Exhibit 1.1
  
  
  
  
  
  
  
  MDS
INC.
  ANNUAL
INFORMATION FORM
  FOR
THE YEAR ENDED OCTOBER 31, 2009
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 January
25, 2010
 Toronto,
Canada
 
 
   INTERPRETATION1
 ITEMS
      AFFECTING THE COMPARABILITY OF FINANCIAL INFORMATION OF PRIOR
      YEARS1
 DOCUMENTS
      INCORPORATED BY REFERENCE2
 CAUTION
      REGARDING FORWARD-LOOKING
STATEMENTS2
 1.
              CORPORATE
      STRUCTURE
 1.1
              Jurisdiction
      of Incorporation
 1.2
              Current
      Organization
 2.
              GENERAL
      DEVELOPMENT OF THE BUSINESSES OF MDS
 2.1
              Overview
 2.1.1
              Life
      Sciences
 2.1.2
              Diagnostic
      Laboratories
 2.1.3
              Customers
 2.1.4
              Employees
 2.2
              Recent
      Industry Developments
 2.2.1     Industry
      Developments – MDS Nordion10
 2.2.2     Industry
      Developments – MDS Analytical Technologies and MDS Pharma
      Services11
 2.3
              Business
      Focus of MDS
 2.4
              Financial
      and Other Developments
 2.4.1
              Capital
      Structure
 2.4.2
              Acquisitions
 2.4.3
              Divestitures,
      Discontinuances and Other Transactions
 2.4.4    MDS
      Nordion Strategic Considerations14
 3.
              NARRATIVE
      DESCRIPTION OF THE BUSINESS OF MDS
 3.1
              Reportable
      Operating Segments
 3.2
              MDS
      Nordion – Continuing Operations
 3.3
              MDS
      Pharma Services – Discontinued Operations
 3.4
              MDS
      Analytical Technologies – Discontinued Operations
 3.5
              Diagnostic
      Laboratories
 3.6
              Significant
      Investees
 3.6.1
              Lumira
      Capital Corp.
 3.7
              Principal
      Facilities
 3.8
              Research
      and Development
 3.9
              Environmental
      Compliance
 3.10
              Other
      Business Matters
 3.10.1
              Risk
      Factors
 3.10.2
              Legal
      Proceedings and Regulatory Actions
 3.10.3
              Interest
      of Management and Others in Material Transactions
 3.10.4
              Transfer
      Agent and Registrar
 3.10.5
              Material
      Contracts
 3.10.6
              Experts
 4.  SELECTED
      CONSOLIDATED FINANCIAL
INFORMATION59
 4.1
              Summary
      Annual Information (Year to October 31)
 4.2
              Dividends
 4.3
              Capital
      Structure
 5.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS
 6.
              MARKET
      FOR SECURITIES
 7.
              DIRECTORS
      AND OFFICERS
 7.1
              Directors
 7.2
              Executive
      Officers
 7.3
              Additional
      Disclosure for Directors and Executive Officers
 8.
              AUDIT
      COMMITTEE INFORMATION
 8.1
              Composition
      of the Audit Committee
 8.2
              Auditor
      Service Fees
 8.3
              Pre-approval
      Policy for External Audit Services
 9.
              ADDITIONAL
      INFORMATION
 APPENDIX
      I – MDS INC. AUDIT COMMITTEE
CHARTER68
 APPENDIX
      II – DEFINITIONS80
 
 
 
  
 The
following are trademarks or registered trademarks of MDS Inc. or its
subsidiaries
 MDS; AB
SCIEX Triple QuadTM; API 2000TM; API 3200TM; API 4000TM; API 5000TM; Arcturus®,
ClinQuickTM; ELAN®; FlexStation®; FLIPR®; GenePix®; GlucotraceTM; ImageXpress®;
MetaFluor®; MetaMorph®; MetaVueTM; Nordion; QSTAR®; QTRAP®; Quality on TimeTM;
Sciex; SpectraMax®; TheraSphere®; Threshold®; and TOF/TOFTM.
 
 
 The
following are registered trademarks belonging to the companies
indicated:
 AzedraTM                                Molecular
Insight Pharmaceuticals, Inc.
 Bexxar®                                GlaxoSmithKline
 ZemivaTM                                Molecular
Insight Pharmaceuticals, Inc.
 Zevalin®                                Cell
Therapeutics, Inc.
 
 
 
   MDS
INC.
 ANNUAL
INFORMATION FORM
  INTERPRETATION
  In this
Annual Information Form (AIF), “we”, “us”, “our”, “MDS”, and “the Company” refer
to MDS Inc., its subsidiaries and joint ventures.  In this AIF, all
references to specific years are references to the fiscal year ended October 31,
2009.  All references to “$” or “dollars” are references to U.S.
dollars and all reference to C$ are to Canadian dollars, unless otherwise
specified.
  Certain
terms and abbreviations used in this AIF are defined in Appendix II -
Definitions.
  ITEMS
AFFECTING THE COMPARABILITY OF FINANCIAL INFORMATION OF PRIOR YEARS
  In the
first quarter of fiscal 2009, the Company’s Board of Directors formed a Special
Committee to review strategic alternatives to enhance shareholder value. During
fiscal 2009, as a result of the strategic review process, the Company sold its
MDS Pharma Services Phase II-IV and Central Labs operations and announced our
intention to sell MDS Pharma Services Early Stage operations. MDS also announced
that the Company entered into an agreement to sell MDS Analytical Technologies
(AT Sale).
  All
financial references in this document, unless otherwise indicated, are based on
continuing operations, primarily consisting of MDS Nordion and corporate
operations.  All other operations are reported as discontinued
operations including MDS Analytical Technologies, MDS Early Stage Pharma
Services, and previously divested operations including  our Phase
II-IV and Central Lab operations of MDS Pharma Services, the Diagnostic
Laboratories business, certain early-stage pharmaceutical research services
operations, and our interests in Source Medical Corporation
(Source).  All financial references for the prior years have been
restated to reflect this treatment.
  
  DOCUMENTS
INCORPORATED BY REFERENCE
   The
following sections of the MDS 2009 Annual Report Financial Review (2009
Financial Review) are incorporated by reference into this AIF:
  1.
              The
      audited consolidated financial statements of MDS Inc. for the years ended
      October 31, 2009, October 31, 2008 and October 31, 2007, reported on by
      Ernst & Young LLP, Chartered Accountants (2009 Financial Statements)
      on pages 41 to 46 of the 2009 Financial Review;
  and
  2.
              Management’s
      Discussion and Analysis of financial condition and results of operations
      of MDS Inc. for the fiscal year ended October 31, 2009 (2009 MD&A)
      contained on pages 1 to 40 of the 2009 Financial
  Review.
  3.
              The
      Management Proxy Circular dated September 17, 2009 issued in relation to
      the Special Meeting of Shareholders of MDS Inc. on October 20, 2009
      regarding the approval of the sale of MDS Analytical
      Technologies.
  Also
incorporated by reference is the Management Proxy Circular, dated January 8,
2010, with respect to the March 11, 2010 Annual and Special Meeting of
Shareholders.
  CAUTION
REGARDING FORWARD-LOOKING STATEMENTS
 
 From time
to time, we make written or oral forward-looking statements within the meaning
of certain securities laws, including under applicable Canadian securities laws
and the “safe harbour” provisions of the United States Private Securities
Litigation Reform Act of 1995. This document contains forward-looking
statements, including statements with respect to the impact of the completion of
the sale of MDS Analytical Technologies on the Company’s operations and
financial results, the strategy of the continuing businesses, the proposed use
of proceeds from the sale of MDS Analytical Technologies, if completed, the
Company’s intention to sell MDS Pharma Services’ Early Stage operations, as well
as statements with respect to our beliefs, plans, objectives, expectations,
anticipations, estimates and intentions. The words “may”, “could”, “should”,
“would”, “outlook”, “believe”, “plan”, “anticipate”, “estimate”, “expect”,
“intend”, “forecast”, “objective”, “optimistic”, and words and expressions of
similar import, are intended to identify forward-looking
statements.
 
 By their
very nature, forward-looking statements involve inherent risks and
uncertainties, both general and specific, which give rise to the possibility
that predictions, forecasts, projections and other forward-looking statements
will not be achieved. We caution readers not to place undue reliance on
these statements as a number of important factors could cause our actual results
to differ materially from the beliefs, plans, objectives, expectations,
anticipations, estimates and intentions expressed in such forward-looking
statements. These factors include, but are not limited to: management of
operational risks; the strength of the global economy, in particular the
economies of Canada, the U.S., the European Union, Asia, and the other countries
in which we conduct business; the stability of global equity markets; our
ability to complete the sale of MDS Analytical Technologies and our intended
sale of MDS Pharma Services Early Stage operations in a timely manner, or at
all; our ability to retain customers as a result of any perceived uncertainty
relating to the planned sale of MDS Analytical Technologies and the intended
sale of MDS Pharma Services Early Stage operations; the fact that
our operations will be substantially reduced as a result of the sale of MDS
Analytical Technologies and the intended sale of MDS Pharma Services Early Stage
operations; liabilities that we will retain from businesses sold; our ability to
complete other strategic transactions and to execute them successfully; our
ability to remain in compliance with our senior unsecured notes and credit
facilities covenants; our ability to negotiate future credit agreements which
may or may not be on terms favourable to us; our ability to secure a reliable
supply of raw materials, particularly cobalt and critical medical isotopes
including the return to service of the National Research Universal reactor owned
and operated by Atomic Energy of Canada Limited; the impact of the movement of
certain currencies relative to other currencies, particularly the U.S. dollar,
Canadian dollar and the Euro; changes in interest rates in Canada, the U.S., and
elsewhere; the effects of competition in the markets in which we operate; the
timing and technological advancement of new products introduced by us or by our
competitors; our ability to manage our research and development; the impact of
changes in laws, trade policies and regulations, and enforcement thereof;
regulatory actions; judicial judgments and legal proceedings; our ability to
maintain adequate insurance; our ability to successfully realign our
organization, resources and processes; our ability to retain key personnel; our
ability to have continued and uninterrupted performance of our information
technology systems; our ability to compete effectively; the risk of
environmental liabilities; our ability to maintain effectiveness of our clinical
trials; new accounting standards that impact the policies we use to report our
financial condition and results of operations; uncertainties associated with
critical accounting assumptions and estimates; the possible impact on our
businesses from third-party special interest groups; our ability to negotiate
and maintain collective bargaining agreements for certain of our employees;
natural disasters; public health emergencies and pandemics; international
conflicts and other developments including those relating to terrorism; other
risk factors described in section 3.10; and our success in anticipating and
managing these risks.
 
 The
foregoing list of factors that may affect future results is not
exhaustive. When relying on our forward-looking statements to make
decisions with respect to the Company, investors and others should carefully
consider the foregoing factors and other uncertainties and potential
events. We do not undertake to update any forward-looking statement,
whether written or oral, that may be made from time to time by us or on our
behalf, except as required by law.
  
  1.           CORPORATE
STRUCTURE
  1.1
              Jurisdiction
      of Incorporation
  MDS Inc.
was incorporated on April 17, 1969 under the laws of the Province of Ontario
under the name Medical Data Sciences Limited.  The Company changed its
name to MDS Health Group Limited in April of 1973 and to MDS Inc. in November
1996.  The Company was continued under the Canada Business Corporations
Act (CBCA) in October 1978 and remains subject to that
statute.
  The head
office of MDS, and its principal place of business, is located at 2810 Matheson
Boulevard East, Suite 500, Mississauga, Ontario, Canada, L4W
4X7.   MDS combined its head-office location from two nearby
office locations into the current premises in April 2009.
  1.2
              Current
      Organization
  On
February 2, 2009, our Board of Directors formed a Special Committee to review
strategic alternatives to enhance shareholder value. The Special Committee
reviewed an extensive range of strategic alternatives for MDS.
 
 On
September 2, 2009, MDS announced that it entered into an agreement to sell MDS
Analytical Technologies and that it intends to sell our MDS Pharma Services
Early Stage business.  MDS expects to complete the sale of MDS
Analytical Technologies during the first calendar quarter of 2010. On July 1,
2009, MDS completed the sale of the Phase II-IV operations; as of October 31,
2009, the Company completed the sale of the Central Lab operations. Assuming
completion of the aforementioned divestitures, MDS expects to remain a publicly
traded entity consisting solely of the MDS Nordion business and corporate
operations.
  Significant
operating subsidiaries and partnerships are defined as those
companies/partnerships that contribute 10% or more of the consolidated revenues
or consolidated operating income of MDS, or account for 10% or more of the
consolidated total assets of the Company. The significant operating subsidiaries
and partnerships of the Company set forth below include subsidiaries whose
results are reported in discontinued operations in the consolidated financial
statements.
  Continuing
Operations
  ·
              MDS
      (Canada) Inc., a Canadian (CBCA)
corporation.
  Discontinued
Operations
  ·
              MDS
      Analytical Technologies (US) Inc., a Delaware
  corporation;
  ·
              MDS
      Pharma Services (US) Inc., a Nebraska
  corporation;
  ·
              MDS
      Pharma Services GB Limited, a company incorporated in England and
      Wales;
  ·
              MDS
      Pharma Services Central Lab, S.A.S. incorporated in
      France; and
  ·
              Applied
      Biosystems/MDS Analytical Technologies Instruments partnership, an Ontario
      partnership.
  MDS
beneficially owns, directly or indirectly, 100% of the shares of each of the
above-named operating subsidiaries and a 50% interest in the above-named
partnership.
  The
entities outlined above are consolidated in the financial statements of MDS and
are referred to hereafter as subsidiaries, with the exception of Applied
Biosystems/MDS Analytical Technologies Instruments, which is accounted for on an
equity basis and is referred to hereafter as a joint venture.
  Until
February 26, 2007, the Company conducted the majority of its diagnostic
laboratories business through the following partnerships:
  ·
              MDS
      Laboratory Services, L.P., a partnership established under the laws of
      Ontario in which MDS held an indirect 99.6% interest;
  and
  ·
              Metro-McNair
      Clinical Laboratories Limited Partnership (Metro-McNair), a limited
      partnership established under the laws of British Columbia in which MDS
      held a 75% interest.
  On
February 26, 2007, the Company sold its interest in its diagnostic laboratories
business, including its interest in these partnerships, to Borealis
Infrastructure Management Inc. (see Section 2.1 - General Development of
the Businesses of MDS: Overview).
 
 In
addition to its subsidiaries, including its ownership interests previously
described, the Company owns: a 99.6% non-controlling equity interest in LPBP
Inc., an Ontario corporation, through which it held its former indirect interest
in the Ontario diagnostic laboratories business; and a 52% interest in Lumira
Capital Corp. (formerly MDS Capital Corp.).  Lumira Capital Corp. is
described in Section 3.6 -
Significant Investees.
 
  2.
              GENERAL
      DEVELOPMENT OF THE BUSINESSES OF
MDS
  2.1
              Overview
 
 MDS is a
global life sciences company that provides market-leading products and services
that our customers need for the development of drugs, and for the prevention,
diagnosis and treatment of disease. We have been a leading global provider of
pharmaceutical contract research, medical isotopes and analytical instruments.
We have 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
 
 February
      2, 2009
              ·MDS announces
      formation of Special Committee to review
      strategic     alternatives.
 
 May
      18, 2009
              ·MDS incurs
      medical-isotope supply disruption due to Atomic Energy
      of   Canada Limited shutdown of the National Research
      Universal reactor.June
      1, 2009
              ·MDS announces
      agreement to sell MDS Pharma Services Phase II-IV operations and its
      intention to sell its MDS Pharma Services Central Labs
      operations.July
      1, 2009
              ·MDS Pharma
      Services Phase II-IV operations sold 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.
                ·MDS announces
      intent to return $400 million to $450 million of proceeds from the AT Sale
      to shareholders through a Substantial Issuer Bid.October
      31, 2009
              ·MDS Pharma
      Services Central Labs operations sold for $6 million in
    cash.
 
  As noted
above, in 2009 the Board of Directors formed a Special Committee to review
strategic alternatives to enhance shareholder value.  The strategic
review of the Company’s businesses resulted in the sale of MDS Pharma Services
Phase II-IV (Phase II-IV) to INC Research, Inc. (INC) for $50 million and MDS
Pharma Services Central Labs (Central Labs) to Czura Thornton for $6
million.  On September 2, 2009, MDS announced that the Company had
entered into a definitive agreement to sell MDS Analytical Technologies to
Danaher Corporation (Danaher) for $650 million and our intention to sell the
remaining Early Stage (Early Stage) operations of MDS Pharma Services (see Section 2.4.3 – Divestitures,
Discontinuances and Other Transactions). Additional details of the Board
of Directors decision to sell MDS Analytical Technologies can be found under
“Background to the Sale” in the Company’s Management Proxy Circular dated
September 17, 2009. Assuming completion of the aforementioned divestitures, we
expect MDS to remain a publicly traded entity consisting solely of the MDS
Nordion business and corporate functions.
  In 2005,
the Company announced a strategic plan (2005 Strategic Plan) to focus on the
global life sciences market.  In November 2005, the Company sold its
interest in Source to Cardinal Health Inc. for C$79 million, and in April 2006,
the Calgary Health Region in Calgary, Canada exercised its option to acquire the
Company’s partnership interest in Calgary Laboratory Services (CLS) for C$21
million, (see Section 2.4.3 –
Divestitures, Discontinuances and Other Transactions).
  On
February 26, 2007, the Company completed another step in the 2005 Strategic Plan
by selling its remaining diagnostic laboratories businesses to Borealis
Infrastructure Management Inc. for gross proceeds of C$1.3 billion, (see Section 2.4.3 – Divestitures,
Discontinuances and Other Transactions).
  In line
with the Company’s 2005 Strategic Plan, on March 20, 2007, MDS finalized the
acquisition of Sunnyvale, U.S.-based Molecular Devices Corporation (MD), a
provider of measurement tools for high-content
screening, cellular analysis, and biochemical testing for, $621 million (see
Section 2.4.2 –
Acquisitions).
  In 2007,
MDS carried out restructuring activities and took steps to further optimize the
global footprint of MDS Pharma Services.  During 2007, the Company
finalized the sale of its Phase I clinical facility in Hamburg, Germany,
transferred its Liquid Chromatography/Mass Spectrometry (LC/MS) bioanalytical,
and drug metabolism and pharmacokinetics (DMPK) operations from Montreal, Canada
to its Lincoln, U.S. and Bothell, U.S. sites, respectively. The Company also
consolidated Central Laboratory operations from Hamburg, Germany into Baillet,
France and transferred bioanalytical operations in Sittingbourne, U.K. to its
Zurich, Switzerland site.  The Company invested in new customer-facing
information technology (IT) systems, expanded Central Laboratory operations in
Beijing, China, and initiated a 300-bed expansion at its Phase I facility in
Phoenix, U.S.  The latter opened in January 2008.
  In 2008,
the Company continued to execute its 2005 Strategic Plan.  During the
year, the Company closed several MDS Pharma Services offices, reduced headcount
in various businesses and continued to transition the MDS Analytical
Technologies primary manufacturing base to Asia. In May 2008, MDS completed the
sale of its non-core external beam therapy and self-contained irradiator
products lines.   In June 2008, the Company acquired
California-based Blueshift Biotechnologies, Inc., a developer of screening
platforms for life sciences research.
 
 On
February 2, 2009, our Board of Directors formed a Special Committee to review
strategic alternatives to enhance shareholder value. The Special Committee
reviewed an extensive range of strategic alternatives for MDS and, on September
2, 2009, MDS announced a strategic repositioning of the Company that it believed
would provide the greatest opportunity to unlock the value of MDS’s businesses
in the near-term, and enable a substantial portion of the sale proceeds to be
returned to shareholders. The strategic review also considered the significant
negative impact on the business from the economic downturn, and the unexpected
and prolonged shutdown of the Atomic Energy of Canada Limited (AECL) National
Research Universal (NRU) reactor.
 
 Assuming
the completion of the sale of the MDS Analytical Technologies business, MDS
currently intends to retire all the outstanding Senior Unsecured Notes, cancel
its existing revolving credit facility, and currently intends to distribute
approximately $400 million to $450 million of the sale proceeds to shareholders
pursuant to a substantial issuer bid. The actual amount used to fund the
Substantial Issuer Bid will be determined at the time the bid is commenced, and
will take into account the expected impact on the liquidity of the Common Shares
subsequent to the Substantial Issuer Bid and current estimates of future cash
requirements to fund transactions and restructuring costs, ongoing operations
and future expenditures. The Company currently intends to proceed with a
Substantial Issuer Bid within 30 days following completion of the sale of MDS
Analytical Technologies.
 
 Upon
completion of the sales of MDS Analytical Technologies and MDS Pharma Services
Early Stage operations, we expect MDS to remain a publicly traded entity
consisting solely of the MDS Nordion business and corporate operations. As part
of the strategic repositioning, we are currently planning to seek shareholder
approval at the next Annual and Special Meeting of Shareholders to be held in
March 2010 to change the Company’s name to Nordion Inc. The Company also intend
to wind-down the existing head-office functions in Toronto, Canada, which
currently employ approximately 150 people, and to establish a new corporate
office in Ottawa, Canada. This transition
 is
intended to result in the establishment and hiring of approximately 50 positions
in Ottawa with the remaining 100 current corporate positions being eliminated
due to the reduced scale of the ongoing operations.
 
 Following
the intended business sales, our operations would consist of the MDS Nordion
business as well as certain corporate functions, which we report as Corporate
and Other in our 2009 annual consolidated financial statements and Management
Discussion and Analysis (MD&A). Included in Corporate and Other are finance,
information technology and systems, real estate, human resources, and certain
assets and liabilities expected to be retained by the Company upon the
completion of the aforementioned strategic repositioning.
  2.1.1    Life
Sciences
  The
Company currently has three life sciences business units: MDS Nordion, a global
leader in the provision of innovative technologies for use in medical imaging
and radiotherapeutics, and sterilization technologies; MDS Pharma Services,
which provides pre-clinical and early-stage clinical research services; and MDS
Analytical Technologies, which designs, manufactures and sells analytical
instruments.  In 1991, pursuant to a privatization initiative by the
Government of Canada and under the Nordion and Theratronics Divestiture
Authorization Act, a statute of the Government of Canada, MDS entered
into the medical-isotope manufacturing and distribution business with the
acquisition of an 83% interest in Nordion International Inc. (Nordion) from the
Canadian Development Investment Corporation. In 1995, the Company increased its
ownership interest in Nordion to 100%.
  Also in
1995, MDS entered into the pharmaceutical contract research business with the
acquisition of several privately held companies in the United States and, in
fiscal 2000, acquired Phoenix International Life Sciences Inc., a public company
based in Montreal, Canada with additional operations in the United States and
Europe.  These pre-clinical and early-stage clinical research services
businesses collectively operate globally under the name MDS Pharma
Services.   In 2009, MDS sold our Late Stage operations and we
currently intend to sell our Early Stage operations.  If we complete
the sale of our Early Stage operations, MDS will no longer compete in the
pharmaceutical contract research industry.
  In 1981,
MDS entered the analytical instruments business with the acquisition of Sciex
(acronym for SCIentific EXport).  In 2007, MDS expanded its analytical
instruments business with the acquisition of Molecular Devices (MD) and renamed
this business “MDS Analytical Technologies”.   In 2009, we
entered into an agreement to sell the entire MDS Analytical Technologies
business, including both the Sciex and MD businesses, to Danaher
Corporation.  We expect the sale to close in the first calendar
quarter of 2010.
  2.1.2    Diagnostic
Laboratories
  Until
February 2007, the Company also operated in the health-care industry in Canada
primarily through its diagnostic laboratories business, MDS Laboratory
Services.  The diagnostic laboratories business was the largest
operator of private-sector clinical diagnostics laboratories in
Canada.  Services provided by the Company included clinical laboratory
testing for physicians and non-hospital health-care institutions, management of
hospital laboratories under contract; and other support services for clinical
diagnostics.  MDS completed the sale of the diagnostic laboratories business
to Borealis Infrastructure Management Inc. on February 26, 2007 as disclosed in
Section 2.4.3 – Divestitures,
Discontinuances and Other Transactions.
  2.1.3     Customers
  Customers
of MDS Nordion include a broad range of manufacturers of medical products
including pharmaceutical manufacturers, biotechnology companies, manufacturers
of medical supplies and devices, plus academic and government institutions. The
Company’s other two businesses – MDS Pharma Services and MDS Analytical
Technologies - also sell to a similar group of customers. Certain of MDS
Nordion’s radiotherapeutic products are sold directly to health-care providers
including hospitals and clinics.  MDS Nordion also provides products
and services related to sterilization to customers in the food and consumer
goods industries, and MDS Analytical Technologies provides products and services
to food and environmental-testing industries, which are referred to as the
Applied Market. The customers of MDS Nordion and the Company’s other businesses
are located in virtually all major international markets.
  Through
its former Canadian diagnostic laboratories business, MDS provided products and
services directly to health-care providers, including physicians and
hospitals.
 
 For the
year ended October 31, 2009, one major customer accounted for $38 million or 17%
(2008 - $53 million or 18%; 2007 - $55 million or 19%) of the Company’s
continuing operations’ product revenues.
  The
Company’s business and customer base are global.  MDS’s total
revenues, as invoiced to customers in 2009, were approximately 55% U.S., 13%
Europe, 19% Asia, 3% Canada, and 10% rest of world.
  2.1.4    Employees
  As at
October 31, 2009, MDS had more than 3,600 employees in 13 countries.MDS Nordion employs
approximately 650 people and the MDS Corporate Headquarters employs
approximately 150 people.  The headcount at MDS Pharma Services and
MDS Analytical Technologies on October 31, 2009 was approximately 1,700 and
1,100 employees, respectively.
  2.2
              Recent
      Industry Developments
 
 MDS’s
overall business including MDS Nordion, as well as both MDS Pharma Services and
MDS Analytical Technologies, serve the life sciences industry including
pharmaceutical, biotechnology, academic, government and other areas of the
health-care market.  MDS has been affected by a number of factors that
affect the life sciences market in general including:
 
  ·
              growth
      in the global demand for drugs;
  ·
              pressure
      to accelerate drug development and contain
  costs;
  ·
              investment
      in new technologies associated with the development of sophisticated drug
      treatment options;
  ·
              increased
      regulatory pressure particularly concerning food, drug, and medical
      product safety; and
  ·
              the
      state of the global economy including access to
  capital.
 
