of perifosine in all human uses, excluding leishmaniasis, in Japan.

March 24, 2011: We announced that we had been awarded a grant of $1.5 million, payable over a three-year period as partial reimbursement of qualifying expenditures, from the German Ministry of Education and Research to develop, up to the clinical stage, cytotoxic conjugates of the proprietary cytotoxic compound disorazol Z and peptides targeting G-protein coupled receptors, including luteinizing hormone releasing hormone ( LHRH ) receptors. The compounds being developed will combine the targeting principle successfully employed in Phase 2 with AEZS-108 (doxorubicin and LHRH receptor-targeting agent) with the novel cytotoxic disorazol Z.

Corporate developments

On February 22, 2011, we entered into an At-the-Market ( ATM ) sales agreement, under which we were able to sell up to 12.5 million of our common shares through ATM issuances on the Nasdaq for aggregate gross proceeds not to exceed $19.8 million. In March 2011, we issued approximately 2.7 million common shares under this agreement for aggregate gross proceeds of approximately $5.1 million, and subsequent to quarter-end, we issued approximately 7.3 million common shares under our ATM sales agreement for aggregate gross proceeds of approximately $14.7 million, which represents the remaining amount of gross proceeds available in connection with our ATM sales agreement.

On February 28, 2011, we announced that we had received a net sales royalty milestone of $2.5 million from Cowen Healthcare Royalty Partners L.P. ( Cowen ). This milestone was payable pursuant to the sale, in December 2008, to Cowen of our rights to royalties on future net sales of Cetrotide .

This Management s Discussion and Analysis ( MD&A ) provides a review of the results of operations, financial condition and cash flows of Aeterna Zentaris Inc. for the three-month period ended March 31, 2011. In this MD&A, Aeterna Zentaris , the Company , we , us , our and the Group mean Aeterna Zentaris Inc. and its subsidiaries. This discussion should be read in conjunction with the information contained in the Company s interim consolidated financial statements as at March 31, 2011 and for the three-month periods ended March 31, 2011 and 2010.

All amounts in this MD&A are presented in US dollars, except for share, option and warrant data, per share and per warrant data and as otherwise noted.

Adoption of International Financial Reporting Standards ( IFRS )

In 2008, the Canadian Accounting Standards Board confirmed that all publicly accountable enterprises must adopt IFRS in place of Canadian generally accepted accounting principles ( GAAP ) beginning on January 1, 2011 (for entities with a calendar year-end). As such, our unaudited interim consolidated financial statements as at March 31, 2011 and for the three months then ended have been prepared in accordance with IFRS as issued by the International Accounting Standards Board. Additionally, our unaudited consolidated statement of financial position as at January 1, 2010 and our comparative unaudited consolidated financial statements for 2010 have been adjusted to reflect our adoption of IFRS on a retrospective basis, effective on January 1, 2010 (the Transition Date ). Consequently, all comparative financial information presented in this MD&A reflects the consistent, retrospective application of IFRS.

IFRS differ in certain respects from Canadian GAAP. A complete description of our conversion to IFRS, including reconciliations of previously reported Canadian GAAP information, is provided in note 21 to our unaudited interim consolidated financial statements as at March 31, 2011 and for the three-month periods ended March 31, 2011 and 2010, which note is incorporated by reference herein.

About Forward-Looking Statements

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

Forward-looking statements involve risks and uncertainties, many of which are discussed in this MD&A. Results or performance may differ significantly from expectations. For example, the results of current clinical trials cannot be foreseen, nor can changes in policy or actions taken by regulatory authorities such as the United States Food and Drug Administration ( FDA ), the European Medicines Agency ( EMA ), the Therapeutic Products Directorate of Health Canada or any other organization responsible for enforcing regulations in the pharmaceutical industry.

Given these uncertainties and risk factors, readers are cautioned not to place undue reliance on any forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments, unless required to do so by a governmental authority or by applicable law.

About Material Information

This MD&A includes information that we believe to be material to investors after considering all circumstances, including potential market sensitivity. We consider information and disclosures to be material if they result in, or reasonably would be expected to result in, a significant change in the market price or value of our securities, or where

it is likely that a reasonable investor would consider the information and disclosures to be important in making an investment decision.

