Second 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

April 4, 2011: We announced that two posters on our lead anticancer agent, perifosine, had been presented at the 102nd annual meeting of the American Association for Cancer Research ( AACR ) held at the Orange County Convention Center in Orlando, Florida.

During the quarter, the recruitment of patients in the X-PECT study (Xeloda + Perifosine Evaluation in Colorectal Cancer Treatment) progressed as scheduled. Subsequent to quarter-end, we announced the completion of the recruitment of over 430 patients. We now expect the completion of this trial by year-end or at the turn of 2012.

Subsequent to quarter-end, the European Patent Office granted a patent for the use of alkyl phosphocholines, and, more specifically for perifosine (octadecyl 1,1-dimethylpiperidino-4-yl phosphate), in the preparation of a medicament for the treatment of benign and malignant tumors, prior to and/or during the treatment with approved anti-tumor anti-metabolites such as 5FU ( fluorouracil ) and capecitabine. This patent will expire on July 28, 2023.

Parallel Scientific Advice process granted by and initiated with the United States Food and Drug Administration ( FDA ) and the European Medicines Agency ( EMA ), with the aim to have the pivotal program in endometrial cancer defined by year-end.

We announced encouraging preliminary results of the Phase 3 trial of AEZS-130 as a diagnostic test for Adult Growth Hormone Deficiency ( AGHD ) after quarter-end. We now expect to meet with the FDA and file a New Drug Application ( NDA ) thereafter.

April 5, 2011: We announced that a poster on our highly selective Erk 1/2 inhibitor anticancer compound, AEZS-131, had been presented at the 102nd annual meeting of the AACR.

Corporate developments

During the three-month period ended June 30, 2011, we completed the drawdowns remaining under the At-the-Market ( ATM ) Sales Agreement entered into with McNicoll, Lewis & Vlak LLC ( MLV ) in February 2011 (the February ATM Sales Agreement ). During the quarter, we raised a total of $14.7 million in gross proceeds, bringing the total aggregate gross proceeds raised under the February ATM Sales Agreement, on a year-to-date basis, to $19.7 million.

On June 29, 2011, we entered into an additional ATM Sales Agreement (the June ATM Sales Agreement ) with MLV, under which we may, at our discretion, from time to time during the 24-month term of the agreement, sell up to a maximum of 9.5 million of our common shares through ATM issuances on the NASDAQ Stock Market for aggregate gross proceeds not to exceed $24.0 million.

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 and six-month periods ended June 30, 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 June 30, 2011 and for the three-month and six-month periods ended June 30, 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 ( Canadian GAAP ) beginning on January 1, 2011 (for entities with a calendar year-end). As such, our unaudited interim consolidated financial statements as at June 30, 2011 and for the three-month and six-month periods then ended have been prepared in accordance with IFRS, as issued by the International Accounting Standards Board ( IASB ), applicable to the preparation of interim financial statements. 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.

A complete description of our transition 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, and in note 18 to our unaudited interim consolidated financial statements as at June 30, 2011 and for the three-month and six-month periods ended June 30, 2011 and 2010, which notes are 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 FDA, the 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 successfully completed a Phase 2 trial in advanced endometrial and advanced ovarian cancer. AEZS-108 is also in development in other cancer indications, including castration refractory prostate cancer and refractory bladder cancer.

Our pipeline also encompasses other earlier-stage programs in oncology. AEZS-112, an oral anticancer agent which involves three mechanisms of action (tubulin, topoisomerase II and angiogenesis inhibition) has completed a Phase 1 trial in advanced solid tumors and lymphoma. Additionally, several novel targeted potential anti-cancer candidates such as AEZS-120, a live recombinant oral tumor vaccine candidate, as well as our PI3K/Erk inhibitors AEZS-129, AEZS-131, and AEZS-132 are currently in pre-clinical development.

Our lead program in endocrinology, a Phase 3 trial with AEZS-130 as a growth hormone ( GH ) stimulation test for the diagnosis of AGHD, has been completed. We are currently preparing for a pre-NDA meeting with the FDA in the upcoming months for the registration of AEZS-130 in the United States.

Key Developments for the Three Months Ended June 30, 2011

Status of our drug pipeline as at August 10, 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 colorectal cancer and multiple myeloma, as well as 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. The FDA has granted perifosine orphan-drug designation in multiple myeloma and in neuroblastoma and Fast Track designations in both refractory advanced colorectal cancer and multiple myeloma. 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, during the first quarter of 2011, to Yakult Honsha Co. Ltd. ( Yakult ) for Japan.

On April 4, 2011, we announced that two posters on perifosine were presented at the 102nd annual meeting of the AACR at the Orange County Convention Center in Orlando, Florida. Perifosine demonstrated antitumor activity in several gastric cancer cell lines. Furthermore, perifosine enhanced the antitumor activity of 5-FU in parts of the cell lines including 5-FU resistant cell lines. 5-FU is the active metabolite of the prodrug Xeloda, which is approved for the treatment of advanced gastric cancer in many countries including Japan and Korea.