 In
addition, MDS Nordion has been directly affected by the global fragility of
medical-isotope supply.
 
 2.2.1    
Industry Developments – MDS Nordion
 
 MDS
Nordion’s medical imaging and radiotherapeutic products are focused on the
diagnosis and treatment of disease.  Governments in the U.S., Canada,
Europe and elsewhere in the world have recognized the benefits of medical
procedures that help provide for early diagnosis of disease and generally
support reimbursement of these procedures, which in turn encourages use by
physicians and patients. Medical isotopes are most commonly used in imaging for
heart disease and the detection and monitoring of cancer. As well, there have
been a number of products developed that use medical isotopes to provide
radiation which, when combined with another drug compound, can be used to target
treatment to cancerous cells.  As with any drug treatment, when these
radiotherapeutic products demonstrate effectiveness and receive regulatory
approval, they are adopted for use in patients and usually accompanied by
reimbursement by government healthcare organizations and/or private
insurers.
 
 The
segment of the health-care industry that is involved in use of medical isotopes
for the diagnosis and treatment of disease is affected by trends of the broader
pharmaceutical industry, as well as certain other factors, particularly related
to product supply.   Some of the key drivers that are increasing
the global use of drugs for the diagnosis and treatment of disease, including
those drugs that utilize medical isotopes, include: the improvement of
health-care systems and standards in developing countries, including increased
access and reimbursement for medical procedures and treatments in these
countries;  the aging of the population, particularly in many of the
developed countries; and increased incidence of disease related to obesity and
other factors.
 
 The
majority of the global supply of medical isotopes are produced from five
multi-purpose research reactors, all of which are over 40 years old.  These
reactors are the AECL’s NRU reactor in Chalk River, Canada; the European
Commission’s High Flux Reactor (HFR) in Petten, Netherlands; the Centre d’Etude
de l’Energie Nucleaire’s Belgian Nuclear Radiopharmacy Centre (BR2) in Mol,
Belgium; the Commissariat a l’Energie Atomique’s Osiris reactor in Saclay,
France, and the Nuclear Energy Corporation of South Africa’s (NESCA) SAFARI-1
reactor in Pelindaba, South Africa.  In the past several years, and
again in 2010, two of these reactors - AECL’s NRU reactor in Canada and the HFR
in the Netherlands - have been or are expected to be out of service for an
extended period of time.  The NRU reactor is currently out of service
and, according to AECL, is expected to be repaired and online by the end of the
first calendar quarter of 2010.  The HFR is expected to be out of
service for approximately six months beginning in mid-February
2010.  As a result of past and present outages, there have been
several periods where there has been a global shortage in the supply of medical
isotopes.  In addition, these five reactors use highly enriched uranium
(HEU) in the production of medical isotopes. Many countries, led by the U.S.
government, are working to eliminate the export and use of HEU due to concerns
over the proliferation of nuclear weapons and safety, and convert to
low-enriched uranium (LEU).  In this regard, in November 2009, Bill H.R.
3276, also known as, the American Medical Isotopes Production Act, was passed by
the House of Representatives.  Included
in H.R. 3276 is language related to phasing out the export of all HEU for use in
making medical isotopes within a decade.  It is uncertain whether the
bill will become law, including the phasing out of exports of HEU.  As
a result of the disruptions of medical-isotope supply and the potential impact
of the focus on conversion to LEU to produce medical isotopes, the
medical-isotope industry is working toward developing new technologies for
viable long-term supply alternatives to produce medical isotopes, alongside the
use of additional medical isotopes produced by methods other than nuclear
reactors, including cyclotrons.
 
 The
sterilization technology segment of the health-care industry is focused on the
prevention of disease through the sterilization of medical products and devices,
as well as food and consumer products.  Medical products and devices make
up the majority of current demand, where growth is primarily driven by growth in
the number of medical procedures worldwide and overall global health-care
spending. A smaller, but likely faster growing part of the current sterilization
market encompasses the sterilization of food and consumer
products.  As there has been an increase in consumer acceptance of
irradiated and sterilized products, these market segments have become an area of
focus within the industry.
 
 2.2.2      Industry
      Developments – MDS Analytical Technologies and MDS Pharma
      Services
 
 The
demand for the services of Contract Research Organizations (CROs) and analytical
instrument products within the life sciences industry has declined over the past
12 – 18 months, primarily as a result of large pharmaceutical company mergers
and consolidation within the pharmaceutical industry, lack of financing for
biotechnology companies, and broader economic conditions.  As a result,
many pharmaceutical and biotechnology companies have delayed or cancelled
certain drug-development programs as they reassessed their drug-development
priorities in an effort to reduce costs and improve the effectiveness of their
Research and Development (R&D) programs.   As well, with the
decrease in the availability of capital during the economic downturn, a number
of biotechnology companies were unable to obtain necessary funding, and
therefore, had to cancel some, or all, of their development
activities.  In addition, decreased spending by life sciences
companies has resulted in a delay and/or decline in spending for new capital
equipment such as mass spectrometers and other instruments used in drug research
and development, and in the Applied Markets for the food, water and other safety
testing.
 
 2.3
              Business
      Focus of MDS
 
 MDS Inc.
has operated as a global life sciences company that provides market-leading
products and services that its 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 molecular 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.
 
 On
September 2, 2009, the Company announced that as a result of a strategic
repositioning, it intended to focus its ongoing operations on its MDS Nordion
business.
  MDS Nordion (see Section 3.2 – MDS Nordion –
Continuing Operations) is a global leader and historically has supplied
more than half of the world’s medical isotopes for medical imaging and radiotherapeutics
to help diagnose and treat disease. MDS Nordion is also the leading provider of
sterilization technologies for disease prevention.  Securing reliable
sources of supply for key isotopes and building safe, dependable logistics
capability are key strategic objectives for this business. MDS Nordion is also
focused on identifying new uses for medical isotopes and building the necessary
manufacturing and development capabilities to be the provider of choice for
companies that are developing new products with applications employing
isotopes.
  
  Discontinued
Operations
  MDS Pharma Services (see Section 3.3 – MDS Pharma Services –
Discontinued Operations) offers global pharmaceutical research services
with a focus on building global scale and delivering quality, on-time studies
through uniform global quality practices and procedures. MDS Pharma Services is
one of the largest CROs in early-stage research (Discovery through Phase
IIa).
 
 MDS Analytical Technologies
(see Section 3.4 – MDS
Analytical Technologies – Discontinued Operations) is a global leader in
certain key life sciences instruments and products which are sold to
pharmaceutical, biotechnology and academic customers.  This business
unit relies heavily on leading-edge research and engineering, as well as
extensive expertise in molecular and cell biology and chemistry to develop mass
spectrometers and bioanalytical measurement instruments that target a clear
advantage over competitive offerings.
  2.4
              Financial
      and Other Developments
  Factors
affecting the comparability of the Company’s financial data for fiscal years
2006 through 2009 include the following:
  2.4.1
              Capital
      Structure
  ·
              In
      December 2002, MDS completed a private placement of $311 million of Senior
      Unsecured Notes. The Senior Unsecured Notes bear interest at rates between
      5.52% and 6.19% per annum, and have maturities ranging from December 2009
      to December 2014.    The Company repaid approximately
      $23 million in December 2009, and has now made scheduled repayments of
      over $113 million.  Following the completion of the sale of MDS
      Analytical Technologies, the Company intends to use the sale proceeds plus
      existing cash on hand, to redeem the balance of the Senior Unsecured
      Notes.
  ·
              Following
      the completion of the sale of MDS Analytical Technologies, MDS currently
      intends to return between $400 million and $450 million to shareholders by
      way of a share buyback through a Substantial Issuer Bid. The actual amount
      will be determined at the time the bid is commenced and will take into
      account, among other things, the expected impact on the liquidity of the
      Common Shares of MDS subsequent to the intended substantial issuer
      bid.  The Company expects the sale of MDS Analytical
      Technologies to be completed in the first calendar quarter of
      2010.
  ·
              In
      July 2005, the Company entered into a C$500 million, five-year committed,
      revolving credit facility with a syndicate of lenders.  This
      facility is scheduled to expire July 14, 2010 and was unused as of October
      31, 2009. Upon the closing of the sale of MDS Analytical Technologies,
      we would not be able to access the C$500 million revolving credit facility
      under the terms of the associated credit facility agreement. As a result
      of losing access to the credit facility, we would also be required to
      cash-collateralize approximately $20 million of existing letters of
      credit. We expect to retain sufficient cash from the sale of the
      businesses in absence of having a revolving credit
      facility.  Due to the current higher costs and restrictions
      associated with a new revolving credit facility, we are not in
      negotiations for a new credit facility. We may, however, enter into a new
      credit facility if terms become more favourable.
  ·
              In
      April 2007, MDS completed a Substantial Issuer Bid and repurchased
      approximately 22.8 million Common Shares for $441 million at a price of
      C$21.90 per share, reducing the number of Common Shares outstanding from
      approximately 144 million to 122
million.
  ·
              In 2008, under the Company’s
      Normal Course Issuer Bid, we repurchased approximately 2.9 million shares,
      reducing the number of Common Shares outstanding to approximately 120
      million.  Our 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. As a result of the write-off of the MAPLE Facilities in fiscal
      2008, the cumulative net income was below the amount defined in the debt
      covenants. The restrictions on the use of cash include the repurchase of
      shares, payment of dividends and investments in businesses that the
      Company does not control. We currently expect these restrictions to remain
      in place until the Senior Unsecured Notes are
    retired.
  
 ·
              In
      fiscal 2009, the Company did not make any share
    repurchases.
 
 2.4.2    Acquisitions
  ·
              On
      March 20, 2007, MDS completed the acquisition of Sunnyvale, U.S.-based
      Molecular Devices Corporation (MD), a leading provider of high-performance
      measurement tools for high-content screening, cellular analysis, and
      biochemical testing. The total cost of the acquisition was $621 million,
      including the cost of the tender offer, the cost to acquire outstanding
      in-the-money options held by MD employees, and transaction
      costs.  Upon completion of this acquisition, MDS established a
      new business unit, MDS Analytical Technologies, which combined MDS Sciex
      with MD.
  ·
              In
      the third quarter of fiscal 2008 MDS Analytical Technologies acquired
      Blueshift Biotechnologies Inc. of Sunnyvale, California. The major product
      suite is the IsoCyteTM benchtop laser scanning cytometer technology which
      compliments our microarray product line within the BioResearch line of
      business.
  Both of
these acquisitions are being sold as part of the sale of MDS Analytical
Technologies to Danaher.
 
 2.4.3    Divestitures,
Discontinuances and Other Transactions
  ·
              In
      2005, the Company announced a strategic plan to focus on the global life
      sciences market.  During 2005, the Company’s interest in Source
      was classified as a discontinued operation, and as stated previously, in
      November, 2005, the Company disposed of its interest in
      Source.  In addition, during 2006, the Company’s partner in CLS
      exercised its right to buy out the Company’s partnership
      interest.
  ·
              In
      2005, the Company approved a plan to divest its pharmaceutics,
      fermentation biopharmaceutics/biosafety, and in vitro Pharmacology
      operations within the MDS Pharma Services business unit.  These
      businesses were classified as discontinued operations. During 2006, these
      businesses were either sold or shut
down.
  ·
              In
      February 2006, MDS and Atomic Energy of Canada Limited (AECL) reached an
      agreement on disputes related to the MAPLE Facilities, which resulted in
      MDS exchanging its ownership of the uncompleted MAPLE Facilities for a
      long-term capital lease of the MAPLE Facilities and a long-term isotope
      supply contract, (See Section 3.2 – MDS Nordion –
      Continuing Operations). Under the 2006 agreement, AECL assumed
      complete ownership of the MAPLE Facilities and took responsibility for all
      costs associated with completing the
facilities.
  ·
              On
      May 16, 2008, AECL and the Government of Canada announced their intention
      to discontinue AECL’s work on the MAPLE Facilities at AECL’s Chalk River,
      Canada laboratories. During the fourth quarter of fiscal 2008, MDS
      wrote-off the long-term capital lease associated with the MAPLE
      Facilities.
  ·
              On
      October 5, 2006, the Company entered into a series of agreements to sell
      its Canadian diagnostics laboratory businesses, MDS Diagnostic Services,
      to Borealis Infrastructure Management Inc. for gross proceeds of C$1.3
      billion.  The sale was completed on February 26,
      2007.
  ·
              On
      May 1, 2008, MDS Nordion sold its external beam therapy and self-contained
      irradiator product lines to Best Medical International
  Inc.
  ·
              On
      July 1, 2009, the Company closed the sale of its MDS Pharma Services Phase
      II-IV operations to INC Research,
Inc.
  ·
              On
      September 2, 2009, the Company entered into an agreement to sell MDS
      Analytical Technologies to Danaher Corporation for gross proceeds of
      US$650 million. The sale is expected to close by March 31,
      2010.  At the same time, the Company announced that it is
      seeking a buyer for its MDS Pharma Services Early Stage
      business.  The Company has not yet entered into an agreement to
      sell its Early Stage business.
  ·
              On
      October 31, 2009, the Company closed the sale of its MDS Pharma Services
      Central Labs operations to Czura
Thornton.
  
 2.4.4    MDS
Nordion Strategic Considerations
  As a
participant in the nuclear industry, MDS Nordion is subject to the Nordion and
Theratronics Divestiture Authorization Act (Canada).  This Act
effectively imposes restrictions on the beneficial ownership or control of
voting shares of MDS (Canada) Inc., a wholly owned subsidiary of MDS and the
entity which holds the Nordion assets, by “non-residents” of Canada (as such
term is defined in the Act). In addition, if MDS Nordion or any of its assets
were to be the subject of an acquisition or merger transaction with a third
party, such transaction would need to comply with competition statutes in
Canada, and other jurisdictions in which we carry on business to assess whether
the transaction is likely to substantially prevent or lessen competition in one
or more markets.  In addition, The Investment Canada Act provides that acquisitions
by “non-Canadians” of control of Canadian businesses are subject to, amongst
other things, review and approval according to a “net benefit to Canada”
test.  Under the 2006 Interim and Long-Term Supply Agreement (2006
Agreement) between MDS (Canada) Inc., on behalf of MDS Nordion, and AECL, MDS
(Canada) Inc. has granted rights of first offer and first refusal in favour of
AECL in the event that MDS (Canada) Inc. proposes to transfer all or a
substantial portion of its isotopes business to certain designated third
parties.
  3.
              NARRATIVE
      DESCRIPTION OF THE BUSINESSES OF
MDS
  3.1
              Reportable
      Operating Segments
  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.
 
 As
a result of a strategic repositioning in fiscal 2009, the Company has reported
MDS Pharma Services and MDS Analytical Technologies as discontinued operations
in the Consolidated Statements of Operations for all periods presented therein.
The Company’s remaining business segment, MDS Nordion, is included and reported
as continuing operations
 
 Prior to
February 26, 2007, as disclosed in Section 2.4.3 – Divestitures,
Discontinuances and Other Transactions, the Company was, through various
operating business units, the leading provider of diagnostic laboratory services
in Canada.
 
  3.2
              MDS
      Nordion – Continuing
Operations
 
 Through
MDS Nordion, MDS is a global leader in the provision of innovative technologies
for use in medical imaging and radiotherapeutics, and sterilization technologies
for medical products and food safety; and the development and manufacture of
radiopharmaceuticals.  MDS Nordion distributes its products in more than 70
countries.
  Product Overview and
Industry Background
  A
radioisotope is a form of a chemical element that emits radiation during its
decay to a stable form. Radioisotopes have important uses in medical diagnosis,
treatment, and research, and are referred to as medical isotopes. Medical
isotopes can be used in medical imaging and radiotherapeutics. In medical
imaging, isotopes are used because of their ability to assist in such diagnostic
procedures as Single Photon Emission Computed Tomography (SPECT) and Positron
Emission Tomography (PET). Isotopes used in medical imaging decay relatively
rapidly and emit particles such as photons or positrons, commonly referred to as
radiation, which can be detected by SPECT or PET cameras.  When formulated
in combination with chemical compounds that are attracted to, or accumulate in,
particular cells, these isotopes can aid physicians to create images of tissues
and organs of the body. These images can then be used in the identification and
treatment of disease. Certain isotopes can be used alone to deliver radiation
therapy directly to cancerous cells. Using the same principles,
radiotherapeutics use medical isotopes in various ways such as linked to
antibodies that target cancer cells,
incorporated into microspheres or (“seeds”), or nanoparticle delivery systems to
place the radiation-producing isotopes directly in or near diseased tissue, such
as a malignant tumour.
  Processing
raw isotopes into a form suitable for the intended medical use is highly
specialized. Many medical isotopes have a half-life, or time it takes for half
the material to decay, of several hours to several days. While this is an
important medical characteristic, it imposes constraints on the manufacturing
process and the logistics procedures needed to deliver refined product to an
end-user. Security of supply is a key customer concern due to the short lifespan
of the products; hence, efficient and safe transportation systems are vital
components of the business.
  Molecular
imaging is a growing market. A key driver of growth includes chronic disease in
aging populations worldwide which are expected to increase demand for the
procedures which medical isotopes make possible. In addition, considerable
research is under way to identify new diagnostic and therapeutic uses for
existing isotopes.
  Sterilization
of medical devices, which accounts for the large majority of sterilization, is a
relatively mature industry with 4%-7% annual market growth. Medical devices are
sterilized in facilities that are specifically constructed to allow the products
to be exposed to radiation. Cobalt 60 (Co60) is
the predominant isotope used to produce the radiation that sterilizes medical
devices by destroying any contaminating microorganisms.  Co60 has
a half-life of over five years; therefore processing and shipping efficiency is
not as time-sensitive as those for isotopes used in medical imaging and
radiotherapeutics.  It does, however, take approximately two years to
produce Co60 in
nuclear reactors; therefore, forecasting supply and working closely with
suppliers to manage the amount and timing of shipments is important in this part
of the business.
  Alternate
applications for this technology are continuously under investigation. The U.S
Food and Drug Administration (FDA)  has approved the use of
irradiation of certain foods for microbial control of pathogens (e.g., E.coli) and as a quarantine
treatment for fruit and vegetables to eliminate agricultural pests. To date, the
commercial use of irradiation has largely been limited to spices, some red meat,
poultry, and certain fresh fruits and vegetables.
 
 Food
irradiation in the U.S. and around the world continues to strengthen and
evolve.  Spices have been irradiated for over a decade in the U.S. where
millions of pounds are sterilized every year.  The technology is endorsed
by the World Health Organization (WHO), United Nations Food and Agriculture
Organization, the FDA, National Aeronautics and Space Administration (NASA) and
the American Medical Association (AMA). Globally, food irradiation has been
adopted by as many as 40 countries that are focused on both safety of their food
supply and export (i.e., countries in Asia and South America).
  Entry
into the medical imaging and radiotherapeutics, and sterilization technologies
businesses require significant capital investment, extensive process development
and access to limited supplies of raw materials. The manufacture of raw isotopes
is dependent upon the availability of capacity in acceptable types of nuclear
reactors and cyclotrons. Processing facilities such as those operated by MDS are
centralized, capital intensive, and expensive to operate. In addition, due to
the nature of the materials handled by the facilities, government and
environmental regulation are significant factors in the
business.
  Overview
of Business
  MDS
Nordion develops, manufactures, and distributes radioactive isotopes to produce
products that include:
  ·
              medical
      isotopes that are used alone or coupled to targeting molecules for use in
      clinical research; diagnosis of cardiac function and other diseases,
      including cancer; and treatment of
cancer;
  ·
              radiopharmaceutical
      products, which use medical isotopes, developed by MDS Nordion, or in
      collaboration with our partners, for targeted imaging in diagnosis and
      targeted therapy for the treatment of disease;
  and
  ·
              industrial
      isotopes and production irradiators for the sterilization of disposable
      medical products and for treating
food.
  MDS
Nordion purchases reactor-produced medical isotopes such as Molybdenum-99
(Mo99),
Iodine-131 (I131),
Iodine-125 (I125)
and Xenon-133 (Xe133) in
an unfinished, non-purified form, and transports them to its own facilities in
Ottawa, Canada for further processing. In the past, MDS Nordion’s principal
source of such isotopes was the NRU. On May 18, 2009, AECL announced that the
NRU would be out of service for more than a month due to a heavy water leak in
the NRU vessel.  On August 12, 2009, AECL announced that the reactor would
be out of service until at least the first quarter of 2010.  On January 13,
2010 AECL stated that the current schedule targets return to service by the end
of March 2010, however if there are continuing challenges to the repair process,
the NRU return-to-service schedule could extend into April 2010.Until the NRU
returns to service, the vast majority of this medical- isotope business of MDS
Nordion will be inactive.  MDS Nordion has been able to source a limited
supply of certain isotopes from other reactors during the period the NRU has
been out of service and, as part of its ongoing business sources, certain
reactor-produced medical isotopes from reactors other than the NRU.
  MDS
Nordion also manufactures and processes cyclotron-produced isotopes such as
Iodine-123 (I123), Thallium-201 (Tl201), Palladium-103 (Pd103) and Yttrium-90
(Y90) at its facilities in Vancouver, Canada and Fleurus, Belgium.  In
addition, in May 2009, MDS Nordion started production of a finished
radiopharmaceutical FDG comprised of Fluorine-18 (F18) used in PET imaging at
its facility in Fleurus.  Prior to this date, the isotope was produced only
through an arrangement with the University of Liege in Belgium.
  The
active pharmaceutical ingredient forms of Nordion-processed isotopes are
incorporated by pharmaceutical companies into radiopharmaceuticals used to
diagnose and treat numerous serious disease states, such as coronary artery
disease and cancer. Mo99decays into Technetium-99m (Tc99m),
which is the most widely used diagnostic imaging isotope in the world.
Approximately 130 million scans are performed each year and 80% use a Tc99m
radiopharmaceutical. The number of scans is expected to grow as the population
in developed countries ages and as the use of molecular imaging in the
management of coronary artery disease expands. Prior to the shutdown of the NRU
in May 2009, MDS Nordion was the world’s leading supplier of Mo99.
  MDS
Nordion is also focused on the development and manufacture of radiotherapeutics
and radiation-based medical devices.  For the treatment of inoperable liver
cancer, MDS Nordion manufactures and markets TheraSphere®.  TheraSphere®
involves injecting tiny irradiated glass beads that target cancerous
tumours in the liver.  In targeting liver cancer cells, the impact on the
patient’s healthy tissues is minimized.
  In
addition, MDS Nordion is working toward identifying new radiotherapeutic uses
for medical isotopes and building the necessary manufacturing and development
capabilities to be the provider of choice for companies that are developing new
products with applications employing isotopes.  In collaboration with
commercial partners, MDS Nordion is developing radiopharmaceuticals such as
ZemivaTM to detect cardiac ischemia and AzedraTM to treat neuroblastoma and
pheochromacytoma with Molecular Insight Pharmaceuticals, Inc.  MDS Nordion
has a contract to manufacture two commercially available radiotherapeutics:
Bexxar® and Zevalin® for GlaxoSmithKline, Inc. and Spectrum Pharmaceuticals,
respectively. Both products are based on monoclonal antibodies and are used to
treat non-Hodgkin’s lymphoma. Zevalin uses Y90 as
the active agent while Bexxar uses I131.
  In 2009,
MDS Nordion commissioned a new dedicated manufacturing facility in Ottawa in
partnership with Bracco Diagnostics, Inc. and commenced manufacturing of
CardioGen-82® used in PET for cardiac perfusion imaging.
  MDS
Nordion has an 80,000-square-foot manufacturing facility at its Ottawa, Canada
site that is utilized on a partnership basis in the development and the direct
manufacture of radiopharmaceuticals.
  MDS
Nordion is a leading supplier of Co60 for
sterilization of single-use medical devices and various applications in food
irradiation and phytosanitary processing. The majority of raw Co60material is produced under long-term supply contracts with nuclear power
suppliers such as Bruce Power L.P. (Bruce Power), Ontario Power Generation (OPG)
and Energoatom (formerly Rosenergoatom), the utility operator responsible for
Russia’s nuclear power plants.  Bruce Power supplies the majority of MDS
Nordion’s Co60 from
four reactors under an exclusive contract with MDS that extends to 2018. 
OPG is MDS Nordion’s second-largest supplier of Co60 with
an exclusive contract that extends to 2015.  MDS Nordion further processes
the raw Co60 into
a finished form for commercial use at its Ottawa, Canada facilities.  The
resulting processed material, or gamma source, is delivered to customers using
approved transport containers and procedures. Customers include major
sterilization contractors, as well as large medical-product manufacturers which
maintain their own in-house sterilization facilities and certain food
producers.
  MDS
Nordion also markets related equipment and services such as industrial-scale
production irradiators.  Delivery or construction of this equipment is
usually accompanied by an initial shipment (“loading”) of a gamma source.
Resupply or replenishment of the gamma source is required from time to time as
the radioactivity level of Co60declines over time at a rate of approximately 12% per year.
  The
nature of MDS Nordion’s products, and the highly regulated environment in which
the Company operates, require compliance with a multitude of regulations as well
as legislation governing radioactive material transportation. The receipt,
processing, handling, shipping and use of radioisotopes are highly regulated,
and MDS Nordion proactively complies with all existing and new security
requirements from multiple authorities around the world. MDS Nordion uses these
regulations as a minimum standard and applies its own controls and procedures,
over and above the required protocols. The logistics system at MDS Nordion can
process isotopes, deliver them to manufacturers and then on to hospitals or
treatment centres within a few days.
  Regulatory
standards include the following:
  ·
              Transport
      Canada regulations for the Transportation of Dangerous
    Goods.
  ·
              Canadian
      Nuclear Safety Commission (CNSC) regulations for Transport of Radioactive
      Materials,    Import/Export controls and source tracking
      requirements.
 ·
              International
      Atomic Energy Agency’s (IAEA) Code of
Conduct.
  ·
              International
      Transport Regulations for Radioactive Materials (Safety Series and Safety
      Standards for transportation of radioactive
  materials).
  ·
              International
      Civil Aviation Organization (ICAO) and International Maritime Organization
      (IMO) requirements for safe transport by air and sea,
      respectively.
  ·
              U.S.
      Department of Transportation
requirements.
  ·
              U.S.
      Nuclear Regulatory Commission
requirements.
  ·
              Member
      state requirements for the transportation of radioactive
      materials.
  MDS
Nordion is committed to complying with all environmental, health, and safety
(EH&S) laws and regulations relevant to its operations.  Our Ottawa,
Canada facility has received ISO 14001 (environmental management systems)
certification from an external authority.  In addition, MDS Nordion
maintains a comprehensive EH&S program, including training for employees and
contractors. MDS Nordion protects the natural environment by using
environmentally sound operation practices, including ALARA (as low as reasonably
achievable), which is designed to keep radiation doses at a minimum for workers
and the public.  MDS Nordion maintains insurance coverage for third-party
claims relating to bodily injury or property damage arising
from the release of pollutants or exposure to isotopes.
  MDS
Nordion is dependent on staff with specialized skills and knowledge necessary to
operate a highly regulated processing facility for radioactive materials. 
Some technical and production employees of MDS Nordion belong to the Public
Service Alliance of Canada, a collective-bargaining agent representing, among
others, certain employees of the Government of Canada. Labour relations are
judged to be good with the unions. Globally, MDS Nordion employs approximately
650 people.
  NRU and MAPLE
Facilities
  MDS
Nordion’s principal source of Mo99 is
the existing NRU reactor located in Chalk River, Canada, which is owned and
operated by AECL.  The NRU reactor is currently licensed until 2011. 
The Government of Canada announced in May 2008 that it had asked AECL to pursue
the extension of the NRU operation beyond 2011.  This license, if renewed,
is typically renewed for a five-year period.  While the Government of
Canada has publicly stated a commitment to support license renewal, there can be
no assurance of renewal, or of the time period of such a renewal. It is critical
that AECL obtain an extension of the site license to maintain supply of medical
isotopes in the near to mid-term.
 