The Company is a reporting issuer under the securities legislation of all of the provinces of Canada, and its securities are registered with the United States Securities and Exchange Commission. The Company is therefore required to file or furnish continuous disclosure information such as interim and annual financial statements, MD&As, proxy circulars, annual reports on Form 20-F, material change reports and press releases with the appropriate securities regulatory authorities. Copies of these documents may be obtained free of charge upon request from the Company s Investor Relations department or on the Internet at the following addresses: www.aezsinc.com, www.sedar.com and www.sec.gov.

Aeterna Zentaris Inc. (Nasdaq: AEZS and TSX: AEZ) is a late-stage drug development company specialized in oncology and endocrine therapy. Our pipeline encompasses compounds at all stages of development, from drug discovery through to marketed products. The highest priorities in oncology are our Phase 3 program with perifosine in colorectal cancer and multiple myeloma, combined with our Phase 2 program in multiple cancers, as well as the further advancement of AEZS-108, which recently completed with success a Phase 2 trial in advanced endometrial and advanced ovarian cancer. AEZS-108 is also in development in other cancer indications, including refractory bladder and castration refractory prostate cancer. In endocrinology, our lead program is our ongoing Phase 3 trial with AEZS-130 (Solorel ) as a growth hormone ( GH ) stimulation test for the diagnosis of GH deficiency in adults ( AGHD ).

Key Developments for the Three Months Ended March 31, 2011

Status of our drug pipeline as at May 17, 2011

Perifosine is a novel, oral anticancer treatment that inhibits Akt activation in the phosphoinositide 3-kinase ( PI3K ) pathway. Perifosine, in combination with chemotherapeutic agents, is currently in Phase 3 studies for the treatment of multiple myeloma, colorectal cancer and in Phase 2 studies for the treatment of other cancers, and is the most advanced anti-cancer compound of its class in late-stage development. Perifosine as monotherapy also is being explored in other indications. The FDA has granted perifosine orphan-drug designation in multiple myeloma and in neuroblastoma and Fast Track designations in both multiple myeloma and refractory advanced colorectal cancer. Additionally, an agreement was reached with the FDA to conduct the Phase 3 trials in both of these indications under a Special Protocol Assessment ( SPA ). Perifosine has also been granted Orphan Medicinal Product designation from the EMA in multiple myeloma, and has received positive Scientific Advice from the EMA for both the advanced colorectal cancer and multiple myeloma programs, with ongoing Phase 3 trials for these indications expected to be sufficient for registration in Europe. Perifosine rights have been licensed to Keryx Biopharmaceuticals, Inc. ( Keryx ) for North America to Handok Pharmaceuticals Co. Ltd. for Korea and to Yakult for Japan.

On March 8, 2011, we entered into an agreement with Yakult for the development, manufacture and commercialization of perifosine in all human uses, excluding leishmaniasis, in Japan. Under the terms of this agreement, Yakult made an initial, non-refundable gross upfront payment to us of 6.0 million (approximately $8.4 million). Also per the agreement, we will be entitled to receive up to a total of 44.0 million (approximately $62.5 million) upon achieving certain pre-established milestones, including the occurrence of certain clinical and regulatory events in Japan. Furthermore, we will be entitled to receive double-digit royalties on future net sales of perifosine in the Japanese market.

We have substantial continuing involvement in the aforementioned arrangement, including the use of commercially reasonable efforts to develop, apply for and obtain relevant regulatory approval for, manufacture and commercialize perifosine outside Japan, which will facilitate the ultimate commercialization process within Japan. Additionally, we will ensure a stable supply of perifosine and related trial products to Yakult throughout the ongoing development process and will maintain relevant patent rights over the term of the arrangement. Lastly, per the terms of the aforementioned agreement, we have agreed to supply perifosine, on a cost-plus basis, to Yakult following regulatory approval.

We have deferred the non-refundable license fee and are amortizing the related payment as revenue on a straight-line basis over the duration of our continuing involvement, which approximates the estimated life cycle of the product that is currently under development and the expected period over which Yakult will derive value from the use of, and access to, the underlying license.

In determining the period over which license revenues are to be recognized, and in addition to due consideration of our continuing involvement, as discussed above, we considered the remaining expected life of applicable patents as the most reasonable basis for estimating the underlying product s life cycle. However, we may adjust the amortization period based on appropriate facts and circumstances not yet known, including, but not limited to, the extension(s) of patents, the granting of new patents, the economic lives of competing products and other events that would significantly change the duration of our continuing involvement and performance obligations or benefits expected to be derived by Yakult.

