Exhibit 1.2







CONSOLIDATED
FINANCIAL STATEMENTS





Report
of Independent Registered Accounting Firm on Internal Controls





To the
Shareholders and Board of Directors of MDS Inc.





We have
audited MDS Inc.’s internal control over financial reporting as of October 31,
2009, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria).  MDS Inc.’s management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s annual report on internal control over
financial reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. The following
material weakness has been identified and included in management’s assessment.
MDS Inc. (“the Company”)did not maintain
effective processes and controls over the accounting and reporting of complex
and non-routine transactions. Specifically, the design of an integrated system
of controls over the accounting and reporting for discontinued operations,
including income taxes, was not adequate. In addition, the technical complexity
and volume of work associated with the Company’s strategic repositioning plan
placed substantial demands on the Company’s tax resources, which in turn
diminished the operating effectiveness of their internal controls for both
routine and non-routine income tax accounting and reporting.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated statements of financial
position of MDS Inc. as of October 31, 2009 and 2008 and the related
consolidated statements of operations, shareholders’ equity and cash flows for
each of the three years in the period ended October 31, 2009. This material
weakness was considered in determining the nature, timing and extent of audit
tests applied in our audit of the 2009 financial statements and this report does
not affect our report dated January 25, 2010, which expressed an unqualified
opinion on those financial statements.





In our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, MDS Inc. has not
maintained effective internal control over financial reporting as of October 31,
2009, based on the COSO criteria.




















Toronto,
Canada


January
25, 2010











CONSOLIDATED
FINANCIAL STATEMENTS





Report
of Independent Registered Public Accounting Firm





To the
Shareholders of MDS Inc.





We have
audited the consolidated statements of financial position of MDS Inc. (the
“Company”) as of October 31, 2009 and 2008 and the related consolidated
statements of operations, shareholders’ equity and cash flows for each of the
three years in the period ended October 31, 2009.  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 Canadian generally accepted auditing
standards and 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  about whether the financial
statements are free of material misstatement.  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, these consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of October 31, 2009 and 2008
and the result of its operations and its cash flows for each of the three years
in the period ended


October
31, 2009 in conformity with US generally accepted accounting
principles.





As
discussed in Note 2 to the consolidated financial statements, effective November
1, 2007, the Company adopted Accounting Standards Codification 740-10, “Income
Taxes” (formerly FIN 48, “Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109”).





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of October 31, 2009, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated January 25, 2010
expressed an opinion that MDS Inc. has not maintained effective internal control
over financial reporting as of October 31, 2009.






















Toronto,
Canada


January
25, 2010














CONSOLIDATED
      STATEMENTS OF FINANCIAL POSITIONAs
      of October 31
              
              (millions
      of U.S. dollars, except share amounts)
            
            2009
            2008ASSETSCurrent
      assetsCash
      and cash equivalents
            $
            298
            $
            117Accounts
      receivable (Note
      4)
            
            45
            
            49Notes
      receivable (Notes 5 and
      10)
            
            16
            
            75Inventories
      (Note
      6)
            
            28
            
            24Income
      taxes recoverable (Note
      22)
            
            2
            
            56Current
      portion of deferred tax assets (Note
      22)
            
            16
            
            22Other
      current assets (Note
      8)
            
            13
            
            3Assets
      of discontinued operations (Note
      3)
            
            941
            
            1,245Total
      current assets
            
            1,359
            
            1,591Property,
      plant and equipment (Note
      7)
            
            131
            
            124Deferred
      tax assets (Note
      22)
            
            39
            
            -Long-term
      investments (Note
      9)
            
            6
            
            16Other
      long-term assets (Note
      10)
            
            91
            
            105Total
      assets
            $
            1,626
            $
            1,836LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
            $
            26
            $
            31Accrued
      liabilities (Note
      13)
            
            82
            
            84Current
      portion of deferred revenue (Note
      15)
            
            5
            
            6Current
      portion of long-term debt (Note
      14)
            
            30
            
            17Liabilities
      of discontinued operations (Note
      3)
            
            214
            
            303Total
      current liabilities
            
            357
            
            441Long-term
      debt (Note
      14)
            
            237
            
            257Deferred
      revenue (Note
      15)
            
            14
            
            9Deferred
      tax liabilities (Note
      22)
            
            -
            
            21Other
      long-term liabilities (Note
      16)
            
            24
            
            18Total
      liabilities
            
            632
            
            746Shareholders’
      equityCommon
      shares at par  – Authorized shares: unlimited; Issued and
      outstanding shares:
              120,137,229
      and 120,137,229 as of October 31, 2009 and October 31, 2008, respectively
      (Note
      18)
            
            489
            
            489Additional
      paid-in capital
            
            79
            
            75Retained
      earnings
            
            166
            
            301Accumulated
      other comprehensive income
            
            260
            
            225Total
      shareholders’ equity
            
            994
            
            1,090Total
      liabilities and shareholders’ equity
            $
            1,626
            $
            1,836





Incorporated
under the Canadian Business Corporations Act


Commitments
and contingencies (Note
27)


The
accompanying notes form an integral part of these consolidated financial
statements.















































CONSOLIDATED
      STATEMENTS OF OPERATIONSYears
      ended October 31
              
              (millions
      of U.S. dollars, except per share amounts)
            
            2009
            2008
            2007Revenues
            $
            231
            $
            296
            $
            290Costs
      and expensesDirect
      cost of revenues
            
            122
            
            153
            
            150Selling,
      general and administration
            
            79
            
            105
            
            122Research
      and development
            
            3
            
            3
            
            4Depreciation
      and amortization
            
            24
            
            25
            
            23MAPLE
      Facilities write-off
            
            -
            
            341
            
            -Restructuring
      charges, net (Note
      20)
            
            9
            
            1
            
            9Change
      in fair value of embedded derivatives
            
            (8)
            
            15
            
            (4)Other
      expenses (income), net (Note
      21)
            
            4
            
            8
            
            (5)Total
      costs and expenses
            
            233
            
            651
            
            299Operating
      loss from continuing operations
            
            (2)
            
            (355)
            
            (9)Interest
      expense
            
            (8)
            
            (3)
            
            (1)Interest
      income
            
            8
            
            12
            
            23Change
      in fair value of interest rate swaps
            
            -
            
            2
            
            1(Loss)
      income from continuing operations before income taxes
            
            (2)
            
            (344)
            
            14Income
      tax expense (recovery) (Note
      22)-
      current
            
            11
            
            33
            
            (9)-
      deferred
            
            2
            
            (131)
            
            1113
            
            (98)
            
            2(Loss)
      income from continuing operations
            
            (15)
            
            (246)
            
            12(Loss) income from discontinued
      operations, net of income taxes(Note
      3)
            
            (120)
            
            (307)
            
            769Net
      (loss) income
            $
            (135)
            $
            (553)
            $
            781Basic (loss) earnings per share(Note
      17)-
      from continuing operations
            $
            (0.12)
            $
            (2.02)
            $
            0.09-
      from discontinued operations
            
            (1.00)
            
            (2.52)
            
            5.84Basic
      (loss) earnings per share
            $
            (1.12)
            $
            (4.54)
            $
            5.93Diluted (loss) earnings per
      share(Note
      17)-
      from continuing operations
            $
            (0.12)
            $
            (2.02)
            $
            0.09-
      from discontinued operations
            
            (1.00)
            
            (2.52)
            
            5.83Diluted
      (loss) earnings per share
            $
            (1.12)
            $
            (4.54)
            $
            5.92





The
accompanying notes form an integral part of these consolidated financial
statements.


























CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)


Additional
              Paid-in
              Capital
            Retained
              Earnings
            Accumulated
              Other
              Comprehensive
      Income
            Total(millions of U.S.
      dollars, except Common shares in thousands)
            Common
      SharesNumber
            AmountBalance
      as of October 31, 2006
            144,319
            $    566
            $          69
            $      421
            $                 328
            $1,384Components
      of comprehensive income:Net
      income
            -
            -
            -
            781
            -
            781Foreign
      currency translation
            -
            -
            -
            -
            139
            139Reclassification
      of realized gains, net of tax of $nil
            -
            -
            -
            -
            (4)
            (4)Unrealized
      gain on net investment hedges, net of tax of $(8)
            -
            -
            -
            -
            50
            50Unrealized
      loss on available-for-sale securities, net of tax of $2
            -
            -
            -
            -
            (3)
            (3)Unrealized
      gain on derivatives designated cash flow hedges, net of tax of
      $(2)
            -
            -
            -
            -
            8
            8Adoption
      of accounting standard for defined benefit pension and other
      post-retirement plans, net of tax of $(5)
            -
            -
            -
            -
            11
            11Total
      comprehensive income
            
            
            
            
            
            982Dividends
            -
            -
            -
            (4)
            -
            (4)Issuance
      of Common shares
            108
            2
            -
            -
            -
            2Repurchase
      and cancellation of Common shares
            (22,831)
            (90)
            -
            (318)
            (33)
            (441)Stock
      options exercised
            982
            15
            (1)
            -
            -
            14Stock-based
      compensation
            -
            -
            4
            -
            -
            4Balance
      as of October 31, 2007
            122,578
            493
            72
            880
            496
            1,941Components
      of comprehensive loss:Net
      loss
            -
            -
            -
            (553)
            -
            (553)Foreign
      currency translation
            -
            -
            -
            -
            (195)
            (195)Reclassification
      of realized loss, net of tax of $nil
            -
            -
            -
            -
            3
            3Unrealized
      loss on net investment hedges, net of tax of $10
            -
            -
            -
            -
            (54)
            (54)Unrealized
      loss on available-for-sale securities, net of tax of $nil
            -
            -
            -
            -
            (2)
            (2)Unrealized
      loss on derivatives designated as cash flow hedges, net of tax of
      $5
            -
            -
            -
            -
            (10)
            (10)Pension
      liability adjustments, net of tax of $3
            -
            -
            -
            -
            (7)
            (7)Total
      comprehensive loss
            
            
            
            
            
            (818)Repurchase
      and cancellation of Common shares
            (2,903)
            (12)
            -
            (26)
            (6)
            (44)Stock
      options exercised
            462
            7
            -
            -
            -
            7Stock-based
      compensation
            -
            -
            6
            -
            -
            6Other
            -
            1
            (3)
            -
            -
            (2)Balance
      as of October 31, 2008
            120,137
            489
            75
            301
            225
            1,090Components
      of comprehensive loss:Net
      loss
            -
            -
            -
            (135)
            -
            (135)Foreign
      currency translation
            -
            -
            -
            -
            39
            39Reclassification
      of realized foreign currency translation gain on
    divestitures
            
            
            
            
            (12)
            (12)Reclassification of realized
      loss, net of tax of$(3)
            -
            -
            -
            -
            5
            5Unrealized gain on net
      investment hedges, net of tax of$(4)
            -
            -
            -
            -
            20
            20Unrealized gain on derivatives
      designated as cash flow hedges, net of tax of$nil
            -
            -
            -
            -
            1
            1Pension liability adjustments,
      net of tax of$6
            -
            -
            -
            -
            (13)
            (13)Other
            -
            -
            -
            -
            (5)
            (5)Total
      comprehensive loss
            
            
            
            
            
            (100)Stock-based
      compensation
            -
            -
            4
            -
            -
            4Balance
      as of October 31, 2009
            120,137
            $489
            $79
            $166
            $260
            $
      994




The
accompanying notes form an integral part of these consolidated financial
statements.














CONSOLIDATED
      STATEMENTS OF CASH FLOWSYears
      ended October 31
              
              (millions
      of U.S. dollars)
            
            2009
            
            2008
            2007Operating
      activitiesNet
      (loss) income
            $
            (135)
            $
            (553)
            $
            781(Loss)
      income from discontinued operations, net of income taxes
            
            (120)
            
            (307)
            
            769(Loss)
      income from continuing operations
            
            (15)
            
            (246)
            
            12Adjustments
      to reconcile net (loss) income to cash provided by (used in) operating
      activities relating to continuing operations (Note
      23):Items
      not affecting current cash flows
            
            3
            
            243
            
            16Changes
      in operating assets and liabilities
            
            93
            
            (107)
            
            128Cash
      provided by (used in) operating activities of continuing
      operations
            
            81
            
            (110)
            
            156Cash
      provided by (used in) operating activities of discontinued
      operations
            
            94
            
            89
            
            (36)Cash
      provided by (used in) operating activities
            
            175
            
            (21)
            
            120Investing
      activitiesPurchase
      of property, plant and equipment
            
            (10)
            
            (13)
            
            (15)Proceeds
      on sale of property, plant and equipment
            
            -
            
            2
            
            4Purchase
      of short-term investments
            
            -
            
            -
            
            (118)Proceeds
      on sale of short-term investments
            
            -
            
            101
            
            165Proceeds
      on sale of long-term investments
            
            -
            
            7
            
            13Proceeds
      on sale of businesses
            
            -
            
            15
            
            -Decrease
      (increase) in restricted cash
            
            (3)
            
            1
            
            (5)Other
            
            -
            
            -
            
            (15)Cash
      provided by (used in) investing activities of continuing
      operations
            
            (13)
            
            113
            
            29Cash
      provided by (used in) investing activities of discontinued
      operations
            
            12
            
            (53)
            
            273Cash
      provided by (used in) investing activities
            
            (1)
            
            60
            
            302Financing
      activitiesRepayment
      of long-term debt
            
            (6)
            
            (79)
            
            (8)Payment
      of cash dividends
            
            -
            
            -
            
            (3)Issuance
      of shares
            
            -
            
            7
            
            15Repurchase
      of shares
            
            -
            
            (44)
            
            (441)Cash
      used in financing activities of continuing operations
            
            (6)
            
            (116)
            
            (437)Cash
      used in financing activities of discontinued operations
            
            (6)
            
            (10)
            
            (12)Cash
      used in financing activities
            
            (12)
            
            (126)
            
            (449)Effect
      of foreign exchange rate changes on cash and cash
    equivalents
            
            19
            
            (18)
            
            10Net
      increase (decrease) in cash and cash equivalents during the
      year
            
            181
            
            (105)
            
            (17)Cash
      and cash equivalents, beginning of year
            
            117
            
            222
            
            239Cash
      and cash equivalents, end of year
            $
            298
            $
            117
            $
            222Cash
      interest paid
            $
            15
            $
            18
            $
            22Cash
      taxes (refunded) paid
            $
            (7)
            $
            88
            $
            15





The
accompanying notes form an integral part of these consolidated financial
statements.











1.
            Nature
      of Operations





MDS Inc.
(MDS or the Company) operates as a global life sciences company that provides
market-leading products and services that customers need for the development of
drugs, diagnosis and treatment of disease. The Company has been operating with
three business segments: MDS Nordion, which is focused on medical imaging and
radiotherapeutics, and sterilization technologies; MDS Pharma Services, which
provides pharmaceutical contract research; and MDS Analytical Technologies,
which involves the development, manufacture and sale of analytical
instruments.





Key
events of fiscal 2009


On
February 2, 2009, MDS formed a Special Committee to continue its review of
strategic alternatives to enhance shareholder value. As a result of this review,
the following key events occurred in fiscal 2009:





•June 1,
    2009
            -
            MDS
      announces its intent to divest MDS Pharma Services Late Stage operations
      (Phase II-IV and Central Labs)•July 1,
    2009
            -
            MDS
      sells MDS Pharma Services Phase II-IV for $50 million in
    cash•September 2,
      2009
            -
            MDS
      announces strategic repositioning-
            MDS
      announces its intention to sell its remaining MDS Pharma Services Early
      Stage operations-
            MDS
      announces agreement to sell MDS Analytical Technologies for $650 million
      in cash•October 30,
      2009
            -
            MDS
      sells MDS Pharma Services Central Labs for $6 million in
    cash





As a
result of these key events, the Company has reported MDS Pharma Services and MDS
Analytical Technologies as discontinued operations in the consolidated
statements of operations for all periods presented herein. Details of the
discontinued operations are provided in Note 3, “Divestitures and Discontinued
Operations”. Certain other notes contain information on the discontinued
operations, including Note 2, “Summary of Significant Accounting
Policies”, Note 11,“Impairment of Long-Lived Assets”, Note 12, “Goodwill”, Note 19, “Financial Instruments and Financial
Risk”, Note 24, “Stock-Based Compensation”,
Note 25, “Employee
Benefits”,  and Note 30, “Subsequent
Events”.





The
Company’s remaining business segment, MDS Nordion, is included and reported as
continuing operations for all periods presented herein. Upon completion of the
aforementioned divestitures, MDS expects to remain a publicly traded entity
consisting primarily of the MDS Nordion business and other corporate
functions.





2.
            Summary
      of Significant Accounting Policies





Basis
of presentation


The
consolidated financial statements have been prepared in United States (U.S.)
dollars and in accordance with United States generally accepted accounting
principles (U.S. GAAP) applied on a consistent basis. On July 1, 2009, the
Financial Accounting Standards Board (FASB) issued Accounting Standards
Codification (ASC) 105, “Generally Accepted Accounting
Principles” (ASC 105), which establishes the ASC as the authoritative
source of U.S. GAAP. The issuance of ASC 105 does not change U.S. GAAP and had
no material impact on the Company’s consolidated financial
statements.





Beginning
with its fiscal 2007 year-end, the Company adopted the U.S. dollar as its
reporting currency and U.S. GAAP as its primary reporting standard for the
presentation of its consolidated financial statements.





Principles
of consolidation


The
consolidated financial statements of the Company reflect the assets and
liabilities and results of operations of all subsidiaries and entities of which
the Company is the primary beneficiary. All significant intercompany accounts
and transactions have been eliminated.





The
equity method of accounting is used for investments in entities for which the
Company does not have the ability to exercise control, but has significant
influence.





Use
of estimates


The
preparation of the consolidated financial statements requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Estimates
are used in accounting for, among other items, revenues from long-term
contracts, inventory valuation, residual values of leased assets, allowance for
credit losses on receivables, the amount and timing of future cash flows
expected to be received on long-term investments, projections related to
stock-based compensation plans, actuarial assumptions for the pension and other
post-employment benefit
plans, future cash flows associated with goodwill and long-lived asset
valuations, and environmental and warranty reserves. The Company’s estimates are
based on the facts and circumstances available at the time estimates are made,
historical experience, risk of loss, general economic conditions and trends, and
the Company’s assessments of the probable future outcomes of these matters.
Actual results could differ from those estimates. Estimates and assumptions are
reviewed periodically, and the effects of changes, if any, are reflected in the
consolidated statements of operations in the period that they are
determined.