 In 1991,
MDS acquired the Nordion business from the Government of Canada.  At that
time, MDS assumed an existing 1988 isotope supply agreement (the 1988 Agreement)
between Nordion and AECL, a Canadian Crown corporation.  The 1988 Agreement
provided for the supply of isotopes from AECL to Nordion for a maximum of 23
years.  The isotopes were being produced at the AECL’s NRU reactor, and
were eventually to be produced from a new AECL-owned reactor called MAPLE X,
which was to be constructed and operated within this period to provide MDS
Nordion with the assurance of a long-term supply of isotopes.  The
obligation to build MAPLE X became
 the
subject matter of a dispute between MDS, AECL, and the Government of Canada in
1993 to 1994, which resulted in the entering into a new agreement between AECL
and MDS in 1996 (the 1996 Agreement).
 
 The 1996
Agreement replaced the 1988 Agreement, provided for ongoing interim supply from
the NRU, and provided for AECL to design, develop, construct and operate two
nuclear reactors and a processing centre (the MAPLE Facilities) which were to be
owned by MDS.  The MAPLE project was intended to replace the majority of
the isotope-producing capacity of AECL’s NRU reactor, and to also provide a
back-up source of supply.  AECL agreed to provide interim supply of medical
isotopes from NRU until the MAPLE Facilities were operational.  The MAPLE
Facilities were required to achieve certain operational criteria by the year
2000 at a planned cost to MDS of C$145 million.
 
 By 2005,
the project had not yet been completed and the costs had more than doubled, with
MDS’s investment exceeding C$350 million.  To address those issues, in
March 2005, the Company entered into mediation with AECL related to disputes
arising from the 1996 Agreement.  In February 2006, both parties agreed to
a new agreement (the 2006 Agreement) under which MDS exchanged all of its
ownership rights and obligations in the MAPLE Facilities for a new 40 year
long-term supply of isotopes to be produced in the now AECL-owned MAPLE
Facilities.  AECL also acquired $46 million of raw material inventory
(Moly-99 targets) and consumable fuel bundles (highly enriched uranium) from MDS
which are used to produce medical isotopes.  In return, MDS received a cash
payment of $22 million and a non-interest bearing note receivable for $46
million. In addition, the interim supply agreement in the 1996 Agreement was
exchanged for essentially the same interim supply agreement in the 2006
Agreement.  Under the 2006 Agreement, AECL assumed complete ownership of
the MAPLE Facilities and took responsibility for all costs associated with
completing the facilities and all associated ownership responsibilities
including maintenance, repair, production of isotopes, and decommissioning of
the MAPLE Facilities.  The MAPLE Facilities were required to meet certain
operational criteria by October 31, 2008 as specified in the 2006
Agreement.  The parties retained certain rights related to existing
claims.  The terms of this agreement are the subject of the Company’s
current dispute with AECL as discussed below.
 
 On May
16, 2008, AECL and the Government of Canada announced their intention to
discontinue AECL’s work on the MAPLE Facilities located at its Chalk River,
Canada laboratories, effective immediately.  MDS was neither consulted nor
informed in advance by AECL or the Government of Canada about their
decision.  Prior to its May 16, 2008 announcement, AECL had consistently
maintained in regular project review meetings with the Company that it would
complete the MAPLE Facilities.  AECL’s announcement and position represents
a different perspective on AECL’s obligations than that held by
MDS.
 
 On July
8, 2008, MDS served AECL with Notice of Arbitration proceedings seeking an order
to compel AECL to fulfill its contractual obligations under 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 for negligence and breach of contract relating to the
1996 Agreement; 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 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 Facilities Development and Construction Funding Agreement
(FDCFA), a  loan agreement between the Government of Canada and MDS for
C$100 million of which C$64 million is outstanding); 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.
 
 AECL and
the Government of Canada also announced on May 16, 2008 that their decision to
discontinue the MAPLE Facilities project would not impact the current supply of
medical isotopes; that AECL would continue to supply medical isotopes using the
NRU reactor; and that AECL would pursue an extension of the NRU operation beyond
the expiry date of its current license of October 31, 2011.  While MDS
supports the decision to pursue an extension of the license, the Company
believes the approach does not adequately address long-term supply.  It is
the Company’s position that AECL has breached its contract with MDS, and the
Company believes that it has a strong case against AECL and the Government of
Canada with respect to the 2006 Agreement.  MDS’s current focus in on
the confidential arbitration proceedings.  However, given the present stage
and complex nature of the proceedings, the uncertainty in projecting the
probability of any particular outcome of a dispute of this nature and the range
of remedies that may be awarded under the arbitration and/or lawsuit if MDS is
successful in its claim, the Company is unable to project a specific outcome
related to the resolution of this dispute.
 
 MDS has
and continues to receive payments from AECL related to the non-interest bearing
note associated with the MAPLE-related inventories.
  Strategy
  MDS
Nordion is a leading supplier of key isotopes. Revenue growth for isotopes
generally has historically been in line with the overall increase in health-care
spending and population growth - both of which have an impact on the growth in
the utilization of diagnostic tests and the use of disposable medical products.
Sales of medical isotopes do not follow any notable seasonal patterns or other
cycles and demand is relatively constant.  The short half-life of the
isotopes used for medical purposes limits the ability of any market participant
to build significant inventories.
  Security
of supply is a significant objective for the majority of the Company’s
customers. MDS Nordion has developed a strong supply and logistics network to
meet these demands and is seeking alternatives for long-term supply of Mo99. 
While short-term alternative supply is not available, MDS continues to seek
alternate long-term supply, which will not likely generate meaningful supply for
at least five years, if at all. In relation to long-term supply, on April 28,
2009, we announced that MDS Nordion has entered into an agreement with TRIUMF,
Canada’s national laboratory for particle and nuclear physics, to study the
preliminary stage of feasibility of producing a viable and reliable supply of
photo fission-based Mo99.
Subsequently, on June 15, 2009, we announced an agreement with the Karpov
Institute of Physical Chemistry in Moscow, Russia, to study the feasibility of
providing us with a viable and reliable reactor-based supply of Mo99.
Although we are also actively seeking other sources of isotope supply, it is
uncertain as to whether, and/or when, any of these alternate sources of supply,
which are all in feasibility assessment, will become commercially
viable.
 
 In
addition, the Company is developing new and complementary lines of business
based on its expertise with isotopes.  For example, the cancer treatment
market is expected to develop rapidly over the next several years, particularly
in emerging economies. Many of these countries are now able to afford modern
cancer therapies and are expected to make significant investments in this
technology as their health-care systems develop.  Furthermore, MDS Nordion
is building its radiopharmaceutical capabilities targeting drug manufacturers
which may not wish to incur the capital cost or regulatory delays associated
with building their own facilities, and which may want to leverage MDS Nordion’s
highly specialized expertise in radiopharmaceutical development, clinical and
commercial manufacturing.
 
 In
January 2007, MDS Nordion announced that the FDA had approved the use of
TheraSphere® to treat patients with hepatocellular carcinoma (HCC), who have
partial or branch portal vein thrombosis and have been identified as suitable
candidates by their physicians. HCC is the most common form of primary liver
cancer.  Portal vein thrombosis is a blockage, by a blood clot, of the
portal vein, which brings blood to the liver.  TheraSphere® is the first
medical device approved in the U.S. to treat primary liver cancer patients with
this condition. This expanded use extends the current approval of TheraSphere®
as a Humanitarian Use Device for the treatment of HCC.
 
 In
February 2007, MDS Nordion established four Centres of Excellence in Europe for
TheraSphere®, its innovative liver cancer treatment.  The Centres will
serve to train and educate oncology professionals on the use of this innovative
technique.  The Centres of Excellence are:  BCLC Group
Hospital Clinic, Barcelona, Spain; Centre Eugene Marquis, Rennes, France;
University-Hospital Essen, Essen, Germany; and University of Pisa, Pisa,
Italy.
 
 In June
2007, MDS Nordion entered into a collaboration with the University of Ottawa
Heart Institute, Canada’s largest cardiovascular health centre, to establish a
Molecular Imaging Centre of Excellence to advance cardiology research. Molecular
imaging is an emerging technology that differs from traditional medical imaging
as it examines changes at the molecular level within the body to support early
disease detection and treatment assessment. MDS Nordion has invested in this new
centre, which is equipped with a research and development radiochemistry
laboratory to support cardiology research.  This collaboration represents a
unique opportunity to expand MDS Nordion’s molecular imaging
business.
 
 MDS
Nordion supplies the majority of Co60 used
in sterilization technologies on a global basis.  MDS Nordion’s
sterilization technologies are used to sterilize more than 40% of the world’s
single use
medical supplies, such as bandages, catheters and syringes. It has been
estimated that 80% of all surgical gloves in the world are sterilized using
Co60. 
A vast array of consumer products, including contact-lens solution, cosmetics,
and certain foods, are also sterilized with MDS Nordion technology.  It is
expected that the need to safely and effectively sterilize products will
continue to grow.
 
 Isotopes
used for sterilization tend to be somewhat more cyclical, due primarily to the
length of time required to convert Cobalt-59 (Co59)
into Co60and
the limited number of facilities in which this can be done economically. 
In 2005, the company took steps to increase its supply of cobalt and signed a
12-year agreement with Energoatom (formerly Rosenergoatom), the operating
utility of Russia’s nuclear power plants.  In October 2007, the Company
signed an amendment to the 2005 agreement, which provided for an increased and
more consistent supply of Co60to MDS Nordion until 2024.  In June 2009, MDS Nordion signed another
amendment to the agreement.  This amendment, was initiated by a change in
the Russian government’s policy on nuclear products, removed the incremental
volume associated with two reactors that had been expected to begin producing
Co60 in
2015, thereby reducing the future supply commitment by approximately
one-third.  Pricing and other terms were unchanged.  Although the
available supply and volumes in the amended agreement are now lower, compared
with prior years Energoatom is still expected to provide an increased and more
consistent supply of Co60to
MDS Nordion until 2024.
  Competition
  There is
significant capital and logistics investments required to successfully compete
in the molecular imaging market, making the Company’s established position a
competitive advantage.  Since Mo99 is
the most significant isotope on world markets, the majority of competition faced
by the Company is in this product. Major competitors are: Covidien Ltd.;
Institute National des Radioelements (IRE) of Belgium; and the NTP Radioisotopes
(Pty) Ltd. (a wholly owned subsidiary of Nuclear Energy Corporation of South
Africa).  Due to the current instability in isotope supply, it is possible
that new entrants could decide to enter the market and identify alternative
modalities for testing or develop alternative reactor sources of supply to
current reactors, including funding initiatives for reactor capacity in the
U.S.  The OPAL reactor in Australia is also expected to manufacture
medical isotopes.  New entrants likely would require a minimum of three
years to build any such facility.
  Competition
in the sterilization technologies market is different from the medical-isotopes
market due to the substantially different half-life of the products. Co60 is
often bought and sold in large quantities, and can be produced by any of several
nuclear power reactors around the world. While delivery and logistics expertise
remains an MDS Nordion advantage, the most significant competition in the
sterilization market and Co60
supply comes from Reviss Services (U.K.) Ltd. based in England,which acquires cobalt
from Russian and Argentine sources. Competition for sterilization spending also
comes from alternative technologies, the most significant of which are Ethylene
Oxide (EtO) and electron-beam.  Balchem Corporation is the most substantial
EtO supplier, and Ion Beam Applications, S.A. is the major manufacturer of
electron-beam sterilization technologies.  The Company believes that
gamma-based sterilization technologies continue to enjoy advantages over these
competitive technologies in some applications. In addition, there is a
significant installed base of industrial irradiators that should ensure that
gamma irradiation remains a key technology in this
market.
    3.3           MDS
Pharma Services – Discontinued Operations
  MDS
operates as a global contract research organization (CRO) through MDS Pharma
Services. MDS Pharma Services provides drug discovery and early-stage
development services to the pharmaceutical, biotechnology and generic industries
and is one of the top-three CROs in the pre-clinical and early clinical segments
of the CRO market. MDS Pharma Services operates in six countries.
  Industry
Background
  During
the 1970s, integrated pharmaceutical companies conducted the majority of
research leading up to development of pharmaceutical products in-house. At that
time, the only significant research function that was contracted out was
pre-clinical toxicology screening.
  The
drug-development process is extremely expensive due to the cost of the
infrastructure required to support the full range of processes necessary for
drug development and the long period of time required to achieve full regulatory
approval of a new compound. On average, it takes 10 to 12 years and over $800
million to bring a new pharmaceutical from discovery through Phases I to III of
clinical trials and make it available to consumers. Since patent protection for
new products extends for only 17 to 20 years, the profitability of a new
compound can be greatly enhanced by reducing the total cost of development and
by shortening the elapsed period over which development occurs.
  As a
result, companies began to outsource to meet the occasional surge in internal
demand that could not be addressed with in-house capabilities.  In an
effort to reduce both time and costs, major drug companies began outsourcing
portions of the development work to companies that provide specialized research
services. These companies have become known as Contract Research Organizations,
or CROs. Individual CROs tend to specialize in particular stages of the
drug-development process and, therefore, develop expertise in those areas.
Reliance on CRO expertise can enable the pharmaceutical and biotech companies to
achieve cost efficiencies and to shorten the research time for that stage of the
development process while avoiding capital investments.
  The
decision by MDS to enter the CRO business in 1995 was influenced by a number of
key trends that were beginning to affect the industry. The Company believes that
these trends remain in place. In particular, corporate mergers and
cost-containment pressures at pharmaceutical companies are expected to continue
to lead to downsizing of in-house research-and-development capabilities, and
pharmaceutical companies are anticipated to continue to focus increasingly on
marketing and product distribution. Outside suppliers will increasingly be
relied upon to provide services previously secured from in-house departments.
Aside from reducing infrastructure costs for the pharmaceutical companies,
outsourcing is expected to lead to reduced cycle time for
development.
  Globalization
of pharmaceutical markets driven by ongoing mergers of major international
pharmaceutical companies has influenced the selection of a CRO. Those with an
international presence and the ability to conduct trials in multiple
jurisdictions and emerging countries, such as China and India, have greater
chances of becoming preferred providers or strategic partners. The growth of the
biotechnology industry is also significantly influencing the growth of CROs, as
many smaller biotechnology companies elect not to build the infrastructure to
conduct the various phases of the development of their products
in-house.
  More
recently, the decline in the global stock market and valuations, and reduction
in available credit in 2008 resulted in reduced availability of funds which may
reduce the market for outsourcing particularly in the biotech sector, and may
lead to consolidation of clients.  In particular, small biopharma
companies may become more appealing acquisition targets by large pharmaceutical
companies due to reduced capitalizations.
  As a CRO,
MDS provides our clients with services in the early stages of drug discovery and
development.  During this process, certain compounds will fail to meet
the desired effectiveness or safety level and our clients will stop development
work on these compounds.  If this occurs during a trial or test that
the Company is performing, the contract may be cancelled by the
client.  In these situations, MDS is normally paid for work completed
up to the time of cancellation and, in certain cases, receive a cancellation
fee.
  A general
overview of the drug development process is provided in the diagram
below:
  
  Overview of
Business
  Headquartered
in King of Prussia, U.S., MDS Pharma Services is a provider of drug discovery
and early-stage development services to the pharmaceutical, biotechnology, and
generic industries. MDS has provided services to pharmaceutical manufacturers
since 1992, beginning as a centralized support laboratory providing testing
services in connection with Phase III clinical trials. MDS is now one of the top
three CROs in the pre-clinical and early clinical segment of the Early Stage
market. MDS is actively exploring the sale of the MDS Pharma Services Early
Stage business. Provided that the Company is able to obtain what it believes
would be the fair value for the Early Stage business, MDS intends to sell the
MDS Pharma Services Early Stage business. While we believe it is probable that a
sale of Early Stage will occur, in the unlikely event that a transaction does
not occur, we currently intend to retain and invest in building the
business.
  The
pharmaceutical research process can be broken down into three primary components
- laboratory-based research, clinic-based testing, and out-patient-based
testing. MDS includes most laboratory-based research and clinic-based research
in early – stage; the Company has been the leading competitor in this phase of
research based on the installed base of mass spectrometers and on the number of
available clinic beds. MDS Pharma Services’ significant capacity in each of
these areas enables it to take on client work on very short notice and to
develop the necessary expertise in these fields to participate in the most
complex studies.
  Key
service lines for this business include:
  ·
              Pre-clinical, in which
      the Company’s vast library of assays is applied to study the effects of
      compounds on living organisms and in-vitro targets and in which advanced
      understanding of drug safety and toxicology is obtained under strict Good
      Laboratory Practices (GLP) regulated
conditions.
  ·
              Bioanalysis, in which
      advanced technology and analytical science is applied to biological fluids
      to gain an understanding of the drug’s absorption, distribution,
      metabolism and elimination.
  ·
              Early-stage clinical or
      first-in-man testing:Phase I, in which new investigational drugs
      are tested for the first time in healthy participants to assess drug
      safety and to determine how the drugs are processed by the body; through
      Phase IIa clinical proof-of-concept studies, which provide an early
      indication of efficacy in patients thereby allowing sponsors to decide
      whether to off-license or take the compound
  forward.
  MDS
pre-clinical and early clinical operations are in Montreal, Canada; Lincoln,
U.S.; Phoenix, U.S.; Bothell, U.S.; Belfast, Northern Ireland; Zurich,
Switzerland; Lyon, France and Taipei, Taiwan.  These facilities
include Phase I clinics and diagnostics laboratories, as well as support
functions.
 
 During
2004, 2006 and 2007, MDS Pharma Services received written communication from the
FDA related to certain generic bioequivalence studies carried out at MDS Pharma
Services’ bioanalytical laboratory facilities in Montreal, Canada.
 
 In
January 2007, the FDA issued statements that outlined steps that those clients
of our Montreal bioanalytical facilities would be required to take to resolve
any outstanding issues.  The FDA directed the sponsors of approved and
pending generic drug submissions containing study data produced in these
facilities during the period between January 2000 and December 2004 to take
actions to address FDA concerns about the accuracy and validity of these
bioanalytical studies.  In addition, the FDA wrote to sponsors of
innovator submissions, and requested that they advise the FDA of any submissions
containing data from those facilities during the affected period.
 
 In their
letter to generic sponsors, the FDA imposed a six-month time limit to complete
the generic work. This time has since passed, and MDS believes that the Company
has substantially completed all related generic site audits.  MDS
continues to receive a limited number of study audit requests from innovator
clients, and expects that the Company may continue to receive these requests in
low numbers in 2010.
 
 MDS has
responded to questions from European regulators about the nature of the work
that was done for the FDA. The European regulators have reviewed studies in
Montreal that are representative
of the work done at that site, and issued a final report indicating that they
have no significant concerns.
  MDS
Pharma Services is dependent on staff with highly specialized
skills.  Individuals with the requisite credentials – including MD and
PhD designations - are recruited on a global basis.  Globally,
approximately 1,700 employees work in MDS Pharma Services, of which
approximately 300 are located in Canada, 800 in the U.S., 500 in Europe and 100
in Asia.
  Strategy
  MDS
Pharma Services is currently one of the leading early - stage CROs in the
world.  Management intends to focus on its core business, and where
appropriate in the future, may assess strategic transactions to focus the
business and to expand its global capabilities.   In addition,
LeanSigma and other operational improvements are intended to be used to enhance
this business’ ability to serve clients and drive profitability. The Company
continues to focus this business in areas that extend leadership in key fields
and build on existing strengths to enhance client services.  Where MDS
Pharma Services’ operations do not meet the Company's expected returns or do not
fit with the strategic markets in which the Company has chosen to compete, MDS
seeks to divest such businesses.  During 2006 and 2007, MDS sold or
closed a number of smaller, non-strategic lines of business, and consolidated
operations to a reduced number of larger facilities.
 
 In 2008,
MDS Pharma Services launched its Quality On TimeTM
brand to highlight its leadership in providing quality, compliance and client
service.  As well, MDS Pharma Services has developed strong client
relationships and, through customized processes and proprietary software
solutions, has focused on delivering the services and information that fully
meet our client requirements in the drug-discovery and development
process.
 
 In June
2009, the Company announced its strategic intent to focus MDS Pharma Services on
the delivery of early - stage services and its intent to divest its Late-Stage
operations which included Phase II-IV operations and Central Labs business. MDS
subsequently sold its Phase IIb-IV operations to INC Research, Inc. on July 1,
2009, and its Central Labs business to Czura Thornton on October 31,
2009.
 
