Exhibit
1.1










MDS
INC.
  ANNUAL
INFORMATION FORM
  FOR
THE YEAR ENDED OCTOBER 31, 2008
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 January
27, 2009
 Toronto,
Canada
 
 
   INTERPRETATION
 ITEMS
      AFFECTING THE COMPARABILITY OF FINANCIAL INFORMATION OF PRIOR
      YEARS
 DOCUMENTS
      INCORPORATED BY REFERENCE
 CAUTION
      REGARDING FORWARD-LOOKING
STATEMENTS
 1.
              CORPORATE
      STRUCTURE
 1.1
              Jurisdiction
      of Incorporation
 1.2
              Current
      Organization
 2.
              GENERAL
      DEVELOPMENT OF THE BUSINESS 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
 2.3
              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     Strategic
      Considerations
 3.
              NARRATIVE
      DESCRIPTION OF THE BUSINESS OF MDS
 3.1
              Reportable
      Operating Segments
 3.2
              MDS
      Pharma Services
 3.3
              MDS
      Nordion
 3.4
              MDS
      Analytical Technologies
 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
 3.10.1Risk
      Factors
 3.10.2Legal
      Proceedings and Regulatory Actions
 3.10.3Interest
      of Management and Others in Material
  Transactions
 3.10.4Transfer
      Agent and Registrar
 3.10.5Material
      Contracts
 3.10.6Experts
 4.
              SELECTED
      CONSOLIDATED FINANCIAL INFORMATION
 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
CHARTER
 APPENDIX
      II – DEFINITIONS
 
 
 
 
 
 
 
 
 
 
 
 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®; ImageXpress®; MetaFluor®;
MetaMorph®; MetaVueTM; Nordion; QSTAR®; QTRAP®; Quality on TimeTM; Sciex;
SpectraMax®; Threshold®; and TOF/TOFTM.
 
 
 The
following are registered trademarks belonging to the companies
indicated:
 
 Altropane®                            Alseres
Pharmaceuticals, Inc.
 AzedraTM                             Molecular
Insight Pharmaceuticals, Inc.
 Bexxar®                               GlaxoSmithKline
 Iotrex®                                Hologic,
Inc.
 NeuradiabTM                       Bradmer
Pharmaceuticals, Inc.
 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.  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
  All
financial references in this document exclude our discontinued generic
radiopharmaceuticals operations, our diagnostic laboratories business, certain
early-stage pharmaceutical research services operations, and our interests in
Source Medical Corporation (Source), unless otherwise indicated. All financial
references for the prior years have been restated to reflect this
treatment.
  MDS
historically prepared its consolidated financial statements in accordance with
Canadian generally accepted accounting principles (GAAP) and provided
reconciliation to U.S. GAAP. The Company adopted U.S. GAAP effective with the
reporting of its fiscal 2007 annual results as its primary reporting standard
for its consolidated financial statements. MDS has adopted U.S. GAAP to improve
the comparability of its financial information with that of its competitors, the
majority of whom are U.S.-based multinational companies. All figures for prior
years have been revised to reflect the adoption of U.S. GAAP as our reporting
standard. All financial statements and Management’s Discussion and Analysis
(MD&A) filed by the Company since its 2007 Annual Reports, including those
filed for interim reporting purposes during 2008, were prepared in accordance
with U.S. GAAP.
  Following
a detailed review of the MAPLE Facilities, we have determined that our
accounting treatment of the MAPLE Facilities in fiscal 2006, 2007 and for the
interim periods of 2008 was incorrect.  As a result, we have restated
our results for prior years and the interim periods for 2008.  We do
not intend to restate and re-file our previously filed interim and annual
financial reports.  Details of the restatement are discussed in the
Company’s 2008 MD&A.
    DOCUMENTS
INCORPORATED BY REFERENCE
   The
following sections of the MDS 2008 Annual Report Financial Review (2008
Financial Review) are incorporated by reference into this AIF:
  1.
              The
      audited consolidated financial statements of MDS Inc. for the years ended
      October 31, 2008, October 31, 2007 and October 31, 2006, reported on by
      Ernst & Young LLP, Chartered Accountants (2008 Financial Statements)
      on pages 45 to 50 of the 2008 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, 2008 (2008 MD&A)
      contained on pages 1 to 44 of the 2008 Financial
  Review.
  Also
incorporated by reference is the Management’s Proxy Circular dated January 7,
2009 with respect to the March 12, 2009 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 the “safe harbour” provisions of
applicable Canadian securities regulation and the United States Private
Securities Litigation Reform Act of 1995.  This document contains such
statements, and we may make such statements in other filings with regulators in
Canada and the United States Securities and Exchange Commission (SEC), in
reports to shareholders or in other communications, including public
presentations and press releases.  These forward-looking statements
include, among others, statements with respect to our objectives for 2009 and
beyond, our medium-term goals, and strategies to achieve those objectives and
goals, as well as statements with respect to our beliefs, plans, objectives,
expectations, anticipations, estimates and intentions.  The words
“may”, “could”, “should”, “would”, “suspect”, “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 economies, in particular the
economies of Canada, the United States, the European Union, and the other
countries in which we conduct business; the stability of global equity markets;
the cost and availability of financing and our ability to obtain such financing
given the restrictions in our Senior Unsecured Notes and bank credit facilities;
our ability to secure a reliable supply of raw materials, particularly cobalt
and critical medical isotopes; 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-rate policies of the Bank of Canada and the Board
of Governors of the Federal Reserve System in the United States; 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 complete strategic transactions and to
execute them successfully; 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 methods we use to report our
financial condition; uncertainties associated with critical accounting
assumptions and estimates; the possible impact on our businesses from
third-party special interest groups, certain of our employees subject to
collective-bargaining, environmental and other regulations, natural disasters,
public-health emergencies, international conflicts and other developments
including those relating to terrorism; other risk factors described in section
3.10 thereof, and our success in anticipating and managing these
risks.
 