Cash
and cash equivalents


Cash and
cash equivalents include cash on hand, balances with banks, demand deposits, and
investments with maturities of three months or less at the time the investment
is made. The fair value of cash and cash equivalents approximates the amounts
shown in the consolidated financial statements.





Restricted
cash


Restricted
cash, which is included in other long-term assets, includes cash held for
specific purposes related to divestitures or liability insurance.





Allowance
for doubtful accounts


The
Company maintains bad debt reserves based on a variety of factors, including the
length of time the receivables are past due, macroeconomic conditions,
significant one-time events, historical experience and the financial condition
of customers. The Company records a specific reserve for individual accounts
when it becomes aware of a customer’s inability to meet its financial
obligations, such as in the case of bankruptcy filings or deterioration in the
customer’s operating results or financial position. If circumstances related to
a customer change, the Company would further adjust estimates of the
recoverability of receivables.





Inventories


Inventories
of raw materials and supplies are recorded at the lower of cost, determined on a
first-in, first-out (FIFO) basis, or market.  Finished goods and
work-in-process include the cost of material, labor and manufacturing overhead
and are recorded on a FIFO basis at the lower of cost or market.





Property,
plant and equipment


Property,
plant and equipment, including assets under capital leases, are carried in the
accounts at cost less accumulated depreciation.  Gains and losses
arising on the disposal of individual assets are recognized in income in the
period of disposal.





The costs
associated with modifications to facilities owned by others to permit isotope
production are deferred and recorded as facility modifications and amortized
over the expected contractual production.





Costs,
including financing charges and certain design, construction and installation
costs, related to assets that are under construction and are in the process of
being readied for their intended use are recorded as construction in-progress
and are not subject to depreciation.





Depreciation,
which is recorded from the date on which each asset is placed into service, is
generally provided for on a straight-line basis over the estimated useful lives
of the property, plant and equipment as follows:





Buildings
            25
      - 40 yearsEquipment
            3
      - 20 yearsFurniture
      and fixtures
            3
      - 10 yearsComputer
      systems
            3
      -  7 yearsLeaseholds
      improvements
            Term
      of the lease plus renewal periods, when renewal is reasonably
      assured





Asset
retirement obligations


The
Company records asset retirement obligation costs associated with the retirement
of tangible long-lived assets. The Company reviews legal obligations associated
with the retirement of these long-lived assets. If it is determined that a legal
obligation exists and it is probable that this liability will ultimately be
realized, the fair value of the liability for an asset retirement obligation is
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added to the carrying
amount of the associated asset and this additional carrying amount is
depreciated over the expected life of the asset. The present value of the asset
retirement obligation is accreted with the passage of time to its expected
settlement fair value.





Capitalized
software


Capitalized
software primarily relates to MDS Pharma Services and is included in assets of
discontinued operations (Note 3) and, therefore, is no longer being depreciated.
The Company capitalizes certain internal and external costs incurred to acquire
or create internal use software, principally related to software coding,
designing system interfaces, and installation and testing of the software. Costs
incurred in the preliminary project stage and the post-implementation stage are
expensed as incurred. The Company amortizes capitalized costs using the
straight-line method over the estimated useful life of the software, generally
over a period of three to seven years.





Goodwill


Goodwill
primarily relates to MDS Pharma Services and MDS Analytical Technologies and is
included in assets of discontinued operations (Note 3). Within continuing
operations, a total of $2 million goodwill relates to MDS Nordion. All business
combinations are accounted for using the purchase method. Goodwill represents
the excess of the purchase price and related costs over the fair value assigned
to the net tangible and intangible assets of the business acquired. Goodwill is
not amortized but is tested for impairment, at least annually, at the reporting
unit level. This same impairment test will be performed at other times during
the course of the year should an event occur which suggests that the
recoverability of goodwill should be reconsidered.





Intangible
assets


Intangible
assets all relate to MDS Analytical Technologies and are included in assets of
discontinued operations (Note 3). Intangible assets consist of acquired
technology, brands, and licenses. Intangible assets acquired through asset
acquisitions or business combinations are initially recognized at fair value
based on an allocation of the purchase price.





Licenses
are amortized on a straight-line basis over their useful life, which is the term
of the license. Acquired technology represents the value of proprietary
‘‘know-how’’ that was technologically feasible as of the acquisition date.
Acquired technology is amortized on a straight-line basis over its estimated
useful life, which ranges between two and seven years.





Brands
represent the value placed on a corporate brand as well as the product brands
used to promote the Company and its products in the
marketplace.  Brands have a definite life and are amortized on a
straight-line basis over their estimated useful life.





The
Company evaluates the reasonableness of the estimated useful lives of these
intangible assets on an annual basis or at other times during the course of the
year should an event occur which suggests that the useful lives should be
reconsidered.





The
Company immediately expenses acquired in-process research and
development.





Impairment
of long-lived assets


The
Company evaluates the carrying value of long-lived assets, including property,
plant and equipment, for potential impairment when events and circumstances
warrant a review. Factors that the Company considers important that could
trigger an impairment review include, but are not limited to, significant
underperformance relative to historical or projected future operating results,
significant changes in the manner of use of the acquired assets or the strategy
for the Company’s overall business, significant negative industry or economic
trends, a significant adverse legal or regulatory development, a significant
decline in the Company’s stock price for a sustained period, and the Company’s
market capitalization relative to its net book value.





The
carrying value of a long-lived asset is considered impaired when the anticipated
net recoverable amount of the asset is less than its carrying
value.  In that event, a loss is recognized in an amount equal to the
difference between the carrying value and fair value less costs of disposal by a
charge to income.  The anticipated net recoverable amount for a
long-lived asset is an amount equal to the anticipated undiscounted cash flows
net of directly attributable general and administration costs, carrying costs,
and income taxes, plus the expected residual value, if any.





When
required, the fair values of long-lived assets are estimated using accepted
valuation methodologies, such as discounted future net cash flows, earnings
multiples, or prices for similar assets, whichever is most appropriate under the
circumstances. See details on the impairment of long-lived assets in Note 11,
“Impairment of Long-Lived
Assets”, which is reported in discontinued operations (Note
3).





Long-term
investments


The
Company accounts for long-term investments where it has the ability to exercise
significant influence using the equity method of accounting. In situations where
the Company does not exercise significant influence over a long-term investee
that is not publicly listed, the investments are recorded at cost. Investments
in public companies are accounted for at fair value. The Company periodically reviews
these investments for impairment. In the event the carrying value of an
investment exceeds its fair value and the decline in fair value is determined to
be other than temporary, the Company writes down the value of the investment to
its fair value.





Leases


Leases
entered into by the Company in which substantially all of the benefits and risks
of ownership are transferred to the Company are recorded as obligations under
capital leases, and under the corresponding category of property, plant and
equipment. Obligations under capital leases reflect the present value of future
lease payments, discounted at an appropriate interest rate, and are reduced by
rental payments net of imputed interest. Property, plant, and equipment under
capital leases is depreciated, to the extent that these assets are in continuing
operations, based on the useful life of the asset.  All other leases
in continuing operations are classified as operating leases and leasing costs,
including any rent holidays, leasehold incentives, and rent concessions, are
amortized on a straight-line basis over the lease term.





Revenue
recognition


Revenues
are recorded when title to goods passes or services are provided to customers,
the price is fixed or determinable, and collection is reasonably assured. For
the majority of product revenues, title passes to the buyer at the time of
shipment and revenue is recorded at that time.





The
Company recognizes revenue and related costs for arrangements with multiple
deliverables as each element is delivered or completed based upon its relative
fair value. If a fair value is not available for any undelivered element,
revenue for all elements is deferred until delivery is completed. When a portion
of the customer’s payment is not due until acceptance, the Company defers that
portion of the revenue until acceptance has been obtained. Revenue for training
is deferred until the service is completed.  Revenue for extended
service contracts is recognized ratably over the contract period. Provisions for
discounts, warranties, rebates to customers, returns and other adjustments are
provided for in the period the related sales are recorded.





A
significant portion of MDS Pharma Services revenues, which is included in
discontinued operations (Note 3), relate to research services revenues provided
under long-term contracts that can extend from several months to several years.
Revenues on these contracts are recognized using the percentage-of-completion
method based on a proportional performance basis using output as a measure of
performance. Losses, if any, on these contracts are provided for in full at the
time such losses are identified. Services performed in advance of billings are
recorded as unbilled revenue pursuant to the contractual terms. In general,
amounts become billable upon the achievement of certain milestones or in
accordance with predetermined payment schedules. Changes in the scope of work
generally result in a renegotiation of contract terms. Renegotiated amounts are
not included in net revenues until earned and realization is assured. Billings
in excess of services performed to date or in excess of costs plus estimated
profits on contracts in progress are included in deferred revenue in
“Liabilities of discontinued operations”. Customer advances on contracts in
progress are included in “Liabilities of discontinued operations”.





Reimbursement
revenues relate to MDS Pharma Services, which is included in discontinued
operations (Note 3). In connection with the management of clinical trials, the
Company pays, on behalf of its customers, fees to physicians and medical
establishments acting as clinical trial investigators, fees to certain
volunteers in clinical trials, as well as other out-of-pocket costs for items
such as travel, printing, meetings and couriers. The Company is reimbursed at
cost, without mark-up or profit, for these expenditures. Amounts paid to
volunteers and other out-of-pocket costs are reflected in operating expenses as
reimbursed expenses, while the reimbursements due are reported as reimbursement
revenues. Revenue and expense associated with fees paid to investigators and the
associated reimbursement are netted in discontinued operations as MDS Pharma
Services acts as an agent on behalf of the pharmaceutical company sponsors with
regard to investigator payments.





Warranty
costs


A
provision for warranties is recognized when the underlying products or services
are recorded as revenues. The provision is based on estimated future costs using
historical labor and material costs to estimate costs that will be incurred in
the warranty period.





Stock-based
compensation


The fair
value of stock options granted on and after November 1, 2003 is recognized as
compensation expense on a straight-line basis over the applicable stock option
vesting period. The expense is included in selling, general, and administration
expenses in the consolidated statements of operations and as additional paid-in
capital grouped within shareholders’ equity on the consolidated statements of
financial position. The consideration received on the exercise of stock options
is credited to share capital at the time of exercise along with the associated
amount of additional paid-in capital.





Certain
incentive compensation plans of the Company base the determination of
compensation to be paid in the future on the price of the Company’s publicly
traded shares at the time of payment or time of the grant date. Expenses related
to these plans are recorded as a liability and charged to income over the period
in which the amounts are earned, based on an estimate of the current fair value
of amounts that will be paid in the future.





Stock-based
compensation expenses (Note 24) relating to certain employees of MDS Analytical
Technologies and MDS Pharma Services are included in the results of discontinued
operations (Note 3).





Pension,
post-retirement and other post-employment benefit plans


The
Company offers a number of benefit plans that provide pension and other
post-retirement benefits. The current service cost of benefit plans is charged
to income. Cost is computed on an actuarial basis using the projected benefits
method and based on management’s best estimates of investment yields, salary
escalation, and other factors.





The
Company recognizes the funded status of its defined benefit plans on its
consolidated statements of financial position; recognizes gains, losses, and
prior service costs or credits that arise during the period that are not
recognized as components of net periodic benefit cost as a component of
accumulated other comprehensive income, net of tax; measures its defined benefit
plan assets and obligations as of the date of the Company’s fiscal year-end
consolidated statements of financial position; and discloses additional
information in the notes to the consolidated financial statements about certain
effects on net periodic benefit cost for the next fiscal year that arise from
delayed recognition of the gains or losses, prior service costs or credits, and
transition assets or obligations.





The
expected costs of post-employment benefits, other than pensions, for active
employees are accrued in the years in which employees provide service to the
Company. Adjustments resulting from plan amendments, experience gains and
losses, or changes in assumptions are amortized over the remaining average
service term of active employees. Other post-employment benefits are recognized
when the event triggering the obligation occurs.





Research
and development


The
Company conducts various research and development programs and incurs costs
related to these activities, including employee compensation, materials,
professional services, facilities costs, and equipment depreciation. Research
and development programs costs, including those internally processed, are
expensed in the periods in which they are incurred.





Income
taxes


Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The Company provides a valuation allowance against its
deferred tax assets when it believes that it is more likely than not that the
asset will not be realized.





Investment
tax credits related to the acquisition of assets are deferred and amortized to
income on the same basis as the related assets, while those related to current
expenses are included in the determination of income for the
year.  All non-refundable investment tax credits recognized in income
are recorded as a reduction in income tax expense for the year. Refundable tax
credits are recorded as a reduction in the related expense.





On
November 1, 2007, the Company adopted the provisions of ASC 740-10, “Uncertainty in Income Taxes”
(formerly, FIN 48, “Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
109”) (ASC 740-10), which clarifies accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements and prescribes a
recognition threshold of more likely than not to be sustained upon audit
examination. See Note 22 for more information regarding the Company’s adoption
of


ASC
740-10.





Earnings per
share


Basic
earnings per share is calculated by dividing net income by the
weighted average number of Common shares outstanding during the
year.





Diluted
earnings per share has been calculated using the treasury stock method, by
dividing net income available to common shareholders by the sum of the weighted
average number of Common shares outstanding and all additional Common shares
that would have been outstanding shares arising from the exercise of potentially
dilutive stock options during the year.





Foreign
currency translation


Although
the Company reports its financial results in U.S. dollars, the functional
currency of the Company’s Canadian operations is Canadian dollars. The
functional currencies of the Company’s foreign subsidiaries are their local
currencies. Monetary assets and liabilities denominated in foreign currencies
are translated into the functional currencies of operations at prevailing
year-end exchange rates. Non-monetary assets and liabilities are translated into
functional currencies at historical rates. Assets and liabilities of foreign
operations with a functional currency other than U.S. dollars are translated
into U.S. dollars at prevailing year-end exchange rates, while revenue and
expenses of these foreign operations are translated into U.S. dollars at average
monthly exchange rates. The Company’s net investments in foreign subsidiaries
are translated into U.S. dollars at historical exchange rates.





Exchange
gains and losses on foreign currency transactions are recorded in other expenses
(income), net. Upon the sale or upon complete or substantially complete
liquidation of an investment in a foreign (non-Canadian functional currency)
entity, the amount attributable to that entity and accumulated in the
translation adjustment component of the equity is removed from the separate
component of equity and reported as part of the gain or loss on sale or
liquidation of the investment in the period during which the sale or liquidation
occurs.





Exchange
gains or losses arising on translation of the Company’s net equity investments
in these foreign subsidiaries and those arising on translation of foreign
currency long-term liabilities designated as hedges of these investments are
recorded in other comprehensive income (OCI).





Upon
reduction of the Company’s investment in the foreign (non-Canadian) subsidiary,
due to a sale or complete or substantially complete liquidation, the amount from
the reporting currency translation as well as the offsetting amount from the
translation of foreign currency long-term liabilities included in accumulated
other comprehensive income are recognized in income.





Derivative
financial instruments


In the
normal course of business, the Company uses derivative financial instruments to
manage foreign currency exchange rate risks. Derivative transactions are
governed by a uniform set of policies and procedures covering areas such as
authorization, counterparty exposure and hedging practices. Positions are
monitored based on changes in foreign currency exchange rates and their impact
on the market value of derivatives. Credit risk on derivatives arises from the
potential for counterparties to default on their contractual obligations to the
Company. The Company limits its credit risk by dealing with counterparties that
are considered to be of high credit quality. The Company does not enter into
derivative transactions for trading or speculative purposes. The Company records
derivatives at fair value either as prepaid expenses and other or accrued
liabilities on the consolidated statements of financial position. The Company
determines the fair value of the derivative financial instruments using
relevant market inputs when no quoted market prices exist for the
instruments. The fair value of the derivative financial
instruments is determined by comparing the rates when the derivatives
are acquired to the market rates at period-end. The key inputs include interest
rate yield curves, foreign exchange spot and forward rates. The Company
classifies cash flows from its derivative programs as cash flows from operating
activities in the consolidated statements of cash flows.





The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. In order for a derivative
to qualify for hedge accounting, the derivative must be formally designated as a
fair value, cash flow or net investment hedge by documenting the relationship
between the derivative and the hedged item. The documentation includes a
description of the hedging instrument, the hedged item, the risk being hedged,
the Company’s risk management objective and strategy for undertaking the hedge,
the method for assessing the effectiveness of the hedge and the method for
measuring hedge ineffectiveness. Additionally, the hedge relationship must be
expected to be highly effective at offsetting changes in either the fair value
or cash flows of the hedged item at both inception of the hedge and on an
ongoing basis. The Company assesses the ongoing effectiveness of its hedges on a
quarterly basis.





Cash
flow hedges


Cash flow
hedges relate to MDS Analytical Technologies, which are reported as part of
discontinued operations (Note 3). The Company uses foreign currency forward
exchange contracts to manage its foreign exchange risk within the joint venture
operations of the Company. Certain Canadian joint venture operations of the
Company are expected to have net cash inflows denominated in U.S. dollars in
2009 and subsequent years. The Company enters into foreign exchange contracts to
hedge a portion of these cash flows. The Company will hedge anticipated cash
inflows that are expected to occur over its planning cycle, typically no more
than 24 months into the future. The Company designates these derivatives as cash
flow hedges.





Hedges
of net investment in foreign operations


The
Company hedges its net investment in certain U.S. dollar investments, the U.S.
operations of MDS Analytical Technologies and


MDS
Pharma Services in discontinued operations (Note 3), by designating a U.S.
dollar denominated debt to reduce foreign exchange fluctuations. If the hedge is
deemed to be effective, the U.S. dollar denominated debt is measured at each
reporting date to reflect changes in the spot rate since the previous
measurement date and recorded in OCI. Ineffective portions of changes in the
fair value of the derivative in a hedging relationship are recognized in other
expenses (income), net in the period in which the changes occur.  If
the hedging relationship is no longer highly effective, changes in the fair
value of the derivative would be recognized in income beginning in the period in
which the changes occur.  If the hedge is terminated because the U.S.
dollar denominated debt is either extinguished, expired or the relationship is
de-designated, the unrealized gain or loss remains in accumulated OCI until the
hedged item affects the consolidated statements of operations.