 In
September 2009, as part of the strategic repositioning, the Company announced
its intent to divest MDS Pharma Services’ Early Stage operations. MDS is
actively seeking a buyer for these operations.
  Competition
  The
growth of the pharmaceutical research services industry has been driven by the
increase in outsourcing by pharmaceutical and biotechnology companies. The
market has experienced high growth rates, although has seen set-backs in past
twelve to eighteen months, and has become highly competitive. Competition for
individual research contracts often includes in-house research departments of
pharmaceutical and biotechnology companies, as well as universities, teaching
hospitals, and other CROs. Industry consolidation and globalization have
affected pharmaceutical companies as well as CROs resulting in the use of fewer,
larger CROs.  The Company believes that outsourcing will continue to
grow as an economically attractive alternative to in-house
research.
  Companies
active in this industry, including MDS, may improve their competitive position
by building scale.  This enhances the ability to service clients with
consistent global quality in their preferred location or in a more timely
fashion, and internal operating efficiencies, which translates into sound and
predicable execution and opportunity to expand profitability.  In
addition, management believes that MDS Pharma Services’ expertise and
capabilities result in a unique offering that contributes to its competitive
position.  MDS Pharma Services’ strength in Pre-Clinical, Phase I and
bioanalytical services allows it to integrate its offerings under complete Early
Stage drug development programs to help pharmaceutical and biotechnology
companies advance their compounds through this development stage more
rapidly.
  There are
Early Stage (pre-clinical to Phase IIa) competitors, some of which are
significantly larger and may have more resources than MDS Pharma
Services.   While there are numerous small CROs with either
functional specialties or local geographic presence, the market continues to
consolidate with market share being gained by the large, global, diversified
CROs.
  3.4           MDS
Analytical Technologies – Discontinued Operations
  MDS
provides life sciences tools and services to customers around the world through
MDS Analytical Technologies.  Applications include drug discovery and
development, bioresearch and mass spectrometry.  MDS Analytical
Technologies designs, develops, manufactures, and markets high-performance
bioanalytical measurement systems acquired through the 2007 acquisition of
Molecular Devices (MD).  In addition, it designs, develops and
manufactures high-end mass spectrometers that are marketed through our joint
venture partners Applied Biosystems (LC/MS high-end mass spectrometers) and
PerkinElmer (ICP/MS high-end mass spectrometers).
  Industry
Background
  In recent
years, research in the life sciences industry has accelerated.  This
expansion of research activity has yielded discoveries that are currently
increasing our understanding of human health and disease. With a better
understanding of biology at the level of genes, proteins and cells, researchers
hope to discover the underlying causes of human diseases and determine ways to
treat them.
  Drugs
typically fight illness by binding to proteins, known as “targets”, and modify
their behaviour to reduce their disease-causing effects.  Once a
protein’s link to a disease is understood, the task of finding a drug that acts
on the protein and treats the disease is undertaken primarily by pharmaceutical
and biotechnology companies.  Drug manufacturers typically own
libraries of potential drug candidates comprising hundreds of thousands, or even
millions, of chemical compounds from which they screen against known
targets.  As life sciences research continues to unveil new targets,
the task of screening large libraries of compounds against these targets
represents both a great opportunity and a technological challenge for
pharmaceutical and biotechnology companies.
  Drug
compounds that progress and become potential drug candidates for in-man use are
rigorously tested for, among other factors, safety, absorption, distribution,
metabolism and excretion (ADME), efficacy and
pharmacokinetics.  High-sensitivity and high-resolution instruments
are necessary to quantify and analyze the physical and biological properties of
substances and metabolites.
  In the
process of developing new and improved drugs to treat diseases, our customers
are looking for the latest in instruments, software, consumables and services to
increase productivity and provide
high-quality data that enables decision-making in the high-cost drug-discovery
and development process.
  Overview of
Business
  MDS first
entered the analytical instruments industry in 1981 with the acquisition of
Sciex and, in 1988, introduced the first liquid-chromatography mass spectrometer
for use on organic compounds to take advantage of the opportunities that exist
in drug discovery and pharmaceutical research services outsourcing for
drug-development companies.
  The
acquisition of Molecular Devices in 2007 brought to MDS a portfolio of
high-performance measurement tools for high-content screening, cellular
analysis, and biochemical testing.  MD’s flagship product lines such
as SpectraMax® and FLIPR® are considered industry standard instruments in liquid
handling and high-throughput screening, respectively.
  MDS
Analytical Technologies also supplies the life sciences industry with
high-sensitivity mass spectrometers under the Sciex brand name.  Sciex
mass spectrometers are marketed through partnerships with Applied Biosystems
(now part of Life Technologies Corporation) and PerkinElmer,Inc. (PerkinElmer)
to a global customer base; sales outside of Canada account for more than 95% of
end-user revenues from MDS’s Sciex products.  For both partnerships,
MDS Analytical Technologies is responsible for manufacturing and has primary
responsibility for research and development. The Company’s partners are
responsible for marketing, sales and service. The partnerships are structured so
that each partner shares equally in the earnings before taxes.  On
November 21, 2008 Applied Biosystems merged with Invitrogen Corporation to form
Life Technologies Corporation (Life).
  Historically,
MDS has been a major innovator of technologically sophisticated mass
spectrometry instrumentation.  In many of its product lines, MDS has
been a leader. Accomplishments include the introduction of the first triple-quad
mass spectrometers, inductively coupled plasma mass spectrometers, and
techniques for detecting ultra-trace amounts of small or large molecules by
atmospheric pressure ionization (electrospray).  Most of these
products have evolved through multiple generations and continue to hold
significant shares of their market segments.
  The
pharmaceutical and biotechnology markets are the major users of technology based
on the principles of liquid chromatography coupled with mass spectrometry
(LC/MS) for detecting organic compounds.  Early models of this
equipment changed and expanded our customers’ ability to search for new drugs or
biotechnology products. Productivity and sensitivity improvements remain the
primary basis for product differentiation for MDS equipment.
  MDS
Analytical Technologies and its partner, Applied Biosystems (now Life), are the
market leader in high-sensitivity LC/MS equipment and have delivered
technological innovation within this industry. This innovation is a result of
significant research and development spending each year.
  A smaller
portion of the Company’s mass-spectrometry market is outside of the
pharmaceutical industry and relies on similar equipment for the detection of
inorganic compounds. For this group of customers, the Company with its partner,
PerkinElmer, produces the ELAN® Inductively Coupled Plasma Mass Spectrometer
(ICP/MS) that provides high sensitivity with extremely high specificity for a
wide range of elements in the analysis of a single sample. The range of market
areas that are addressed with the ELAN® is broad and includes environmental
monitoring (drinking and wastewater analysis),
toxicology (role of trace metals in human disorders), semiconductors (trace
impurities), and the nuclear industry (impurities in uranium). These machines
are marketed on a worldwide basis.
  The
following table summarizes the mass spectrometers offered by the Applied
Biosystems/MDS Analytical Technologies and PerkinElmer Sciex Instruments joint
ventures.  In April 2009, MDS Analytical Technologies introduced a
newly designed mass spectrometer, the AB SCIEX TOF/TOFTM 5800
System.
  
 Instrument Name
              Joint Venture PartnerAB
      SCIEX TOF/TOFTM 5800 System
              Applied
      BiosystemsAPI
      5000TM LC/MS/MS System
              Applied
      BiosystemsAPI
      4000TM LC/MS/MS System
              Applied
      BiosystemsAPI
      3200TM LC/MS/MS System
              Applied
      BiosystemsAPI
      2000TM LC/MS/MS System
              Applied
      BiosystemsQSTAR®
      Elite LC/MS/MS System
              Applied
      BiosystemsQSTAR®
      XL Hybrid LC/MS/MS System
              Applied
      Biosystems4000
      QTRAP® LC/MS/MS System
              Applied
      Biosystems3200
      QTRAP® LC/MS/MS System
              Applied
      Biosystems4800
      MALDI TOF/TOFTM Analyzer
              Applied
      BiosystemsAB
      SCIEX QTRAP® 5500 LC/MS/MS System
              Applied
      BiosystemsAB
      SCIEX Triple QuadTM 5500 LC/MS/MS System
              Applied
      BiosystemsELAN®
      DRC II ICP-MS System
              PerkinElmerELAN®
      DRC-e ICP-MS System
              PerkinElmerELAN®
      9000 ICP-MS System
              PerkinElmer
  MDS also
offers a full range of high-performance bioanalytical tools, including automated
systems for pharmaceutical screening, and a variety of general-purpose research
instruments under the MD brand, which are grouped into two families: BioResearch
and Drug Discovery.
  BioResearch
products include microplate detection products, microarray scanners,
laser-capture microdissection, cellular imaging and analysis, microplate washers
and Threshold® product lines.  Our microplate detection products
consist of the SpectraMax®, Maxline and FlexStation® lines of advanced
microplate readers; they address the increasing need for the acquisition and
processing of large quantities of biochemical and biological
data.  The GenePix® family of products is a complete line of
instruments and software for analyzing microarrays, which enable the
high-throughput identification
of large numbers of genes. For cellular imaging and analysis, the Company offers
the ImageXpress® line of products for high-throughput and cell-based screening
and the MetaMorph®, MetaFluor® and MetaVueTM systems for cellular imaging in the
research environment.  In April 2009,  MDS released the
MetaXpressPowerCoreTM and MetaXpress® 3.0 Cellular Imaging Software which
are  designed to accelerate the throughput of high-content screening
and expand toxicity applications.  The Arcturus® line of laser-capture
microdissection products, help researchers to visualize and extract individual
cells or groups of cells from tissue samples with minimal
damage.  AquaMax is a line of state-of-the-art microplate washers and
other related tools, including cell harvesters, included in the bioresearch
product family.  The Threshold® system emerged from a need by
biopharmaceutical companies for more sensitive and reproducible methods to
detect contaminants in biopharmaceuticals during the manufacturing and
quality-control processes.
  Drug
Discovery products are used to screen large numbers of chemical compounds to
assess their effects on disease targets.  Drug discovery products
include: FLIPR® system and reagent kits, the label-free based CellKeyTM
platforms, automated electrophysiology systems, Cellular Neuroscience
amplifiers, data-acquisition systems and software, and the Analyst system and
reagent kits.  Since its introduction in 1995, the FLIPR® system has
become the industry standard for the automated testing of compounds in live
cells.  FLIPR® instrumentation is complemented by FLIPR® reagent kits
for calcium and membrane potential measurement, which use a proprietary
technology to reduce the number of steps involved in live cell
testing.  Automated electrophysiology products are automated systems
that obtain the same high-quality information from cells as conventional patch
clamping, but at a much faster rate and requiring far less operator
skill.
  The
CellKeyTM System uses patented impedance-based measurements to enable the
measurement of endogenous receptors for more biorelevant screening data. In June
2008, the Company introduced the CellKeyTM384 system. The instrument is deployed
in the drug discovery market and offers a label-free technology for biological
screening. To efficiently visualize cellular events, our high-throughput imaging
systems provide automation of image capture and analysis to allow tens of
thousands of microscopic cellular assays to be performed in a single
day.  The Analyst family of products provides industry-leading
flexibility and throughput for a wide range of biochemical assays. For cellular
neurosciences research, the Company offers a range of products for voltage
recording, current and voltage clamping and patch clamping.   In
the fiscal year, several new software introductions were delivered to the market
across business areas.
  MDS also
provides services to its installed base of customers on both a contract, and
time and materials basis, as well as a variety of post-warranty contract options
for all instrument offerings.
  MDS
Analytical Technologies’ business is dependent on a staff with highly
specialized skills and knowledge in various branches of physics, chemistry
and biology. Individuals with the requisite credentials are recruited on a
global basis and their knowledge is further developed by in-house
training.  Approximately 1,100 people are directly employed by MDS
Analytical Technologies globally.   As a technology-delivery
organization within scientific instruments, a significant percentage of staff in
the research-and-development area of MDS Analytical Technologies have
post-graduate-qualifications at Masters and/or PhD level.  MDS
Analytical Technologies senior research staff includes a number of thought
leaders in their respective fields.
   Strategy
  MDS
Analytical Technologies is a leading global provider of life sciences research
and analysis solutions, with a particular focus on the application of these
technologies within the drug-discovery and development process. As announced on
September 2, 2009, MDS signed an agreement (the “AT Sale Agreement”) to sell MDS
Analytical Technologies to Danaher Corporation.  This transaction is
expected to close in the first calendar quarter of 2010.
  Competition
  The
Company’s principal competitors in the life sciences tools market
include:  Agilent Technologies Inc.; Alpha Innotech Corp.; Becton,
Dickinson and Company; Biotek Instruments, Inc.; Bruker Daltonics, Inc.; General
Electric Company; Hamamatsu Photonics K.K.; Innopsys SA; Leica Microsystems
GmbH; Applied Biosystems Corp; Nikon Corp.; PerkinElmer, Inc.; Sophion Inc.;
Tecan Group Ltd.; Thermo Fisher Scientific Inc.; Waters Corporation; Carl Zeiss,
Inc.  Competition includes other manufacturers selling similar technology
and also companies that sell competing but different technologies for certain
applications.
  Since
technological superiority is a key product differentiator, MDS Analytical
Technologies, along with our partners, seeks to take necessary actions to
protect and defend our intellectual property.  The Company owns
numerous United States, Canadian and foreign patents, and has patent
applications pending in the U.S., Canada and abroad.  In addition to
our patent portfolio, MDS possesses a wide array of unpatented proprietary
technology and know-how.  MDS also owns numerous United States, Canada
and foreign trademarks and trade names for a variety of our product names, and
has applications for the registration of trademarks and trade names pending in
the U.S., Canada and abroad.  MDS believes that patents and other
proprietary rights are important to develop and maintain the competitive
position of our business.
  In 2006,
MDS leased and built a 10,000-square-foot manufacturing facility in Singapore in
an effort to improve the cost base of its instrumentation and materials, and
position the Company to take advantage of the increasing importance of the Asian
market with respect to future sales growth.   To date, the
manufacturing of all LC mass spectrometer product lines have been transferred to
the site, which has since been expanded to 45,000 square feet.
  The
majority of MDS Analytical Technologies’ infrastructure, manufacturing and
research and development activities take place in North America: Concord, Canada
and Sunnyvale, U.S.  However, in addition to the Singapore facility,
the Company has manufacturing operations in Shanghai, China as well as a global
network of sales offices throughout Europe, Asia and Latin America.
  The
operations of MDS Analytical Technologies to a certain degree have been impacted
and could be impacted, by the cyclical nature of the pharmaceutical industry,
the investment cycle in the biotech industry and government regulation of
environmental issues.
  3.5
              Diagnostic
      Laboratories
  Until
2006, the Company also operated in the health-care industry primarily through
its Canadian diagnostic laboratories business, MDS Diagnostic
Services.  The diagnostic laboratories business was the largest
operator of private-sector clinical diagnostics laboratories in
Canada.  Services provided by the Company included clinical laboratory
testing for physicians and non-hospital health-care institutions,
management of hospital laboratories under contract and other support services
for clinical diagnostics.
  The
diagnostic laboratories business was determined not to be consistent with the
Company’s strategic focus and was sold to Borealis Investment
Management.  This transaction was completed on February 26, 2007 as
disclosed under Section 2.4.3 –
Divestitures, Discontinuances and Other Transactions.
  
  3.6
              Significant
      Investees
  3.6.1           
Lumira Capital Corp. (formerly MDS Capital Corp.)
  Lumira
Capital Corp., in which MDS has a 52% interest, is a venture-capital and
fund-management company focused on the health-care and life sciences
industry.  Lumira Capital Corp. earns management fees from the
management of investment funds, including incentive fees based on the overall
success of the funds.  In 2006, Lumira Capital Corp. sold its retail
funds management business.
  3.7
              Principal
      Facilities
  The
following were the principal operating facilities of the Company as at October
31, 2009:
 
 Location of Facility
              Type of Facility
              Owned/
                Leased
              Business Unit
              Approximate
      Square FootageOttawa,
      Canada
              Manufacturing
      Plant
              Owned
              MDS
      Nordion
              337,300Concord,
      Canada
              Manufacturing
      Plant
              Owned
              MDS
      Analytical Technologies
              147,500Sunnyvale,
      U.S.
              Manufacturing/Office
              Leased
              MDS
      Analytical Technologies
              143,100Lyon,
      France
              Research
      Facility
              Owned
              MDS
      Pharma Services
              134,200Lincoln,
      U.S.
              Clinical
      Trials Facility
              Owned
              MDS
      Pharma Services
              130,200Montreal,
      Canada
              Research
      Laboratory and Clinical Trials Facility
              Leased
              MDS
      Pharma Services
              111,400Tempe,
      U.S.
              Clinical
      Trials Facility
              Owned
              MDS
      Pharma Services
              104,500Bothell,
      U.S.
              Research
      Laboratory
              Leased
              MDS
      Pharma Services
              81,100Vancouver,
      Canada
              Manufacturing
      Plant
              Leased
              MDS
      Nordion
              54,800King
      of Prussia, U.S.
              Division
      Office
              Leased
              MDS
      Pharma Services
              16,000Toronto,
      Canada
              Corporate
      Offices
              Leased
              MDS
      Corporate
              54,300Zurich,
      Switzerland
              Research
      Laboratory
              Leased
              MDS
      Pharma Services
              40,200
 Neptune,
      U.S.
              Clinical
      Trials Facility
              Leased
              MDS
      Pharma Services
              39,700Taipei,
      Taiwan
              Research
      Laboratory
              Owned
              MDS
      Pharma Services
              39,500Fleurus,
      Belgium
              Manufacturing
      Plant
              Leased
              MDS
      Nordion
              157,900Singapore
              Manufacturing
      Plant
              Leased
              MDS
      Analytical Technologies
              44,900Belfast,
      N.  Ireland
              Clinical
      Trials Facility
              Owned
              MDS
      Pharma Services
              28,500Downingtown,
      U.S.
              R&D
              Leased
              MDS
      Analytical Technologies
              27,900Shanghai,
      China
              Manufacturing
      Plant
              Leased
              MDS
      Analytical Technologies
              18,900Winnersh,
      U.K.
              Division
      Office
              Leased
              MDS
      Analytical Technologies
              14,000Laval,
      Canada
              Manufacturing
      Plant
              Leased
              MDS
      Nordion
              13,500
 
  3.8
              Research
      and Development
  MDS
carries on various research-and-development (R&D) programs largely focused
on product development at MDS Analytical Technologies and, to a lesser extent,
at MDS Nordion.  Accounting for R&D is described in Note 2 to the
2009 Financial Statements, which are incorporated by reference into this
AIF.
  3.9
              Environmental
      Compliance
  MDS has
established a series of policies to facilitate compliance with applicable
environmental laws and regulations.  The policies require that
business units conduct regular environmental assessments of Company activities,
establish remedial and contingency plans to deal with any incidents, and
establish processes to report to senior corporate management and to the Board
through the Environment, Health & Safety Committee of the Board on the
environmental status of the Company and its subsidiaries.  MDS uses an
independent third party environmental auditing firm to conduct regular
regulatory audits of MDS operations.  MDS believes its approach to
environmental compliance meets all regulatory requirements.  It is not
expected that this policy will have a significant impact on capital
expenditures, consolidated earnings, or our competitive position.
  MDS
Nordion as part of its licensing with CNSC has pledged a $14 million letter of
credit in support of future site remediation costs at its Ottawa, Canada
facility.
  3.10
              Other
      Business Matters
  3.10.1           
Risk Factors
  The
businesses in which MDS operates are subject to a number of risks and
uncertainties discussed below and under the heading “Risks and Uncertainties” on
pages 26 to 28 of the 2009 MD&A and in other documents incorporated herein
by reference. Additional risks and uncertainties not presently known to the
Company or that the Company does not currently anticipate may be material, and
may impair the Company’s business operations. If any such risks occur, the
Company’s business, financial condition and results of operations could be
materially adversely affected.
  Continued
interruption and future interruptions in the supply of reactor-produced isotopes
could have a material adverse effect on the Company’s financial
results.
  To
provide greater security for the future supply of molybdenum-99 and other
reactor-produced radioisotopes commonly used in nuclear medicine, in 1996, the
Company contracted with AECL for the construction and operation of two
special-purpose reactors and a processing facility (the MAPLE Facilities) to
produce such isotopes.  In May 2008, AECL and the Government of Canada
announced their intention to discontinue the MAPLE project without prior notice
to or consultation with MDS.  See “Narrative Description of the
Business of MDS – MDS Nordion - National Research Universal Reactor and MAPLE
Facilities”.
 
 In July
2008, MDS served AECL with Notice of Arbitration proceedings seeking an order to
compel AECL to fulfill its contractual obligations under 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. The Company is currently focused on the
confidential arbitration proceedings.
 
 MDS
believes that it has a strong case against AECL in the arbitration, AECL and the
Government of Canada in the court action with respect to the breach of and
inducing breach of the 2006 Agreement respectively.  The Company is
currently focused on the arbitration proceedings. The Company believes it has a
strong defence to AECL’s counterclaim in the arbitration and a strong claim
against AECL in the court action regarding the 1996
Agreement.  However, given the present stage and complex nature of the
proceedings, the uncertainty in projecting the probability of any particular
outcome of a dispute of this nature, the range of remedies that may be awarded
under the arbitration and/or lawsuit if the Company is successful in its claim,
the Company is unable to project a specific outcome for this
dispute.  An unfavourable outcome would have an adverse effect on the
business, financial condition, and results of operations of the Company which
could be material.
 
 In the
absence of the MAPLE Facilities, the Company depends upon the NRU reactor
operated by AECL in Chalk River, Canada for the supply of a majority of its
reactor-produced radioisotopes.  On May 18, 2009, AECL announced that
its NRU reactor would be out of service due to a heavy water leak in the reactor
vessel.  On August 12, 2009, AECL further clarified that the reactor
would be out of service until at least the first quarter of 2010.  On
January 13, 2010 AECL stated that the current schedule targets return to service
by the end of March 2010, however if there are continuing challenges to the
repair process, the NRU return-to-service schedule could extend into April 2010.
Unless and until the NRU returns to service, MDS Nordion will be unable to
obtain supply of substantially all of its reactor-based medical isotope
requirements.
 
 The NRU
reactor is 50 years old and its current license extends to
2011.  While AECL and the Government of Canada have stated that they
intend to apply to extend the license for an additional five years to 2016,
there can be no assurance that the license will be extended past
2011.  There can also be no assurance that the NRU reactor, if it
returns to service following the current outages, will not experience other
planned or unplanned shutdowns in the future.  An extension of the
current shutdown or further prolonged planned or unplanned shutdowns would have
an adverse effect on the business, financial condition, and results of
operations of the Company which could be material.
 
 If
the sale of MDS Pharma Services Early Stage business is not completed there
could be a negative impact on the market price of the Common Shares, and/or the
use of cash required to
invest in and operate the business may have a significant negative impact on our
cash flow and operations.
 
 We have
announced our intention to sell Early Stage and initially stated that upon
completion of the Early Stage sale, we intended to make a secondary distribution
to shareholders with a portion of the net cash proceeds. This secondary
distribution would be in addition to the planned shareholder distribution of
$400 million to $450 million following the sale of MDS Analytical Technologies.
There can be no assurance that MDS will complete a transaction involving Early
Stage.  During the first quarter of fiscal 2010, continued deterioration of
market conditions, the declining Early Stage customer base and new developments
in the ongoing Strategic Review process, including recent discussions with
interested parties, are now likely to result in lower sale proceeds than
previously expected, and we now believe the sale proceeds from Early Stage may
not be sufficient to fund a second distribution to shareholders. Shareholders
may be expecting the sale and subsequent distribution to be completed, and if we
are unable to complete the sale of Early Stage and/or make a distribution, the
market price of our Common shares may decline.
 
 The
early-stage contract research organization market has recently seen reductions
in orders and revenue as a result of economic conditions, mergers between major
pharmaceutical companies and the reduced availability of funding for
biotechnology companies. In addition, some customers have expressed concern
regarding the uncertainty created by MDS’s Strategic Review process. The
Company’s Early Stage business has seen reduced orders and revenue, which we
believe is driven by these factors. Considering the high portion of fixed costs
within Early Stage, profitability has declined as a result of reduced revenue,
and Early Stage is currently generating an EBITDA loss. While we believe it is
probable that a sale of Early Stage will occur, in the unlikely event that MDS
does not complete the intended sale of Early Stage, in order to increase revenue
and improve profitability, MDS may have to invest additional capital and incur
restructuring costs to strengthen the business. The cost and length of time for
which MDS would have to incur cash outflows related to Early Stage is uncertain.
Those outflows may have a material adverse effect on the business, financial
condition and cash flows of the Company.
 The
Company has retained, or expects it may have to retain, certain obligations in
relation to businesses it has sold or  intends to sell, that may
result in future charges that are significant in relation to cash flow and could
have a material adverse effect on the financial position of the
Company.
  Certain
liabilities, relating to the businesses which have been sold or are expected to
be sold, have been or will be retained by the Company. In particular, the
Company may remain the defendant in current lawsuits, and potentially future
lawsuits, that relate to activities, which occurred prior to the sale of the
businesses, which have been or will be sold. The Company has retained
liabilities relating to studies that were closed prior to the sale of MDS Pharma
Services Phase II-IV business. The Company may also retain certain pre-closing
liabilities of the businesses sold, such as environmental liabilities. As well,
the Company may be required to reimburse the purchasers of the businesses sold
under certain circumstances, including for breaches of representations and
warranties in the applicable sale agreement. Given its reduced size, the Company
now has less of a financial base upon which to sustain such retained
liabilities, and any payments required to be made as a result of such
liabilities could have a material adverse effect on the Company and its
financial condition.
  As
a result of the Strategic Review announced on February 2, 2009, certain
customers, suppliers and partners of MDS may express concern about the long term
strategic direction of the Company, which could have a negative impact on
proposals, new business generation and revenues, and the value we obtain if we
sell the MDS Pharma Services Early Stage business.
  Customers
in the contract research organization industry often work with a small number of
suppliers or in partnership arrangements due to their reliance on their
suppliers to comply with regulatory quality and reporting
requirements.  In response to the uncertainty created by the Strategic
Review, our customers, suppliers and strategic partners may delay or defer
decisions concerning transacting business with us which could have an adverse
effect on the revenues of our Early Stage Pharma Services business.
 
 There
can be no certainty that all conditions precedent to the sale of MDS Analytical
Technologies (AT Sale) will be satisfied or that other factors will prevent the
AT Sale.  Failure to complete the AT Sale could negatively impact the
market price of the Common Shares.
  The
completion of the planned sale of MDS Analytical Technologies is subject to a
number of conditions precedent, certain of which are outside the control of the
Company, including regulatory approvals and the completion of the sale by Life
to Danaher of its interest in the Applied Biosystems MDS Analytical Technologies
Instruments joint venture. There can be no certainty that these conditions will
be satisfied or, if satisfied, when they will be satisfied. Danaher is also not
required to consummate the sale of MDS Analytical Technologies in the event of a
change having a Material Adverse Effect (as defined in the sale agreement
between MDS and Danaher) prior to the consummation of the planned sale of MDS
Analytical Technologies. Although a Material Adverse Effect excludes certain
events that are beyond the control of the Company, such as changes in general
economic conditions or general conditions in any of the markets in which the MDS
Analytical Technologies business operates, there are a number of other events
that would be consider as having a Material Adverse Effect.  If the
sale of MDS Analytical Technologies is not completed, the market price of the
Common shares may decline to the extent that the market price reflects a market
assumption that the sale of MDS Analytical Technologies will be completed. If
the sale of MDS Analytical Technologies is not completed and our Board of
Directors decide to seek another merger or business combination, there can be no
assurance that it will be able to find a party willing to pay an equivalent or
more attractive price than the price to be paid pursuant to the agreement
between MDS and Danaher in relation to the sale of MDS Analytical
Technologies.
 
 The
Company’s business, financial condition, and results of operations could be
subject to significant fluctuation, and the Company may not be able to adjust
its operations to effectively address changes it does not
anticipate.
  The
Company cannot reliably predict future sales and profitability. Changes in
competitive, market and economic conditions may require the Company to adjust
its operations, and it may not be able to make those adjustments or to make them
quickly enough to adapt to changing conditions. A high proportion of the
Company’s costs are fixed and thus, declines in sales could disproportionately
affect its business, financial condition, and results of operations in any
particular quarter.
  Factors
that may negatively affect sales and operating results include:
 
 ·
              access
      to supplies of key materials, such as medical isotopes, required to
      deliver products to the Company’s
markets;
 ·
              the
      timing of supply of cobalt which is primarily obtained from suppliers when
      they shutdown their reactors for
maintenance;
 ·
              global
      or regional economic downturns including instability of equity markets and
      financial markets;
 ·
              lack
      of demand for, or market acceptance of, the Company’s products and
      services;
 ·
              adverse
      changes in industries on which the Company is dependent, such as the
      pharmaceutical and biomedical
industries;
 ·
              changes
      in the volume or timing of product or service
  orders;
 ·
              inability
      of the Company’s customers to obtain regulatory approval or funding to
      continue the development of certain drug compounds including
      radiopharmaceuticals;
 ·
              changes
      in the relative amounts of sales represented by various products,
      services  and customers which have different gross margin
      levels;
 ·
              delays
      or problems in the introduction of new products or
    services;
 ·
              competitors’
      announcement or introduction of new products, services or technological
      innovations;
 ·
              competitive
      pressures resulting in lower selling
prices;
 ·
              changes
      in foreign exchange rates and interest
rates;
 ·
              increased
      costs of raw materials or supplies;
 ·
              changes
      in import licenses or duties changes;
or
 ·
              changes
      in the financial stability of customers or suppliers, including their
      ability to obtain financing at a reasonable
  cost.
 