 We
caution that the foregoing list of important 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 2700 Matheson
Boulevard East, Suite 300, West Tower, Mississauga, Ontario, Canada, L4W
4V9.
  1.2
              Current
      Organization
  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 the Company, or account for 10% or more of
the consolidated total assets of the Company. The significant operating
subsidiaries and partnerships of the Company are set forth below.
  ·
              MDS
      (Canada) Inc., a Canadian (CBCA)
corporation;
  ·
              MDS
      Analytical Technologies (US) Inc., a Delaware
  corporation;
  ·
              MDS
      Pharma Services (US) Inc., a Nebraska
  corporation;
  ·
              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.
  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).
 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 the diagnosis and
treatment of disease.  We are a leading global provider of
pharmaceutical research services, medical isotopes for molecular imaging,
sterilization technologies, radiotherapeutics and analytical
instruments.
  MDS
operates in three business units within the life sciences industry: MDS Pharma
Services, MDS Nordion and MDS Analytical Technologies.
  In 2005,
the Company announced a 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 significant step in this
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 strategic plan, on March 20, 2007, MDS finalized the
acquisition of Sunnyvale, U.S.-based Molecular Devices Corporation (MDC), a
leading provider of high-performance 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.  To further accelerate growth, the Company
has invested in new customer-facing 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 strategic plan by further focusing its
portfolio, optimizing its global footprint and driving operational efficiencies
in its businesses.  During the year, the Company closed several MDS
Pharma Services offices, reduced headcount in various businesses and continued
to transition 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.
  2.1.1    Life
Sciences
  The
Company has three life sciences business units: MDS Pharma Services, which
provides pharmaceutical research services; MDS Nordion, which provides medical
isotopes for molecular imaging, sterilization technologies and
radiotherapeutics; and MDS Analytical Technologies, which designs, manufactures
and sells analytical instruments.
  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
(MDC).
  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 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 pharmaceutical research services businesses
collectively operate globally under the name MDS Pharma Services.
  2.1.2    Diagnostic
Laboratories
  Until
February 2007, the Company also operated in the health-care industry primarily
through its diagnostic laboratories business, MDS Laboratory Services, in
Canada.  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 the Company’s life sciences businesses 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 also provides products and
services to food and environmental testing industries, which are referred to as
the Applied Market. These customers 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.
  No single
customer accounted for more than 10% of the consolidated revenues of the Company
for the fiscal year ended October 31, 2008.
  The
Company’s business and customer base are global.  MDS’s total
revenues, including reimbursement revenue, as invoiced to customers in 2008 were
approximately 49% U.S., 30% Europe, 11% Asia, 8% Canada, and 2% rest of
world.
  2.1.4    Employees
  As at
October 31, 2008, MDS had more than 5,000 employees in 29
countries.
  2.2
              Recent
      Industry Developments
  MDS
serves the life sciences industry including pharmaceutical, biotechnology,
academic, government and other research and industrial markets, as well as the
health-care market. MDS’s businesses have been affected by a number of events
that affect the life sciences industry in general. They include:
  (i)
              growth
      in the global demand for drugs;
 (ii)
              intensifying
      pressure to accelerate drug development and contain
  costs;
 (iii)
              rapid
      progress in new technologies leading to innovation, increasing the
      availability of advanced research and analysis tools and sophisticated
      drug treatment options;
 (iv)
              heightened
      regulatory scrutiny worldwide - particularly concerning drug, food and
      water safety; and
 (v)
              the
      state of the global economy including the equity and financial
      markets.
  i)  Increased
Demand for Drugs
  As the
population expands and ages, there has been a corresponding increase in the
global demand for therapeutics.  In addition, demand from such
emerging markets as India and China is increasing as these economies grow
stronger.
  ii)  Pressure
for Drug Development Acceleration and Cost Containment
  Looming
patent expiration of large market drugs and the escalating investment necessary
to bring a drug to market has led to pressure to speed the development of new
drugs and reduce costs.
 