Other
derivatives


Derivatives
not designated as hedges are recorded at fair value on the consolidated
statements of financial position, with any changes in the mark to market being
recorded in the consolidated statements of operations. Interest rate swap
contracts may be used as part of the Company’s program to manage the fixed and
floating interest rate mix of the Company’s total debt portfolio and the overall
cost of borrowing. The Company uses short-term foreign currency forward exchange
contracts to hedge the revaluations of the foreign currency balances. The
Company has also identified embedded derivatives in certain supply
contracts.





Comprehensive
income


The
Company defines comprehensive income as net income plus the sum of the changes
in unrealized gains (losses) on derivatives designated as cash flow hedges,
unrealized gains (losses) on translation of debt designated as a hedge of the
net investment in self-sustaining foreign subsidiaries, unrealized gains
(losses) on pension liability adjustments, foreign currency translation gains
(losses) on


self-sustaining
foreign subsidiaries and an unrealized gain (loss) on translation resulting from
the application of U.S. dollar reporting and is presented in the consolidated
statements of shareholders’ equity and comprehensive income (loss), net of
income taxes.







Recent
accounting pronouncements




United
States


In
December 2009, FASB issued Accounting Standards Update (ASU) No. 2009-17,
“Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities”
(formerly, SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)”) (ASU 2009-17) to improve financial reporting by enterprises
involved with variable interest entities. ASU 2009-17 shall be effective as of
the beginning of each entity’s first annual reporting period that begins after
November 15, 2009 and earlier application is not allowed. The Company will adopt
ASU 2009-17 on November 1, 2010 and it is not expected to have a material impact
on the Company’s consolidated results of operations and financial
condition.





In
August 2009, FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair
Value” (ASU 2009-05). This update provides amendments to ASC 820, “Fair Value Measurements and
Disclosure” for the fair value measurement of liabilities when a quoted
price in an active market is not available. The Company will adopt ASU 2009-05
on November 1, 2009 and it is not expected to have a material impact on the
Company’s consolidated financial statements.





In
December 2008, FASB issued ASC 715-20, “Compensation – Retirement
Benefits” (formerly, FSP FAS No. 132R-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets”) (ASC 715-20), which requires plan
sponsors to provide new disclosures about assets in defined benefit
post-retirement benefit plans as well as any concentrations of associated
risks.  These disclosures about plan assets are required for fiscal
years ending after December 15, 2009, but are not required for interim periods.
ASC 715-20 does not require disclosures for earlier periods presented for
comparative purposes at initial adoption. The Company will adopt ASC 715-20 on
November 1, 2009, which will only impact the Company’s disclosures of its
pension plan assets in the Company’s annual consolidated financial
statements.





In April
2008, FASB issued ASC 350-30, “Intangibles – Goodwill and
Other” (formerly, FSP FAS No. 142-3, “Determination of the Useful Life of
Intangible Assets”) (ASC 350-30). ASC 350-30 provides guidance with
respect to estimating the useful lives of recognized intangible assets acquired
on or after the effective date and requires additional disclosure related to the
renewal or extension of the terms of recognized intangible assets. ASC 350-30 is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Early adoption is prohibited. The Company
plans to adopt ASC 350-30 on November 1, 2009 and it is not expected to have a
material impact on the Company’s consolidated financial statements.





In
February 2008, FASB issued ASC 820-10, “Fair Value Measurements and
Disclosures” (formerly, FSP 157-2,“Effective Date of FASB Statement
No. 157”)(ASC 820-10).ASC 820-10 defers the effective date of ASC 820 for non-financial assets
and liabilities to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. The Company adopted the applicable
portions of ASC 820 effective November 1, 2008 and has not yet applied the
provisions of ASC 820 to the non-financial assets and liabilities within the
scope of ASC 820-10. The Company plans to adopt the deferred portion of ASC 820
on November 1, 2009.  The Company currently does not expect the
adoption of the deferred portions of ASC 820 to have a material impact on the
Company’s consolidated financial statements.





In
December 2007, FASB issued ASC 805, “Business Combinations”
(formerly FAS No. 141 (revised 2007), “Business Combinations (revised
2007)”)(ASC 805). ASC 805 requires companies to use the acquisition
method of accounting for all business combinations and the identification of an
acquirer for each business combination. ASC 805 also requires that liabilities
related to contingent consideration be measured at fair value at the acquisition
date, acquisition-related and restructuring costs be recognized separately from
the business combination and noncontrolling interest in subsidiaries be measured
at fair value and classified as a separate component of equity.  ASC
805 is effective for business combinations for which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The Company plans to adopt ASC 805 on November 1, 2009
and is currently assessing the impact of ASC 805 retroactive tax impacts related
to tax uncertainties acquired in previous business combinations.





In
December 2007, FASB issued ASC 810, “Consolidation” (formerly,
SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51”) (ASC 810), which is effective for fiscal years beginning on or after
December 15, 2008. ASC 810 requires noncontrolling interests in subsidiaries be
presented as equity in the consolidated financial statements and that all
transactions between an entity and noncontrolling interests be accounted for as
equity transactions. The Company plans to adopt ASC 810 on November 1, 2009 and
it is not expected to have a material impact on the Company’s consolidated
results of operations and financial condition.





International
Accounting Standards


The
Company has been monitoring the deliberations and progress being made by
accounting standard setting bodies and securities regulators both in the U.S.
and Canada with respect to their plans regarding convergence to International
Financial Reporting Standards (IFRS).  The Company currently expects to
adopt IFRS as its primary reporting standard when the U.S. Securities and
Exchange Commission requires domestic registrants in the U.S. to transition to
IFRS.





3.
            Divestitures
      and Discontinued Operations





As a
result of its ongoing strategic activities (Note 1), the Company has completed
the sale of MDS Pharma Services Phase II-IV and Central Labs operations and
announced its intention to sell its remaining MDS Pharma Services Early Stage
operations and the planned sale of MDS Analytical Technologies. Each of these
divestitures is described in more details below.





Sale
of MDS Pharma Services Phase II-IV


On July
1, 2009, the Company completed the sale of MDS Pharma Services Phase II-IV
(Phase II-IV) for total cash consideration of


$50
million, subject to certain closing adjustments including final working capital,
cash, and indebtedness amounts. The consideration includes $10 million in
restricted cash (Note 10) that will be paid or released to MDS upon meeting post
closing obligations (subject to set off for any claims for breach of
representations and warranties under the sale agreement) and $3 million to be
paid following the delivery of certain tax certifications. MDS expects the $10
million to be released to the Company within 15 months from the closing date of
July 1, 2009.





Total
assets disposed of are $103 million (2008 - $105 million), which includes
accounts receivable of $49 million (2008 - $49 million) and unbilled revenue of
$27 million (2008 - $42 million). Total liabilities disposed of are $67 million
(2008 - $61 million), which includes accounts payable and accrued liabilities of
$26 million (2008 - $25 million) and deferred revenue of $39
million


(2008 -
$33 million). During the fourth quarter of fiscal 2009, the sale of Phase II-IV
was finalized and the Company recorded an after tax loss of $7 million on the
sale, which is included in “(Loss) income from discontinued operations, net of
income taxes” on the consolidated statements of operations. The loss on sale
includes a $4 million closing adjustment, which is a reduction in the sale
proceeds, and recognition of an unrealized foreign currency translation gain of
$8 million.





As part
of the sale of Phase II-IV, the Company signed a Transition Services Agreement
(TSA) to provide certain post closing transition services to the buyer for a
period of six months from the closing date with an option by the buyer to extend
for an additional six months. The total cash consideration includes $2 million
related to the TSA in which $1 million has been recorded in “(Loss) income from
continuing operations” in the consolidated statements of operations in fiscal
2009 and the remainder will be recorded in the first quarter of fiscal 2010 when
the TSA is anticipated to be completed.





Sale
of MDS Pharma Services Central Labs


On
October 30, 2009, the Company completed the sale of MDS Pharma Services Central
Labs (Central Labs) for total cash consideration of $6 million, subject to
certain closing adjustments. Total assets disposed of are $63 million (2008 -
$77 million), which includes accounts receivable of $42 million (2008 - $40
million). Total liabilities disposed of are $18 million (2008 - $27 million),
which includes accounts payable and accrued liabilities of $13 million (2008 -
$22 million). The Company has recorded an after tax loss of $25 million on the
sale. The loss on sale includes a $13 million preliminary closing adjustment,
which is an increase in the sale proceeds, and recognition of an unrealized
foreign currency translation gain of $4 million. The Company expects to finalize
the loss on the sale during fiscal 2010 for post-closing
adjustments.





As part
of the sale of Central Labs, the Company signed a TSA to provide certain post
closing transition services to the buyer for a period of six months from the
closing date with an option by the buyer to extend for an additional six months.
In addition to the total consideration of $6 million, the Company is expected to
receive an additional $2 million in cash related to this TSA during fiscal 2010.
No amount has been recorded in fiscal 2009 in the consolidated statements of
operations related to the TSA.





Intent
to sell MDS Pharma Services Early Stage


On
September 2, 2009, the Company announced that it intends to sell its remaining
MDS Pharma Services Early Stage operations (Early Stage). As a result of this
decision, the Company has reflected the total assets and total liabilities of
Early Stage at the lower of their carrying value or their fair value less costs
to sell as “Assets of discontinued operations” and “Liabilities of discontinued
operations” in the consolidated statements of financial position, respectively.
The assets included in “Assets of discontinued operations” are not being
depreciated. The results of operations of Early Stage are included in “(Loss)
income from discontinued operations, net of income taxes” in the consolidated
statements of operations. As a result of MDS’s intention to sell Early Stage,
the Company estimated the loss on sale utilizing a fair value based on
appraisals, estimated net proceeds upon sale, and discounted cash flows. As a
result, the Company recorded an estimated pre-tax loss on sale of $13 million in
the fourth quarter of fiscal 2009. This estimated loss on sale includes
recognition of an unrealized foreign currency translation gain of $44 million.
While management believes that the estimated loss as of October 31, 2009 was its
then best estimate and that its valuation methods were reasonable and
appropriate in the circumstances, the ultimate amount of this estimated loss may
vary significantly. See Note 30, “Subsequent Events –Intent to sell
MDS Pharma Services Early Stage”, for an update related to Early
Stage.





The
Company also recorded non-cash long-lived asset impairment charge of $7 million
and $2 million in the third and fourth quarter of fiscal 2009, respectively, in
“(Loss) income from discontinued operations, net of income taxes”. See Note 11,
“Impairment of Long-Lived
Assets”, for details on impairment of long-lived assets related to Early
Stage.





Sale
of MDS Analytical Technologies


On
September 2, 2009, MDS announced that it has entered into an agreement to sell
MDS Analytical Technologies to Danaher Corporation (Danaher), which includes its
two joint ventures, Applied Biosystems MDS Analytical Technologies Instruments
(AB/MDS) and PerkinElmer Sciex Instruments (PKI/Sciex). Total consideration for
this sale is $650 million in cash subject to certain closing adjustments
including final working capital, cash, and indebtedness amounts. The sale
remains subject to certain closing conditions and approvals, including clearance
by the U.S. Federal Trade Commission. Under a separate arrangement, Danaher has
agreed to purchase the portion of the AB/MDS joint venture partnership held by
Life Technologies Corporation. Completion of each transaction is conditional on
the concurrent closing of the other transaction.





The
Company has reflected the total assets and total liabilities of MDS Analytical
Technologies at the lower of their carrying value or fair value less costs to
sell as “Assets of discontinued operations” and “Liabilities of discontinued
operations” in the consolidated statements of financial position, respectively.
The assets included in “Assets of discontinued operations” are not being
depreciated. The carrying value of MDS Analytical Technologies’ net assets did
not exceed its fair value less costs to sell resulting in no write-down of this
business as of October 31, 2009. The results of operations of MDS Analytical
Technologies are included in “(Loss) income from discontinued operations, net of
income taxes” in the consolidated statements of operations. The Company expects
to finalize the sale of MDS Analytical Technologies during the first calendar
quarter of 2010 and the Company expects to record an after-tax gain on the sale
in the range of $10 million to $20 million.





See Note
30, “Subsequent Events - Sale
of MDS Analytical Technologies” for an update on the
transaction.





Included
in the sale of MDS Analytical Technologies are the following two companies
previously acquired by MDS. Details of these prior acquisitions are presented
below.





Blueshift
Biotechnologies Inc.


On June
26, 2008, MDS Analytical Technologies acquired 100% of the common shares of
Blueshift Biotechnologies Inc. (Blueshift) for a total purchase price of $14
million of which $1 million was placed in escrow and has since been released. An
additional


$0.5
million was placed in escrow, which was contingent on the achievement of certain
milestones and has been released to the vendors during fiscal 2009. The Company
allocated the purchase price to the assets acquired and the liabilities assumed
and the purchase price and related allocations were finalized in fiscal 2008. In
connection with determining the fair value of the assets acquired and the
liabilities assumed, management performed assessments of the assets and
liabilities using customary valuation procedures and techniques. The results of
operations of Blueshift are included in discontinued operations from the date of
acquisition.





Molecular
Devices Corporation


During
fiscal 2007, the Company acquired 100% of the shares of Molecular Devices
Corporation (MDC) for a total purchase price of


$600
million in cash. Included in the consideration was a $27 million cash cost to
buy back outstanding options of MDC at the closing date of the acquisition. Of
the $600 million purchase price, $26 million was allocated to net tangible
assets, $161 million to developed technologies, $30 million to brands and $383
million to goodwill. The results of operations of MDC are included in
discontinued operations from the date of acquisition.





Sale
of MDS Diagnostic Services


During
fiscal 2007, the Company completed the sale of its Canadian laboratory services
business, MDS Diagnostic Services in a


C$1.3
billion (US$1.2 billion) transaction.  The sale was structured as an
asset purchase transaction and after the provision for taxes, expenses and
amounts attributable to minority interests resulted in net proceeds of $988
million, comprising $929 million in cash and


$65
million in an unconditional non-interest bearing note payable in March
2009.  During the second quarter of fiscal 2009, this note matured and
the Company received $60 million in cash proceeds (Note 5). Included in “(Loss)
income from discontinued operations, net of income taxes” is a gain of $791
million net of income taxes on the transaction, which the Company recorded in
fiscal 2007.





Discontinued
operations


The
following table details the assets and liabilities of MDS Pharma Services and
MDS Analytical Technologies as discontinued operations for all periods presented
herein.





MDS
              Pharma
              Services
            MDS
              Analytical
              Technologies
            TotalAs
      of October 31
            
            2009(a)
            
            2008
            
            2009
            
            2008
            
            2009
            
            2008Accounts
      receivable
            $
            37
            $
            143
            $
            59
            $
            72
            $
            96
            $
            215Unbilled
      revenue
            
            29
            
            86
            
            -
            
            -
            
            29
            
            86Inventories
            
            4
            
            4
            
            55
            
            57
            
            59
            
            61Property,
      plant and equipment (Note
      11)
            
            107
            
            158
            
            25
            
            25
            
            132
            
            183Deferred
      tax assets(b)
            
            23
            
            38
            
            17
            
            19
            
            40
            
            57Long-term
      investments
            
            -
            
            -
            
            20
            
            13
            
            20
            
            13Goodwill
      (Note
      12)
            
            -
            
            37
            
            410
            
            413
            
            410
            
            450Intangibles
            
            -
            
            -
            
            120
            
            155
            
            120
            
            155Other
      assets
            
            8
            
            17
            
            27
            
            8
            
            35
            
            25Assets
      of discontinued operations
            $
            208
            $
            483
            $
            733
            $
            762
            $
            941
            $
            1,245Accounts
      payable and accrued liabilities
            $
            58
            $
            89
            $
            58
            $
            61
            $
            116
            $
            150Long-term
      debt
            
            8
            
            8
            
            -
            
            -
            
            8
            
            8Deferred
      revenue
            
            18
            
            64
            
            9
            
            10
            
            27
            
            74Deferred
      tax liabilities(b)
            
            7
            
            9
            
            36
            
            46
            
            43
            
            55Other
      liabilities(c)
            
            16
            
            10
            
            4
            
            6
            
            20
            
            16Liabilities
      of discontinued operations
            $
            107
            $
            180
            $
            107
            $
            123
            $
            214
            $
            303





(a)  As of
October 31, 2009, the assets and liabilities of MDS Pharma Services represent
only the Early Stage operations as Phase II-IV and Central Labs were sold during
fiscal 2009.





(b)  Where the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases are both included in the discontinued operations, the
related deferred tax asset or deferred tax liability has been included in
discontinued operations. Valuation allowances related to deferred tax assets
included in discontinued operations have also been included in discontinued
operations with the exception of changes in valuation allowances that relate to
changes in judgment, which remain in continuing operations.





(c) Other
liabilities include post-retirement obligations, asset retirement obligations,
income taxes and various other miscellaneous liabilities.





The
following table details the operating results of the businesses noted above for
the year ended October 31, 2009, except for Phase II-IV which is included until
June 30, 2009. These operations have been reflected as discontinued operations
for all periods presented herein.