Future milestones will be recognized as revenue individually and in full upon the actual achievement of the related milestone, given the substantive nature of each milestone. Lastly, upon initial commercialization and sale of the developed product, we will recognize royalty revenues as earned, based on the contractual percentage applied to the actual net sales achieved by Yakult, as per the aforementioned agreement.

We were required to remit to the Japanese tax authorities $0.8 million of the gross proceeds received from Yakult. This amount, which was withheld at the source, was recognized as income tax expense in our consolidated statement of comprehensive loss.

Corporate developments

On February 22, 2011, we entered into an ATM sales agreement, under which we were able to sell up to 12.5 million of our common shares through ATM issuances on the Nasdaq for aggregate gross proceeds not to exceed $19.8 million. The ATM sales agreement provided that common shares are sold at market prices prevailing at the time of sale, and, as a result, prices may vary.

During the three-month period ended March 31, 2011, we issued approximately 2.7 million common shares under the ATM sales agreement for aggregate gross proceeds of approximately $5.1 million, less cash and previously deferred transaction costs totalling approximately $0.4 million.

Subsequent to quarter-end

At various dates during April 2011, we issued a total of approximately 7.3 million common shares under our ATM sales agreement for aggregate gross proceeds of approximately $14.7 million, less cash transaction costs of approximately $0.4 million. Those drawdowns represent the remaining aggregate gross proceeds available in connection with our ATM sales agreement.

Interim Consolidated Statements of Comprehensive Loss Information

Revenues are derived primarily from sales and royalties as well as from license fees. Sales are derived from Cetrotide (cetrorelix acetate solution for injection), marketed for reproductive health assistance for in vitro fertilization, as well as from active pharmaceutical ingredients. Royalties are derived indirectly from ARES Trading S.A. s ( Merck Serono ) net sales of Cetrotide and represent the periodic amortization, under the units-of-revenue method, of the proceeds received in connection with the 2008 sale to Cowen of the underlying future royalty stream.

License fees include periodic milestone payments, research and development ( R&D ) contract fees and the amortization of upfront payments received from our licensing partners.

Sales and royalties were $7.1 million for the three-month period ended March 31, 2011, compared to $5.7 million for the same period in 2010. This increase is largely related to comparative higher-than-normal deliveries of Cetrotide to certain customers as well as to the comparative strengthening of the euro against the US dollar.

Sales and royalties of the second quarter 2011 are expected to decrease slightly, as compared to the first quarter of 2011.

License fees and other revenues decreased to $0.3 million for the three-month period ended March 31, 2011, as compared to $0.7 million for the same period in 2010.

License fees and other revenues are expected to increase in subsequent quarters of 2011, as compared to the first quarter of 2011, as we amortize to license fee revenues the deferred upfront payment received from Yakult, as discussed above.

Cost of sales increased to $6.0 million for the three-month period ended March 31, 2011, as compared to $4.6 million for the same period in 2010. This increase is largely attributable to the higher comparative increase in sales of Cetrotide , as discussed above. Additionally, cost of sales as a percentage of sales and royalties increased to approximately 85%, compared to 81% in the first quarter of 2010, due to a comparative decrease in royalty revenues.

R&D costs, net of tax credits and grants, were $5.5 million for the three-month period ended March 31, 2011, compared to $6.1 million for the same period in 2010.

The following table summarizes our net R&D costs by nature of expense:

* including depreciation and amortization charges.

The following table summarizes primary third-party R&D costs, by product candidate, incurred by the Company during the three-month period ended March 31, 2011.

(in thousands, except percentages)

We expect net R&D costs to remain relatively stable, excluding the impact of foreign exchange rate fluctuations, in the second quarter of 2011, compared to the first quarter of 2011. Overall, excluding the impact of unforeseen foreign exchange rate fluctuations, we now expect that net R&D costs will total between $23.0 million and $25.0 million for the full year 2011, particularly given our primary focus on developing perifosine, AEZS-108 and Solorel . We note that perifosine-related development activities are sponsored by our North American license partner, Keryx. Additionally, we continue to seek government grants for our earlier-stage projects.

Selling, general and administrative ( SG&A ) expenses were $3.2 million for the three-month period ended March 31, 2011, as compared to $3.1 million for the same period in 2010.