 Loss of
patent protection on a significant number of large market drugs is expected in
the near future.  Off-patent drugs often lose a substantial portion of
their market share to generic alternatives in less than one year. To replace
these lost revenues and sustain the levels of growth enjoyed in the past, large
pharmaceutical and biotechnology companies must improve the effectiveness of
existing drug development budgets.  This has also led to the need to
reduce development costs while continuing to fill the pipeline with potential
new products.
  This has,
in turn, helped to fuel the growth of the contract research organization
industry.  In efforts to reduce costs and shorten the time to market,
drug development companies have been expanding their use of contract research
organizations to fulfill their pre-clinical and clinical research
needs.  Many large pharmaceutical companies have rationalized their
workforces and facilities, and/or increased outsourcing to concentrate on their
internal expertise and resources in early drug discovery, while continuing to
advance their most promising products through the development
pipeline.
  In
addition to more focused research spending, these developments have led to
continued mergers of significant size within the pharmaceutical and
biotechnology industries. Mergers are expected to continue, and are likely to
reduce drug development budgets.  They are also expected to lead to
more focused research spending by the merged entities, including more
concentration of spending within particular therapeutic areas of
focus.  Cost-containment efforts have also led to an expanded shift of
drug development activities to such lower cost geographies as China, India and
Eastern European countries.
  iii)
              Rapid
      Progress in New Technologies Leading to
  Innovation
  Advances
in life sciences, including developments in the areas of genomics and
proteomics, have created a better understanding of the field both at a molecular
level and within a biological system.  This has led to new and
improved methods of drug discovery and development such as high throughput
technologies. These technologies increase the number of new drug leads and
enable earlier identification of promising candidates.  In addition,
researchers can eliminate unpromising candidates before investing in further
development.
  It is
anticipated that these technological advances may lead to more targeted,
personalized and effective medicines.  In addition, these technologies
are expected to lead to more accurate diagnosis at an earlier disease stage,
which, in turn, is expected to lead to more effective
treatment.   Advancements include improved molecular-imaging
technologies that may provide innovative diagnostic and therapeutic treatments
in the future.
  iv)
Heightened Regulatory Scrutiny
  The
withdrawal of high-profile drugs from the market due to safety concerns, along
with concerns about food and water contamination, has resulted in heightened
regulatory scrutiny worldwide.  In turn, there has been a reduction
over the past decade in the frequency of drugs gaining approval.  This
has propelled the need for more effective tools and services for drug discovery
and development, as well as the development of new testing methodologies to
enhance the safety of food and water supplies.  In addition, concerns
surrounding the spread of infectious disease and recent incidents of
contaminated food have driven a growing demand for sterilization
technologies.
  v)  State
of the Global Economy
  The
recent downturn in the equity markets, combined with the turmoil in the
financial markets, is expected to negatively impact many industries including
life sciences.  It is expected that these events will cause customers
to curtail capital expenditures and adjust their research and development
pipelines to concentrate funding on their most critical projects.  At
this time, the severity or length of this economic downturn is
undetermined.
   2.3           Business
Focus of MDS
  MDS’s
business is focused on the global life sciences markets.  The life
sciences markets are some of the fastest growing markets in the world, driven by
long-term trends in population demographics and the way therapeutics are
developed and disease is treated.  The Company is focused in the areas
of pharmaceutical research services through MDS Pharma Services, molecular
imaging, sterilization technologies and radiotherapeutics through MDS Nordion,
and life sciences instruments and tools through MDS Analytical
Technologies.  From time to time, MDS may supplement organic growth in
its three life sciences businesses with selected strategic
transactions.
  MDS Pharma Services (see Section 3.2) 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. The Company is the sixth-largest publicly held contract research
organization (CRO) globally (based on revenues), and one of the largest CROs in
early-stage research (Discovery through Phase IIa). The current focus of MDS
Pharma Services is on improving the growth and profitability of this operating
segment across its areas of business and regions.
  MDS Nordion (see Section 3.3) is a global
leader in supplying more than half of the world’s medical isotopes for molecular
imaging to help diagnose and treat disease. MDS Nordion is also the leading
provider of sterilization technologies for disease prevention and
radiotherapeutics for targeted treatments.  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.
 