MDS
              Pharma
              Services
            MDS
              Analytical
              Technologies
            MDS
              DiagnosticsServices
            TotalYears
      ended
              October
      31
            2009
            2008
            2007
            2009
            2008
            2007
            2007
            2009
            2008
            2007Revenues(a)
            $
            442
            $
            582
            $
            568
            $
            359
            $
            437
            $
            352
            $
            95
            $
            801
            $
            1,019
            $
            1,015Costs
      and other expenses
            
            457
            
            576
            
            655
            
            379
            
            450
            
            364
            
            73
            
            836
            
            1,026
            
            1,092Impairment
      of long-lived
              assets(b)
            
            26
            
            11
            
            -
            
            -
            
            -
            
            -
            
            -
            
            26
            
            11
            
            -Goodwill(c)
            
            30
            
            320
            
            -
            
            -
            
            -
            
            -
            
            -
            
            30
            
            320
            
            -Operating
      (loss) income
            
            (71)
            
            (325)
            
            (87)
            
            (20)
            
            (13)
            
            (12)
            
            22
            
            (91)
            
            (338)
            
            (77)Gain
      (loss) on the sale of
              discontinued
      operations
            
            (46)
            
            -
            
            -
            
            -
            
            -
            
            -
            
            904
            
            (46)
            
            -
            
            904Equity
      earnings(d)
            
            -
            
            -
            
            -
            
            33
            
            49
            
            53
            
            1
            
            33
            
            49
            
            54Other,
      net(e)
            
            (2)
            
            (5)
            
            (4)
            
            (8)
            
            (6)
            
            (8)
            
            (4)
            
            (10)
            
            (11)
            
            (16)Income
      tax (expense) recovery
            
            3
            
            -
            
            31
            
            (9)
            
            (7)
            
            (10)
            
            (117)
            
            (6)
            
            (7)
            
            (96)(Loss)
      income from
              discontinued
              operations,
              net
      of income taxes
            $
            (116)
            $
            (330)
            $
            (60)
            $
            (4)
            $
            23
            $
            23
            $
            806
            $
            (120)
            $
            (307)
            $
            769





(a)      Revenues
for the year ended October 31, 2009 for Phase II-IV, Central Labs, and Early
Stage are $88 million (2008 - $150 million; 2007 - $155 million), $110
million (2008 - $136 million; 2007 - $131 million), and $244 million (2008 -
$296 million; 2007 - $282 million), respectively.





Pre-tax
income (loss) for the year ended October 31, 2009 for Phase II-IV, Central Labs,
and Early Stage are $(3) million (2008 - $4 million; 2007 - $6
million), $(60)
million (2008 - $(22) million; 2007 - $(49) million), and $(56) million (2008 -
$(312) million; 2007 - $(48) million), respectively.





In fiscal
2007, the results of MDS Analytical Technologies include the operations of
Molecular Devices Corporation from the date of acquisition on March 20,
2007.





(b)           The
Company recorded non-cash pre-tax impairment charges for the year ended October
31, 2009 of $26 million, of which $17 million (2008 - $nil; 2007 - $nil) relates
to Central Labs and $9 million (2008 - $11 million; 2007 - $nil) relates to
Early Stage. See Note 11, “Impairment of Long-Lived
Assets”, for details on the impairment of long-lived assets related to
MDS Pharma Services.





(c)      The
Company wrote off goodwill of $37 million for the year ended October 31, 2009
(2008 - $320 million; 2007 - $nil), of which $7 million is included in the loss
on the sale of Phase II-IV. See Note 12, “Goodwill”, for details on
the write-off of goodwill related to MDS Pharma Services.





(d)      MDS
Analytical Technologies includes two joint ventures, AB/MDS and PKI/Sciex. Under
the terms of these joint venture arrangements, the Company provides
manufacturing, research and development and administrative support for the joint
venture partnerships on an outsourced service provider basis. All costs,
including selling, general and administration expenses, incurred by the Company
for direct materials, labor, travel, consulting, and other related expenses, are
billed to the joint ventures at cost and recorded as revenue. The Company does
not recognize any profits from the sales to the joint ventures as the amounts
are billed without any markups. The joint ventures realize net income when
products and services are sold to a third party customer. The Company records
its share of realized profits from the joint ventures as equity earnings, which
is included in “(Loss) income from discontinued operations, net of income
taxes”.





For the
year ended October 31, 2009, revenues of $110 million (2008 - $149 million; 2007
- $205 million) related to the sale of products and services to the joint
ventures and equity earnings of $33 million (2008 - $49 million; 2007 - $53
million) from the joint ventures. For the year ended October 31, 2009 the
Company received $36 million (2008 - $59 million; 2007 - $52 million) in cash
distributions from these joint ventures. As of October 31, 2009, accounts
receivable from the joint ventures are $14 million (2008 - $24 million) and are
included in “Assets of discontinued operations”.





(e)             Interest
on the senior unsecured notes was allocated to discontinued operations based on
the ratio of net assets to be sold to the sum of total net assets of the Company
plus the senior unsecured notes. Interest expense allocated to discontinued
operations is $9 million, $9 million, and $11 million for the years
ended


October
31, 2009, 2008, and 2007, respectively.





Other
divestitures


During
fiscal 2008, MDS Nordion sold its external beam therapy and self-contained
irradiator product lines for $15 million in cash. The Company recorded a loss on
sale of this business of $4 million, including a $1 million impairment of
goodwill.  The Company recorded a pension curtailment gain of
approximately $1 million as a result of the transfer of employees to the
buyer.





4.
            Accounts
      Receivable





2009
            
            2008Trade
      accounts receivable
            $
            27
            $
            48Other
      receivables(a)
            
            18
            
            245
            
            50Allowance
      for doubtful accounts
            
            -
            
            (1)Accounts
      receivable
            $
            45
            $
            49




(a)      As
of October 31, 2009, other receivables include a $3 million (2008 - $nil)
deferred purchase amount for the delivery of certain tax certifications and $1
million (2008 - $nil) for the TSA related to the sale of Phase II-IV, and a $13
million (2008 - $nil) preliminary closing price adjustments related to the sale
of Central Labs (Note 3).





5.
            Notes
      Receivable





Notes
receivable as of October 31, 2009 of $16 million (2008 - $75 million) consist of
the current portion of other long-term assets as described in Notes 10(a) and
10(b). During fiscal 2009, a non-interest bearing promissory note related to the
sale of MDS Diagnostic Services (Note 3) matured and the Company received cash
proceeds of $60 million.





6.
            Inventories





2009
            
            2008Raw
      materials and supplies
            $
            28
            $
            24Work-in-process
            
            1
            
            1Finished
      goods
            
            1
            
            130
            
            26Allowance
      for excess and obsolete inventory
            
            (2)
            
            (2)Inventories
            $
            28
            $
            24





7.
            Property,
      Plant and Equipment





2009
            
            2008Cost
            
            Accumulated
              Depreciation
            
            Cost
            
            Accumulated
              DepreciationLand
            $
            2
            $
            -
            $
            2
            $
            -Buildings
            
            78
            
            35
            
            65
            
            25Equipment
            
            111
            
            80
            
            90
            
            63Furniture
      and fixtures
            
            2
            
            2
            
            2
            
            1Computer
      systems
            
            80
            
            55
            
            68
            
            36Leasehold
      improvements
            
            9
            
            2
            
            3
            
            2Facility
      modifications
            
            35
            
            18
            
            23
            
            13Construction
      in-progress
            
            6
            
            -
            
            11
            
            -323
            $
            192
            
            264
            $
            140Accumulated
      depreciation
            
            (192)
            
            
            
            (140)Property,
      plant and equipment
            $
            131
            
            
            $
            124





8.
            Other
      Current Assets





Asset
backed commercial paper


As of
October 31, 2009, other current assets include Canadian non-bank sponsored asset
backed commercial paper (ABCP) with a fair value of $11 million. As of October
31, 2008, the Company held ABCP (Original notes) with a fair value of $9
million, which was designated as available for sale and included in long-term
investments in the consolidated statements of financial position. On January
21, 2009, the Pan-Canadian Investors Committee announced that the restructuring
of the Canadian non-bank sponsored ABCP was completed. As part of the
restructuring, the Company exchanged its Original notes, with a par value of
C$17 million (US$16 million), for longer-term Master Asset Vehicle II Class A-1,
Class A-2, Class B, Class C, and CL 13 notes (collectively, MAVII notes) with
the same total par value. The MAVII Class A-1, Class A-2, and Class B notes have
interest rates of Bankers’ Acceptance rate less 50 basis points and mature on
July 15, 2056, the Class C notes have interest rates of 20% per annum and mature
on July 15,
2056 and the CL 13 notes have interest based on the net rate of return generated
by the related Specific Tracked Asset - Rocket Trust, Series A and mature on
March 20, 2014. While the legal maturity of these notes is July 15, 2056, the
actual expected note repayment date is January 22, 2017.





On the
date of exchange, the Company recorded the MAVII notes at a fair value of $9
million and designated the MAVII notes as held for trading, which requires the
notes to be fair valued at each reporting period with changes in the fair value
included in the consolidated statements of operations in the period in which
they arise and that they be reported as current assets. The fair value of the
MAVII notes has been determined using a probability-weighted discounted cash
flow model making use of currently available information and assumptions that
market participants would use in pricing these investments such as information
provided by the Court appointed Monitor, current investment ratings, liquidity
and subordination considerations and general economic conditions. For the year
ended October 31, 2009, the Company recorded a foreign currency translation gain
(loss) of $2 million (2008 - $(2) million; 2007 - $nil) in the consolidated
statements of shareholders’ equity and comprehensive income (loss). The Company
recorded an impairment loss for the years ended October 31, 2008 and 2007 of $3
million and $2 million, respectively, in other expenses (income), net in the
consolidated statements of operations.





Prepaid
expenses and other


As of
October 31, 2009, other current assets also includes prepaid expenses and other
assets of $2 million (2008 - $3 million).





9.
            Long-Term
      Investments





Long-term
investments include an investment in Lumira Capital Corp. (Lumira), formerly MDS
Capital Corp. Lumira is an investment fund management company that has long-term
investments in development-stage enterprises that have not yet earned
significant revenues from their intended business activities or established
their commercial viability. MDS does not have any involvement in Lumira other
than to obtain its share of earnings. The Company’s exposure to losses is
limited to its investment of $5 million (2008 -
$5 million).





Other
long-term investments include available for sale investments in marketable
equity securities which has a fair value of $1 million as of October 31, 2009
(2008 - $2 million), which has been determined using quoted market bid prices in
active markets. As of October 31, 2008, long-term investments included ABCP of
$9 million which were designated as available for sale (Note 8).





10.
            Other
      Long-Term Assets


2009
            
            2008Financial
      instrument pledged as security on long-term debt(a)
            $
            38
            $
            35Long-term
      note receivable(b)
            
            21
            
            30Restricted
      cash(c)
            
            16
            
            13Deferred
      pension assets (Note
      25)
            
            14
            
            25Goodwill(Note
      12)
            
            2
            
            2Other
      long-term assets
            $
            91
            $
            105




(a)      Financial
instrument pledged as security on long-term debt


The
financial instrument pledged as security on long-term debt is classified as held
to maturity and is not readily tradable as it defeases the long-term debt from
the Government of Canada related to the construction of the MAPLE Facilities.
The effective annual interest rate is 7.02% and it is repayable semi-annually
over 15 years commencing October 2, 2000. The carrying value as of October 31,
2009 is $42 million (2008 - $38 million), of which $4 million (2008 - $3
million) is included in notes receivable (Note 5). As of October
31, 2009, the fair value is $49 million (2008 - $38 million), which has been
determined using a discounted cash flow model, in which
future cash flows are discounted to present value using the current
market borrowing rate pertaining to the remaining life of the
receivable.





(b)      Long-term
note receivable


In fiscal
2006, as a result of a comprehensive mediation process that resulted in an
exchange of assets between the Company and AECL related to the MAPLE Facilities,
a long-term note receivable for $38 million after discounting was received by
the Company. This non-interest bearing note receivable is repayable monthly over
four years commencing November 1, 2008. The long-term note receivable is net of
an unamortized discount based on an imputed interest rate of 4.45%. The carrying
value of the long-term note receivable as of October 31, 2009 is $33 million
(2008 - $40 million), of which $12 million (2008 - $10 million) is included in
notes receivable (Note 5). As of October 31, 2009, the fair value is $36 million
(2008 - $42 million), which has been determined using a discounted
cash flow model, in which future cash flows are discounted to present value
using the current market borrowing rate pertaining to the remaining life of
the receivable. The long-term note receivable will be accreted up to its face
amount of $49
million by 2012. All
scheduled monthly payments due have been received.





(c)      Restricted
cash


Restricted
cash as of October 31, 2009 includes $10 million of proceeds related to the sale
of Phase II-IV (Note 3) and the remainder for funds for insurance liabilities.
As of October 31, 2008, restricted cash primarily relates to funds for insurance
liabilities.





11.
            Impairment
      of Long-Lived Assets





The
Company tests its long-lived assets and intangible assets subject to
amortization for recoverability whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. An impairment
charge is recognized for the amount, if any, by which the carrying value of the
asset exceeds the fair value. In assessing long-lived assets for impairment,
assets are grouped with other assets and liabilities at the lowest level for
which identifiable cash flows are largely independent of the cash flows of other
assets and liabilities.





During
fiscal 2009, the Company experienced a decline in its Central Labs operation.
The Company performed an impairment analysis and has determined property, plant
and equipment, which represent the long-lived asset group of Central Labs are
impaired. The Company recorded in fiscal 2009 total non-cash pre-tax impairment
charges of $17 million (2008 - $nil; 2007 - $nil) in “(Loss) income from
discontinued operations, net of income taxes”, of which $16 million and $1
million were recorded in the second and fourth quarter of fiscal 2009,
respectively. See Note 3, “Divestitures and Discontinued
Operations”, for details on the sale of Central Labs.





During
fiscal 2009, the Company experienced a decline in current and projected revenues
for certain service lines within the Early Stage operations. A deterioration of
customer demand and declines in forecasted cash flows represent indicators of
impairment. The Company performed an impairment analysis and determined that
certain long-lived asset groups are impaired. Based on the estimated fair value
of Early Stage’s property, plant and equipment asset group using undiscounted
cash flows as well as reviewing information with respect to prices for similar
assets, the Company recorded in fiscal 2009 a total non-cash pre-tax impairment
charge of $9 million (2008 - $11 million; 2007 - $nil) in “(Loss) income from
discontinued operations, net of income taxes”, of which $7 million and $2
million were recorded in the third and fourth quarter of fiscal 2009,
respectively.





During
the fourth quarter of fiscal 2009, the Company announced its intention to sell
Early Stage. As a result of this decision, the Company estimated the loss on
sale utilizing a fair value based on appraisals, estimated net proceeds upon
sale, and discounted cash flows.





As a
result, the Company recorded an estimated pre-tax loss on sale of $13 million in
“(Loss) income from discontinued operations, net of income taxes”. This
estimated loss on sale includes recognition of an unrealized foreign currency
translation gain of $44 million. See Note 3, “Divestitures and Discontinued
Operations”, for details on the Company’s intent to sell Early
Stage.





While the
Company believes that its estimates are reasonable, different assumptions
regarding such factors as industry outlook, customer demand, competitor actions
and the effectiveness of productivity and cost saving initiatives, could
significantly affect its future cash flow estimates.





12.
            Goodwill





The
Company performs a goodwill impairment test at the reporting unit level annually
at year end or more frequently if events or changes in circumstances indicate
that goodwill might be impaired. The goodwill impairment test requires the
identification of reporting units and a comparison of the estimated fair value
of each reporting unit to its carrying value, including goodwill. If the
carrying value of the reporting unit exceeds its fair value, the goodwill is
potentially impaired and the Company then determines the implied fair value of
goodwill, which is compared to the carrying value to determine if impairment
exists.





The
Company reviewed the components of its operating segments and has identified MDS
Nordion as its only remaining reporting unit in continuing operations. MDS
Analytical Technologies and MDS Pharma Services are reported as discontinued
operations. The details of the Company’s discontinued operations are provided in
Note 3, “Divestitures and
Discontinued Operations”.





For MDS
Nordion, management determined as of October 31, 2009 that the estimated fair
value of goodwill exceeds its carrying value of $2 million (2008 - $2 million)
resulting in no impairment of goodwill.





During
the fourth quarter of fiscal 2009, the Company announced the sale of MDS
Analytical Technologies, resulting in the business being reported as
discontinued operations (Note 3). As of October 31, 2009, management determined
that the net fair value for MDS Analytical Technologies exceeded its carrying
value, including goodwill, such that there is no impairment of
goodwill.





During
the third quarter of fiscal 2009, the Company completed the sale of Phase II-IV
and announced its intention to sell Central Labs resulting in both of these
businesses being reported as discontinued operations. ASC 350, “Intangibles – Goodwill and
Other” (formerly, SFAS 142, “Goodwill and Other Intangible Assets”)
requires that when a portion of a reporting unit is disposed of, goodwill of the
reporting unit be allocated to the business being disposed of based on the
relative fair value of the portion of the business being disposed of to the
remaining reporting unit. The fair value of Phase II-IV, Central Labs and Early
Stage were estimated based on discounted cash flows and comparable company
market valuation approaches. Management chose the discounted cash flow approach
as the primary valuation approach as cash flows can reasonably be estimated and
are expected to differ significantly from the current levels due to the
Company’s growth potential. The estimated fair value of Phase II-IV, Central
Labs and Early Stage were based on the Company’s five-year business plan and on
the best information available as of the date of the assessment in the third
quarter of fiscal 2009. The valuation approaches use key judgments and
assumptions that are sensitive to change, which include appropriate sales growth
rates, operating margins, weighted average cost of capital, and comparable
company market multiples. When developing these key judgments and assumptions,
the Company considered economic, operational and market conditions that could
impact the estimated fair value of the reporting unit; however, estimates are
inherently uncertain and represent only management’s reasonable expectations
regarding future developments. These estimates and the key judgments and
assumptions upon which the estimates are based will, in all likelihood, differ
in some respect from actual future results.





As of the
third quarter of fiscal 2009, management performed Step 1 of its goodwill
impairment test in accordance with ASC 350 and determined that the estimated
carrying value of Phase II-IV, Central Labs and Early Stage exceeded their
respective fair value. As a result of failing Step 1, management performed Step
2 of the impairment testing and determined the implied fair value of the
goodwill by allocating the fair value of Phase II-IV, Central Labs and Early
Stage determined in Step 1 to all the assets and liabilities of each respective
business, including any recognized and unrecognized intangible assets, as if the
respective business had been acquired in a business combination and the fair
value was the price paid to acquire the business. Upon completion of Step 2,
management determined that, as of the third quarter of fiscal 2009, the implied
fair value of goodwill for each of Phase II-IV, Central Labs and Early Stage,
respectively, was less than each of its carrying value and the Company wrote off
the total remaining goodwill of $37
million, which has been reported as discontinued operations. Of the $37 million
goodwill written off, $7 million was included in the loss on the sale of Phase
II-IV in discontinued operations (Note 3).