Perifosine also markedly enhanced the antitumor activity of the cellular TRAIL based treatment and was able to overcome TRAIL resistance both in vitro and in vivo. The results are in line with other studies demonstrating the synergistic effects of perifosine with cytotoxic drugs, including bortezomib and 5-FU.

Corporate developments

During the three-month period ended June 30, 2011, we completed the drawdowns remaining under the February ATM Sales Agreement. During the quarter, we raised a total of $14.7 million in gross proceeds, bringing the total aggregate gross proceeds raised under the February ATM Sales Agreement, on a year-to-date basis, to $19.7 million.

On June 29, 2011, we entered into the June ATM Sales Agreement, under which we may, at our discretion, from time to time during the 24-month term of the agreement, sell up to 9.5 million of our common shares through ATM issuances on the Nasdaq Stock Market for aggregate gross proceeds not to exceed $24.0 million. The June ATM Sales Agreement, similar to the February ATM Sales Agreement, provides that common shares may be sold at market prices prevailing at the time of sale, and, as a result, prices may vary.

Subsequent to quarter-end

On July 27, 2011, we announced the completion of patient recruitment for the ongoing Phase 3 trial with perifosine in refractory advanced colorectal cancer. The trial, involving over 430 patients, is being conducted pursuant to an SPA with the FDA and with Fast Track Designation. This Phase 3 X-PECT trial is a randomized (1:1), double-blind trial comparing the efficacy and safety of perifosine + capecitabine vs. placebo + capecitabine in patients with refractory advanced colorectal cancer.

On July 26, 2011, we announced completion of our Phase 3 study with AEZS-130 as the first oral diagnostic test for AGHD. We are currently proceeding with detailed analyses of the data and preparing for a pre-NDA meeting with the FDA in the upcoming months, which would be followed by the filing of an NDA for the registration of AEZS-130 in the United States.

On July 12, 2011, we announced that the European Patent Office had granted a patent for the use of alkyl phosphocholines, more specifically perifosine (octadecyl 1,1-dimethylpiperidino-4-yl phosphate), in the preparation of a medicament for the treatment of benign and malignant tumors, prior to and/or during the treatment with approved anti-tumor anti-metabolites such as 5FU ( fluorouracil ) and capecitabine. The patent (EP #1 545 553) titled, Use of Alkyl Phosphocholines in Combination with Anti-Tumour Medicaments , became effective as of July 13, 2011, and will expire on July 28, 2023.

Subsequent to quarter-end, we issued a total of approximately 1.9 million common shares under the June ATM Sales Agreement for aggregate gross proceeds of $4.3 million, less cash and non-cash transaction costs totalling $0.3 million.

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 Healthcare Royalty Partners L.P. 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 $6.1 million and $13.2 million for the three-month and six-month periods ended June 30, 2011, respectively, as compared to $5.2 million and $10.9 million for the same periods 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 third quarter 2011 are expected to increase slightly, as compared to the second quarter of 2011, given a higher volume of Cetrotide sales, based on recently received firm orders from Merck Serono.

License fees and other revenues are expected to increase slightly in subsequent quarters of 2011, as compared to the second quarter of 2011, given expected future cost reimbursement billings to Keryx in connection with ongoing perifosine-related initiatives.

Cost of sales increased to $5.5 million and $11.5 million for the three-month and six-month periods ended June 30, 2011, respectively, as compared to $4.4 million and $9.0 million for the same periods in 2010. These increases are largely attributable to the comparative increase in sales of Cetrotide , as discussed above. Additionally, cost of sales as a percentage of sales and royalties increased to approximately 90% and 87% for the three-month and six-month periods ended June 30, 2011, respectively, compared to 85% and 83% for the same periods in 2010. Our lower margins are attributable to the increase in the sales of a dosing level of Cetrotide that is more costly to produce.

R&D costs, net of tax credits and grants, were $5.6 million and $11.1 million for the three-month and six-month periods ended June 30, 2011, respectively, compared to $5.4 million and $11.5 million for the same periods 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 and six-month periods ended June 30, 2011.

(in thousands, except percentages)

We expect net R&D costs to increase in the second half of 2011, as compared to the second quarter of 2011, as we continue to focus on the development of perifosine, AEZS-108 and AEZS-130. In particular, given the successful raising of additional capital via the recent ATM drawdowns, we plan to invest additional proceeds in efforts related to perifosine in multiple myeloma in Europe and for the purchase of raw materials in connection with ongoing efforts related to AEZS-108.

Whereas we had previously stated that we expect to incur a total of between $23.0 million and $25.0 million in net R&D costs for the twelve-month period ended December 31, 2011, we now expect, excluding the impact of unforeseen foreign exchange rate fluctuations, that net R&D costs will total approximately $27.0 million for the full year 2011, due to the additional investments discussed above. We note, however, that our R&D estimates may be revised in future quarters as we continue to advance our development activities and as new information becomes available. We also note that many perifosine-related development activities are sponsored by our North American license partner, Keryx and that we continue to seek government grants for our earlier-stage projects.

Selling, general and administrative ( SG&A ) expenses were $3.4 million and $6.6 million for the three-month and six-month periods ended June 30, 2011, respectively, as compared to $3.7 million and $6.8 million for the same periods in 2010.