 The
Company believes that operating results for any particular quarter are not
necessarily a meaningful indication of future results.  While
fluctuations in the Company’s quarterly operating results could negatively or
positively affect the market price of the Common Shares, these fluctuations may
not be related to the future overall operating performance of the
Company.
 
 An
interruption in the Company’s ability to manufacture its products or deliver its
services or an inability to obtain key components or raw materials may adversely
affect its business.
  A number
of the Company’s products are manufactured at single locations, with limited
alternate facilities.  Any event including, a labour dispute, natural
disaster, fire, power outage, security, regulatory, health or other issue that
results in a prolonged business disruption or shutdown to one or more of the
Company’s facilities, could create conditions that prevent it from manufacturing
products at previous levels or at all.
  In
addition, the Company purchases certain components and raw materials from sole
suppliers and may not be able to quickly establish additional or replacement
sources for certain components or materials at acceptable prices.  A
reduction or interruption in manufacturing, or an inability to secure
alternative sources of raw materials or components, could have a material
adverse effect on the business, financial condition or results of operations of
the Company.
  The
NRU reactor which supplies the substantial majority of the Company’s
reactor-based medical isotopes is currently out of service and if, and when, the
NRU returns to service there is uncertainty as to the extent of short and long
term adverse affects to the business of the Company.
  The
Government of Canada publicly stated its intent to exit the isotope business and
as result of this statement and the impact of the NRU reactor being out of
service, various governments, including the U.S., and companies have undertaken
to create new sources of supply of Mo99 or
alternative modalities to the use of Mo99.  MDS
Nordion may not receive supply from these new sources and these new sources
could result in a deterioration of the Company’s market position and/or the
price of Mo99, adversely affecting the Company’s results.  As result
of the NRU reactor being out of service, the Company’s customers may have
secured supply from other suppliers and when the NRU reactor returns to service
there is uncertainty as to whether such customers will purchase from the Company
and the amount that they will purchase from the Company.  As well, in
the past, the Company marketed its medical isotopes based on the reliability of
supply that was provided by the NRU.  The NRU outage negatively
impacted the Company’s marketing position and may result in a reduction of
purchases by the Company’s customers.  The impact of the outage of the
NRU and other reactors has led to an increase in the number of alternate isotope
supply initiatives to address the current fragility of medical isotope supply,
including the introduction of the “American Medical Isotopes Production
Act”.
  Covenants and
Restrictions in our Senior Unsecured Notes and bank credit facilities and other
debt instruments may require us to repay our debt and/or lose access to our
credit facilities or limit our activities.
  Our
Senior Unsecured Notes, as well as our revolving credit facility, require us to
meet certain debt covenants, including specified financial ratios that are
defined under the terms of the note purchase agreement relating to our Senior
Unsecured Notes and revolving credit facility. Failure to meet these financial
ratios may result in an event of default which could result in acceleration of
our indebtedness, under the Senior Unsecured Notes and require us to prepay the
Senior Unsecured Notes before their scheduled due date. Non-compliance with
certain financial ratios could also impair our ability to draw funds on the
revolving credit facility. Future debt instruments to which we may become
subject to could also contain similar provisions.
  The
earnings impact from an extended NRU reactor shutdown, combined with the
continued negative impact of existing market conditions, may cause a breach of
these debt covenants. A breach of these covenants may require repayment of our
Senior Unsecured Notes have a principal amount outstanding of $199 million ($221
million as of October 31, 2009) plus accrued interest and an associated
tax-deductible make-whole payment of approximately $23 million that would
prevent us from accessing the existing revolving credit facility. As a result of
losing access to the revolving credit facility, we would also be required to
cash collateralize approximately $20 million of letters of
credit.  Depending on the timing of the sale of MDS Analytical
Technologies, and based on the reporting of compliance with the covenants with
respect to our first quarter of fiscal 2010, a breach of certain debt covenants
related to the senior unsecured notes and the revolving credit facility may
occur during our second quarter of fiscal 2010. We may, however, not violate our
covenants, or we may be able to obtain a waiver if we expect to be in violation
of the covenants.
  While we
intend to redeem our Senior Unsecured Notes using cash on hand and a portion of
the proceeds from the AT Sale and cancel the revolving credit facility upon
completion of the sale, if we fail to meet the financial ratios at some point
prior to the completion of the sale of MDS Analytical Technologies we would be
required to seek a waiver from the note holders or obtain new financing at
market rates.  The Company may not be able to obtain a waiver or
obtain new financing, and may not have sufficient cash on hand to repay the
Senior Unsecured Notes, including the make-whole payment, cash collateralize
letters of credit and fund its operations. In addition, our Senior Unsecured
Notes and our revolving credit facility contain restrictive covenants limiting
our ability to engage in certain activities.  The note purchase
agreement that governs our Senior Unsecured Notes includes restrictions on our
ability and the ability of our subsidiaries to:
  ·
              pay
      dividends (see Section
      4.2 – Dividends);
  ·
              repurchase
      Common Shares (see Section 2.4.1  –
      Capital Structure);
  ·
              invest
      in businesses that the Company does not
control;
  ·
              sell
      assets;
  ·
              incur
      obligations that restrict the ability of our subsidiaries to pay dividends
      or other amounts to us;
  ·
              guarantee
      or secure indebtedness;
  ·
              enter
      into transactions with affiliates;
  ·
              consolidate,
      merge, or transfer all or substantially all of our assets and the assets
      of our subsidiaries on a consolidated basis;
or
  ·
              initiate
      refinancing of debt.
   Under a
restricted payments covenant in our Senior Unsecured Notes, MDS is currently
unable to pay dividends or repurchase Common Shares which may limit our ability
to access new capital and may negatively affect our share
price.
   The
Company’s access to cash for ongoing operations or for strategic transactions
may be restricted due to the cost or availability of financing and/or government
regulations.
   While MDS
intends to finance on-going operations, capital expenditures and transaction and
restructuring costs from existing cash, cash flow from operations, and cash
proceeds from the AT Sale, cash financing required for large strategic
transactions or unexpected operating needs may prove costly, and difficult or
impossible to obtain.
   Following
the AT Sale, the remaining MDS businesses will be less profitable, particularly
if the NRU does not return to service.  In addition, the Company must
fund ongoing transaction and restructuring costs following the AT
Sale.  As a result, banks and other lenders may not be willing to
provide financing to the Company, or financing on acceptable terms, until the
Company has completed its transition services, the NRU is back in service and/or
the Company has shown a successful reduction in its corporate
costs.
   The
Company faces significant competition and it may not be able to compete
effectively.
  MDS
competes with many companies ranging from multinationals to start-up
companies.  Competition takes many forms, including aggressive pricing
for products or services that are comparable to its own, and development of new
products or services that are more cost-effective, or have superior performance
than its current products or services.  The Company’s products or
services can be rendered obsolete or uneconomical as a result of this
competition.  Failure to compete effectively could cause the Company
to lose market share to its competitors and have a material adverse effect on
the business, financial condition and results of operations of the
Company.
  The
Company also faces competition for marketing, distribution and collaborative
development agreements, for establishing relationships with academic and
research institutions, and for licenses to intellectual property.  In
addition, academic institutions, governmental agencies and other public and
private research organizations also may conduct research, seek patent protection
and establish collaborative arrangements for discovery, research, clinical
development and marketing of products or services similar to those of
MDS.  These companies and institutions compete with MDS in recruiting
and retaining qualified scientific and management personnel as well as in
acquiring necessary product technologies.
  Globalization
of the Company’s industries also impacts its competitiveness.  As
competitors and new entrants establish operations in lower-cost labour markets,
pricing in these industries may be reduced resulting in lower revenues and
profitability for the Company.
  The
Company is subject to complex and costly regulation.
  All of
the Company’s facilities that handle or store radioactive material are
government regulated and inspected.  Operating licenses related to
radioactive materials could be subject to cancellation under certain
circumstances.  Failure to obtain or maintain future operating
licenses could have a material adverse effect on the business, financial
condition, or results of operations of the Company.
 Governmental
agencies throughout the world strictly regulate the drug development
process.  The MDS facilities devoted to pharmaceutical development are
subject to regular inspection by the FDA, Health Canada, the European Medicines
Agency (EMEA) and other regulatory agencies.  Customers also are
subject to periodic review by drug approval authorities.  The
Company’s failure, or any of its customers' failure, to pass an inspection
conducted by the FDA, Health Canada, the EMEA, and any other regulatory body
could result in disciplinary action leading to increased cost and/or reduced
customer demand that would have a material adverse affect on the business,
financial condition or results of operations of the Company.
 
 The
nature of MDS Nordion’s products, and the highly regulated environment in which
MDS Nordion operates, requires compliance with a multitude of regulations as
well as legislation governing radioactive material
transportation.  The receipt, processing, handling, shipping and use
of radioisotopes are highly regulated.  See “Narrative Description of
the Business – MDS Nordion - Overview of the Business”.
 
 The
health and life sciences industries are subject to extensive and frequently
changing laws and regulations. If the Company fails to comply with applicable
laws and regulations, it could suffer civil and criminal damages, fines and
penalties, loss of various licenses, certificates and authorizations necessary
to operate its business, as well as incur liabilities from third-party claims,
all of which could have a material adverse effect on the business of the
Company.
 
 The
Company will be required to implement restructuring actions primarily related to
the resizing of its corporate functions subsequent to the sale of MDS Analytical
Technologies and may be required to incur additional charges in the future to
implement additional restructuring.
  Following
the completion of the AT Sale, MDS intends to close it corporate offices in
Toronto, Canada and establish its corporate offices in Ottawa,
Canada.  In addition, MDS operates in markets in which demand for
products and services may vary on a global basis.  As a result of
these factors, MDS intends to implement restructuring programs to better align
its workforce and facilities to match demand and to maintain or improve mid- to
long-term profitability.  Significant restructuring actions and
consequent workforce reductions could have the effect of reducing our employee
talent pool and available resources of the Company.  Consequently this
could have long-term effects on the Company’s business by decreasing or slowing
improvements in its products, thereby affecting the Company’s ability to respond
to customer demand, and limiting its ability to hire and retain key
personnel.  In addition, restructuring costs may have a negative
impact on the operations of the Company, and these actions may not achieve the
desired improvement in profitability.
  The
majority of the Company’s existing corporate employees, including its executive
officers, are expected to leave the Company in 2010 and as a result the business
may be adversely affected.
  During
2010, following the completion of the AT Sale, MDS intends to close its
corporate offices in Toronto, Canada and establish its new corporate
headquarters in Ottawa, Canada.  There has been a change in the Company’s
CEO and effective February 1, 2010; there is a planned change in the Company’s
CFO.  The Company’s executive officers and corporate employees are
responsible for, or significantly involved in, many of the Company’s business
decisions and activities, including among other things, financial reporting,
taxation and the strategic repositioning plan.  The Company intends to
implement a transition plan to support the transfer of work, processes and
knowledge between incumbent employees in Toronto and new employees to be hired
in Ottawa, retention plans for key employees in Toronto, records retention
programs, and the transfer of certain staff from Toronto to the Ottawa
office.  However, given the expected significant change in employees, including
executive officers, the extent of activities being undertaken, including the
completion of the strategic repositioning and transition service agreements
associated with the businesses being sold, not all activities may be properly
completed and certain key aspects of knowledge of the business may not be
transferred to the new corporate staff.  In addition, because of such
changes we may be at higher risk of not maintaining sufficient controls over
financial reporting, which could result in a material weakness and the
restatement of financial reports; in addition we may not be successful in
supporting audits of tax filings; and suffer increased difficulty in
administering certain aspects of the agreements related to the businesses we
have sold.
  From
time to time during the normal course of business, the Company and its
subsidiaries are subject to litigation.
 From time
to time, the Company may be the plaintiff or defendant in litigation, including
potential litigation regarding products and services it provides or products and
services it expects or receives from others.  Lack of success in such
litigation may expose the Company to financial loss or prevent it from enforcing
rights that are important to the Company, thereby having an adverse effect on
the business or results of operations of the Company.  During fiscal
2009, MDS Inc. was served with two complaints related to repeat study costs,
mitigation costs related to certain bioequivalence studies carried out at our
Quebec, Canada facility, and claims for lost profits.  MDS maintains
an accounting provision in respect of study costs as well as errors and
omissions insurance with respect to damages. MDS has assessed these claims and
no provision has been recorded related to claims for lost profit. In addition,
material litigation that is not covered by insurance policies, or falls within
retained liability under the Company’s policies, could have a material adverse
impact on the business, financial condition, or results of operations of the
Company.
  The
Company’s insurance coverage may not be adequate in all circumstances. There can
be no assurance that such coverage will continue to be available at rates and on
terms acceptable to MDS.
  MDS
maintains a global liability insurance policy covering all of its operating
units.  The policy provides coverage for normal operating risks and
includes annual liability coverage of up to $50 million for MDS Analytical
Technologies, $100 million for MDS Nordion, and $97.5 million for MDS Pharma
Services.  The Company also maintains a global policy covering property and
business interruption risks with a total insured value of $1.7 billion and
directors’ and officers’ insurance having a limit of $140 million.  There
is no certainty that the amount of coverage is adequate to protect the Company
in all circumstances or that the Company will be able to acquire such insurance
on an ongoing basis at rates acceptable to the Company.  In addition,
the Company is expected to retain liabilities for businesses which are divested,
and may not be able to acquire adequate insurance to cover these potential
liabilities.  Failure to obtain or maintain adequate insurance may
have a material adverse affect on the Company’s business and
operations.
 
 MDS
may not be able to successfully execute strategic transactions.
  MDS may
be unable to complete the acquisition of promising businesses, divestitures of
all or portions of businesses including MDS Pharma Services Early Stage business
or license technologies for many reasons, including:
  ·
              global
      market conditions and lack of credit
  availability;
   ·
              the
      need for regulatory and other
approvals;
   ·
              the
      inability by the Company, or others, to raise capital to fund
      transactions;
   ·
              current
      valuations of businesses and
technologies;
   ·
              potential
      restrictions in instruments governing the Company’s indebtedness;
      or
   ·
              regulatory
      or statutory restrictions including with respect to foreign ownership of
      shares of MDS (Canada) Inc.  See “Narrative Description of the
      Business of MDS - MDS Nordion – Strategic
  Considerations”.
  Any
business MDS may seek to acquire or technology it may seek to license may fall
short of expectations or may prove to be unprofitable.  Accordingly,
the earnings or losses from any such business that is acquired or technology
that is licensed may dilute earnings.  In addition, any failure to
complete an acquisition, divest a business or license a technology may result in
adverse market reaction.
 
 Under
agreements that govern each of our joint ventures in MDS Analytical
Technologies, a change of control at one of the joint ventures would entitle the
other joint venture party to terminate the joint venture.
  MDS is
party to joint venture agreements with Applied Biosystems, (now a part of Life
Technologies) and PerkinElmer.  The agreements governing these joint
ventures provide termination rights in various circumstances, including a right
in favour of each party to terminate the joint venture, absent the consent of
the other party, and subject to certain transition rights of both parties,
in the event of a change of control of the other party.  Any early
termination of either joint venture could adversely affect our working
relationship with the partner of the terminated joint venture and adversely
impact our business.
  MDS
may incur product liability losses and other litigation liability.
  In the
ordinary course of business, the Company is subject to product liability claims
and lawsuits, including potential class actions, alleging that our products have
resulted or could result in an unsafe condition or injury. Any product liability
claim brought against us, with or without merit, could be costly to defend and
could result in an increase of our insurance premiums. Some claims brought
against us might not be covered by our insurance policies. In addition, MDS has
significant self-insured retention amounts which the Company would have to pay
in full before obtaining any insurance proceeds to satisfy a judgment or
settlement. Furthermore, even where the claim is covered by our insurance, our
insurance coverage might be inadequate and MDS would have to pay the amount of
any settlement or judgment that is in excess of our policy
limits.  Manufacturing flaws, component failures, design defects,
off-label uses or inadequate disclosure of product-related information could
result in an unsafe condition or the injury or death of a patient. These
problems could lead to a recall of, or issuance of a safety alert relating to,
our products and result in significant costs and negative
publicity.
 
 If
the AT Sale is completed, the size and scope of the Company’s business will be
substantially reduced.
  Historically,
the financial performance of the MDS Analytical Technologies business has been a
significant contributor to the Company’s financial results. If the AT Sale is
completed, the size and scope of the Company’s business will be substantially
reduced.  This may have a negative impact on the ability of the
Company to access financing, and increase the cost of financing. This may also
increase variability in quarterly financial performance due to changes in cost,
demand, availability of raw materials, foreign exchange fluctuation, and other
factors.
 
 Foreign
currency exchange rates may adversely affect results.
  The
Company derives a large portion of revenues from international
sales.  For the year ended October 31, 2009, the Company derived
approximately 45% of total revenues from continuing operations, from outside the
U.S.  In addition, MDS Analytical Technologies and MDS Pharma Services
generate a significant portion of their revenues from outside of the
U.S.  The Company’s financial statements are denominated in U.S.
dollars.  As a result, factors associated with international
operations, including changes in foreign currency exchange rates, could
significantly affect the business, financial condition and results of operations
of the Company.
 As a
global company, the Company’s exposure to foreign-exchange rate changes includes
but is not limited to, the following:
  ·
              Costs
      and revenues incurred in foreign currencies, when translated into U.S.
      dollars for financial reporting purposes, can fluctuate due to exchange
      rate movements.
   ·
              Embedded
      derivatives based on the currency of certain contracts the Company enters
      into with customers and suppliers are valued at market
      rates.  The Company may report significant
      gains or losses based on changes in current and expected future, or
      commonly referred to as forward, exchange
  rates.
   ·
              The
      Company’s foreign subsidiaries, on occasion, invoice third-party customers
      in foreign currencies other than the functional currency in which they
      primarily conduct business. Movements in the invoiced currency, compared
      with their functional currency, can result in either realized or
      unrealized transaction losses that directly impact cash flows and results
      of operations of the Company.
   ·
              Certain
      long-term contracts with suppliers or customers may experience significant
      fluctuations in foreign exchange rates over several years thereby
      impacting cash flows and results of operations of the
    Company.
   ·
              The
      Company’s manufacturing and distribution organization is multinational in
      nature resulting in a variety of intercompany transactions that are billed
      and paid in many different currencies. Cash flows and results of
      operations of the Company are therefore directly impacted by volatility in
      these currencies.
   ·
              The
      cash flow needs of each of the Company’s foreign subsidiaries vary over
      time.  Accordingly, there may be times when a subsidiary is on
      the receiving side or the lending side of a short-term advance from either
      the Company or one of its subsidiaries.  These advances, being
      denominated in currencies other than a particular entity’s functional
      currency, can expose the Company to volatility in exchange rates that can
      adversely impact both its cash flows and results of
      operations.
   ·
              To
      repay debt or take advantage of tax saving opportunities, the Company may
      remit cash from its foreign locations to Canada.  When this
      occurs, the Company is liquidating foreign-currency net asset positions
      and converting them into Canadian or U.S. dollars.  Cash flows
      and results of operations of the Company may therefore be adversely
      impacted by these transactions.
  
 Changes
in government and regulatory policies may reduce demand for the Company’s
products and services, and increase expenses.
  MDS
competes in markets in which it, or its customers, must comply with federal,
state, local, and foreign regulations, such as environmental, health and safety,
and food and drug regulations. These regulations may also create or impact
market demand for products and services. Because of the high cost to develop,
configure, and market products and services to meet customer needs, any
significant change in these regulations could reduce demand for the Company’s
products or services or increase the costs of producing these products and
services.  Sales of our products depend, in part, on the extent to
which the costs of our products are reimbursed by governmental health
administration authorities, private health coverage insurers and other
third-party payors. Our potential customers’ ability to obtain appropriate
reimbursement for products and services from these third-party payors affects
the selection of products they purchase and the prices they are willing to pay.
In addition, demand for new products may be limited unless MDS obtains
reimbursement approval from governmental and private third-party payors prior to
introduction. Reimbursement criteria vary by country, are becoming increasingly
stringent and require management
expertise and significant attention to obtain and maintain qualification for
reimbursement.
 
 In
addition, changes to government health-care reimbursement policies could have a
significant impact on spending decisions of certain of the Company’s
customers.  In recent years, the United States Congress and U.S. state
legislatures have considered various types of health-care reform in order to
control growing health-care costs.  Similar reform movements have
occurred in Europe and Asia.  Implementation of health-care reform
legislation to reduce costs could limit the profits that can be made from the
development of new drugs.  This could adversely affect research and
development expenditures by pharmaceutical and biotechnology companies which
could in turn decrease the business opportunities available to the Company both
in the U.S. and abroad.
 
 Changes
in trends in the pharmaceutical and biotechnology industries could adversely
affect operating results.
  Industry
trends and economic and political factors that affect pharmaceutical and
biotechnology companies also affect the Company’s business. For example, R&D
budgets fluctuate due to changes in global and regional economic conditions,
availability of resources, availability of financing or funding, mergers of
pharmaceutical and biotechnology companies, spending priorities and
institutional budgetary policies.  The Company’s business could be
adversely affected by any significant decrease in life sciences research and
development expenditures by pharmaceutical and biotechnology companies, as well
as by academic institutions, government laboratories and private
foundations.
 
 The
Company may be unable to effectively introduce and market new products and
services, or may fail to keep pace with advances in technology.
  Without
the timely introduction of new products and enhancements, the Company’s products
could become technologically obsolete over time, which could have a material
adverse effect on the Company’s business, financial condition and results of
operations.  New product offerings will not succeed if the Company is
unable to:
  ·
              accurately
      anticipate customer needs;
   ·
              accurately
      anticipate evolving government and regulatory
  policies;
   ·
              innovate
      and develop new products and
services;
   ·
              successfully
      commercialize new technologies in a timely
  manner;
   ·
              price
      products competitively;
   ·
              source,
      manufacture and deliver high-quality products in sufficient volumes and on
      time; or
   ·
              differentiate
      product offerings from its competitors’ product
  offerings.
   Developing
new products may require significant investments before the Company, or its
customers, can determine the commercial viability of the new
product.  Investments may be made in research and development of
products that do not become commercially viable.
   The
Company is dependent upon the services of key personnel.
  The
Company’s success depends, to a significant extent, upon the continued service
of its executive officers and key management and technical personnel -
particularly scientific, technical and sales staff - and the Company’s ability
to continue to attract, retain, develop and motivate qualified
personnel.  The competition for these employees is
intense.  The loss of the services of one or more of the Company’s key
personnel could have a material adverse effect on the business, financial
condition and results of operations of the Company.  The investment
required to retain key staff, including the provision of compensation packages
that are competitive, could have an impact on the profitability of the business
of the Company.  The Company does not maintain key person life
insurance policies on any of its officers or employees.  The Company
believes that its employees may experience uncertainty about their future roles
with the Company until the Company’s strategies with respect to its business are
announced and executed.  This may adversely affect the Company’s
ability to attract or retain key employees.  The Company has
established retention programs to mitigate this risk but there can be no
assurance that they will be effective.
 
 The
Company could be subject to claims as a result of product failure in clinical
trials testing.
  During
clinical trials testing, the Company will typically administer pharmaceutical
products owned and developed by others to individuals acting as test
subjects.  The terms of the contracts the Company enters into with the
sponsor of the product vary and do not prevent individuals to whom the products
have been administered from filing claims against the Company even though it may
be indemnified in these circumstances.  Furthermore, the indemnity
obligations established under these contracts are not secured and it is possible
that the indemnifying party may not have the financial ability to meet its
obligations to the Company in the case of an adverse event.
 
 Contract
research services create a risk of liability.
  In
contracting to work on drug development trials and studies, the Company faces a
range of potential liabilities, including:
  ·
              errors
      or omissions that create harm during a trial to study volunteers or after
      a trial to consumers of the drug after regulatory approval of the
      drug;
   ·
              general
      risks associated with clinical pharmacology facilities, including negative
      consequences from the administration of drugs to clinical trial
      participants or the professional malpractice of clinical pharmacology
      medical care providers; and
   ·
              errors
      and omissions during a trial or study that may undermine the usefulness of
      a trial or data from the trial or study, or impact customers’ regulatory
      submissions.
   MDS
adheres to Canadian, European Union and other applicable laws regulating the
handling of confidential personal information.  This is accomplished
through the implementation of a comprehensive program that encompasses globally
recognized information protection practices.  MDS continually monitors
its compliance with applicable privacy and data protection
regulations.
  Contractual
indemnifications and some limitations may not generally protect the Company
against liability arising from certain of its own actions, such as negligence or
misconduct.  MDS could be materially and adversely affected if it were
required to pay damages or bear the costs of defending any claim which is not
covered by a contractual indemnification provision or in the event that a party
who must indemnify MDS does not fulfill its indemnification obligations or which
is beyond the level of the Company’s insurance coverage.  There can be
no assurance that MDS will be able to maintain such insurance coverage on terms
acceptable to the Company.
 