During
fiscal 2008, the market capitalization of the Company was below the book value
of its equity, indicating a potential impairment of goodwill. As a result of
these impairment indicators, the Company performed, as of October 31, 2008, Step
1 of its goodwill impairment test and determined that the carrying value of the
MDS Pharma Services reporting unit exceeded its estimated fair value, indicating
that goodwill for MDS Pharma Services was impaired. The Company believed that
the decline in overall contract research organization market valuations, ongoing
economic uncertainty and the delay in profit recovery in its MDS Pharma Services
reporting unit are the principal factors related to the fourth quarter of fiscal
2008 decline in its MDS Pharma Services estimated fair value as compared to its
carrying value. The Company concluded as part of its annual goodwill impairment
test that these and other related factors were likely to persist well into
fiscal 2009. Upon completion of the Step 2 goodwill impairment test, the Company
determined that as of October 31, 2008, the implied fair value of its MDS Pharma
Services goodwill was less than its carrying value by $320
million and recorded this amount as a goodwill impairment charge as of October
31, 2008.







13.        Accrued
Liabilities


2009
            
            2008Employee-related
      accruals
            $
            14
            $
            12FDA
      provision(a)
            
            19
            
            30Restructuring
      provision (Note
      20)
            
            8
            
            1Other(b)
            
            41
            
            41Accrued
      liabilities
            $
            82
            $
            84




(a)      The
FDA provision was established in fiscal 2007 to address certain U.S. Food and
Drug Administration (FDA) issues related to the Company’s bioanalytical
operations in its Montreal, Canada, facilities. Although the bioanalytical
operations are part of MDS Pharma Services, the FDA provision is recorded in
continuing operations as MDS expects to retain this potential liability
following an intended sale of Early Stage. The Company may, where appropriate,
reimburse clients who have incurred or will incur third party audit costs or
study re-run costs to complete the work required by the FDA and other
regulators. Management regularly updated its analysis of this critical estimate
based on all currently available information. During fiscal 2009, the Company
recognized a $10 million (2008 -
$10 million) benefit in “(Loss) income from discontinued operations, net of
income taxes” based on the revised estimate for future costs due to effective
MDS risk mitigation actions and the relative infrequency of client reimbursement
claims. As of October
31, 2009, management believes that the remaining provision of $19 million (2008
- $30 million) should be sufficient to cover any agreements reached with clients
for study audits, study re-runs, and other related costs (Note 28). While
management believes that its estimates and valuation methods are reasonable and
appropriate in the circumstances, the ultimate amount of this potential
liability may vary significantly if other reasonably possible alternative
assumptions were used.




(b)      Other
includes derivative liabilities, accrued interest, accrued transaction costs,
and various miscellaneous payables.





14.
            Long-Term
      Debt


Maturity
            
            2009
            
            2008Senior
      unsecured notes(a)
            2009
      to 2014
            $
            221
            $
            227Other
      debt(b)
            2009
      to 2015
            
            46
            
            47Total
      long-term debt
            
            
            267
            
            274Current
      portion of long-term debt
            
            
            (30)
            
            (17)Long-term
      debt
            
            $
            237
            $
            257




(a)      The
senior unsecured notes outstanding have fixed interest between 5.52% and 6.19%
per annum and mature in several tranches up to December 2014. The fair value of
senior unsecured notes was $238 million (2008 - $225 million), which has been
determined using a discounted cash flow model, in which future cash
flows are discounted to present value using the current market borrowing
rate pertaining to their remaining life of the notes. See Note 27, “Commitments and Contingencies –
Long-term debt” for the potential impact on the Company’s senior
unsecured notes.





(b)      As
of October 31, 2009, other debt includes a non-interest-bearing Canadian
government loan with a carrying value of $42
million (2008 - $39 million) discounted at an effective interest rate of 7.02%
and repayable at C$4 million (US$4 million) per year with the remaining balance
due April 1, 2015.  The fair value of this financial instrument was
$51 million (2008 - $47 million), which has been determined
using a discounted cash flow model , in which future cash flows
are discounted to present value using the current market borrowing rate
pertaining to their remaining life of the receivable. A long-term financial
instrument has been pledged as full security for the repayment of this debt
(Note 10(a)).





As of
October 31, 2009, other debt also includes a $4 million note payable (2008 – $8
million) relating to assets purchased for the MALDI-TOF mass spectrometry
operations. The note bears interest at 4%. Although the note was due on
October 22, 2009, in accordance with an agreement with the lender, the Company
repaid $4 million of this note plus interest on October 22, 2009 and the
remaining $4 million will be forgiven upon closing the sale of MDS Analytical
Technologies (Note 3).





Revolving
credit facility


The
Company has a C$500 million (US$462 million) revolving credit facility available
to fund its liquidity requirements which expires in July 2010. As of October 31,
2009, no amounts were drawn or outstanding under this facility. See Note 27,
“Commitments and Contingencies
– Long-term debt” for the potential impact on the Company’s revolving
credit facility.





Principal
repayments


Principal
repayments of long-term debt over the next five fiscal years and thereafter are
as follows:





2010
            $
            302011
            
            142012
            
            142013
            
            1712014
            
            9Thereafter
            
            29$
            267





15.
            Deferred
      Revenue


2009
            
            2008Payment
      in advance of services rendered
            $
            9
            $
            6Deferred
      credit related to government loan(a)
            
            7
            
            9Other
            
            3
            
            -19
            
            15Less:
      current portion
            
            (5)
            
            (6)Long-term
      portion of deferred revenue
            $
            14
            $
            9




(a)      The
deferred credit is related to the Canadian government loan associated with the
MAPLE Facilities, which is being amortized over the remaining seven-year term of
the debt using the sum of the years’ digits method.





16.
            Other
      Long-Term Liabilities


2009
            
            2008Post-retirement
      obligations (Note
      25)
            $
            12
            $
            13Asset
      retirement obligation (Note
      29)
            
            5
            
            -Liability
      insurance reserve (Note
      27)
            
            4
            
            -Other
            
            3
            
            5Other
      long-term liabilities
            $
            24
            $
            18





17.
            Earnings
      Per Share


The
following table illustrates the reconciliation of the denominator in the
computations of the basic and diluted earnings per share:





(number
      of shares in millions)
            
            2009
            
            2008
            
            2007Weighted
      average number of Common shares outstanding – basic
            
            120
            
            122
            
            132Impact
      of stock options assumed exercised
            
            -
            
            -
            
            -Weighted
      average number of Common shares outstanding – diluted
            
            120
            
            122
            
            132Basic
      (loss) earnings per share from continuing operations
            $
            (0.12)
            $
            (2.02)
            $
            0.09Basic
      (loss) earnings per share from discontinued operations
            $
            (1.00)
            $
            (2.52)
            $
            5.84Diluted
      (loss) earnings per share from continuing operations
            $
            (0.12)
            $
            (2.02)
            $
            0.09Diluted
      (loss) earnings per share from discontinued operations
            $
            (1.00)
            $
            (2.52)
            $
            5.83





Pro-forma
impact of stock-based compensation


The
Company is required to calculate and disclose the compensation expense related
to the grant-date fair value of stock options for all grants of options for
which no expense has been recorded in the consolidated statements of
operations.  For the Company, this includes those stock options issued
prior to November 1, 2003.





18.
            Share
      Capital





As of
October 31, 2009, the authorized share capital of the Company consists of
unlimited Common shares. The Common shares are voting and are entitled to
dividends if, as and when declared by the Board of Directors.





Summary
of share capital


Common
      Shares(number
      of shares in thousands)
            Number
            
            AmountBalance
      as of October 31, 2006
            144,319
            $
            566Issued
            1,090
            
            17Repurchased
      and cancelled
            (22,831)
            
            (90)Balance
      as of October 31, 2007
            122,578
            
            493Issued
            462
            
            7Repurchased
      and cancelled
            (2,903)
            
            (12)Other
            -
            
            1Balance
      as of October 31, 2008
            120,137
            
            489Issued
            -
            
            -Repurchased
      and cancelled
            -
            
            -Balance
      as of October 31, 2009
            120,137
            $
            489





During
fiscal 2009, there were no cash dividends declared or paid as the Company
discontinued its dividend payments as of January
2007. Due to restrictions in debt covenants on MDS’s long-term debt as of
October 31, 2008, the Company does not expect to make further dividend payments
or share repurchases until the existing senior unsecured notes are
retired.





During
fiscal 2009, the Company issued no Common shares. During fiscal 2008, the
Company issued 462,100 (2007 - 982,000) Common shares under the stock option
plan for proceeds of $7 million (2007 - $14 million).





During
fiscal 2009, the Company did not repurchase or cancel any Common shares. During
fiscal 2008, the Company repurchased and cancelled 2,903,200 Common shares under
the terms of a normal course issuer bid for a cost of $44 million. During fiscal
2007, the Company repurchased and cancelled 22,831,050 Common shares under a
substantial issuer bid for $441 million. Of the total cost in fiscal 2008, $12
million (2007 - $90 million) was charged to share capital and the excess of the
cost over the amount charged to share capital, totaling $32 million (2007 - $351
million), was charged to retained earnings and OCI.





Stock
dividend and share purchase plan and employee share ownership plan


Until
fiscal 2007, the Company sponsored a stock dividend and share purchase plan,
under which shareholders were able to elect to receive stock dividends in lieu
of cash dividends.  Stock dividends were issued at not less than 95%
of the five-day average market price (the Average Market Price) of the shares
traded on the Toronto Stock Exchange immediately prior to the dividend payment
date. Plan participants were also able to make optional cash payments of up to
C$3,000 semi-annually to purchase additional Common shares at the Average Market
Price.  Participation in this plan for the year ended October 31, 2007
resulted in the issuance of 41,000 Common shares as stock dividends and the
issuance of 1,000 Common shares for cash. The Company discontinued this plan
during fiscal 2007.





The
Company sponsors a non-compensatory Employee Share Ownership Plan. Until June
2007, eligible employees were able to purchase Common shares at 90% of the
Average Market Price for the five days preceding the
purchase.  Effective June 30, 2007, the Company changed the terms of
this plan and replaced the 10% market price discount with a 10% matching cash
contribution.  During fiscal 2009 and 2008, the Company issued no
Common shares under this plan. During fiscal 2007, the Company issued 66,000
Common shares under this plan for proceeds of $1 million.





19.
            Financial
      Instruments and Financial Risk





Derivative
instruments


As of
October 31, 2009, the Company held no derivatives that were designated as fair
value hedges.





The
Company uses foreign currency forward exchange contracts to manage its foreign
exchange risk. The Company entered into foreign exchange contracts to hedge a
portion of the cash flows and designated these foreign currency forward exchange
contracts as cash flow hedges. As of October 31, 2009, the Company did not have
any derivatives designated as cash flow hedges.





The U.S.
dollar denominated senior secured notes have been designated as hedge of net
investment in foreign operations to reduce foreign exchange fluctuations
associated with certain foreign currency investments of the Company, the U.S.
operations of MDS Analytical Technologies and MDS Pharma Services. As the
Company’s net investment hedge has been deemed to be effective, the U.S. dollar
denominated senior secured notes have been measured at each reporting date to
reflect changes in the spot rate since the previous measurement date and
recorded in OCI. The unrealized gain or loss in the cumulative translation
account would continue to be deferred until the time it is released with the
sale of the Company’s foreign operations.





The
Company uses short-term foreign currency forward exchange contracts to hedge the
revaluations of the foreign currency balances, which have not been designated as
hedges. The Company has also identified embedded derivatives in certain of its
supply contracts, primarily relating to MDS Nordion.





The
following table provides the notional and fair value of all Company derivative
instruments:





As
      of October 31
            2009
            2008Assets
            Notional
              Value
            Fair
              Value
            
            Notional
      Value
            Fair
              ValueEmbedded
      derivatives(a)
            $
            -
            $
            -
            $
            5
            $
            -Foreign
      currency forward contracts under cash flow hedges and not under hedging
      relationships(b)
            
            -
            
            -
            
            8
            
            1$
            -
            $
            -
            $
            13
            $
            1LiabilitiesEmbedded
      derivatives(a)
            $
            83
            $
            4
            $
            125
            $
            11Foreign
      currency forward contracts under cash flow hedges and not under hedging
      relationships(b)
            
            15
            
            -
            
            -
            
            -$
            98
            $
            4
            $
            125
            $
            11




(a)   Excludes
embedded derivatives with assets and liabilities related to discontinued
operations with notional amounts of $4 million (2008 -
$25 million) and $nil (2008 - $1 million), respectively. These embedded
derivatives assets and liabilities had fair value of $nil (2008 -
$1 million) and $nil (2008 - $nil), respectively.




(b)   Excludes
derivatives with assets and liabilities related to discontinued operations with
notional amounts of $nil (2008 - $1 million) and $nil (2008 - $65 million),
respectively. These derivatives assets and liabilities had fair value of $nil
(2008 - $nil) and $nil (2008 -
$9 million), respectively.




The
following table summarizes the activities of the Company’s derivative
instruments:





Years
      ended October 31
            2009
            2008
            2007Realized
      gain on foreign currency forward contracts under cash flow hedges(a)
            $
            -
            $
            (2)
            $
            (2)Unrealized
      gain recorded in OCI expected to be reclassified to consolidated
      statements of operations in the next 12 months(b)
            $
            -
            $
            -
            $
            (4)Realized
      (gain) loss on foreign currency forward contracts not under hedging
      relationships(c)
            $
            (1)
            $
            7
            $
            (1)Unrealized
      (gain) loss recorded in OCI relating to net investment hedges(d)
            $
            (24)
            $
            64
            $
            (58)Unrealized
      gain for other foreign currency forward contracts not under
              hedging
      relationships recorded in other expenses (income), net(e)
            $
            -
            $
            -
            $
            -Unrealized
      (gain) loss for embedded derivatives recorded in change in fair value of
      embedded derivatives(f)
            $
            (8)
            $
            15
            $
            (4)




(a)      Excludes
realized loss (gain) of forward contracts under cash flow hedges of $7 million
(2008- $nil; 2007 - $(2)) included in equity earnings within discontinued
operations.




(b)      Excludes
unrealized loss (gain) recorded in OCI expected to be reclassified to income
over the next 12 months of $nil (2008 -
$(9) million; 2007 - $(3) million) related to discontinued
operations.




(c)      Excludes
realized loss (gain) of derivatives not under hedging relationships of $nil
(2008 - $nil; 2007 - $1 million) related to discontinued
operations.




(d)      No
ineffectiveness was recorded in income for the years ended October 31, 2009,
2008 and 2007.




(e)      Excludes
unrealized loss (gain) of derivatives not under hedging relationships of $nil
(2008 - $(1) million; 2007 - $3 million) related to discontinued
operations.




(f)      Excludes
unrealized loss (gain) for embedded derivatives of $(1) million (2008 - $(1)
million; 2007 - $nil) related to discontinued operations.





Credit
risk


Certain
of the Company’s financial assets, including cash and cash equivalents, are
exposed to credit risk. The Company may, from time to time, invest in debt
obligations and commercial paper of governments and
corporations.  Such investments are limited to those issuers carrying
an investment-grade credit rating.  In addition, the Company limits
the amount that is invested in issues of any one government or
corporation.





The
Company is also exposed, in its normal course of business, to credit risk from
its customers.  No single party accounts for a significant balance of
accounts receivable.  As of October 31, 2009, accounts receivable is
net of an allowance for uncollectible accounts of $nil (2008 - $1
million).





Credit
risk on financial instruments arises from the potential for counterparties to
default on their contractual obligations to the Company. The Company is exposed
to credit risk in the event of non-performance, but does not anticipate
non-performance by any of the counterparties to its financial instruments.
 The Company limits its credit risk by dealing with counterparties that are
considered to be of high credit quality.  In the event of non-performance
by counterparty, the carrying value of the Company’s financial instruments
represents the maximum amount of loss that would be incurred.





Valuation
methods and assumptions for fair value measurements


Cash and
cash equivalents, accounts receivable, notes receivable, income taxes
recoverable, accounts payable, accrued liabilities, and income taxes payable
have short periods to maturity and the carrying values contained in the
consolidated statements of financial position approximate their estimated fair
value.





Fair
value hierarchy


The fair
value of the Company’s financial instruments is 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. The fair value of financial
instruments is determined by reference to quoted market prices for the same
financial instrument in an active market (Level 1). If Level 1 fair values are
not available, the Company uses quoted prices for identical or similar
instruments in markets which are non-active, inputs other than quoted prices
that are observable and derived from or corroborated by observable market data
such as quoted prices, interest rates, and yield curves (Level 2), or valuation
techniques in which one or more significant inputs are unobservable (Level
3).





The
following table discloses the Company’s financial assets and liabilities
measured at fair value on a recurring basis:





As
      of October 31, 2009Description
            
            Level
      1
            
            Level
      2
            
            Level
      3
            
            TotalCash
      equivalents
            $
            10
            $
            -
            $
            -
            $
            10Asset
      backed commercial paper (Note
      8)
            $
            -
            $
            -
            $
            11
            $
            11Available
      for sale (Note
      9)
            $
            1
            $
            -
            $
            -
            $
            1Derivative
      liabilities
            $
            -
            $
            4
            $
            -
            $
            4





The
following tables present the changes in the Level 3 fair value
category:





Year
      ended October 31, 2009Description
            As
      of October 31 2008
            Net
      Realized/
              Unrealized
      Gains
              (Losses)
      included in
            Purchases,
      Sales, Issuance and
              (Settlements),
      net
            Transfers
      in
              and/or
      out of Level 3
            As
      of
              October
      31
              2009Earnings
            OtherAsset
      backed commercial paper (Note
8)
            $
            -
            $
            -
            $
            2
            $
            9
            $
            -
            $
            11Available
      for sale (Note
      9)
            $
            9
            $
            -
            $
            -
            $
            (9)
            $
            -
            $
            -





20.
            Restructuring
      Charges, Net





During
the fourth quarter of fiscal 2009, the Company announced a strategic
repositioning of its businesses, which resulted in the planned sale of MDS
Analytical Technologies and its intention to sell the remaining MDS Pharma
Services Early Stage business (Note 3).
As a result of these activities, a pre-tax restructuring charge of $9 million
was recorded to reflect the closure of the Company’s Toronto, Canada corporate
office and establishment of its corporate headquarters in Ottawa, Canada. The
restructuring charge is for estimated workforce reductions including severance
and benefit costs. These restructuring activities are expected to be completed
in fiscal 2010 and additional restructuring charges may be incurred as discussed
in Note 27, “Commitments and
Contingencies – Corporate restructuring”.