We expect that SG&A expenses will increase slightly in the third quarter of 2011, as compared to the second quarter of 2011, given both the additional expected Cetrotide sales volume and the expected establishment of European marketing and sales efforts related to perifosine.

Net finance (costs) income, 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 and six-month periods ended June 30, 2011 totalled ($2.6 million) and ($4.5 million), respectively, as compared to $1.8 million and $3.4 million for the same periods in 2010, as presented below.

The significant increase in net finance costs during the three- and six-month periods ended June 30, 2011, as compared to the same periods in 2010, is due to the change in fair value of our warrant liability. That change results from the periodic mark-to-market revaluation, via the application of the Black-Scholes option pricing model, of currently outstanding share purchase warrants. The Black-Scholes mark-to-market warrant valuation most notably has been impacted by the market price of our common shares, which, on the Nasdaq market, has increased consistently from $1.72 as at December 31, 2010, to $2.20 as at June 30, 2011.

Additionally, our net finance costs increased during the three- and six-month periods ended June 30, 2011 from the same periods in 2010 due to higher foreign exchange losses, which in turn resulted primarily from the weakening of the US dollar against the euro during the first half of 2011. Since December 31, 2010, the US dollar lost approximately 8.4% 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. The aforementioned increases have been partially offset by the unrealized gains on our short-term investment, which is carried at fair value.

It can be noted that neither the losses resulting from the periodic mark-to-market valuation of our share purchase warrants nor the gains resulting from the fair value adjustments to our short-term investment has resulted in any cash disbursement or cash receipt during the three-month or six-month periods ended June 30, 2011 and 2010.

Net loss for the three-month and six-month periods ended June 30, 2011 was $10.6 million and $20.6 million, or $0.12 and $0.23 per basic and diluted share, respectively, compared to $6.2 million and $11.9 million, or $0.08 and $0.17 per basic and diluted share, for the same periods in 2010. This increase is mainly related to higher net finance costs, as discussed above, and, on a comparative year-to-date basis only, to higher income tax expense, which was payable in connection with the establishment of our licensing agreement with Yakult, as noted above.

Quarterly Consolidated Results of Operations Information

* 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 and 2011 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 June 30, 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 noted above; the receipt of net proceeds pursuant to drawdowns made in connection with the February ATM Sales Agreement, as discussed above; and, the comparative strengthening, in the first half 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 June 30, 2011 predominantly due to the change in fair value pursuant to the periodic mark-to-market revaluation of the underlying outstanding share purchase warrants, partly offset by the impact of warrant exercises during the six-month period ended June 30, 2011.

Non-financial liabilities increased from December 31, 2010 mainly as a result of the deferral of the upfront payment received in connection with our development, commercialization and licensing agreement entered into with Yakult, as well as due to the strengthening of the euro against the US dollar.

The net decrease in shareholders deficiency from December 31, 2010 to June 30, 2011 is attributable to an increase in share capital following the issuance of common shares pursuant to the aforementioned drawdowns made in connection with the February ATM Sales Agreement, partially offset by the increase in our deficit due to the net loss for the six months ended June 30, 2011 and by the increase in accumulated other comprehensive loss, which in turn is comprised of cumulative translation adjustments.

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 August 10, 2011, there were 97,088,126 common shares issued and outstanding, as well as 6,727,965 stock options outstanding. Share purchase warrants outstanding as at August 10, 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 the February ATM Sales Agreement, and we expect to continue to raise capital via drawdowns related to the June 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 the February ATM Sales Agreement and the June ATM Sales Agreement, as discussed above.

Our cash and cash equivalents amounted to $46.6 million as at June 30, 2011, compared to $32.0 million as at December 31, 2010. As at June 30, 2011, cash and cash equivalents of the Company included 1.4 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 June 30, 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 used in operating activities totalled $8.0 million and $7.2 million for the three-month and six-month periods ended June 30, 2011, respectively, compared to $6.6 million and $17.4 million for the same periods in 2010. The significant decrease in cash used in operating activities on a year-to-date basis 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, as well as to lower trade accounts payable and higher trade accounts receivable settlements.

We expect net cash used in operating activities to increase in the third quarter of 2011, as compared to the second quarter of 2011, as we increase our investment in perifosine and in AEZS-108, as discussed above.

Financing Activities

Cash flows provided by financing activities decreased to $16.3 million and to $21.4 million for the three-month and six-month periods ended June 30, 2011, respectively, as compared to $25.7 million for each of the corresponding periods in 2010. The significant decrease is primarily due to lower proceeds from offerings such as the drawdowns related to the February ATM Sales Agreement, discussed above, which resulted in the receipt of net cash proceeds of $19.2 million, partly offset by an increase in proceeds received following the exercise of share purchase warrants.

Subsequent to quarter-end, we raised an additional $4.2 million in net proceeds in connection with the June ATM Sales Agreement. As a result, our year-to-date cash flows provided by financing activities will increase further during the third quarter of 2011.

Critical Accounting Policies, Estimates and Judgments