 
 MDS
is subject to a number of risks due to the fact that it carries on business in
several countries.
  MDS’s
operations are subject to the risks of carrying on business in various countries
in North America, Europe and Asia.  Accordingly, future business,
financial condition and results of operations of the Company could be materially
adversely affected by a variety of factors including, but not limited
to:
  ·
              changes
      in a country’s or region’s political or economic conditions, particularly
      in developing or emerging markets;
   ·
              exposure
      to foreign-exchange rate fluctuations between
  currencies;
   ·
              tax
      consequences and/or other potential restrictions on the transfer of funds
      between subsidiaries;
   ·
              longer
      payment cycles of foreign customers and difficulty of collecting
      receivables in foreign
jurisdictions;
   ·
              trade
      protection measures and import or export licensing
      requirements;
   ·
              potential
      nationalization of industries, properties or assets that the Company
      relies on;
   ·
              differing
      tax laws and changes in those laws including investment tax credits, or
      changes in the countries in which MDS is subject to
  tax;
   ·
              differing
      cultural and business practices associated with foreign
      operations;
   ·
              differing
      labour laws, including being subject to certain European regulations
      relating to work counsels and changes in those
  laws;
   ·
              differing
      protection of intellectual property and changes in that protection;
      or
   ·
              differing
      regulatory requirements and changes in those
  requirements.
   MDS
could be subject to tax reassessment and may be required to pay additional
income taxes.
  MDS tax
filings are subject to audit and review by government tax authorities who may
disallow certain deductions or disagree with the Company’s interpretation of tax
laws, which may result in its having to
pay additional taxes and incur additional tax expense.  This
obligation extends to MDS filings prior to the sale of those subsidiaries sold
by the Company.
  The
terms of MDS Pharma Services’ contracts entitle clients to cancellation rights,
which, if exercised, could have a material adverse effect on the business,
financial condition, and results of operations of the Company.
  The
majority of the revenues earned by MDS Pharma Services are under contracts that
typically run several months for drug discovery to more than one year for Phase
I clinical trials.  Terms of most contracts entered into by MDS Pharma
Services entitle clients to cancellation rights that may be exercised by the
client in the event of regulatory delays or if unexpected results are
encountered at any stage of the development program.  The cancellation
of contracts by these customers could have a material adverse effect on MDS
Pharma Services’ business, financial condition and results of
operations.
 
 The
uncertainty of the Company’s strategic direction may make it difficult to retain
or attract employees and may have a negative impact on operations.
  As
described in the risk factor “MDS is dependent upon the services
of key personnel”, certain employees are critical to the Company’s
operations and the Company believes that its current and prospective employees
may experience uncertainty about their future roles with the Company until the
Company’s strategies with respect to the business are announced and
executed.  This may adversely affect the Company’s ability to attract
or retain key employees in the period until the Company has executed on its
strategic repositioning.  The Company has established retention
programs to mitigate this risk but there can be no assurance that they will be
effective.
 
 Potential
changes to regulations regarding the export and use of highly enriched uranium
could cause supply disruptions.
  Certain
purchased medical isotopes are produced in reactors and are by-products of the
decay of the uranium in the reactor.  MDS’s supplier of medical
isotopes, AECL, obtains the majority of its uranium from the United
States.  The U.S. Department of Energy (DOE) strictly controls exports
of HEU.  Delays in obtaining HEU could cause supply disruption for
certain isotopes.  Currently the DOE must approve each shipment of
HEU.  There is political pressure by the U.S. Government on medical
isotope manufacturers to convert to low-enriched uranium (LEU).  Any
conversion to LEU, should such conversion become technologically, commercially
and economically viable, could require significant additional capital investment
to convert both reactors and related processing facilities, and could impact the
profitability and potential viability of the Company’s medical isotope
business.  In November 2009, Bill H.R. 3276, also known as, the
American Medical Isotopes Production Act, was passed by the House of
Representatives.  Included in H.R. 3276 is language related to phasing
out the export of all HEU for use in making medical isotopes within a
decade.  It is uncertain whether the bill will become law, including
the phasing out of exports of HEU.
  Failure
to gain FDA acceptance of Study Reviews could have a continuing material adverse
effect on the financial performance of MDS Pharma Services bioanalytical
operations.
  During
2004, 2006 and 2007, MDS Pharma Services received written communication from the
FDA related to certain generic bioequivalence studies carried out at MDS Pharma
Services’ bioanalytical laboratory facilities in Montreal,
Canada.  The communication resulted from inspections carried out by
the FDA in 2003 and 2004, a subsequent FDA audit in March 2006, and the FDA’s
review of the Company’s responses to the audit and related
communications.  The communications from the FDA outlined concerns in
certain studies about unexpected results in a limited number of study samples,
the standard procedures in place at that time to investigate the root cause of
the unexpected results, and the policies and procedures in place to address such
results.
  In
January 2007, the FDA issued statements that outlined certain steps that those
customers of MDS Pharma Services’ Montreal bioanalytical facilities would be
required to take to resolve any outstanding issues.  The FDA directed
sponsors of approved and pending generic drug submissions containing study data
produced in these facilities between January 2000 to December 2004 to take one
of three actions within six months to address FDA concerns about the accuracy
and validity of these bioanalytical studies: 1) repeat their bioanalytical
studies; 2) re-analyze their original study samples at a different bioanalytical
facility; or 3) independently audit original study results.  In
addition, the FDA wrote to sponsors of innovator submissions and requested that
they advise the FDA of any submissions containing data from those facilities
from the affected period.  In some instances, the FDA also required
these innovator sponsors to validate their studies by also choosing one of the
three requested approaches.
 
 In
September 2007, MDS Pharma Services responded to questions from European
regulators about the bioanalytical work performed in the Montreal
facility.  The European regulators reviewed studies in Montreal that
are representative of the work done at that site, and issued a final report in
July 2008 indicating that they have no significant concerns and that no further
actions were required.
 While the
Company’s support for generic and innovator clients is substantially completed,
there can be no assurance that further work will not be required, or that there
will not be further impact from the work, such as the failure of clients’
studies to gain FDA clearance.  Such results could impact the
Company’s ability to attract and retain work, cause the Company to incur further
support or reimbursement expenses, or lead to other adverse results which could
have a material adverse effect on the overall financial results of the
Company.
 
 The
Company is required to provide transition services to certain of its divested
businesses; the failure to deliver services may subject MDS to reduced payments,
penalties and its operations may be adversely affected.
  The
Company may be required to provide transition services to several companies
concurrently in relation to recently completed and expected sales of
businesses.  The Company has a limited number of employees and/or
contractors who are able to provide these services and complete these
activities.  The majority of the employees providing transition
services are expected to be terminated upon the completion of the transition
services and therefore may be difficult to retain.  Although the
Company has implemented certain retention plans, there can be no assurance that
all key employees will be retained and that all transition services will be
provided.
 
 There
can be no assurance as to the amount of the proceeds from the AT Sale, if any,
that will be used to repurchase shares of the Company pursuant to the proposed
substantial issuer bid or otherwise distributed to Shareholders.
  The
quantum and method of any distribution of AT Sale proceeds to Shareholders will
be finally determined by the Board of Directors following the completion of the
AT Sale.  The terms of the proposed substantial issuer bid are subject
to the discretion of the Board and applicable law and the satisfaction of
solvency tests set forth in the CBCA. While the Board currently intends to use
approximately $400 million to $450 million of the proceeds of the AT Sale to
complete a substantial issuer bid, intervening events could cause the amount of
such funds to be reduced or could cause the Board to determine that the
substantial issuer bid be deferred indefinitely or that the method of
distribution of proceeds should be other than by way of substantial issuer
bid.
 
 There
can be no certainty that the net proceeds we receive from the intended sale of
MDS Pharma Services Early Stage business will allow us to make a distribution to
shareholders or equal the fair value used in determining loss on sale that was
booked when the business was moved into discontinued operations.
 
 Assuming
the sale of MDS Pharma Service Early Stage business is completed, proceeds from
the sale after deducting the associated transaction and restructuring costs (net
proceeds) may be lower than the fair value used in the determination of the
carrying value of the business, which would require us to book a loss on the
sale that may be significant.  While management believes that the estimated
loss as of October 31, 2009 was its then best estimate and that its valuation
methods are reasonable and appropriate in the circumstances, the ultimate amount
of this estimated loss may vary significantly. During the first quarter of
fiscal 2010, continued deterioration of market conditions, the declining Early
Stage customer base and new developments in the 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.  As
such, we also believe that these reduced net cash proceeds from the sale may not
be sufficient to fund a secondary distribution to shareholders beyond the
planned shareholder distribution of $400 million to $450 million following the
sale of MDS Analytical Technologies.  To the extent that investors have
used the fair value of Early Stage, which the Company has determined for
accounting purposes; or used the revised estimated range of additional loss;
and/or have assumed the secondary distribution to Shareholders subsequent to the
Early Stage sale in their valuation of the Company; and actual net proceeds are
lower than the fair value and/or are insufficient to fund the secondary
distribution to shareholders, the market price of our Common Shares may
decline.
 
 The
AT Sale may result in an Event of Default under the Company’s Credit
Agreement
  If the
Company’s Credit Agreement is not terminated at or prior to the closing of the
AT Sale, the AT Sale will constitute a default under the Company’s Credit
Agreement which if not remedied would result in an Event of Default.  In
order to avoid a potential Event of Default, the Company
has completed negotiations with its banking syndicate and
has received an amendment to waive the default provisions in return
for the cancellation of the Credit Agreement at or prior to the closing of
the AT Sale. The Company intends to terminate the Credit Agreement at or
prior to the closing of the AT Sale.  We expect to retain sufficient cash
from the AT Sale of the businesses in absence of having a
revolving credit facility, and therefore due to the costs and restrictions
associated with a new revolving credit facility, we currently are not in
negotiations for a new credit facility.  However, we may enter into
future negotiations if terms become more favourable
  The
AT Sale may result in an Event of Default under our Senior Unsecured
Notes.
  Completion
of the AT Sale will result in a default under our Senior Unsecured Notes, which,
if not remedied within three days, would result in the occurrence of an Event of
Default.  In order to avoid a potential default and/or Event of Default,
the Company has completed negotiations with its note holders and
has received an amendment to waive the default provisions in return
for an expedited repurchase of all outstanding notes within three days
following the completion of the AT Sale.  If an Event of Default occurs,
the Company may experience a default under other agreements as a result of the
cross-default provisions in such agreements.
 
 The Company’s
business depends on the continued and uninterrupted performance of its
information technology systems and the communication systems that support those
systems, including the Internet.
 The
Company’s business depends, in part, on the continued and uninterrupted
performance of its information technology systems.  Sustained system
failures or interruptions could disrupt the Company’s ability to perform many of
the functions that are critical to the Company’s business, including processing
customer orders, transportation of raw materials and finished products,
manufacturing of products, processing laboratory requisitions, and timely
invoicing and collections.  In performing testing of samples or the
examination from clinical trials, MDS is required to deliver the results of
testing within certain preset time intervals.  If MDS fails to deliver
the results of testing on time, or the integrity of results are compromised, the
safety of clinical trial participants may be impacted and affect the success of
the client’s clinical trial.  In addition, the Company’s business,
financial condition and results of operations could have a material adverse
effect from a prolonged system failure.
 
 The
Company’s computer systems are vulnerable to damage from a variety of sources,
including telecommunications failures, malicious human acts, and natural
disasters.  Additionally, unanticipated problems affecting systems
could cause interruption in information technology systems.  The
Company’s insurance policies may not adequately compensate the Company for any
losses that may occur due to any failures in its information technology
systems.
 
 Cost
of research and development could increase in the event certain tax credits were
to become unavailable.
  Most of
the research and development activities, including those performed on behalf of,
or in partnership with customers, that the Company conducts in Canada are
eligible for tax credits.  Elimination or significant reduction of
these tax credits would have a material impact on the overall costs of research
and development, which would have a material adverse effect on the business,
financial condition, or results of operations of the Company.  In
addition, if the Company is not profitable,
the benefit of these credits would be limited as they can only be applied as a
credit to income taxes payable.
 
 MDS may bear financial risk if the
Company under-prices
its contracts or overruns cost estimates.
  Since the
Company’s contracts are often structured as fixed price or fee-for-service with
a cap, MDS bears the financial risk if it under-prices contracts or otherwise
overruns cost estimates.  Certain contracts may also involve foreign
exchange risk when costs are incurred in a different currency than
revenue.  As a result, under pricing or significant cost overruns, or
foreign exchange risk could have a material adverse effect on the business,
financial condition, and results of operations of the Company.
 
 The
Company’s ability to reduce tax payments on the AT Sale is dependent on
achieving certain reorganizations of MDS’s corporate structure.
  There are
several legal entities within MDS involved in the AT Sale and the Company’s
ability to offset the various gains and losses arising from the AT Sale
necessitates the appropriate timing and execution of certain reorganizations and
other transactions within MDS’s existing corporate structure.  These
reorganizations and transactions rely on existing tax laws and announced
amendments, and related interpretations.  If the Company is unable to
complete these reorganizations and transactions as planned, or in the event that
there is an unfavourable change in tax law, expected amendments, or
interpretation thereof, there may be an adverse impact on the Company’s estimate
of tax payments arising on the AT Sale.
 
 If
MDS is unable to attract suitable participants for its clinical trials, its
business might suffer.
  The
clinical research studies that MDS runs rely on the ready accessibility and
willing participation of subjects.  The Company’s clinical research
activities could be adversely affected if it is unable to attract suitable and
willing participants on a consistent basis.
  Operating
licenses related to handling and storage of radioactive materials could be
subject to cancellation by the CNSC under certain
circumstances.
  All MDS
facilities that handle or store radioactive materials are government regulated
and inspected.  Failure to obtain future operating licenses could
impact the Company’s ability to receive, store, process or ship products and
could adversely affect the business, financial condition, or results of
operations of the Company.
  MDS
may not be able to integrate acquired businesses or licensed technologies into
its existing business, or make acquired businesses or licensed technologies
profitable.
  MDS may
be unable to integrate acquired businesses or licensed technologies into its
existing business, or make the acquired businesses or licensed technologies
profitable for various reasons including:
  ·
              its
      ability to retain key employees;
   ·
              its
      ability to integrate business information systems and
      processes;
   ·
              its
      ability to complete the development of products and sell them into the
      market; or
   ·
              incompatible
      management or other cultural
differences.
  
 Life, the Company’s joint venture partner, entered into
an agreement to sell its ownership interest in the joint venture and its
associated operations to Danaher; if the AT Sale is not completed there may be a
change inthe Company’s or Life’s mass spectrometer strategy, which
may adversely affect the Company’s operations.
  In the
past, the success of the joint venture partnership with Life is believed to have
been based on the good working relationship and common view of the strategic
direction between the joint venture partners. If the At Sale is not completed
and the two companies do not have the same strategy going forward, it may result
in uncertainty for customers, suppliers and employees which may negatively
affect the operations of the joint venture.
 MDS depends on
joint venture partners for sales of our mass spectrometers.
  Essentially
all sales of mass spectrometry products are made through partnerships with
Applied Biosystems (now a part of Life Technologies Inc.) and
PerkinElmer.  The relationships are governed by partnership agreements
that define the rights and responsibilities of each party.  While each
partnership is for a fixed term, both agreements extend automatically in the
absence of any notice to terminate the agreements. Our mass spectrometry
business at MDS Analytical Technologies focuses primarily on the development and
manufacturing of analytical instruments while our partners focus primarily on
marketing, sales, and service.  Failure by either partner to carry out
its respective obligations could adversely affect our mass spectrometry
business, financial condition, or results of operations.
  Patent protection
for our proprietary products, processes, and technologies may be difficult and
expensive to obtain or maintain, and may not result in sufficient protection for
our technology.
  MDS has
applied, or intends to apply, for additional patents to cover our newest
products. The Company may not obtain issued patents from any pending or future
patent applications owned by or licensed to us. Of the U.S. and foreign patents
MDS currently holds, the claims allowed may not be broad enough to protect our
technology.  In addition, competitors may design around our technology
or develop competing technologies.  Intellectual property rights may
also be unavailable or
limited in some foreign countries, which could make it easier for some of our
competitors to capture increased market position.
  Third parties may
seek to challenge, invalidate or circumvent issued patents owned by us, or claim
that our products and operations infringe on their patent or other intellectual
property rights.
  In
addition to our patents, the Company possesses an array of unpatented
proprietary technologies and know-how. MDS also licenses intellectual property
rights to and from third parties. The measures that the Company employs to
protect these technologies and these rights may not be adequate. Moreover, in
some cases, the licensor can terminate a license or convert it to a
non-exclusive arrangement if MDS fails to meet specified performance
targets.
  MDS may
incur significant expense in any legal proceedings to protect our proprietary
rights or to defend infringement claims by third parties. In addition, claims of
third parties against us could result in awards of substantial damages or court
orders that could effectively prevent us from manufacturing, using, importing or
selling our products in the U.S. or in any other country. It could also,
depending on the quantum of damages awarded, have a material adverse affect on
our financial results.
 
 Our
reported results of operations will be adversely affected if the intangible
assets or goodwill the Company acquired as part of historical acquisitions are
determined to be impaired.
 As at
October 31, 2009, our total assets included approximately $412 million of
goodwill and $120 million of intangible assets substantially all of which were
reported in discontinued operations. Goodwill represents the value MDS paid to
acquire a business in excess of its tangible and intangible assets and
liabilities. The Company reviews these assets for potential impairment on a
regular basis.
  Adverse
changes in the global economy, our business or the failure to grow our business
may result in impairment of our goodwill and/or intangible assets. A
corresponding write-down could adversely affect our reported operating income
and capitalization (See Note 12 - Goodwill in the Notes to the 2009 Consolidated
Financial Statements).
 
  3.10.2
              Legal
      Proceedings and Regulatory Actions
 
 In July,
2008, MDS served AECL with Notice of Arbitration proceedings seeking an order to
compel AECL to fulfill its contractual obligations under 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 seeking against AECL damages in the amount of C$1.6
billion for negligence and breach of contract relating to the 1996 Agreement;
and, against the Government of Canada, MDS is seeking damages in the amount of
C$1.6 billion for inducing breach of contract and interference with economic
relations in respect to the 2006 Agreement.  AECL has served certain
counterclaims claiming damages for breach of contract in the amount of $250
million and other relief.  The Company believes it has a strong
defence to such counterclaims on the merits.  In addition, MDS
believes that it has a strong case against AECL and the Government of Canada
with respect to the 2006 agreement.  The Company’s current focus is on the
confidential arbitration proceedings which are confidential. Given the present
stage and complex nature of the proceedings, the uncertainty in projecting the
probability of any particular outcome of a dispute of this nature, and the range
of remedies that may be awarded under the arbitration and/or lawsuit if the
Company is successful in our claim, the Company is unable to project a specific
outcome for this dispute.  An unfavorable outcome would have an adverse
effect on our business, financial condition, and results of operations which
could be material.
  During
fiscal 2009, the Company became a defendant in two lawsuits relating to certain
bioequivalence studies carried out at the Company’s Quebec, Canada facilities in
the period from January 1, 2000 to December 31, 2004.  In November
2008, Apotex Inc. filed a claim in the Superior Court of Justice in Toronto,
Ontario related to repeat study and mitigation costs of C$5 million and lost
profits of C$30 million.  In April 2009, Dr. Reddy’s Laboratories
Limited filed a claim in the Superior Court of New Jersey related to repeat
study and mitigation costs of approximately US$10 million and lost profits of
approximately US$70 million.  MDS has filed a statement of defense and
answer, respectively in connection with these actions, and intends to defend
them vigorously.  MDS currently maintains an accounting reserve of
US$19 million to cover any agreements reached with clients for study audits,
study reruns and other related costs.  The Company also maintains
errors and omissions insurance.  MDS has assessed these claims and no
provision has been recorded related to the claims for lost
profits.  The Company is a defendant in certain other litigation
which, net of insurance coverage and amounts reserves, is not anticipated at
this time to have a material impact on the results of operations.
 
 In
December 2009, the Company was served with a Notice of Application (the
“Notice”) from PerkinElmer, Inc., with whom MDS has a joint - venture to
develop, manufacture and sell inductively coupled plasma mass spectrometers
(ICP/MS).  The Notice filed with the Ontario Superior Court of Justice
related to the sale of MDS Analytical Technologies to Danaher Corporation, and
sought a range of alternative possible remedies: 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 of the MDS Analytical Technologies/Danaher sale agreement; or an
interim and permanent injunction preventing the completion of the sale of MDS
Analytical Technologies business to Danaher.  On January 25, 2010, the
above action was dismissed.
  3.10.3
              Interest
      of Management and Others in Material
  Transactions
  No
director or executive officer of MDS nor any associate or affiliate of any of
the foregoing, and, to the knowledge of the directors and executive officers of
MDS, no person or company that is the direct or indirect beneficial owner of, or
who exercises control or direction over, more than 10 percent of our Common
Shares or any of such person or company’s associates or affiliates, has had an
interest in any material transaction entered into by the Company since November
1, 2006.
  3.10.4
              Transfer
      Agent and Registrar
  The
transfer agent of the Company is CIBC Mellon Trust Company, Toronto,
Canada.
  3.10.5            Material
Contracts
  Following
are the only material contracts, other than contracts entered into in the
ordinary course of business, which have been entered into by the Company within
the most recently completed fiscal year, or were entered into before the most
recently completed fiscal year and are still in effect, deemed to be
material:
  (a)
              The
      Note Purchase Agreement governing our Senior Unsecured Notes issued on
      December 18, 2002.  The Senior Unsecured Notes bear interest at
      rates between 5.52% and 6.19% and have maturities ranging from December
      2009 to December 2014. (See Section 2.4.1 – Capital
      Structure).
  (b)
              A
      C$500 million, five-year committed, revolving credit facility provided on
      July 14, 2005, (see Section 2.4.1 – Capital
      Structure).
  (c)
              Interim
      and Long-term Supply Agreement between Atomic Energy Canada Limited and
      MDS (Canada) Inc., (see Section 3.2 – MDS Nordion –
      Continuing Operations: NRU and MAPLE
  Facilities).
  (d)
              Stock
      and Asset Purchase Agreement among MDS Inc. and other sellers and DH
      Technologies Development PTE LTD and Danaher Corporation dated as of
      September 2, 2009.
 
 The terms
of our Senior Unsecured Notes and credit facility are typical for debt
instruments of this nature (see Section 3.10.1 - Risk
Factors).
 
  3.10.6
              Experts
  The 2009
Financial Statements have been audited by Ernst & Young LLP, P.O. Box 251,
222 Bay Street, Toronto, Ontario, M5K 1J7. During fiscal 2009, MDS’s Audit
Committee obtained written confirmation from Ernst & Young LLP confirming
that they are independent with respect to the Company within the meaning of the
Rules of Professional Conduct of the Institute of Chartered Accountants of
Ontario.
 
 In
addition, the Company engaged other experts in fiscal 2009 to advise MDS in
matters related to the Strategic Repositioning who gathered information and
provided opinions related to the Management Proxy Circular to approve the sale
of MDS Analytical Technologies.  These included:
 
 Blair
      Franklin Capital Partners Inc.
              Commerce
      Court West, Suite 1905
                199
      Bay Street, P.O. Box 147
                Toronto,
      Ontario
                M5L
      1E2
                Canada
 Fasken
      Martineu DuMoulin LLP
              55
      King St. W., 37th Floor
                TD
      Bank Tower, Toronto Dominion Centre
                P.O.
      Box 20
                Toronto,
      Ontario
                M5K
      1N6
                CanadaGoldman,
      Sachs & Co.
              85
      Broad Street
                New
      York, New York
                10004
                USARBC
      Capital Markets
              RBC
      Capital Markets
                200
      Bay Street, P.O. Box 50
                Royal
      Bank Plaza
                4th
      Floor, South Tower
                Toronto,
      Ontario
                M5J
      2W7Skadden,
      Arps, Slate, Meagher & Flom LLP
              222
      Bay Street, Suite 1750
                P.O.
      Box 258
                Toronto,
      ON  M5J 1J5
                Canada
 
  4.
              SELECTED
      CONSOLIDATED FINANCIAL INFORMATION
  4.1
              Summary
      Annual Information (Year to October
31)
 
 (amounts
      in U.S.$ millions except per share amounts)
              2009
              2008
              2007Consolidated
      Statements of Operations(U.S.
      GAAP)Revenues
      from continuing operations
              231
              296
              290Operating
      loss from continuing operations
              (2)
              (355)
              (9)(Loss)
      income from continuing operations, before income taxes
              (2)
              (344)
              14(Loss)
      income from continuing operations
              (15)
              (246)
              12(Loss)
      income from discontinued operations, net of income taxes
              (120)
              (307)
              769Net
      (loss) income
              (135)
              (553)
              781Basic
      (loss) earnings per share
              (1.12)
              (4.54)
              5.93Diluted
      (loss) earnings per share
              (1.12)
              (4.54)
              5.92
 
 
 2009
              2008
              2007Consolidated
      Statements of Financial Position
 
 (U.S.
      GAAP)Total
      assets
              1,626
              1,836
              3,243Long-term
      debt
              267
              274
              384Total
      shareholders’ equity
              994
              1,090
              1,941Weighted
      average number of Common shares outstanding
              120
              122
              132Long-term
      debt/shareholders’ equity
              27%
              25%
              20%
 
 
 2009
              2008
              2007Consolidated
      Statements of Cash Flows(U.S.
      GAAP)Cash
      provided by (used in) operating activities of continuing
      operations
              81
              (110)
              156Capital
      assets purchased
              (10)
              (13)
              (15)Cash
      provided by discontinued operations, net
              100
              26
              225Repayment
      of long-term debt
              (6)
              (79)
              (8)
 
  Items on
the pre-tax basis that impact the comparability of operating income
include:
  ·
              Results
      for the year ended October 31, 2009 reflect $9 million of restructuring
      charges related to aligning the Company to its new strategic focus and $1
      million write-down of long-term investment related to the investment in
      Entelos.
  ·
              Results
      for the year ended October 31, 2008, reflect the $341 million write-off of
      the MAPLE Facilities, and $10 million write-down of long-term investments,
      primarily related to the investment in Entelos and the investment in
      ABCP.
 