In fiscal
2008 and 2007, the Company recorded restructuring charges of $1 million and $9
million, respectively, related to various initiatives focused on improving
profitability. The Company completed its activities associated with the fiscal
2008 and 2007 restructuring plans and has utilized all of the related prior year
provisions.





As of
October 31, 2009, the restructuring provision of $8 million (2008 - $1 million)
is included in accrued liabilities in the consolidated statements of financial
position.





The table
below provides an analysis of the Company’s restructuring activities related to
its continuing operations until October 31, 2009.





Expenses
            
            
            Cumulative
              Activities
            Balance
      as of
              October
      312009
            
            2008
            
            2007
            
            Total
            
            Cash
            
            Non-Cash
            
            2009Workforce
      reductions
            $
            9
            $
            -
            $
            1
            $
            10
            $
            (2)
            $
            -
            $
            8Contract
      cancellation charges
            
            -
            
            1
            
            -
            
            1
            
            (1)
            
            -
            
            -Other
            
            -
            
            -
            
            8
            
            8
            
            (7)
            
            (1)
            
            -Restructuring
      charges, net
            $
            9
            $
            1
            $
            9
            $
            19
            $
            (10)
            $
            (1)
            $
            8





21.
            Other
      Expenses (Income), Net





2009
            
            2008
            
            2007Write-down
      of investments/valuation provisions
            $
            1
            $
            11
            $
            8Gain
      on sale of investment
            
            -
            
            (2)
            
            (7)Loss
      (gain) on sale of business
            
            -
            
            4
            
            (1)Gain
      on sale of property, plant and equipment, net
            
            -
            
            -
            
            (9)Foreign
      exchange loss (gain)
            
            5
            
            (7)
            
            4Other
            
            (2)
            
            2
            
            -Other
      expenses (income), net
            $
            4
            $
            8
            $
            (5)





22.
            Income
      Taxes





Income
tax provision


The
components of the Company’s (loss) income from continuing operations before
income taxes and the related provision for income taxes are presented
below:





2009
            
            2008
            
            2007Canadian
            $
            -
            $
            (335)
            $
            30Foreign
            
            (2)
            
            (9)
            
            (16)(Loss)
      income from continuing operations before income taxes
            $
            (2)
            $
            (344)
            $
            14





The
components of the income tax expense (recovery) are as follows:





2009
            
            2008
            
            2007Canadian
      income tax expense (recovery)Current
            $
            1
            $
            21
            $
            (3)Deferred
            
            2
            
            (117)
            
            (3)Foreign
      income tax expense (recovery)Current
            
            10
            
            12
            
            (6)Deferred
            
            -
            
            (14)
            
            14Income
      tax expense (recovery)
            $
            13
            $
            (98)
            $
            2





The
reconciliation of expected income taxes to reported income taxes is set out
below.





2009
            
            2008
            
            2007Expected
      income tax expense (recovery) at the 32% (2008 – 33%;
              2007
      – 35%) statutory rate
            $
            (1)
            $
            (113)
            $
            4Increase
      (decrease) in taxes as a result of:Deferred
      tax recovery on the MAPLE Facilities lease reassessment
              at
      lower tax rates
            
            -
            
            18
            
            -Valuation
      allowance on deferred tax assets
            
            12
            
            -
            
            -Other
      investment write-downs
            
            -
            
            2
            
            1Tax
      liability arising on utilization of R&D tax credits
            
            1
            
            (11)
            
            (3)Net
      changes in reserves for uncertain tax positions(a)
            
            3
            
            4
            
            -Differential
      foreign tax rates
            
            (1)
            
            (1)
            
            (1)Stock-based
      compensation
            
            1
            
            2
            
            1Foreign
      losses not recognized
            
            -
            
            1
            
            3Impact
      of enacted rate changes on deferred tax balances
            
            -
            
            6
            
            (2)Other
            
            (2)
            
            (6)
            
            (1)Reported
      income tax expense (recovery)
            $
            13
            $
            (98)
            $
            2




(a)           Excludes
net changes in reserves for uncertain tax positions of $10 million (2008 - $6
million; 2007 - $nil) related to discontinued operations.





Deferred
tax assets and liabilities


Components
of the deferred tax assets and liabilities consist of the following temporary
differences:





2009
            
            2008Tax
      benefit of losses carried forward
            $
            9
            $
            6Tax
      basis in excess of book value
            
            15
            
            2Investment
      tax credits
            
            31
            
            (14)Provisions
      and reserves
            
            14
            
            21Other
      comprehensive income
            
            (5)
            
            (8)Deferred
      tax assets before valuation allowance
            
            64
            
            7Valuation
      allowance
            
            (9)
            
            (6)Net
      deferred tax assets
            $
            55
            $
            1


No
deferred income taxes have been provided on undistributed earnings, or relating
to cash held in foreign jurisdictions as the Company has estimated that any
income or withholding taxes on repatriation would not be
significant.





Tax losses carried
forward


As of
October 31, 2009, the Company has deferred tax assets relating to net operating
loss carryovers for continuing operations of $9
million (2008 - $6 million; 2007 - $8 million).  These assets relate
to $30 million (2008 - $24 million; 2007 - $23 million) of tax loss carryovers
from continuing operations.  Of the total losses, $nil (2008 - $nil;
2007 - $2 million) will expire in the next 5 years, $4
million (2008 - $2 million; 2007 - $1 million) will expire between the next 6
and 15 years and the remaining $26 million (2008 -
$22 million; 2007 - $20 million) may be carried forward
indefinitely.





Tax
contingencies


The
Company adopted the provisions of ASC 740-10 on November 1, 2007, which had no
impact on the liability for unrecognized tax benefit.





At the
adoption date of November 1, 2007, the Company had approximately $26 million of
total gross unrecognized income tax benefits, excluding $3 million in interest
and penalties. Of this total, $25 million represents the amount of unrecognized
tax benefits that would favourably affect the effective income tax rate in
future periods, if recognized.





The gross
reserves for uncertain tax positions excluding accrued interest and penalties
were $46 million and $29 million at


October
31, 2009 and November 1, 2008, respectively. The Company believes that it is
reasonably possible that the total amounts of unrecognized tax benefits will
decrease by $10 million during the year ended October 31, 2010.





The
Company accrues interest and penalties related to uncertain tax positions in
income tax expense. Accrued interest and penalties related to uncertain tax
positions totaled $4 million and $4 million as of October 31, 2009 and November
1, 2008, respectively.





Below is
a reconciliation of the reserve associated with uncertain tax positions,
excluding accrued interest and penalties, as of the adoption date through
October 31, 2009.





2009
            
            2008Gross
      unrecognized tax benefits as of October 31, 2008
            $
            29
            $
            26Increase
      in reserve for tax positions taken for the prior year
            
            2
            
            7Decrease
      in reserve for tax positions taken for the prior year
            
            -
            
            (2)Increase
      in reserve for tax positions taken in the current year
            
            12
            
            5Decrease
      in reserve for tax positions taken in the current year
            
            (1)
            
            -Foreign
      currency exchange rate changes
            
            4
            
            (7)Gross
      unrecognized tax benefits as of October 31, 2009
            $
            46
            $
            29





MDS is
subject to taxation in Canada and the U.S., its principal jurisdictions, and in
numerous other countries around the world.  With few exceptions, MDS
is no longer subject to examination by Canadian tax authorities for tax years
before 2002, while most tax returns for 2002 and beyond remain open for
examination.  Tax returns filed in the U.S. generally are not subject
to examination for years before 2005, while 2005 and subsequent U.S. tax filings
generally remain open for audit by tax authorities.  In certain
circumstances, selective returns in earlier years are also open for
examination.





23.
            Supplementary
      Cash Flow Information




Items not
affecting current cash flows comprise the following:


2009
            
            2008
            
            2007Depreciation
      and amortization
            $
            24
            $
            25
            $
            23Stock
      option compensation
            
            3
            
            3
            
            3Deferred
      income taxes
            
            -
            
            (131)
            
            6MAPLE
      Facilities write-off
            
            -
            
            341
            
            -Write-down
      of investments
            
            1
            
            11
            
            8Gain
      on sale of investments
            
            -
            
            (2)
            
            (7)Loss
      (gain) on sale of businesses
            
            -
            
            4
            
            (1)Change
      in fair value of embedded derivatives
            
            (8)
            
            13
            
            (5)Unrealized
      foreign currency translation (gain) loss
            
            (3)
            
            (4)
            
            4Other
            
            (14)
            
            (17)
            
            (15)$
            3
            $
            243
            $
            16





Changes
in operating assets and liabilities comprise the following:


2009
            
            2008
            
            2007Accounts
      receivable
            $
            24
            $
            (3)
            $
            (26)Notes
      receivable
            
            60
            
            (3)
            
            -Inventories
            
            (4)
            
            (13)
            
            (3)Other
      current assets
            
            -
            
            (14)
            
            38Accounts
      payable and accrued liabilities
            
            5
            
            (38)
            
            52Income
      taxes payable
            
            -
            
            (45)
            
            56Deferred
      income and other long-term obligations
            
            8
            
            9
            
            11$
            93
            $
            (107)
            $
            128





24.
            Stock-Based
      Compensation





Upon the
close of the sale of MDS Analytical Technologies (Note 3), a change in control
will be triggered. In the event of a change of control all unvested stock
options, mid-term incentive plan awards and restricted share units will vest and
become exercisable immediately on closing of the transaction. A change of
control (COC) includes, among other things, the sale of all or substantially all
of the assets and undertaking of the Company.





Stock
option plan


At the
Company’s annual and Special Meeting of Shareholders held on March 8, 2007,
shareholders approved the Company’s 2007 Stock Option Plan (the Plan), which
replaced the Company’s 2006 Stock Option Plan.  Under the Plan, which
conforms to all current regulations of the New York and Toronto stock exchanges,
the Company may issue shares on the exercise of stock options granted to
eligible employees, officers, directors and persons providing on-going
management or consulting services to the Company.  The exercise price
of stock options issued under the Plan equals the market price of the underlying
shares on the date of the grant.  All options issued under the Plan
are granted and priced on the date on which approval by the Board of Directors
of the Company is obtained or a later date set by the Board of Directors in its
approval.  Except as noted below, stock options granted up to October
31, 2005 vest evenly over five years and have a term of ten
years.  Certain options granted on April 22, 2005 and all options
granted after October 31, 2005 vest evenly over three years and have a term of
seven years.  As of October 31, 2009, 11 million Common shares have
been reserved for issuance under the Plan.




Canadian
Dollar Options


Number
      (000s)
            Weighted
      Average
              Exercise
              Price
              (C$)
            Weighted
              Average
              Remaining
      Contractual Life (Years)
            Aggregate
              Intrinsic
      Value
              (C$
      millions)Outstanding
      as of October 31, 2007
            5,555
            $
            19.66
            5.3
            $
            10Granted
            39
            
            20.29Exercised
            (462)
            
            15.91Cancelled
      or forfeited
            (942)
            
            20.41Outstanding
      as of October 31, 2008
            4,190
            $
            19.92
            4.3
            $
            -Granted
            -
            
            -Exercised
            -
            
            -Cancelled
      or forfeited
            (636)
            
            20.21Expired
            (72)
            
            15.50Outstanding
      as of October 31, 2009
            3,482
            $
            19.95
            3.5
            $
            -Vested
      and expected to vest at October 31, 2008(a)
            4,043
            $
            19.90
            4.8
            $
            -Vested
      and expected to vest at October 31, 2009(a)
            3,991
            $
            20.11
            3.9
            $
            -Exercisable
      at October 31, 2008
            2,944
            $
            19.49
            3.9
            $
            -Exercisable
      at October 31, 2009
            2,972
            $
            19.72
            3.3
            $
            -




(a)   The
expected to vest amount represents the unvested options as at October 31, 2009
and 2008, respectively, less estimated forfeitures.





Options
outstanding as of October 31, 2009 comprised the following:





Options
      Outstanding
            Options
      ExercisableRange
      of Exercise Prices
              (C$)
            Weighted
              Average
              Remaining
              Contractual
              Life
      (Years)
            
            Number
              (000s)
            
            Weighted
              Average
              Exercise
              Price
              (C$)
            Number
              (000s)
            
            Weighted
              Average
              Exercise
              Price
              (C$)$13.95
      - $15.70
            0.11
            
            119
            $
            13.95
            119
            $
            13.95$15.75
      - $17.20
            2.50
            
            403
            
            16.77
            402
            
            16.77$17.50
      - $19.00
            3.53
            
            539
            
            18.38
            488
            
            18.44$19.05
      - $20.70
            3.52
            
            875
            
            19.94
            836
            
            19.92$20.75
      - $22.50
            3.91
            
            1,546
            
            21.78
            1,127
            
            21.793.46
            
            3,482
            $
            19.95
            2,972
            $
            19.72





United
States Dollar Options


Number
              (000s)
            Weighted
              Average
              Exercise
              Price
              (US$)
            Weighted
              Average
              Remaining
              Contractual
              Life
      (Years)
            Aggregate
              Intrinsic
      Value
              (US
      millions$)Outstanding
      as of October 31, 2007
            -
            $
            -
            -
            $
            -Granted
            1,161
            
            15.89Cancelled
      or forfeited
            (8)
            
            16.65Outstanding
      as of October 31, 2008
            1,153
            $
            15.88
            6.6
            $
            -Granted
            46
            
            6.14Cancelled
      or forfeited
            (44)
            
            15.86Outstanding
      as of October 31, 2009
            1,155
            $
            15.49
            5.7
            $
            -Vested
      and expected to vest as of October 31, 2008
            1,016
            $
            15.88
            6.6
            $
            -Vested
      and expected to vest as of October 31, 2009
            1,131
            $
            15.50
            3.7
            $
            -Exercisable
      at October 31, 2008
            -
            $
            -
            -
            $
            -Exercisable
      at October 31, 2009
            369
            $
            15.88
            5.6
            $
            -





Options
      Outstanding
            Options
      ExercisableRange
      of Exercise Prices
              (US$)
            Weighted
              Average
              Remaining
              Contractual
              Life
      (Years)
            
            Number
              (000s)
            
            Weighted
      Average Exercise Price
              (US$)
            Number
              (000s)
            
            Weighted
      Average Exercise
              Price
              (US$)$6.13
      - $6.15
            6.19
            
            46
            $
            6.14
            -
            $
            -$9.89
      - $14.34
            5.81
            
            19
            
            13.38
            6
            
            13.38$14.35
      - $17.74
            5.61
            
            1,090
            
            15.93
            363
            
            15.935.65
            
            1,155
            $
            15.49
            369
            $
            15.88





Total
stock option compensation expense for fiscal 2009 was $4 million (2008 - $5
million; 2007 - $4 million), which has been recorded in selling, general and
administration expenses in the consolidated statements of operations and as
additional paid-in capital within share capital on the consolidated statements
of financial position.  Stock option compensation expense related to
discontinued operations for the year ended October 31, 2009 was $1 million (2008
- $2 million; 2007 - $1 million) as included in costs and other expenses in
“(Loss) income from discontinued operations, net of income taxes” (Note
3).





The
Company utilizes the Black-Scholes option valuation model to estimate the fair
value of options granted based on the following assumptions:





2009
            2008
            2007Risk-free
      interest rate
            1.7%
            3.6%
            4.5%Expected
      dividend yield
            0.0%
            0.0%
            0.0%Expected
      volatility
            0.311
            0.231
            0.209Expected
      time until exercise (years)
            4.20
            4.40
            4.35





The
weighted average fair values of options granted are estimated to be US$1.47 per
Common share in fiscal 2009, C$4.51 and US$4.13, respectively, per Common share
in fiscal 2008, and C$5.66 per Common share in fiscal 2007.





The
Black-Scholes option valuation model used by the Company to determine fair
values was developed for use in estimating the fair value of freely traded
options that are fully transferable and have no vesting restrictions. This model
requires the use of assumptions, including future stock price volatility and
expected time until exercise. The Company uses historical volatility to estimate
its future stock price volatility. The expected time until exercise is based
upon the contractual term, taking into account expected employee exercise and
expected post-vesting employment termination behavior.





The
following table summarizes the intrinsic value of options exercised and the fair
values of shares vested:





2009
            
            2008
            
            2007Aggregate
      intrinsic value of options exercised
            C$
            -
            C$
            1
            C$
            5US$
            -
            US$
            -
            US$
            -Aggregate
      grant-date fair value of shares vested
            C$
            4
            C$
            5
            C$
            5US$
            2
            US$
            -
            US$
            -





As of
October 31, 2009, the total remaining unrecognized compensation expense related
to non-vested stock options amounted to approximately C$1 million and US$2
million, which will be amortized over the weighted average remaining requisite
service period of approximately 5 months and 20 months,
respectively.





Incentive
plans


The
Company has mid-term incentive plans (MTIP) which issue Performance Share Units
(PSUs).





The 2006
MTIP was to vest in two equal tranches, based on achieving specified share price
hurdles of C$22.00 and C$26.00, respectively. The term of the PSUs was three
years and payout occurred at the later of 24 months from the date of grant and
achievement of each share price hurdle. During fiscal 2006, the first share
price hurdle was met and 50% of the issued units vested. Payout on certain PSUs
was in the form of Deferred Share Units (DSUs) and the balance was paid in cash
in fiscal 2008.





The 2007
MTIP was to vest in two equal tranches, based on achieving specified share price
hurdles of C$25.30 and C$27.50, respectively. The term of the PSUs was three
years and the payout was to occur at the later of 24 months from the date of
grant and achievement of each price hurdle. The price hurdles for the 2007 MTIP
were not met and the 2007 MTIP expired in fiscal 2009.





The 2008
MTIP will vest on December 15, 2010 and the final number of PSUs granted will be
determined based on achieving a target 2010 cash earnings per share. The final
number of vested units can range from 0% to 200% of the number of PSUs granted.
Payout will occur no later than 60 days following the vesting date.