We expect that SG&A expenses will remain relatively stable in the second quarter of 2011, as compared to the first quarter of 2011.

Net finance income (costs), comprised predominantly of net foreign exchange gains and losses, the change in fair value of our warrant liability and the unrealized gain on our short-term investment (2011 only), for the three-month period ended March 31, 2011 totalled ($1.9 million), as compared to $1.7 million for the same period in 2010, as presented below.

The significant increase in finance costs during the first quarter of 2011, as compared to the first quarter of 2010, is due to higher foreign exchange losses, which in turn resulted primarily from the weakening of the US dollar against the euro during the first quarter of 2011. Since December 31, 2010, the US dollar lost approximately 6% of its value against the euro. As a result, we recorded foreign exchange losses on transactions and on cash and cash equivalent balances denominated in US dollars.

Additionally, our net finance costs increased during the first quarter of 2011 due to the change in fair value of our warrant liability since December 31, 2010. That change results from the periodic mark-to-market revaluation, of currently outstanding share purchase warrants.

Net loss for the three-month period ended March 31, 2011 was $10.1 million, or $0.12 per basic and diluted share, compared to $5.7 million, or $0.09 per basic and diluted share, for the same period in 2010. This increase is mainly related to higher net finance costs and higher income tax expense, as discussed above.

Quarterly Consolidated Results of Operations Information

(in thousands, except for per share data)

* as per our previously filed quarterly and annual consolidated financial statements prepared in accordance with Canadian GAAP. These periods have not been adjusted to reflect any retrospective IFRS conversion adjustments. Those adjustments would have included, among others, our periodic fair value adjustments to our warrant liability. As such, the 2009 Canadian GAAP quarterly figures presented above are not entirely comparable to the 2010 IFRS amounts.

Net earnings (loss) per share are (is) based on each reporting period s weighted average number of shares outstanding, which may differ on a quarter-to-quarter basis. As such, the sum of the quarterly net earnings (loss) per share amounts may not equal year-to-date net loss per share.

Interim Consolidated Statement of Financial Position Information

* Comprised mainly of deferred revenues, employee future benefits and provision.

The increase in cash and cash equivalents as at March 31, 2011, as compared to December 31, 2010, is due to the receipt of the upfront license payment in connection with our development, commercialization and licensing agreement entered into with Yakult, as discussed above; the receipt of net proceeds pursuant to drawdowns made in connection with our ATM sales agreement, as discussed above; and, the comparative strengthening, in the first quarter of 2011, of the euro against the US dollar, as compared to December 31, 2010. These increases were partially offset by recurring disbursements and other variations in components of our working capital.

Our warrant liability increased from December 31, 2010 to March 31, 2011 predominantly due to the change in fair value pursuant to the periodic mark-to-market revaluation of the underlying outstanding share purchase warrants, as discussed above.

Non-financial liabilities increased from December 31, 2011 predominantly as a result of the deferral of the upfront payment received in connection with our development, commercialization and licensing agreement entered into with Yakult.

The increase in shareholders deficit from December 31, 2010 to March 31, 2011 is attributable to the increase in our deficit due to the net loss for the three months ended March 31, 2011 and to the increase in accumulated other comprehensive loss, which in turn is comprised of cumulative translation adjustments, partially offset by an increase in share capital following the issuance of common shares pursuant to the aforementioned drawdowns made in connection with our ATM sales agreement.

Financial Liabilities, Obligations and Commitments

We have certain contractual obligations and commercial commitments. Commercial commitments mainly include R&D services and manufacturing agreements related to the production of Cetrotide and to other R&D programs. The following table summarizes future cash requirements with respect to these obligations.

Outstanding Share Data

As at May 17, 2011, there were 95,185,296 common shares issued and outstanding, as well as 6,718,465 stock options outstanding. Warrants outstanding as at May 17, 2011 represented a total of 11,266,104 equivalent common shares.

Our objective in managing capital, primarily composed of shareholders deficiency and cash and cash equivalents, is to ensure sufficient liquidity to fund our R&D activities, SG&A expenses, working capital and capital expenditures.

Our priority is to optimize our liquidity by non-dilutive sources, including the sale of non-core assets, investment tax credits and grants, interest income, licensing and related services and royalties. More recently, however, we have raised additional capital via registered direct offerings and drawdowns related to our ATM sales agreement.

