Third Quarter 2008 Management s Discussion and Analysis of Financial Condition and Results of Operations The following analysis provides a review of the Company s results of operations, financial condition and cash flows

Management s Discussion and

of Financial Condition and

Results of Operations

The following analysis provides a review of

the Company s results of operations, financial condition and cash flows for the

three-month and nine-month periods ended September 30, 2008 and 2007. In this Management s

Discussion and Analysis (MD&A), the Company , we , us , and our mean

terna Zentaris Inc. and its subsidiaries. This discussion should be read in conjunction

with the information contained in terna Zentaris Inc. s interim consolidated

financial statements and related notes for the three-month and nine-month

periods ended on September 30, 2008 and 2007. Our consolidated financial

statements are reported in United States dollars and have been prepared in

accordance with Generally Accepted Accounting Principles in Canada, or Canadian

Generally Accepted Accounting Principles (Canadian GAAP). All amounts are in US dollars unless otherwise indicated.

Inc. (TSX: AEZ, NASDAQ: AEZS) is a global biopharmaceutical company focused on

endocrine therapy and oncology.

pipeline encompasses compounds at all stages of development, from drug

discovery through marketed products. The two highest priority clinical programs

are our lead value driver, cetrorelix for benign prostatic hyperplasia (BPH)

and our lead oncology program, AEZS-108 for advanced endometrial and advanced

2008, Juergen Engel, Ph.D., was appointed President and CEO of the Company, replacing Juergen Ernst who had

been acting as Interim President and CEO since April 2008. Mr. Ernst,

the former Chairman of the Company, was appointed Executive Chairman effective September 1,

We completed patient recruitment for

the second efficacy trial of our Phase 3 program in BPH with our lead compound,

We entered the second stage of

recruitment for our Phase 2 trial in ovarian cancer with AEZS-108. The trial is

part of a Phase 2 program in gynaecological cancers which will include up to 82

license and cooperation agreement for the commercialization of cetrorelix in

BPH, with Handok Pharmaceuticals Co., Ltd. (Handok) for the Korean market.

Furthermore, subsequent to quarter-end, we signed another agreement with Handok for the

commercialization of ozarelix in BPH also for the Korean market.

We regained worldwide rights from

Ardana plc (LSE: ARA) for the Growth Hormone Secretagogue (GHS) compound,

AEZS-130. In 2002, we had granted Ardana an exclusive worldwide license to

develop and market AEZS-130. A Phase 1 clinical trial has been completed with

AEZS-130 for therapeutic use in growth hormone deficiencies. Future development

options are currently being evaluated for the use of this compound.

On November 11, 2008, we agreed to sell to

Cowen Healthcare Royalty Partners, L.P. ( CHRP ), our rights to royalties on

future sales of Cetrotide covered

by our license agreement with Merck Serono. The license agreement between terna

Zentaris and Merck Serono was signed in 2000 and granted Merck Serono exclusive

rights to market, distribute and sell

Cetrotide worldwide, with the exception of

Japan, in the field of in vitro

fertilization. On closing, terna

Zentaris will receive $52.5 million from CHRP. In addition, contingent on

2010 net sales of Cetrotide reaching a specified level, we would receive

an additional payment of $2.5 million from CHRP.

Under the terms of the agreement, if cetrorelix which is currently in

Phase 3 clinical trials for the treatment of benign prostatic hyperplasia, is

approved for sale by the European regulatory authorities in an indication other

than in vitro fertilization, terna Zentaris

has agreed to make a one-time cash payment to CHRP for an amount ranging from

$5 million up to a maximum of $15 million. The amount which would be due

to CHRP will be higher the earlier the product receives European regulatory

The transaction is expected to close on or before December 2,

Status of our drug pipeline

as of November 12, 2008

In September 2008, we

reported the completion of patient recruitment for the second efficacy trial of

this program, which involves approximately 400 patients primarily in Europe.

In April 2008, we reported

the completion of patient recruitment for the first efficacy trial of this same

program. The study involves approximately 600 patients primarily in the United

States and Canada, with additional sites in Europe.

In May 2008, we had also

reported first patient dosing for the safety trial, an open-label,

single-armed, multi-center study involving approximately 500 patients in North

First efficacy results of this

Phase 3 program are expected in the third quarter of 2009.

In July 2008, we signed a

license and cooperation agreement for the commercialization of cetrorelix in

BPH with Handok Pharmaceuticals Co., Ltd. (Korea Stock Exchange: Koscom) for

the Korean market, providing us with upfront and future milestone payments

based on approval, launch and future sales of cetrorelix in this indication.

In September 2008, we announced

that we had entered the second stage of patient recruitment for our Phase 2

trial in ovarian cancer with AEZS-108, a luteinizing hormone-releasing hormone

(LHRH) agonist linked to doxorubicin. The trial is part of a Phase 2

program in gynaecological cancers which will include up to 82 women (up to 41

with ovarian cancer and up to 41 with endometrial cancer).

Subsequent to quarter-end, we

signed a license and cooperation agreement for the commercialization of

ozarelix in BPH with Handok for the Korean market, providing us with upfront

and future milestone payments based on approval, launch and future sales of

Consolidated Results of Operations

For the three-month and nine-month periods ended September 30,

2007, consolidated revenues and expenses of Echelon Biosciences have been

reclassified as discontinued operations. Since we disposed of our entire

position in Echelon Biosciences in November 2007, going forward we will no

longer have access to liquidity or cash flows from said company.

The following table sets forth selected Canadian GAAP consolidated

financial data in thousands of US dollars, except shares and per share data.