During
the first quarter of fiscal 2009, the Company implemented a new fiscal 2009
MTIP. The 2009 MTIP will vest on January
16, 2012 and the number of PSUs granted will be determined based on achieving a
target 2011 cash earnings per share. The final number of vested units can range
from 0% to 200% of the number of PSUs granted. Payout will occur no later than
60 days following the vesting date.





The
Company records the cost of its MTIP compensation plans at fair value based on
assumptions that are consistent with those used to determine the fair value of
stock compensation.  The table below shows the liability and expense
related to the MTIP plans:





Liability
            As
      of October 312009
            
            20082006
      Plan
            $
            1
            $
            12007
      Plan
            
            -
            
            -2008
      Plan
            
            -
            
            22009
      Plan
            
            -
            
            -Total
            $
            1
            $
            3





Expense (Income)(a)
            Years
      ended October 312009
            
            2008
            
            20072006
      Plan
            $
            -
            $
            (7)
            $
            22007
      Plan
            
            -
            
            (3)
            
            32008
      Plan
            
            (2)
            
            2
            
            -2009
      Plan
            
            -
            
            -
            
            -Total
            $
            (2)
            $
            (8)
            $
            5




(a)   Expense
(income) related to discontinued operations for the year ended October 31, 2009
was $(1) million (2008 - $(5) million; 2007 - $3 million) as included in costs
and other expenses in “(Loss) income from discontinued operations, net of income
taxes” (Note 3).





Restricted
stock units


The
Company periodically grants time-based restricted stock units (RSUs) to certain
employees. Outstanding RSUs are strictly time-based and vest at the end of the
restriction period, which can be settled in cash or shares. Payout will be made
within 60 days of the vesting date. The Company records the liability and
expense relating to RSUs based on the market value of the Company’s Common
shares at each reporting date.  The expense is recorded in the
consolidated statements of operations on a straight-line basis over the term of
the RSUs and adjusted for any fair value changes at each reporting date. As of
October 31, 2009, the liability relating to RSUs was $3 million (2008 - $nil)
and the total expense relating to RSUs during fiscal 2009 was $2 million (2008 -
$1 million). RSUs expense related to discontinued operations for the year ended
October 31, 2009 was $2 million (2008 - $nil; 2007 - $nil) as included in costs
and other expenses in “(Loss) income from discontinued operations, net of income
taxes” (Note 3).





As of
October 31, 2009, the Company has 707,000 of outstanding RSUs (2008 -
286,000).





Grant
      Date
            Granted
              Number
              [in
      thousands]
            Cancelled
              Number
              [in
      thousands]
            Outstanding
              Number
              [in
      thousands]
            Vesting
      DateSeptember
      2, 2008
            286
            (16)
            270
            January
      15, 2010March
      11, 2009
            437
            -
            437
            September
      30, 2010723
            (16)
            707





25.
            Employee
      Benefits





The
Company sponsors various post-employment benefit plans including defined benefit
and contribution pension plans, retirement compensation arrangements, and plans
that provide extended health care coverage to retired employees.  All
defined benefit pension plans sponsored by the Company are funded
plans.  Other post-employment benefits are unfunded.  During
2005, the Company amended the terms of certain post-employment plans such that
effective January 1, 2008, and subject to certain transitional conditions, newly
retired employees will no longer be entitled to extended health care
benefits.





Defined
      benefit pension plans


The
Company sponsors three defined benefit pension plans, one for each of its
employees in Canada, the U.S. and Taiwan. The Canadian plan is based on the
highest three or six average consecutive years of wages and requires employee
contributions. The Taiwanese plan is based upon years of service and
compensation during the last month prior to retirement and the U.S. plan is
based on the participants’ 60 highest consecutive months of compensation and
their years of service. The pension plans in Taiwan and the U.S. are related to
MDS Pharma Services, which is reported as discontinued operations in the
consolidated financial statements (Note
3).





All plans
are funded and the Company uses an October 31st
measurement date for its plans.  The most recent actuarial valuations
of the majority of the pension plans for funding purposes were as of January 1,
2008.





The
components of net periodic pension cost for these plans for fiscal 2009, 2008
and 2007 are as follows:





Domestic
      Plan
            International
      Plans2009
            
            2008
            
            2007
            
            2009
            
            2008
            
            2007Components
      of net periodic pension costService
      cost
            $
            1
            $
            3
            $
            4
            $
            1
            $
            1
            $
            -Interest
      cost
            
            10
            
            11
            
            9
            
            1
            
            1
            
            1Expected
      return on plan assets
            
            (13)
            
            (15)
            
            (12)
            
            (1)
            
            (1)
            
            (1)Recognized
      actuarial gain
            
            (1)
            
            -
            
            -
            
            -
            
            -
            
            -Amortization
      of net transition asset
            
            -
            
            -
            
            (2)
            
            -
            
            -
            
            -Curtailment
      gain
            
            -
            
            (1)
            
            -
            
            -
            
            -
            
            -Net
      periodic pension cost
            $
            (3)
            $
            (2)
            $
            (1)
            $
            1
            $
            1
            $
            -





The net
periodic pension costs under the International Plans related to MDS Pharma
Services and are included in costs and other expenses in “(Loss) income from
discontinued operations, net of income taxes” (Note 3).





The
following weighted average assumptions are used in the determination of the net
periodic benefit cost and the projected benefit obligation:





Domestic
      Plan
            
            International
      Plans2009
            2008
            2007
            
            2009
            2008
            2007Projected
      benefit obligationDiscount
      rate
            6.50%
            7.25%
            5.60%
            
            4.60%
            5.45%
            4.94%Expected
      return on plan assets
            6.90%
            6.75%
            6.75%
            
            6.11%
            5.74%
            5.94%Rate
      of compensation increase
            3.75%
            3.75%
            3.75%
            
            4.00%
            4.28%
            3.94%Benefit
      costDiscount
      rate
            7.25%
            5.80%
            5.25%
            
            5.94%
            4.74%
            4.85%Expected
      return on plan assets
            6.75%
            6.75%
            6.50%
            
            6.28%
            5.74%
            5.94%Rate
      of compensation increase
            3.75%
            3.75%
            3.75%
            
            4.32%
            3.85%
            3.94%





Discount
rate assumptions have been, and continue to be, based on the prevailing market
long-term interest rates at the measurement date.




The
changes in the projected benefit obligation, fair value of plan assets, and the
funded status of the plans are as follows:





Domestic
      Plan
            International
      Plans2009
            
            2008
            
            2009
            
            2008Change
      in projected benefit obligationProjected
      benefit obligation, beginning of year
            $
            138
            $
            208
            $
            20
            $
            22Service
      cost - pension
            
            2
            
            4
            
            1
            
            1Interest
      cost
            
            10
            
            11
            
            1
            
            1Benefits
      paid
            
            (7)
            
            (5)
            
            (2)
            
            (1)Actuarial
      loss (gain)
            
            17
            
            (39)
            
            3
            
            (1)Curtailments
            
            -
            
            (1)
            
            -
            
            -Foreign
      currency exchange rate changes
            
            18
            
            (40)
            
            -
            
            (2)Projected
      benefit obligation, end of year
            
            178
            
            138
            
            23
            
            20Change
      in fair value of plan assetsFair
      value of plan assets, beginning of year
            
            163
            
            246
            
            18
            
            23Employer
      contributions
            
            1
            
            3
            
            -
            
            1Employee
      contributions
            
            1
            
            1
            
            -
            
            -Actual
      return on plan assets
            
            14
            
            (35)
            
            -
            
            (2)Benefits
      paid
            
            (7)
            
            (5)
            
            (2)
            
            (1)Foreign
      currency exchange rate changes
            
            20
            
            (47)
            
            -
            
            (3)Fair
      value of plan assets, end of year
            
            192
            
            163
            
            16
            
            18Funded
      status – over/(under) at end of year
            $
            14
            $
            25
            $
            (7)
            $
            (2)





The
funded status of the Domestic plan, measured as the difference between plan
assets at fair value and the projected benefit obligation, was included within
other long-term assets (Note 10). The funded status of the International Plans
related to MDS Pharma Services and was included in liabilities of discontinued
operations on the consolidated statements of financial position.





A
reconciliation of the funded status to the net plan assets (liabilities)
recognized in the consolidated statements of financial position is as
follows:


Domestic
      Plan
            International
      Plans2009
            
            2008
            
            2009
            
            2008Projected
      benefit obligation
            $
            178
            $
            138
            $
            23
            $
            20Fair
      value of plan assets
            
            192
            
            163
            
            16
            
            18Plan
      assets in excess of (less than) projected benefit
    obligations
            
            14
            
            25
            
            (7)
            
            (2)Unrecognized
      net actuarial loss (gain)
            
            10
            
            (8)
            
            6
            
            3Net
      amount recognized at year end
            $
            24
            $
            17
            $
            (1)
            $
            1Long-term
      pension plan assets
            $
            14
            $
            25
            $
            1
            $
            1Non-current
      liabilities
            
            -
            
            -
            
            (8)
            
            (2)Accumulative
      other comprehensive loss (income)
            
            10
            
            (8)
            
            6
            
            2Net
      amount recognized at year end
            $
            24
            $
            17
            $
            (1)
            $
            1






The
following table illustrates the amounts in accumulated other comprehensive
income that have not yet been recognized as components of pension
expense:





2009
            
            2008Net
      actuarial loss (gain)
            $
            16
            $
            (6)Deferred
      income taxes
            
            (5)
            
            2Accumulated
      other comprehensive loss (income) - net of tax
            $
            11
            $
            (4)








The
weighted average asset allocation of the Company’s pension plans is as
follows:





Target
            Domestic
      Plan
            International
      PlansAsset
      Category
            
            2009
            2008
            2009
            2008Cash
            -
            -
            0.1%
            48.5%
            51.7%Fixed
      income
            35.0%
            39.6%
            39.6%
            18.2%
            17.3%Equities
            65.0%
            60.4%
            60.3%
            33.3%
            31.0%Total
            100.0%
            100.0%
            100.0%
            100.0%
            100.0%





The
Company maintains target allocation percentages among various asset classes
based on investment policies established for the pension plans, which are
designed to maximize the total rate of return (income and appreciation) after
inflation within the limits of prudent risk taking, while providing for adequate
near-term liquidity for benefit payments. The Company’s expected return on asset
assumptions are derived from studies conducted by actuaries and investment
advisors. The studies include a review of anticipated future long-term
performance of individual asset classes and consideration of the appropriate
asset allocation strategy given the anticipated requirements of the plans to
determine the average rate of earnings expected on the funds invested to provide
for the pension plans benefits. While the study gives appropriate consideration
to recent fund performance and historical returns, the assumption is primarily a
long-term, prospective rate.





Expected
future benefit payments are as follows:





Years
      ending October 31
            Domestic
              Plan
            International
      Plans2010
            $
            7
            $
            12011
            
            8
            
            -2012
            
            8
            
            -2013
            
            9
            
            12014
            
            9
            
            12015
      – 2019
            
            56
            
            5$
            97
            $
            8





Other
      benefit plans


Other
benefit plans include a supplemental retirement arrangement, a
retirement/termination allowance and post-retirement benefit plans, which
include contributory health and dental care benefits and contributory life
insurance coverage. All non-pension post-employment benefit plans are
unfunded.





The
components of net periodic cost for these plans are as follows:





2009
            
            2008
            
            2007Components
      of net periodic costInterest
      cost
            $
            1
            $
            1
            $
            1Recognized
      actuarial gain
            
            (1)
            
            -
            
            -Curtailment
      gain recognized
            
            -
            
            (1)
            
            -Net
      periodic cost
            $
            -
            $
            -
            $
            1





The
weighted average assumptions used to determine the net periodic pension cost and
projected benefit obligation for these plans are as follows:





2009
            2008
            2007Projected
      benefit obligationDiscount
      rate
            6.09%
            7.15%
            5.56%Rate
      of compensation increase
            4.12%
            4.13%
            4.16%Initial
      health care cost trend rate
            9.12%
            8.84%
            9.10%Ultimate
      health care cost trend rate
            4.85%
            4.84%
            4.86%Years
      until ultimate trend rate is reached
            13
            9
            5Benefit
      costDiscount
      rate
            7.15%
            5.70%
            5.18%Rate
      of compensation increase
            4.12%
            4.13%
            4.16%





Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans. A one-percentage point change in assumed health care
cost trend rates would have had the following impact in fiscal
2009:





1%
      Increase
            1%
      DecreaseChange
      in net benefit cost
            $
            -
            $
            -Change
      in projected benefit obligation
            $
            1
            $
            (1)





The
changes in the projected benefit obligation and the funded status of the plans
are as follows:





2009
            
            2008Change
      in projected benefit obligationProjected
      benefit obligation – beginning of year
            $
            10
            $
            21Interest
      cost
            
            1
            
            1Benefits
      paid
            
            (1)
            
            (1)Actuarial
      loss (gain)
            
            1
            
            (5)Curtailments
            
            -
            
            (1)Foreign
      currency exchange rate changes
            
            3
            
            (5)Projected
      benefit obligation – end of year
            $
            14
            $
            10Funded
      status – over/(under) at end of year
            $
            (14)
            $
            (10)





A
reconciliation of the funded status to the net plan liabilities recognized in
the consolidated statements of financial position is as follows:





2009
            
            2008Projected
      benefit obligation
            $
            14
            $
            10Fair
      value of plan assets
            
            -
            
            -Plan
      assets in excess of (less than) projected obligations
            
            (14)
            
            (10)Unrecognized
      actuarial gains
            
            (3)
            
            (3)Unrecognized
      past service costs
            
            -
            
            (1)Net
      amount recognized at year end
            $
            (17)
            $
            (14)Non-current
      liabilities
            $
            (14)
            $
            (14)Accumulative
      other comprehensive income
            
            (3)
            
            -Net
      amount recognized at year end
            $
            (17)
            $
            (14)





The other
benefit plan liabilities related to continuing operations are included within
other long-term liabilities (Note 16). The other benefit plan liabilities
related to discontinued operations as of October 31, 2009 of $2 million (2008 -
$1 million) are included in liabilities of discontinued operations on the
consolidated statements of financial position (Note 3).





As of
October 31, 2009, the unrecognized actuarial gains and past service costs of $3
million (2008 - $nil), net of tax of $1 million (2008 -
$nil) are included in accumulated other comprehensive income.





Based on
the actuarial assumptions used to develop the Company’s benefit obligations as
of October 31, 2009, the following benefit payments are expected to be made to
plan participants:





Years
      ending October 312010
            $
            12011
            
            12012
            
            12013
            
            12014
            
            12015
      - 2019
            
            5Total
            $
            10





During
fiscal 2010, the Company expects to contribute approximately $2 million and $1
million to the Company’s pension plans and other benefit plans,
respectively.





During
fiscal 2009, the Company contributed $8 million to defined contribution pension
plans on behalf of its employees


(2008 -
$8 million; 2007 - $13 million).





26.
            Segmented
      Information


As
discussed in Note 1, the Company operates as a global life sciences with three
business segments: MDS Nordion (medical imaging and radiotherapeutics, and
sterilization technologies), MDS Pharma Services (pharmaceutical contract
research) and MDS Analytical Technologies (development, manufacture, and sale of
analytical instruments). During fiscal 2009, the Company sold MDS Pharma
Services Phase II-IV and Central Labs and announced its intention to sell its
remaining MDS Pharma Services Early Stage operations. The Company also announced
that it has signed an agreement to sell MDS Analytical Technologies. As a result
of these activities, MDS Pharma Services and MDS Analytical Technologies have
been reported in discontinued operations in the consolidated financial
statements for all periods presented herein (Note 3) and have appropriately been
excluded from the following segment disclosures.





The
Company’s remaining business segment, MDS Nordion, is reported as continuing
operations. The Company’s chief operating decision maker (CODM) and the
operating and financial information regularly reviewed by the CODM has not
changed during fiscal 2009. As the Company continues its strategic
repositioning, management will reevaluate its business segments.  The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. There are no significant
inter-segment transactions. Segmented earnings are computed by taking the
segment’s operating income, interest costs, other expenses and foreign exchange
translations. The corporate segment results include the incremental cost of
corporate overhead in excess of the amount allocated to the other operating
segments, as well as certain other costs and income items that do not pertain to
a business segment.





The
information presented below is for continuing operations.





Operating
results





Year
      ended October 31, 2009MDS
      Nordion
            Corporate
              and
      Other
            TotalRevenues
            $
            231
            $
            -
            $
            231Direct
      cost of revenues
            
            122
            
            -
            
            122Selling,
      general and administration
            
            40
            
            39
            
            79Research
      and development
            
            3
            
            -
            
            3Depreciation
      and amortization
            
            14
            
            10
            
            24Restructuring
      charges, net
            
            -
            
            9
            
            9Change
      in fair value of embedded derivatives
            
            (8)
            
            -
            
            (8)Other
      expenses, net
            
            1
            
            3
            
            4Segment
      (loss) earnings
            $
            59
            $
            (61)
            $
            (2)Total
      assets excluding assets of discontinued operations(Note
      3)
            $
            259
            $
            426
            $
            685Year
      ended October 31, 2008MDS
              Nordion
            Corporate
              and
      Other
            TotalRevenues
            $
            296
            $
            -
            $
            296Direct
      cost of revenues
            
            153
            
            -
            
            153Selling,
      general and administration
            
            48
            
            57
            
            105Research
      and development
            
            3
            
            -
            
            3Depreciation
      and amortization
            
            13
            
            12
            
            25MAPLE
      Facilities lease reassessment
            
            341
            
            -
            
            341Restructuring
      charges, net
            
            -
            
            1
            
            1Change
      in fair value of embedded derivatives
            
            15
            
            -
            
            15Other
      expenses, net
            
            2
            
            6
            
            8Segment
      loss
            $
            (279)
            $
            (76)
            $
            (355)Total
      assets excluding assets of discontinued operations (Note
      3)
            $
            367
            $
            224
            $
            591








Year
      ended October 31, 2007MDS
              Nordion
            Corporate
              and
      Other
            TotalRevenues
            
            290
            
            -
            
            290Direct
      cost of revenues
            
            150
            
            -
            
            150Selling,
      general and administration
            
            60
            
            62
            
            122Research
      and development
            
            4
            
            -
            
            4Depreciation
      and amortization
            
            13
            
            10
            
            23Restructuring
      charges, net
            
            -
            
            9
            
            9Change
      in fair value of embedded derivatives
            
            (4)
            
            -
            
            (4)Other
      income, net
            
            (5)
            
            -
            
            (5)Segment
      (loss) earnings
            $
            72
            $
            (81)
            $
            (9)Total
      assets excluding assets of discontinued operations (Note
      3)
            $
            1,014
            $
            537
            $
            1,551





Revenues
by geographic location are summarized below:





Canada
            
            U.S.
            