Our capital management objective remains the same as that of previous periods. The policy on dividends is to retain cash to keep funds available to finance the activities required to advance our product development pipeline.

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

It is important to note that historical patterns of expenditures cannot be taken as an indication of future expenditures. The amount and timing of expenditures and availability of capital resources vary substantially from period to period, depending on the level of research and development activity being undertaken at any given time and on the availability of funding from investors and prospective commercial partners.

Liquidity, Cash Flows and Capital Resources

Our operations and capital expenditures have been financed mainly through cash flows from operating activities and other non-dilutive activities, except for the registered direct offerings completed during the year ended December 31, 2010 and, more recently, the drawdowns related to our ATM sales agreement, as discussed above.

Our cash and cash equivalents amounted to $38.3 million as at March 31, 2011, compared to $32.0 million as at December 31, 2010. As at March 31, 2011, cash and cash equivalents of the Company included 5.1 million.

Based on our assessment, which took into account current cash levels, as well as our strategic plan and corresponding budgets and forecasts, we believe that we have sufficient liquidity and financial resources to fund planned expenditures and other working capital needs for at least, but not limited to, the 12-month period following the balance sheet date of March 31, 2011.

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

The variations in our liquidity by activity are explained below.

Operating Activities

Cash flows provided by (used in) operating activities were $0.8 million for the three-month period ended March 31, 2011, compared to ($10.8 million) for the same period in 2010. The significant increase in cash provided by operating activities is predominantly related to the receipt of $8.4 million in connection with our development, commercialization and licensing agreement entered into with Yakult, as discussed above.

We expect net cash provided by operating activities to decrease substantially in the second quarter of 2011, as compared to the first quarter of 2011, as we return to an operating cash burn reflective of recurring activities.

Financing Activities

Cash flows provided by financing activities increased by $5.1 million during the first quarter of 2011, as compared to nil for the same period in 2010. The significant increase is primarily due to the drawdowns related to our ATM sales agreement, discussed above, which resulted in the receipt of net cash proceeds of $4.9 million.

As noted above, subsequent to quarter-end, we raised an additional $14.3 million in net proceeds in connection with the remaining drawdowns available related to our ATM sales agreement. As a result, our cash flows provided by financing activities will increase substantially during the second quarter of 2011, as compared to the first quarter of 2011.

Critical Accounting Policies, estimates and judgments

As noted above, our unaudited interim consolidated financial statements as at March 31, 2011 and for the three-month periods ended March 31, 2011 and 2010 have been prepared in accordance with IFRS. In addition, and subject to certain transition exceptions and exemptions, we have consistently applied the same accounting policies in our IFRS consolidated statement of financial position as at January 1, 2010 and throughout comparative periods as if these policies had always been in effect. Note 21 to our unaudited interim consolidated financial statements as at March 31, 2011 and for the three-month periods ended March 31, 2011 and 2010, which note is incorporated by reference herein, discusses the impact of the transition to IFRS on our reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies from those used in our previous Canadian GAAP consolidated financial statements. Comparative figures for 2010 have been adjusted to give effect to these changes.

The policies applied in our unaudited interim consolidated financial statements as at March 31, 2011 and for the three-month periods ended March 31, 2011 and 2010 are based on IFRS issued and outstanding as of May 17, 2011, which is the date at which the Company s Board of Directors approved those unaudited interim consolidated financial statements. Any subsequent changes to IFRS that will be applied in our annual consolidated financial statements as at and for the year ended December 31, 2011 could result in the restatement of those interim unaudited consolidated financial statements, including the transition adjustments recognized on transition to IFRS.

Additionally, the preparation of consolidated financial statements in accordance with IFRS often requires management to make estimates about and apply assumptions or subjective judgment to future events and other matters that affect the reported amounts of our assets, liabilities, revenues, expenses and related disclosures. Assumptions, estimates and judgments are based on historical experience, expectations, current trends and other factors that management believes to be relevant at the time at which our consolidated financial statements are prepared. Management reviews, on a regular basis, the Company s accounting policies, assumptions, estimates and judgments in order to ensure that the consolidated financial statements are presented fairly and in accordance with IFRS.

Critical accounting estimates and judgments are those that have a significant risk of causing material adjustment and are often applied to matters or outcomes that are inherently uncertain and subject to change. As such, management cautions that future events often vary from forecasts and expectations and that estimates routinely require adjustment.