 ·
              Results
      for the year ended October 31, 2007 reflect $9 million of restructuring
      charges.
 
  4.2
              Dividends
  The
declaration of dividends is at the discretion of the Board of
Directors.  Both the Company’s credit facility and Senior Unsecured
Notes contain provisions which restrict the amount of any dividend
payment.  As noted below, the Company has discontinued the payment of
dividends.
  Prior to
October 2004, dividends were declared payable in April and
October.  Effective for the October 2004 dividend, the Company adopted
a policy of paying quarterly dividends.  Pursuant to the policy,
dividends, when declared, were paid in January, April, July and
October.  In the past three years, MDS has paid the following cash
dividends:
   Fiscal Year
              Aggregate Dividend Amount per Common
      Share2007
              C$0.03252008
              C$0.00002009
              C$0.0000
  On
October 5, 2006, the Company announced that it would discontinue paying
dividends following completion of the sale of the diagnostics laboratory
business.  The final dividend was declared on December 12, 2006 and
was paid January 8, 2007 to shareholders of record on December 20,
2006.
  As a
result of MDS’s cumulative net loss as of October 31, 2009, a certain debt
covenant under our Senior Unsecured Notes restricts us from further dividend
payments for the foreseeable future.  Our 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. As a result of the write-off of the MAPLE Facilities in
fiscal 2008, the cumulative net income was below the amount defined in the debt
covenants. The restrictions on the use of cash include the repurchase of shares,
payment of dividends and investments in businesses that the Company does not
control. MDS currently expects these restrictions to remain in place until our
Senior Unsecured Notes are retired.
  4.3
              Capital
      Structure
  MDS uses
a combination of equity and long-term debt to finance its
business.  The Company has one class of shares authorized and
outstanding, being Common Shares.  As at October 31, 2009, there were
120,137,229 Common Shares outstanding.
  The
Common Shares entitle the holder thereof to receive notice of, to attend, and to
vote at all meetings of holders of Common Shares.  Each Common share
entitles the holder thereof to one vote per share and to share rateably in the
assets of the Company on liquidation or dissolution.
  The
Company’s share capital has been restructured or converted several times from
Common Shares in 1973 to Class A Common and Class B Non-Voting in 1980 and back
to Common Shares in March 2000.  Under the terms of the 2000
conversion, each Class A share was converted into 1.05 Common Shares and each
Class B non-voting share was converted into 1.0 Common share.
  The
Company’s shares have been split on a two-for-one basis four times, on the
following dates: September 26, 1980, July 13, 1983, March 15, 1990, and,
November 15, 1996.  In addition, on September 14, 2000, the directors
of the Company declared a one-for-one share dividend paid on October 10, 2000 to
shareholders of record on September 26, 2000.  This share dividend had
the same effect as a two-for-one stock split.
  MDS had a
Normal Course Issuer Bid (NCIB) in place to purchase up to 4,136,766 Common
Shares that expired on July 2, 2009.   As at October 31, 2009,
the Company repurchased no Common Shares in fiscal 2009 under this NCIB (2008 -
1,417,900 Common Shares), and the Company repurchased no Common Shares in fiscal
2009 under our prior NCIB (2008 – 1,485,300 Common Shares).
  The
Company repurchased no Common Shares under an NCIB in fiscal 2006 or fiscal
2007.  In the second quarter of 2007, the Company conducted a
Substantial Issuer Bid and repurchased approximately 22.8 million Common Shares
at a price of C$21.90 per share on April 9, 2007.  As a result of MDS’s
cumulative net loss as of October 31, 2008, a certain debt covenant under our
Senior Unsecured Notes restricts us from further share repurchases.
  The
Company currently intends to repurchase $400 million to $450 million of Common
Shares following the close of the sale of MDS Analytical Technologies and to
redeem our Senior Unsecured Notes.
  The
Company has Senior Unsecured Notes payable totalling $198 million ($221 million
as at October 31, 2009), has a defeased non-interest bearing government loan,
and a note payable associated with the purchase of specific
assets.  At October 31, 2009, the value of all of the Company’s
outstanding debt was $267 million.  In addition, the Company has
available C$500 million of undrawn committed term credit facilities at October
31, 2009.
  5.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS
  Please
refer to the disclosure contained on pages 1 to 40 of the 2009 Annual Financial
Review under the heading “Management’s Discussion and Analysis” which is
incorporated by reference into this AIF.
  6.
              MARKET
      FOR SECURITIES
  The
outstanding Common Shares are listed for trading on the Toronto Stock Exchange
(TSX: MDS) and the New York Stock Exchange (NYSE: MDZ).  The following
table sets forth the price ranges and volume of Common Shares traded on the
Toronto Stock Exchange and the New York Stock Exchange for each month of fiscal
2008.
  
 TSX
              
              NYSEHigh
              
              Low
              
              Volume
              
              High
              
              Low
              
              Volume(CDN$)
              
              
              
              (US$)Fourth
      Quarter of 2009October
              9.19
              
              8.48
              
              8,591,348
              
              8.75
              
              7.97
              
              17,869,813September
              8.80
              
              6.42
              
              22,335,811
              
              8.19
              
              5.86
              
              23,401,771August
              6.96
              
              6.27
              
              5,832,637
              
              6.46
              
              5.75
              
              4,019,996Third
      Quarter of 2009July
              6.97
              
              6.06
              
              9,662,332
              
              6.42
              
              5.18
              
              5,460,176June
              6.11
              
              5.42
              
              14,391,730
              
              5.44
              
              4.79
              
              5,930,756May
              7.27
              
              5.07
              
              13,623,437
              
              6.36
              
              4.54
              
              2,608,771Second
      Quarter of 2009April
              7.35
              
              5.99
              
              5,147,777
              
              6.09
              
              4.73
              
              2,485,815March
              8.18
              
              5.74
              
              8,428,241
              
              6.32
              
              4.54
              
              4,971,030February
              9.23
              
              7.36
              
              8,708,880
              
              7.44
              
              5.91
              
              3,978,433First
      Quarter of 2009January
              9.60
              
              7.22
              
              6,152,900
              
              7.77
              
              5.70
              
              8,241,907
  
 2008December
              8.88
              
              6.21
              
              12,373,850
              
              7.09
              
              5.20
              
              6,361,099November
              13.14
              
              8.55
              
              8,295,422
              
              11.26
              
              6.62
              
              3,514,457
  
 Other
than the Common Shares, no other class of securities of the Company is traded or
quoted on any exchange or market.
 
  7.
              DIRECTORS
      AND OFFICERS
  7.1
              Directors
  Each
director of the Company is elected to serve until the next Annual Meeting of the
Company or until their successor is elected or appointed.  The
disclosure under the heading “Election of Directors” in the Company’s Management
Proxy Circular dated January 8, 2009 contains information about each director of
the Company and is incorporated herein by reference.
  7.2
              Executive
      Officers
  The
Company’s Executive Management team currently comprises the following
individuals:
 
 Executive
      Officer Name
              Position
      with MDS
              Province
      or State and Country of ResidenceAndrew
      W. Boorn
              President
                MDS
      Analytical Technologies
              Ontario,
      CanadaMary
      E. Federau
              Executive
      Vice-President, Global Human Resources
              Ontario,
      CanadaThomas
      E. Gernon
              Executive
      Vice-President, Information Technology and Chief Information Officer
      (CIO)
              Ontario,
      CanadaKenneth
      L. Horton
              Executive
      Vice-President, Corporate Development and General Counsel
              Massachusetts,
      U.S.Janet
      Ko
              Senior
      Vice-President, Communications
              Ontario,
      CanadaDouglas
      S. Prince
              Executive
      Vice-President, Finance and Chief Financial Officer (CFO)
              Ontario,
      Canada
  David
      Spaight
              President
                MDS
      Pharma Services
              Pennsylvania,
      U.S.Steven
      M. West
              Chief
      Executive Officer (CEO) MDS
              Ontario,
      Canada
  Effective
January 8, 2010, Stephen P. DeFalco, former President and Chief Executive
Officer, left the Company and Steven M. West, former Chief Operating Officer of
the Company and President of MDS Nordion, was appointed CEO of MDS
Inc.  In addition, the Company announced a succession plan for the
role of CFO, with Douglas S. Prince expected to leave the Company by the end of
March 2010.  G. Peter Dans, currently Senior Vice President, Finance
of MDS Inc., will assume the role of CFO, effective February 1,
2010.
  Andrew W.
Boorn, Mary E. Federau, and Steven M. West have held their present positions or
other senior positions with MDS Inc. or its subsidiaries during the past five
years. The executive officers listed below have not held their present positions
or other senior positions with MDS or its subsidiaries for the last five years
and their previous occupations are as follows:
  a)
              G. Peter Danswill
      be appointed Chief Financial Officer effective February 1,
      2010.  Mr. Dans joined MDS in 2007 from Nortel Networks, where
      he spent more than 15 years in global finance leadership roles, including
      positions in North America, South Korea, Singapore and the Philippines. In
      addition to significant external reporting and financial operating
      experience, Mr. Dans has a thorough understanding of MDS operations and
      the Company’s repositioning plan.
  b)
              Thomas E. Gernon joined
      MDS in 2005, was previously Chief Operating Officer of D2Hawkeye Inc., a
      health-care software development company and held CIO positions at both
      PerkinElmer, Inc. and J.P. Morgan
Investments.
  c)
              Janet Ko was appointed
      Senior Vice-President, Communications, in April 2008. Since joining MDS in
      November 2003, she has held increasingly senior roles in
      Communications and Organizational Development. Prior to joining MDS, she
      was head of communications for Pharmacia Canada, and held senior
      communications posts at GlaxoSmithKline and Ontario's Ministry of the
      Attorney General.
  d)
              Kenneth L. Horton joined
      MDS in December 2005 and was previously Vice-President, Acquisitions,
      Ventures and General Counsel for the Life and Analytical Sciences business
      unit at PerkinElmer, Inc. and previously an attorney at Ropes & Gray
      LLP.
  e)
              David Spaight joined MDS
      in April 2006 and was previously Senior Vice-President, Global Sales and
      Marketing at Fisher Scientific Products (Fisher).  Prior to
      joining Fisher, Mr. Spaight held the role of Vice-President, Global Sales
      and Marketing for the Life and Analytical Sciences business unit at
      PerkinElmer, Inc.
  f)
              Douglas S. Prince joined
      MDS in 2007 and was previously Vice-President, Enterprise Risk Management
      at PerkinElmer, Inc.  He also served as Vice-President and CFO
      for the Life and Analytical Sciences business unit at PerkinElmer,
      Inc.
   To
      the knowledge of MDS, the directors and executive officers of MDS, as a
      group, beneficially own, directly or indirectly, or exercise control or
      direction over an aggregate of 57,508 MDS Common Shares representing 0.05%
      of MDS’s issued and outstanding Common
Shares.
  7.3
              Additional
      Disclosure for Directors and Executive
Officers
  To
the knowledge of MDS, no director or executive officer of MDS (a) is at the date
hereof or has been, in the last 10 years before the date hereof, a director,
chief executive officer (CEO) or chief financial officer (CFO) of any company,
including MDS that, while that person was acting in that capacity, (i) was the
subject of a cease trade order, similar order or an order that denied the
company or MDS access to any exemptions under securities legislation, for a
period of more than 30 consecutive days, (ii) was subject to an order that was
issued, after that person ceased to be a director, CEO or CFO and which resulted
from an event that occurred while that person was acting in that capacity as a
director, CEO or CFO, (b) is at the date hereof or has been in the 10 years
before the date hereof, a director or executive officer of a company, including
MDS that, while that person was acting in that capacity or within a year of that
person ceasing to act in that capacity became bankrupt, made a proposal under
any bankruptcy or insolvency legislation or became subject to or instituted any
proceedings, arrangement or compromise with creditors, or had a receiver,
receiver or manager or trustee appointed to hold assets or (c) has within the
last 10 years become bankrupt, made a proposal under any legislation relating to
bankruptcy or insolvency, or become subject to or instituted any proceedings,
arrangements or compromise with creditors or had a receiver, receiver manager or
trustee appointed to hold the assets of any director, or executive officer
except for Mr. Robert Luba, a director of MDS who was an independent director of
Safety-Kleen Corp., a New York Stock Exchange listed company, which filed for
bankruptcy in 2000.
  8.           AUDIT
COMMITTEE INFORMATION
  8.1
              Composition
      of the Audit Committee
  The Audit
Committee of MDS is composed of the following four members:
 William
D. Anderson (Chair), William G. Dempsey, Robert W. Luba, and Richard H.
McCoy. The responsibilities and duties of the Committee are set out in the
Committee’s charter, the text of which is set forth in Appendix I to this
AIF.
  The Board
of Directors believes that the composition of the Audit Committee reflects a
high level of financial literacy and expertise.  Each member of the
Audit Committee has been determined by the Board to be “independent” and
“financially literate” as such terms are defined under Canadian and United
States securities laws and the NYSE Corporate Governance Listing
Standards.  In addition, the Board has determined that each of William
D. Anderson, and Robert W. Luba, are each an “Audit Committee Financial Expert”
as such term is defined under United States securities laws.  The
Board has made these determinations based on the education and breadth and depth
of experience of each member of the Committee.  The following is a
description of the education and experience of each member of the Committee that
is relevant to the performance of his or her responsibilities as a member of the
Audit Committee:
  William D. Anderson, a
Chartered Accountant, is a Corporate Director, having retired in 2005 after
serving 14 years with BCE Inc. (a global communications company headquartered in
Montreal, Canada).  Mr. Anderson was appointed to the Board of MDS
Inc. in 2007.  From 2001 to 2004, Mr. Anderson was President of BCE
Ventures and from 1997 to 2000 was Chief Financial Officer of BCE Inc. Mr
Anderson currently serves on the public boards of TransAlta Corporation and
Gildan Activeware Inc. He serves as the Chair of the TransAlta and Gildan
Activeware Inc. audit committees.
  William G. Dempseywas
appointed to the Board in 2008.  Mr. Dempsy was an executive with
Abbott Laboratories for 25 years, prior to his retirement in
2007.  His assignments included Executive Vice-President of the
Pharmaceutical Products Group and Senior Vice-President of International
Operations.  He currently serves on the public Board of Landaeur, Inc.
where he is the Chair of the compensation committee.
  Robert W. Luba, a Chartered
Accountant, is President of Luba Financial Inc. (an investment company in
Toronto, Canada).  Prior to 1994, he was President and Chief Executive
Officer of Royal Bank Investment Management Inc., President and Chief Financial
Officer (CFO) of Crown Life Insurance Company and Senior Vice-President and CFO
of John Labatt Limited. Mr. Luba currently serves on the public boards of
Invesco Trimark Funds and Softchoice Corporation. He also serves on the audit
committee of Softchoice Corporation.
  Richard H. McCoy is a
Corporate Director.  He was in the investment banking business for
over 35 years.  Prior to retiring in 2003, he was Vice-Chairman,
Investment Banking at TD Securities Inc. (one of Canada’s largest investment
firms in Toronto, Canada).  Mr. McCoy currently serves on the public
boards of Aberdeen Asia-Pacific Income Investment Company Limited; Gerdau
Amersteel Corp.; Jazz Air Income Fund; Pizza Pizza Royalty Income Fund; and
Uranium Participation Corporation. He also serves on the audit committees of Ace
Aviation Holdings Inc., Aberdeen Asia-Pacific Income Investment Company Limited
and Uranium Participation Corporation.
   8.2           Auditor
Service Fees
 
 The
fees for all services performed by the auditors for the years ended October 31,
2009 and October 31, 2008 are set out below.
  2009
                (US$‘000s)
              2008
      (US$‘000s)Audit
      services
              $4,853
              $6,100Audit-related
      services
              $2,301
              872Tax
      services
              $   285
              271Total
              $7,439
              $7,243
  In fiscal
2009, the Company paid additional fees related to services rendered for fiscal
2008 in the amount of $1,070,000 (Audit services: $871,000, Audit-related
services $165,000 and Tax services $34,000) that are not reflected in the table
above.
   Audit Services – an audit engagement
is one in which Ernst & Young LLP, or a foreign affiliate, has been hired to
render an audit opinion on a set of financial statements or related financial
information. These engagements include the opinion issued on the consolidated
financial statements of MDS, the opinions issued on subsidiaries of MDS as
required by statute in certain jurisdictions, and opinions issued on the
financial statements of subsidiaries or entities over which MDS exercises
management discretion. The latter category includes audit opinions issued on
Pension Plans established for the benefit of MDS employees.
  Audit-Related Services – an audit-related
engagement is one in which some sort of assurance is provided that is not an
audit opinion or one which supports the ability of Ernst & Young LLP to
render an audit opinion in an indirect manner. Such engagements include reviews
of the interim financial statements, the reports of which are provided to the
Audit Committee, accounting assistance and advice and translation services
related solely to our filed financial reports. From time to time, Ernst &
Young LLP may also be engaged to provide audit-related services in connection
with acquisitions, including audits of transaction-date balance sheets and
similar services.
  Tax Services – a tax engagement is
one in which Ernst & Young LLP has been engaged to provide tax services,
including assistance with tax compliance and tax advice and planning. Tax
compliance assistance is generally provided to the foreign subsidiaries of MDS
and to certain entities that are controlled by MDS but in which there are other
minority interests. Tax compliance services include assistance with the
preparation and filing of tax returns, and assistance in dealing with tax
audits. Tax advice and planning services are provided to the Company and many of
its subsidiaries and relate to both income taxes and sales and use
taxes.
   8.3
              Pre-Approval
      Policy for External Auditor
Services
  The Audit
Committee has adopted processes for the pre-approval of engagements for services
of its external auditors.  The Audit Committee’s policy requires
pre-approval of all audit and non-audit services
provided by the external auditor.  The policy identifies three categories
of external auditor services and the pre-approval procedures applicable to each
category, as follows:
   ·
              Audit
      and audit-related services – these are identified in the annual audit
      service plan presented by the external auditor and require annual
      approval.  Changes to these fees are reported to the Audit Committee
      at least quarterly.
   ·
              Pre-approved
      list of non-audit services – non-audit services which are reasonably
      likely to occur have been identified and receive general pre-approval of
      the Audit Committee, and as such, do not require specific
      pre-approvals.  The term of any general pre-approval is 12 months
      from approval unless otherwise specified.  The Audit Committee
      annually reviews and pre-approves the services on this
    list.
   ·
              Other
      proposed services – all proposed services not categorized above are
      brought forward on a case-by-case basis and specifically pre-approved by
      the Audit Committee.
  All fees
paid to the independent auditors for fiscal 2009 were approved in accordance
with the pre-approval policy.
  9.
              ADDITIONAL
      INFORMATION
  Additional
information about MDS is available on the Company’s web site at www.mdsinc.com, on
SEDAR (System for Electronic Document Analysis and Retrieval) at www.sedar.com, and on
the U.S. Securities and Exchange web site at www.sec.gov.
  Additional
information, including directors’ and executive officers’ remuneration and
indebtedness, principal holders of the Company’s securities and securities
authorized for issuance under equity compensation plans is contained in the
Management Proxy Circular dated as of January 7, 2009 prepared in connection
with the Company’s Annual and Special Meeting of Shareholders to be held on
March 11, 2010.
  Additional
financial information is provided in the 2009 Financial Statements and the 2009
MD&A, each included in the 2009 Annual Report Financial Review of MDS for
its fiscal year ended October 31, 2009.
  Copies of
this AIF, as well as copies of the 2009 Annual Report Financial Review of MDS
for the year ended October 31, 2009 and the Management Proxy Circular dated
January 8, 2010, may be obtained from:
 
 Peter
      Brent
                Senior
      Vice-President Legal & Corporate Secretary, MDS Inc.
                Telephone:                      905-267-4252
                Fax:                                  
      905-267-4277
                Email:                             
       peter.brent@mdsinc.com
              2810
      Matheson Blvd., Suite 500
                Mississauga,
      Ontario, L4W 4X7
                Canada
  
  APPENDIX
I – MDS INC. AUDIT COMMITTEE CHARTER
 
 CHARTER
OF THE AUDIT COMMITTEE
 OF
THE BOARD OF DIRECTORS OF MDS INC.
  Purpose
 
 The
primary function of the audit committee (the “Audit Committee”) of the board of
directors (the “Board”) of MDS Inc. (the “Corporation”) is to assist the Board
in fulfilling its oversight responsibilities for the financial reporting process
including responsibility for overseeing:
 
 ·
              the
      integrity of the Corporation’s financial statements and financial
      reporting process, including the system of internal control over financial
      reporting, the audit process and the processes for identifying, evaluating
      and managing the Corporation’s principal risks impacting financial
      reporting;
  ·
              compliance
      with legal and regulatory requirements, other than those otherwise
      assigned from time to time by the
Board;
  ·
              financial
      oversight of Pension Plan
management;
  ·
              the
      qualifications and independence of the independent auditor;
      and
  ·
              the
      Corporation’s internal audit
function.
  Consistent
with these functions, the Audit Committee should encourage continuous
improvement of, and should foster adherence to, the Corporation’s policies,
procedures and practices.
 
 Approval
of Charter
 
 This
Charter and any future changes to this Charter require approval by the
Board.
 
 Structure
and Composition
 
 The Audit
Committee shall consist of no fewer than three members from among the
Board.
 
 Each
member of the Audit Committee shall: (i) be free from any relationship that, in
the opinion of the Board, would reasonably be expected to interfere with the
exercise of his or her independent judgment as a member of the Audit Committee;
and (ii) meet the independence and financial literacy requirements of all
applicable corporate, exchange and securities statutes, rules and regulations in
Canada and the United States (the “Regulations”).
 
 Each
member of the Audit Committee shall be financially literate as contemplated by
applicable regulations and as determined by the Board in its business
judgment.
 
 At least
one member of the Audit Committee shall be an “audit committee financial expert”
as such term is defined by the Regulations. The Board shall make determinations
as to whether any particular member of the Audit Committee satisfies this
requirement.
  The
members of the Audit Committee shall be appointed by the Board annually on the
recommendation of the Nominating and Corporate Governance Committee or until
successors are duly appointed.
 
 The Board
shall normally designate the Chair of the Audit Committee. In the event that a
Board designation is not made, the members of the Audit Committee shall elect a
Chair by majority vote of the full Audit Committee.
 
 In the
event that the Chair of the Audit Committee does not attend a meeting of the
Audit Committee, the members of the Audit Committee shall elect a temporary
Chair for such meeting by majority vote of the members in attendance at the
meeting.
 
 Once
appointed, Audit Committee members shall cease to be a member of the Audit
Committee only upon:
 
 (a)
              resignation
      from the Audit Committee or the
Board,
 (b)
              death,
 (c)
              disability,
      as determined by an independent physician retained by the Board;
      or
 (d)
              not
      being re-appointed pursuant to the annual appointment process described
      above.
 
 Members
of the Audit Committee shall not simultaneously serve on the audit committees of
more than three public companies, including the Corporation, unless the Board
determines that such simultaneous service would not impair the ability of such
member to effectively serve on the Audit Committee.
 
 Meetings
 
 The Audit
Committee shall meet at least quarterly and more frequently as circumstances
dictate.
 
 A
majority of Audit Committee members is required for meeting quorum.
 
 The Audit
Committee shall meet separately at their quarterly meetings with management, the
Internal Auditor and the independent auditor in separate committee
sessions.
 
 The Chief
Executive Officer, Chief Financial Officer, Chief Accounting Officer, Vice
President Tax and Treasury, Vice President Financial Planning and Analysis, Vice
President Internal Audit and Risk and Corporate Secretary of the Corporation and
representatives of the independent auditor shall normally attend meetings of the
Audit Committee. The Audit Committee may request any officer or employee of the
Corporation or the Corporation’s outside counsel or independent auditor to
attend a meeting of the Audit Committee or to meet or provide consultations to
the Audit Committee or any member thereof.   Others may also
attend meetings as the Audit Committee may request.
 
 Notice of
all meetings of the Audit Committee shall be sent to all Audit Committee members
and to those persons referred to in the preceding paragraph.
 
 Chair
  The Chair
of the Committee shall have the duties and responsibilities set forth in
Appendix "A".
 
 Resolutions
 
 Resolutions
of the Audit Committee shall require approval by a simple majority of members
voting on such resolution.
 
 Responsibilities
and Duties
 
 (i)
              Minutes
      and Reporting to the Board
 
 The Audit
Committee shall prepare written minutes of all of its meetings.  The
Audit Committee shall make regular reports to the Board, but not less frequently
than quarterly.  In addition, after each meeting of the Audit
Committee, the Chair of the Audit Committee or designate shall report to the
Board on the significant matters addressed by the Audit Committee at such
meeting and a copy of the minutes shall be made available to all members of the
Board.
 