            Europe
            
            Asia
            
            Other
            
            Total2009
            $
            7
            $
            127
            $
            31
            $
            43
            $
            23
            $
            2312008
            
            10
            
            169
            
            36
            
            57
            
            24
            
            2962007
            
            10
            
            162
            
            45
            
            47
            
            26
            
            290





Property, plant and equipment by
geographic location and additions are summarized below:





Canada
            
            Europe
            
            Total
            
            AdditionsMDS
      Nordion
            2009
            $
            94
            $
            10
            $
            104
            $
            102008
            
            83
            
            8
            
            91
            
            8Corporate
      and Other
            2009
            $
            27
            $
            -
            $
            27
            $
            52008
            
            33
            
            -
            
            33
            
            5Total
            2009
            $
            121
            $
            10
            $
            131
            $
            152008
            
            116
            
            8
            
            124
            
            13





All of
the goodwill of the Company is carried in Canada.





Significant
customers


For the
year ended October 31, 2009, one major MDS Nordion customer accounted for $38
million or 17% (2008 - $53 million or 18%; 2007 - $55 million or 19%) of the
Company’s product revenues.





27.
            Commitments
      and Contingencies





Leases
and other commitments


The
Company is obligated under non-cancelable operating leases, primarily for its
offices and equipment. These leases generally contain customary scheduled rent
increases or escalation clauses and renewal options.





The
Company is also obligated under outsourcing agreements related to certain
aspects of its information technology and human resources support functions.
Actual amounts paid under these outsourcing agreements could be higher or lower
than the amounts shown below as a result of changes in volume and other
variables. In addition, early termination of these outsourcing agreements by the
Company could result in the payment of termination fees, which are not reflected
in the table below.





As of
October 31, 2009, the Company is obligated under non-cancelable operating
leases, primarily for its premises and equipment leases and other long-term
contractual commitments to make minimum annual payments of
approximately:





Operating
              Leases
            
            Other
      Contractual
              Commitments2010
            $
            19
            $
            472011
            
            14
            
            342012
            
            10
            
            222013
            
            6
            
            202014
            
            4
            
            25Thereafter
            
            11
            
            113$
            64
            $
            261





Net
rental expense for premises and equipment leases for the year ended October 31,
2009 was $20 million (2008 - $25 million; 2007 -
$28 million).





Contractual
commitments


Included
in other contractual commitments is $234 million (2008 - $279 million)
associated with long-term supply arrangements, including the Company’s long-term
Russian cobalt supply agreements and other long-term commitments primarily with
power producers.




Other
contractual commitments also include a remaining four-year commitment totaling
$18 million (2008 - $54 million) relating to the outsourcing of the information
technology infrastructure.




Net sales
of certain products of the Company are subject to royalties payable to third
parties. Royalty expense recorded in direct cost of revenues for the year ended
October 31, 2009 amounted to $6 million (2008 - $3 million; 2007 - $5
million).




Indemnities
and guarantees


In the
normal course of its operations, the Company enters into a variety of commercial
transactions such as the purchase or sales of businesses, the purchase or supply
of products or services, clinical trials, licenses and leases. These
transactions are evidenced by agreements, most of which contain standard
indemnity obligations. The Company’s financial exposure to counterparties under
these indemnity obligations is generally based upon actual future damages which
the counterparty may suffer as a result of the Company’s actions or inaction. In
the circumstances, the Company is not able to make a reasonable estimate of the
maximum potential amount the Company could be required to pay to counterparties
under these indemnity obligations.  Historically, the Company has not
made significant payments under these indemnity obligations.





Liability
insurance


The
Company is self-insured for up to the first $5 million of costs incurred
relating to a single liability claim in a year and to $10
million in aggregate claims arising during an annual policy
period.  The Company provides for unsettled reported losses and losses
incurred but not reported based on an independent review of all claims made
against the Company. Accruals for estimated losses related to self-insurance are
$5 million as of October 31, 2009 (2008 - $5 million).




MDS
Nordion - medical isotope supply disruption




On May
18, 2009, MDS Nordion received information from its primary supplier, AECL,
regarding an interruption in the supply of medical isotopes. AECL announced that
its National Research Universal (NRU) reactor would be out of service for more
than one month due to a heavy water leak in the reactor vessel. On August 12,
2009, AECL further clarified that they expected the reactor would return to
service in the first calendar quarter of 2010. On January 13, 2010, AECL in its
weekly update on the status of the NRU repairs stated that the current schedule
targets return to service by the end of March 2010, however, AECL also reported
that if there are continuing challenges with the repair process, the NRU return
to service schedule could extend into April 2010. According to AECL, guidance on
the duration of the shutdown continues to be founded on the best evidence
available, including the most up-to-date analysis of the inspection data,
progress on repair strategies, and critical path requirements for restart after
an extended shutdown. Although AECL has selected a repair method, there is
uncertainty regarding the time required to complete potentially complex repairs
and the reactor may be out of service for longer than currently announced by
AECL.







Corporate
restructuring


As
previously discussed in Note 20, the Company is in the process of restructuring
its operations given the agreement to sell MDS Analytical Technologies and its
intention to sell Early Stage (Note 3). Contingent upon the closing of a sale of
all or substantially all of the assets of the Company (Note 3), or a change in
accordance with the Company’s COC policy (Note 24), certain executive officers
of the Company are entitled to severances which include: (i) a sum equal to the
executive officer’s annual compensation times a prescribed multiple, ranging
from one to three, (ii) the executive officer’s average annual bonus over the
last three years, and (iii) to the extent the executive officer is subject to
certain U.S. tax requirements a tax gross-up amount in respect thereof. In
addition, other employees in the Toronto, Canada corporate office would be
entitled to severance and certain retention payments if they are terminated by
the Company. MDS expects to record approximately $21 million of additional
restructuring charges in 2010. Subsequent to year end, on January 8, 2010, the
Company announced the departure of Stephen P. DeFalco, former Chief Executive
Officer, and as a result $7 million of the above $21 million of severance and
benefits, including a U.S. tax gross-up, became payable in accordance with his
employment contract.





Pursuant
to the Company’s strategic repositioning and COC policy, MDS may also incur the
following additional costs.





Stock-based
compensation awards


The
Company’s stock-based compensation awards consist of stock options, PSUs granted
under MTIP and RSUs. Upon the sale of MDS Analytical Technologies and pursuant
to the COC policy, all of the outstanding unvested stock-based compensation
awards will accelerate and fully vest.





The
accelerated vesting of all of the 1 million outstanding stock options due to the
COC policy will result in a non-cash stock compensation expense of approximately
$3 million. Substantially all of the unvested stock options are out of the money
as of October
31, 2009. The Company will record a non-cash expense for these stock options
upon the closing of the planned sale of MDS Analytical Technologies, which is
expected to close during the first calendar quarter of 2010.





In
addition, pursuant to the COC policy, all of the stock based incentives granted
to employees including to the executive officers pursuant to the MTIP and RSU
plan will accelerate and fully vest at an estimated cost of approximately $15
million based on approximately 2 million PSUs and RSUs outstanding, and assuming
a share price of $8.00 per Common share. The actual payment will be based on the
average closing price of the Common shares for the five trading days up to and
including the date of vesting. The Company will record amounts payable under the
MTIP and the RSU plans upon the closing of the sale of MDS Analytical
Technologies, which is expected to close in the first calendar quarter of 2010.
The $2 million of RSUs that vested and were paid out in the first fiscal quarter
of 2010 are not included in the $15 million.





Transaction
incentive plan


The
Company implemented a transaction incentive plan (Incentive Plan) on May 20,
2009, which is designed to motivate and retain certain executives to assist in
the evaluation and implementation of strategic alternatives available to MDS.
This Plan established an incentive pool based on a percentage of the enterprise
value of the Company. Based on a share price of $8.00 per Common share, the
payment under the Incentive Plan is estimated to be $10 million of which less
than $1 million was accrued in fiscal 2009.





Contract
cancellation charges


Subsequent
to the sale of MDS Analytical Technologies and Early Stage, the Company will
retain certain contracts that contain minimum purchase or fixed price
commitments that are not economical for the remaining business. The Company
expects to incur up to $5 million of expense to restructure or pay out these
contracts in fiscal 2010. Additionally, the Company intends to vacate all, or
substantially all of the corporate office space in Toronto, Canada, for which
future rent payments and cancellation penalties currently total
approximately $7 million. The Company has initiated actions to sublease the
office space or negotiate a buyout of the remaining lease at a reduced
amount.





Financial
advisory services fees


As a
result of the sale of both MDS Analytical Technologies and Early Stage, MDS will
incur fees of approximately $21 million in connection with financial advisory
services provided by investment bankers to the Company. Approximately $14
million of these fees are related to the sale of MDS Analytical Technologies of
which $5 million was paid in fiscal 2009. In agreement with the investment
bankers, if two business units are sold, they are entitled to a fee based on the
market capitalization of the remaining business which is determined by the first
sixty days average closing market price of the Common shares following the
consummation of the sale of MDS Analytical Technologies and MDS Pharma Services.
Assuming an average share price of $8.00 per Common share, the Company estimates
approximately $7 million of financial advisory services fee would be incurred in
relation to the sale of Early Stage should it occur following the close of the
MDS Analytical Technologies transaction.





In
addition, the Company expects to incur approximately $11 million in legal,
accounting and other advisory fees associated with the sale of MDS Analytical
Technologies, of which $4 million was paid in fiscal 2009. The Company has
approximately $2 million of unpaid advisory fees associated with the sale of
Phase II-IV and Central Labs and currently expects to incur approximately $4
million of advisory fees in relation to the sale of Early Stage.





Long-term
debt


The
long-term senior unsecured notes contain a number of financial and other
covenants, including restrictions on asset sales, debt incurrence and the
ability to consolidate, merge or amalgamate with another corporation or transfer
all or substantially all of the Company’s assets. Based on an agreement that the
Company entered into with the note holders in the fourth quarter of fiscal 2009,
MDS would be required to repay the senior unsecured notes, which includes
principal plus accrued interest and a make-whole payment, within three days on
the closing of the planned sale of MDS Analytical Technologies.





Upon the
closing of the sale of MDS Analytical Technologies, the Company would not be
able to access its existing revolving credit facility. As a result of losing
access to this credit facility, MDS would also be required to cash collateralize
approximately $20 million of letters of credit. The Company expects to retain
sufficient cash from the sale of the businesses in absence of having a revolving
credit facility. Due to the costs and restrictions associated with a new
revolving credit facility, MDS is currently not in negotiations for a new credit
facility; however, the Company may enter into future negotiations if terms
become more favourable.





The terms
of the current credit facility require the Company to meet certain financial
covenants, which it met for the current fiscal year, and limit certain uses of
funds including significant acquisitions. These covenants require the Company to
prepay all amounts outstanding under the facility and provide the lenders’ the
right to discontinue further commitments under the facility before any person
acquires beneficial ownership of, or control or direction over, 50% or more of
the issued and outstanding voting shares of MDS.





The
senior unsecured notes contain a covenant that restricts the Company’s use of
cash for certain purposes if cumulative net income from the date of issuance of
the notes falls below a predefined amount. With the fiscal 2008 non-cash
write-off of the MAPLE Facilities, the cumulative net income was below the
amount defined in the debt covenants for the senior unsecured notes, which
triggered some restrictive debt covenants. The restrictions on the use of cash
include the repurchase of shares, payment of dividends and investments in
businesses that MDS does not control. The Company currently expects these
restrictions to remain in place until the senior unsecured notes are
retired.





If the
sale of MDS Analytical Technologies is not completed, the earnings impact from
an extended NRU reactor shutdown combined with the existing market conditions
may cause a breach of the debt covenants which may require repayment of the
senior unsecured notes and preventing access to the revolving credit facility.
MDS is taking actions to mitigate the risk of any debt covenant violation and is
developing plans to address this situation should it occur. This may involve
negotiating waivers on existing agreements or securing a new, smaller short-term
credit facility to help fund the ongoing liquidity requirements; however, there
can be no assurance that MDS will be successful in securing a new revolving
credit facility, and if so, at what cost.





28.
            Litigation




During
fiscal 2009, the Company was served with a Complaint related to repeat study and
mitigation costs of $10 million and lost profits of $70 million. This action
relates to certain bioequivalence studies carried out at the Company’s Quebec,
Canada facility from January 1, 2000 to December 31, 2004. The Company maintains
reserves in respect of study costs as well as errors and omissions
insurance.  MDS has assessed this claim and no provision has been
recorded related to the claim for lost profit. The Company has filed an Answer
and intends to vigorously defend this action.





During
fiscal 2009, the Company was served with a Statement of Claim related to repeat
study and mitigation costs of $5 million (C$5
million) and loss of profit of $28 million (C$30 million). This action relates
to certain bioequivalence studies carried out at the Company’s Quebec, Canada
facility from January 1, 2000 to December 31, 2004. The Company maintains
reserves in respect of study costs as well as errors and omissions
insurance.  MDS has assessed this claim and no provision has been
recorded related to the claim for lost profit. The Company has filed a Statement
of Defence and intends to vigorously defend this action.





During
fiscal 2008, MDS served AECL with notice of arbitration proceedings seeking an
order to compel AECL to fulfill its contractual obligations under an agreement
entered into with AECL in February 2006 (the 2006 Agreement), and, in the
alternative and in addition to such order, seeking significant monetary damages.
MDS concurrently filed a court claim against AECL and the Government of Canada.
MDS is seeking against AECL (i) damages in the amount of C$1.6 billion (US$1.5
billion) for negligence and breach of contract relating to an agreement entered
into with AECL in August 1996; and (ii) interim, interlocutory and final orders
directing AECL to continue to supply radioisotopes under a certain agreement,
i.e., the 2006 Agreement, pending any final judgment and completion of the MAPLE
Facilities; and, against the Government of Canada, MDS is seeking (i) damages in
the amount of C$1.6 billion (US$1.5 billion) for inducing breach of contract and
interference with economic relations in respect to the 2006 Agreement; (ii) an
order that MDS Nordion may set-off the damages owing to it by the Government of
Canada as a result of the Government’s conduct set out herein against any
amounts owing by MDS Nordion to the Government of Canada under the Fair Debt
Collection Practices Act (FDCPA); and (iii) an interim and interlocutory order
suspending any payments that may be owing to the Government of Canada under the
FDCFA pending the determination of the issues in this litigation and an interim
or interlocutory order requiring the return of all security instruments
delivered in connection with the FDCFA. MDS continues to pursue these actions
with current emphasis on the arbitration proceedings.





29.
            Asset
      Retirement Obligation





During
the year ended October 31, 2009, the Company reviewed the timing of incurring
future site remediation costs of the facility located in Kanata, Ontario, due to
the NRU reactor shutdown (Note 27). As a result, the Company established $5
million (2008 - $nil) representing the present value of future remediation costs
in property, plant and equipment, net and other long-term liabilities in the
consolidated statements of financial position. The capitalized future site
remediation costs will be depreciated and the retirement obligation will be
accreted over the life of the asset.





The fair
value of the retirement obligation is determined based on certain third party
estimates. Considerable management judgment is required in estimating this
obligation. The key assumptions include credit adjusted risk free interest rate,
timing and the estimate of the remediation activities. Changes in these
assumptions based on future information may result in an adjustment to the
estimated obligation over time.





The
Company has pledged a $14 million (2008 - $13 million) letter of credit in
support of future site remediation costs for the Kanata, Ontario
facility.





30.
            Subsequent
      Events





The
Company has evaluated events to January 25, 2010, the date these consolidated
financial statements are issued.





Sale
of MDS Analytical Technologies


U.S.
Federal Trade Commission


On
November 3, 2009, the Company announced that MDS and Danaher had received a
Second Request for information from the FTC regarding the sale of MDS Analytical
Technologies. The Second Request relates to a global market segment that MDS and
Danaher estimate generates less than $50 million in annual revenues for all
sellers combined. The effect of the Second Request is to extend the waiting
period imposed by the Hart Scott Rodino Antitrust Improvements Act of 1976, as
amended for a period of 30 calendar days from the date of the parties’
substantial compliance with the request, unless the waiting period is earlier
terminated. MDS and Danaher continue to cooperate with the FTC.




PerkinElmer,
Inc.


On
December 11, 2009, the Company announced that it was served with a Notice of
Application (Notice) from PerkinElmer, Inc. (PerkinElmer), with whom MDS has a
joint venture to develop, manufacture and sell inductively coupled plasma mass
spectrometers. This product line represents less than 10% of annual revenue
generated by MDS Analytical Technologies. The Notice relates to the previously
announced sale of MDS Analytical Technologies to Danaher. The Notice has been
filed with the Ontario Superior Court of Justice. PerkinElmer seeks a range of
alternative possible remedies including: court direction with respect to the
development of protocols to enforce key provisions of the joint venture
agreement between MDS and PerkinElmer; an injunction preventing enforcement of
provisions in the sale agreement of MDS Analytical Technologies to Danaher,
which provide for MDS’s retention of the joint venture; or an interim and
permanent injunction preventing the completion of the sale of MDS Analytical
Technologies to Danaher. On January 25, 2010, the above action was dismissed.
The Company continues to believe the sale of MDS Analytical Technologies to
Danaher will be completed during the first calendar quarter of
2010.





Intent
to sell MDS Pharma Services Early Stage


During
the first quarter of fiscal 2010, continued deterioration of market conditions,
the declining Early Stage customer base and new developments in its ongoing
strategic review process, including recent discussions with interested parties,
are now likely to result in lower sale proceeds than previously expected, which
could lead to an additional loss on sale in the range of $30 million to $60
million (Note 3).




31.
            Comparative
      Figures





Certain
figures for the prior period have been reclassified to conform to the current
period’s consolidated financial statements presentation.