 (ii)
              Selection,
      Evaluation and Oversight of Independent
Auditor
 
 With
respect to the Corporation’s independent auditor the Audit Committee
shall:
 
 ·
              have
      the sole authority to recommend to the Board the appointment, retention or
      replacement of the independent auditor (subject, if applicable, to
      shareholder approval)
  ·
              be
      directly responsible for establishing the compensation of the independent
      auditor
  ·
              have
      the independent auditor report directly to the Audit Committee and
      otherwise be directly responsible for overseeing the work of the
      independent auditor
  ·
              have
      the authority to communicate directly with the independent
      auditor
  ·
              meet
      with the independent auditor prior to the annual audit to discuss the
      planning, scope and staffing of the audit and approve the selection of the
      coordinating partner having primary responsibility for the
      audit
  ·
              provide
      for the periodic rotation of the coordinating partner having primary
      responsibility for the audit and the audit partner responsible for
      reviewing the audit as required by
law
  ·
              at
      least on an annual basis, evaluate the qualifications, performance and
      independence of the independent auditor and the senior audit partners
      having primary responsibility for the
audit
  ·
              obtain
      and review a report from the independent auditor at least annually
      regarding: (i) the independent auditor’s internal quality-control
      procedures, (ii) any material issues raised by the most recent internal
      quality-control review, or peer review, of the firm, or raised by any
      inquiry or investigation by governmental or professional authorities
      within the preceding five years respecting one or more independent audits
      carried out by the firm, (iii) any steps taken to deal with any issues,
      (iv) all relationships between the independent auditor and the Corporation,
      and (v) the independence of the independent auditor as required by the
      Regulations
  ·
              review
      and approve the Corporation’s hiring policies regarding partners,
      employees and former partners and employees of the present and former
      independent auditor
  ·
              obtain
      confirmation from management that the Corporation has not hired employees
      or former employees of the independent auditor who have participated in
      any capacity in the audit of the Corporation for the immediately previous
      12 month period
  pre-approve
all auditing services and permitted non-audit services (including fees and terms
thereof) to be performed for the Corporation or its subsidiaries by the
independent auditor
  (iii)
              Internal
      Audit
  With
respect to the Corporation’s lead of internal audit (the “Internal Auditor”),
the Audit Committee shall:
  ·
              have
      the authority to approve the appointment and termination of the Internal
      Auditor
  ·
              have
      the Internal Auditor report directly on a functional basis to the Audit
      Committee (although the Internal Auditor may report administratively to
      the CEO or the CFO)
  ·
              have
      the authority to communicate directly with the Internal
      Auditor
  ·
              meet
      with the Internal Auditor to discuss the planning, scope and staffing of
      the internal audit plan
  ·
              approve
      the internal audit mandate and annual plan, including the
      responsibilities, budget, compensation and staffing of the Corporation’s
      internal audit function, through inquiry with the Corporation’s
      independent auditor, management and the Corporation’s internal auditing
      department
  (iv)
              Financial
      Reporting of Quarterly Financial
Results
 
 With
respect to the Corporation’s reporting of unaudited quarterly financial results,
the Audit Committee shall:
 
 ·
              prior
      to their public release and filing with securities regulatory agencies,
      review and discuss with management, the internal auditor and the
      independent auditor:
  o
              earnings
      press release
 o
              financial
      statements and notes thereto
 o
              management’s
      discussion and analysis
 
 The
review of the Corporation’s unaudited quarterly financial results shall
include:
 
 ·
              critical
      accounting policies and practices
  ·
              significant
      financial reporting issues and judgments (e.g. estimates and reserves)
      made in the preparation of the Corporation’s financial statements,
      including any significant changes in the Corporation’s selection or
      application of accounting
principles
  ·
              the
      extent to which changes or improvements in financial or accounting
      practices, as approved by the Audit Committee, have been
      implemented
  ·
              results
      of the independent auditor’s review
  ·
              any
      written communications between the independent auditor and management
      (e.g. management letters, schedule of unadjusted
    differences)
  ·
              any
      significant disagreements among management and the independent auditor in
      connection with the preparation of financial
  statements
  ·
              adequacy
      of internal controls over financial reporting and any major issues as to
      the adequacy of the Corporation’s internal controls and any special steps
      adopted in light of material control
  deficiencies
  ·
              management
      certifications of reports filed by the Corporation pursuant to applicable
      regulations
  ·
              the
      effect of regulatory and accounting initiatives as well as off-balance
      sheet structures on the Corporation’s financial
  statements
  ·
              the
      Corporation’s use of “pro forma” or “adjusted” non-GAAP
      information
  ·
              the
      Corporation’s use of forward-looking financial
  guidance
  ·
              any
      correspondence with, or published reports by, regulators or governmental
      agencies which raise material issues regarding the Corporation’s financial
      statements or accounting policies
  ·
              approve
      the unaudited quarterly financial statements of the
      Corporation
 
 (v)
              Financial
      Reporting of Year-End Financial
Results
 
 With
respect to the Corporation’s annual audit, the Audit Committee
shall:
 
 ·
              prior
      to their public release and filing with securities regulatory agencies,
      review and discuss with management, the internal auditors and the
      independent auditor the:
 
 o
              earnings
      press release
 o
              financial
      statements and notes thereto
 o
              management’s
      discussion and analysis
 o
              results
      of the independent auditor’s
audit
  The
review of the Corporation’s audited financial results shall
include:
 
 o
              all
      matters described above under “Financial Reporting of Quarterly Financial
      Results”
  o
              results
      of the independent auditor’s audit
  o
              discussions
      with the independent auditor on the matters required to be discussed by
      Statement on Auditing Standards No. 61, including significant adjustments,
      management judgments and accounting estimates, significant new accounting
      policies, any difficulties encountered in the course of the audit work,
      any restrictions on the scope of activities or access to requested
      information, and any significant disagreements with
    management
  o
              a
      report from the independent auditor describing (i) all critical
      accounting policies and practices to be used, (ii) all alternative
      treatmentsof
      financial information within generally accepted accounting principles that
      have been discussed with management, ramifications of the use of such
      alternative disclosures and treatments, and the treatment preferred by the
      independent auditor and (iii) other material communications between the
      independent auditor and management, such as the annual management letter
      or schedule of unadjusted
differences
  ·
              recommend
      to the Board whether the audited consolidated financial statements of the
      Corporation should be approved by the
Board
 
 (vi)
              Financial
      Oversight of Pension Plan
Management
 
 With
respect to the Corporation’s management of Pension Plans, the Audit Committee
shall fulfill duties related to financial oversight of pension plan management
including funding, asset management, and reporting.
 
 The
review of the Corporation’s Pension Plan’s shall include:
 
 ·
              External
      Auditor reports and financial statements of the plans, including
      compliance with pension reporting
regulations
 
 ·
              Actuarial
      valuations and contribution and funding
policies
 
 ·
              Plan
      solvency and compliance with pension
legislation
 
 ·
              Review
      of the investment fund strategy and performance and investment manager
      selection
   (vii)           
Regulatory Filings and Guidance
 
 The Audit
Committee shall:
 
 ·
              consider
      the effectiveness of the procedures that are in place for the review of
      the Corporation’s public disclosure of financial information extracted or
      derived from the Corporation’s financial statements, other than
      management’s discussion and analysis and annual and interim earnings press
      releases, and shall periodically assess the adequacy of those
      procedures
  ·
              issue
      any reports required of the Audit Committee to be included in the
      Corporation’s annual proxy
statement
  ·
              prior
      to their public release or filing with securities regulatory agencies,
      review and recommend to the Board the approval of the following
      documents:
 
 o
              Annual
      Information Form
 o
              Annual
      Report on Form 40-F
 o
              prospectuses
 
 ·
              review
      financial information and review and approve annual earnings guidance
      provided by the Corporation to analysts and rating agencies or which the
      Corporation or any of its officers or employees intends to publicly
      disclose by way of press release (other than press releases referred to
      under “Financial Reporting of Quarterly Financial Results” and under
      “Financial Reporting of Year-End Financial Results”) or otherwise (which
      review may be done generally (i.e., discussion of the types of information
      to be provided or disclosed and type of presentations to be
      made);  the Audit Committee need not discuss in advance each
      instance in which the Corporation may provide or disclose earnings
      guidance)
 
 (viii)
              Related
      Party Transactions and Off-Balance Sheet
  Structure
 
 The Audit
Committee shall:
 
 ·
              review
      all proposed related-party transactions including those between the
      Corporation and its officers or directors and, if deemed appropriate,
      recommend approval of any particular transaction to the
    Board
  ·
              review
      all material off-balance sheet structures which the Corporation is a party
      to
 
 (ix)
              Internal
      Controls, Risk Management and Legal
Matters
 
 The Audit
Committee shall:
 
 ·
              consider
      the effectiveness of the Corporation’s internal controls over financial
      reporting
  ·
              discuss
      with management the Corporation’s major financial risk exposures and the
      steps management has taken to monitor and control such exposures,
      including the Corporation’s risk
      assessment and risk management policies including the use of derivative
      financial instruments. Areas to be considered in this respect
      include:
  o
              insurance
      coverage
 o
              foreign
      currency exposure
 o
              interest
      rate exposure
 
 ·
              review
      with management at least annually reports demonstrating compliance with
      risk assessment and with risk management
  policies
  ·
              review
      quarterly with management, and if necessary, the Corporation’s counsel,
      any legal matter which could reasonably be expected to have a material
      impact on the Corporation’s financial statements or accounting
      policies
  ·
              review
      the yearly report prepared by management, and attested to by the
      Corporation’s independent auditor, assessing the effectiveness of the
      Corporation’s internal control over financial reporting and stating
      management’s responsibility for establishing and maintaining adequate
      internal control over financial reporting prior to its inclusion in the
      Corporation’s annual filings under applicable securities
    laws
  ·
              review
      quarterly with the Chief Executive Officer, Chief Financial Officer, Chief
      Accounting Officer, Internal Auditor and Independent Auditor,
      periodically, the following:
  o
              all
      significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the Corporation’s ability to record,
      process, summarize and report financial information;
  and
  o
              any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the Corporation’s internal
      control over financial reporting
  ·
              review
      and approve the Corporation’s disclosure
policy
  (x)
              Capital
      Structure, Investment and Cash Management Policies,
    Disclosure
              Policy
 
 The Audit
Committee shall:
 
 ·
              review
      and approve any changes to the Corporation’s capital
    structure
  ·
              review
      and approve the Corporation’s treasury management
  policies
  ·
              review
      and approve the Corporation’s disclosure
policy
  (xi)
              “Whistle
      Blower” and Related Procedures
 
 The Audit
Committee shall oversee the establishment of procedures for the receipt,
retention and treatment of complaints received by the Corporation regarding
accounting, internal controls, auditing
matters or fraud, and for the confidential and/or anonymous submission by
employees of the Corporation of concerns regarding questionable
accounting  auditing matters, internal control failures or fraud,
which procedures shall include the requirement to advise the Audit Committee of
all such complaints received.
 
 (xii)
              Review
      of Charter and Self Assessment
 
 The Audit
Committee shall:
 
 ·
              review
      and reassess annually the adequacy of this
  Charter
  ·
              review
      annually the Audit Committee’s own
performance
  (xiii)
              Other
      Activities
 
 The Audit
Committee shall carry out such other activities consistent with this Charter,
the Corporation’s by-laws and governing law, that the Audit Committee or the
Board deems necessary or appropriate.
 
 Resources
and Authority
 
 The Audit
Committee shall have the authority to retain independent legal, accounting or
other advisors, including consulting with the national office of the independent
auditor, as it determines necessary to carry out its duties. The Corporation
shall provide for appropriate funding, as determined by the Audit Committee, for
payment of compensation to the independent auditor for the purpose of rendering
or issuing an audit report or performing other audit, review or attest services
and to any advisors employed by the Audit Committee and for ordinary
administrative expenses of the Audit Committee.
 
 The Audit
Committee shall have the authority to conduct any investigation necessary and
appropriate to fulfilling its duties and in connection therewith, to inspect all
books and records of the Corporation and its subsidiaries and to discuss such
books and records and any matters relating to the financial position, risk
management and internal controls of the Corporation and its subsidiaries with
the officers of the Corporation and with the independent auditor.
 
 Limitations
on Committee’s Duties
 
 It is
recognized that members of the Audit Committee are not full-time employees of
the Corporation and do not represent themselves to be accountants or auditors by
profession.  Each member of the Audit Committee shall be entitled to
rely on (i) the integrity of those persons and organizations within and outside
the Corporation from whom such member receives information, and (ii) the
accuracy of the financial and other information provided to the Audit Committee
by such persons or organizations absent actual knowledge to the
contrary.
 
 While the
Audit Committee has the responsibilities and power set forth in this Charter, it
is not the duty of the Audit Committee to plan or conduct audits or to determine
that the Corporation’s financial statements and disclosures are complete and
accurate and are in accordance with generally accepted
accounting principles and applicable rules and regulations. These are the
responsibilities of either management and/or the independent
auditor.
 
 In
discharging its duties, each member of the Committee shall be obliged only to
exercise the care, diligence and skill that a reasonably prudent person would
exercise in comparable circumstances. Nothing in this Charter, including
designating any member of the Committee as an “audit committee financial expert”
is intended, or should be determined to impose on any member of the Committee a
standard of care or diligence that is in any way more onerous or extensive than
the standard to which all members of the Board are subject.
 
 The
essence of the Committee’s responsibilities is to monitor and review the
activities described in this Charter to gain reasonable assurance (but not to
ensure) that such activities are being conducted properly and effectively by the
Corporation.
   Appendix
"A"
 
 Position
Description
 Chair
of the Audit Committee
 
 In
addition to the duties and responsibilities set out in the Board of Directors
Charter and the Charter of the Audit Committee, the chair (the "Chair") of the
Audit Committee (the "Committee) of MDS Inc. (the "Company") has the duties and
responsibilities described below.  The Committee Chair
will:
 
 1.
              Provide
      overall leadership to enhance the effectiveness of the Committee,
      including:
 
 a.
              Recommend
      and oversee the appropriate structure, composition, membership and
      activities delegated to the
Committee;
 
 b.
              Chair
      all meetings of the Committee and manage agenda items so appropriate
      consideration can be given to agenda
items;
 
 c.
              Encourage
      Committee members to ask questions and express viewpoints during
      meetings;
 
 d.
              Schedule
      and set the agenda for Committee meetings with input from other Committee
      members, the Chair of the Board of Directors and management as
      appropriate;
 
 e.
              Facilitate
      the timely, accurate and proper flow of information to and from the
      Committee;
 
 f.
              Arrange
      for management, internal personnel, external advisors and others to attend
      and present at Committee meetings as
  appropriate;
 
 g.
              Arrange
      sufficient time during Committee meetings to fully discuss agenda items;
      and
  h.
            Carry
      out the responsibilities and duties of the Committee, as outlined in its
      Charter and review the Charter and duties and responsibilities with
      Committee members on an annual basis;  
 2.
              Foster
      ethical and responsible decision-making by the Committee and its
      individual members.
 
 3.
              Provide
      for in-camera sessions at the quarterly meetings of the Committee and at
      such times as required.
 
 4.
              Following
      each meeting of the Committee, report to the Board of Directors on the
      activities, findings and any recommendations of the
    Committee.
 
 5.
              Carry
      out such other duties as may reasonably be requested by the Board of
      Directors.
 
 
   APPENDIX II -DEFINITIONS
 
 Acronyms:
 AECL
              Atomic
      Energy of Canada Limited
                
                A
      nuclear technology and services company providing services to utilities
      worldwide. AECL delivers a range of nuclear services including R&D
      support, construction management, design and engineering to specialized
      technology, waste management and decommissioning in support of CANada
      Deuterium Uranium (CANDU) reactor products.CBCA
              Canada
      Business Corporations Act
                  
                  The
      law applicable to business corporations incorporated to carry on business
      throughout Canada.CLS
              Calgary
      Laboratory Services
                  
                  A
      medical diagnostic laboratory that offers a full range of laboratory
      services to the Calgary, Canada region.CNSC
              Canadian
      Nuclear Safety Commission
                  
                  An
      independent federal government agency that regulates the use of nuclear
      energy and material to protect health, safety, security and the
      environment and to respect Canada’s international commitments on the
      peaceful use of nuclear energy.Co59and Co60
              Cobalt-59
      and Cobalt-60
                
                Cobalt-59
      is the stable form of cobalt.  Cobalt-60 is a radioisotope with a
      half-life of 5.2
      years.CRO
              Contract
      Research Organization
                
                A
      company that conducts research on behalf of a pharmaceutical or
      biotechnology company.DMPK
              Drug
      Metabolism and PharmacoKinetics
                
                Measuring
      the movement of drugs in the body, including the processes of absorption,
      distribution, localization in tissues, biotransformation and
      excretion.
 
 EMEA
              European
      Medicines Agency
                
                A
      decentralized body of the European Union whose main responsibility is the
      protection and promotion of public and animal health, through the
      evaluation and supervision of medicines for human and veterinary
      use.FDA
              Food
      and Drug Administration
                
                The
      U.S. regulatory agency charged with maintaining the safety of food, drugs,
      and cosmetics.FDCFA
              Facilities
      Development and Construction Funding Agreement
                
                A
      loan agreement between the Government of Canada and MDS for C$100 million
      of which C$68 million is outstanding.FDG
              Fluorine-18
      Fluorodeoxyglucose
                
                A
      short-lived isotope of fluorine used predominantly in PET
      scans.GAAP
              Generally
      Accepted Accounting Principles
                
                The
      standard framework of guidelines for financial accounting.  It
      includes the standards, conventions, and rules accountants follow in
      recording and summarizing transactions, and in the preparation of
      financial statements.GCP
      and GLP
              Good
      Clinical Practices and Good Laboratory Practices
                
                Standards
      for the conduct of clinical trials (including laboratory studies), the
      data from which are expected to be submitted to a regulatory agency such
      as the FDA.  In the case of GLP, these practices are defined by
      regulation.  GCP have arisen from general accepted clinical
      practices within the industry.HCC
              Hepatocellular
      Carcinoma
                
                The
      most common primary malignant tumour of the liver.HEU
              Highly
      Enriched Uranium
                
                Uranium
      that contains the isotope uranium 235 in
      a concentration of 20% or more. Naturally occurring uranium has a
      uranium235
      content of about 0.7%.
 
 ICP/MS
              Inductively
      Coupled Plasma Mass Spectrometry
                
                A
      type of mass spectrometry that combines inductively coupled plasma as a
      method of producing ions with a mass spectrometer as a method of
      separating and detecting the ions to determine the contents of a
      sample.LC/MS
              Liquid
      Chromatography/Mass Spectrometry
                
                A
      type of mass spectrometry that combines the physical separation
      capabilities of liquid chromatography with a mass spectrometer as a method
      of determining the specific contents of a sample.LEU
              Low-Enriched
      Uranium
                
                Uranium
      that contains the isotope uranium235
      in a concentration 20% or less.MALDI
              Matrix-Assisted
      Laser Desorption/Ionization
                
                A
      form of mass spectrometer that uses this technology to give a more
      detailed measure of the molecular mass of a sample.MD&A
              Management
      Discussion and Analysis
                
                A
      section of a company's financial report in
      which management discusses numerous aspects of the company, both past
      and present.MD
              Molecular
      Devices Corporation
                
                An
      analytical tools company acquired by MDS in 2007.Mo99
              Molybdenum-99
                
                A
      radioactive chemical formed by nuclear reactions during the fission of
      uranium which decays into Technetium-99m (Tc99m).  It
      is the most common isotope used for medical purposes.NCE
              New
      Chemical Entity
                
                A
      chemical compound being studied for possible use as a
      drug.  Compounds are generally referred to as NCEs until a NDA
      is filed.
 
 NCIB
              Normal
      Course Issuer Bid
                
                The action
      of a company buying back its own outstanding shares from the market
      so it can cancel them.NDA
              New
      Drug Application
                
                An
      NDA is submitted to the FDA reporting the results of clinical trials and
      must be approved by the FDA before marketing can begin.PET
              Positron
      Emission Tomography
                
                A
      diagnostic imaging technology that uses positron emission to measure in
      detail the functioning of distinct areas of the human brain while the
      patient is comfortable, conscious and alert.SPECT
              Single
      Proton Emission Computed Tomography
                
                A
      diagnostic imaging technology that allows a physician to see a
      three-dimensional image of a particular organ or body system.  A
      SPECT scan is often used to visualize the brain cerebral blood flow, and
      thereby indicate metabolic activity patterns in the
  brain.Tc99m
              Technetium-99m
                
                Tc99m
      is the metastable nuclear form of Techentium-99.  Metastable
      refers to the stable nature of this element in that it does not change
      into another element as it decays over time.  It emits gamma rays and is used
      in radioactive medical isotope tests.TOF
              Time
      of Flight
                
                A
      form of mass spectrometry that uses differences in the transit times of
      molecules through a known distance to determine their molecular
      weight.
  Technical
Terms:
 Assay
              Analysis
      of biological fluids or structure to determine how much or how little drug
      has been absorbed into the fluid or structure.Bioanalytical
              Methods
      for determining the concentration of drugs in biological samples such as
      blood.
 Bioequivalence
              The
      study of different formulations of the same drug to determine if the
      metabolic effects are equivalent.Biomarker
              A
      distinctive biochemical or physiological indicator of a biological process
      or event.Biopharmaceuticals
              Pharmaceutical
      products (drugs) developed using biotechnology instead of chemical
      synthesis.Biotechnology
              The
      scientific manipulation of living organisms, especially at the molecular
      genetic level, to produce useful products.Clinical
      Trials
              Broadly,
      the regulated process by which new drugs proceed after discovery through
      to acceptance for marketing to patients.  The term most
      correctly refers to the period during which new compounds are tested in
      human subjects and encompasses the following broad
  phases:Phase
      I
              Segment
      of clinical trials research allocated to assessing the safety, tolerance,
      and pharmacokinetics of a NCE generally using otherwise healthy study
      subjects.Phase
      II
              Segment
      of clinical trials research allocated to assessing the safety and efficacy
      of a NCE in selected disease states using patients having the
      condition.Phase
      III
              Segment
      of clinical trials research allocated to assessing the safety and efficacy
      of a NCE often in comparison with standard therapies, conducted in an
      expanded, multi-centre manner using patients having the
      condition.Phase
      IV
              Follow-on
      clinical studies completed after the FDA has approved the NCE for
      marketing.Cobalt-60
              A
      radioactive isotope of cobalt containing one additional neutron
      (electrically neutral particle) compared with cobalt in its natural
      state.Cyclotron
              A
      form of particle accelerator that can be used to produce
      radioisotopes.Decay
              A
      spontaneous radioactive process by which the number of radioactive atoms
      in a material decreases over time resulting in the release of a defined
      amount of radiant energy.
 E.
      coli
              A
      member of the family of microorganisms called coliforms.  Many
      strains of E. coli live peacefully in the gut; however, one strain (E.
      coli 0157:H7) has been identified as the cause of a specific form of
      gastroenteritis characterized by abdominal cramps and bloody diarrhea,
      leading to kidney failure and sometimes death.Efficacy
              Capacity
      for producing a desired result or effect.Electron
      (or E) Beam
              A
      type of particle accelerator that creates a stream of high-energy
      electrons.Gamma
      Radiation
              Very
      high-energy electromagnetic radiation that is released from the decay of
      radioactive sources.Genome
              The
      entire genetic information present in a particular
    organism.Genomics
              The
      study of the organization, structure and function of the
      genomeHalf-life
              The
      time required for radioisotopes to decay to one-half the level of
      radioactivity originally present.Humanitarian
      Use Device
              A
      device that is intended to benefit patients in the treatment and diagnosis
      of diseases or conditions that affect or is manifested in fewer than 4,000
      individuals in the United States per year.Ionization
              The
      process by which neutral atoms become electrically charged by the loss of
      one or more electrons (electrically negative
particles).Investigator
              The
      individual from a clinic site who is ultimately in charge of a study,
      typically a physician.Irradiation
              The
      process of exposing product to gamma radiation, or X-rays, or electrons
      under controlled conditions.Isotope
              A
      form of an element having the same number of protons (electrically
      positive particles) but a different number of neutrons from its ordinary
      state.  Most elements exist in more than one form of isotope,
      and most isotopes are stable (unchanging).  Isotopes are
      typically identified by an element name followed by a number (e.g.
      Molybdenum-99).
 Liquid
      Chromatography
              A
      separation technique in which the sample is injected into a liquid stream
      pumped at high pressure through a column packed with materials which
      absorb the components of the sample to varying extents, such that over the
      length of the column the components of the sample become separated and are
      detected sequentially by the mass spectrometer.Mass
      Spectrometry
              The
      science that measures the masses and relative concentrations of atoms and
      molecules to determine the make-up of the substance.Molybdenum-99
              The
      most common isotope used for medical purposes.  It is processed
      into technetium-99m for these purposes.Particle
      Accelerator
              A
      machine that increases the kinetic energy of electrons or protons by
      accelerating them through electric fields.Pharmacology
              The
      study of drugs and their origins, nature, properties, and effects on
      living organisms.Pre-clinical
      Studies
              Designates
      those studies generally completed prior to human clinical
      trials.Proteomics
              The
      study of protein location, interaction, structure, and function that aims
      to identify and characterize the proteins present in normal versus
      diseased states in biological samples.Radioisotopes
              An
      isotope that is unstable and returns to a stable state through the release
      of energy in a process called decay.  MDS processes and
      distributes radioisotopes for use in medical applications and for
      sterilization processing.Radiopharmaceuticals
              A
      specially designed pharmaceutical having as part of its ingredients a
      minute amount of a radioisotope.  After injection or ingestion,
      the radiopharmaceutical is designed to collect in specific organs or types
      of cells such as tumour cells.
 Substantial
      Issuer Bid
              Substantial
      Issuer Bid is a process that allows a company to buy back its shares from
      shareholders. A Substantial Issuer Bid operates like an auction; a company
      offers to repurchase a specific number of shares within a set price range,
      and shareholders are invited to tender shares during the offer period.
      Shareholders must specify the lowest price within the range that they are
      willing to accept.
                At
      the end of the offer period, the company will collect investor offers and
      select the lowest tendered price that allows it to buy the maximum number
      of shares up to a pre-determined dollar amount. This price becomes the
      purchase price and all shares that are tendered at or below the purchase
      price will be purchased by the company.  If the company receives more
      offers at the accepted price than the specified maximum number of shares,
      all shareholders who tendered at or below the accepted price will receive
      a pro-rata allocation.Synthesis
              The
      process of creating a molecule through chemical
  reaction.Target
              The
      cells, tissues, or structures that a drug is intended to interact with as
      part of its pharmacological effect.Toxicology
      (also called Safety Pharmacology)
              Toxicology
      in the biomedical area is primarily concerned with the prediction of
      adverse effects in humans resulting from exposure to drugs as well as the
      demonstration of safety or hazard associated with their
    use.