 MDS Analytical Technologies
(see Section 3.4) is a
global leader in certain key life sciences tools 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 2008 include the following:
  2.4.1
              Capital
      Structure
  ·
              In
      December 2002, the Company 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 2008 to December 2014.    The Company repaid
      $79 million in December 2007, and has now repaid $84 million over the life
      of the Senior Unsecured Notes.
  ·
              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. As at October 31, 2008, the
      facility was undrawn.
  ·
              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, it repurchased
      approximately 2.9 million shares, reducing the number of Common shares
      outstanding to approximately 120 million.  As a result of MDS’s
      cumulative net loss as of October 31, 2008, a restricted payments covenant
      under our Senior Unsecured Notes will restrict us from further share
      repurchases for the foreseeable
future.
  2.4.2
              Acquisitions
  ·
              On
      March 20, 2007, MDS finalized the acquisition of Sunnyvale,
      California-based Molecular Devices Corporation (MDC), 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 MDC employees, and transaction
      costs.  Upon completion of this acquisition, MDS established a
      new business unit, MDS Analytical Technologies, which combined MDS Sciex
      with MDC.
  ·
              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.
  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 of 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 3.3. – MDS Nordion: NRU
      and 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.
 
 2.4.4                       Strategic
Considerations
 
 The Board
of Directors and management continue to review the Company’s strategy against
potential strategic options with a firm commitment to deliver shareholder value.
  In reviewing potential strategic options, the Board and management
consider, amongst other things, current economic and market conditions, relevant
valuations, the relative strength of the businesses, available opportunities,
and business, financial, tax, legal, regulatory and other considerations
impacting the Company as a whole or its individual businesses.  Certain
contracts, arrangements and regulations affect the Company’s considerations and
include those discussed below.
  MDS
Analytical Technologies markets certain of its high-sensitivity mass
spectrometers under joint ventures with Applied Biosystems, Inc. (Applied
Biosystems - now part of Life Technologies Corporation) and with PerkinElmer,
Inc. (PerkinElmer).  In both joint ventures, MDS Analytical
Technologies develops and manufactures the instruments, while the joint venture
partners manage the sales and service of such instruments.  Under
agreements that govern each of the joint ventures, a change of control at one of
the joint venture partners would, absent the consent of the other joint venture
partner, entitle the other joint venture partner to terminate the joint
venture.
  If MDS 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, the U.S. 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.  Further, 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).
  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.
  The
Company’s Senior Unsecured Notes contain a number of financial and other
covenants of MDS, including restrictions on asset sales, debt incurrence and the
Company’s ability to consolidate, merge or amalgamate with another corporation,
or transfer all or substantially all of the Company’s assets.
  The
Company’s C$500 million revolving credit facility requires the Company to offer
to prepay all amounts outstanding under the facility and also provides the
lenders the right to discontinue further commitments under the facility before
any person acquires beneficial ownership of, or control or direction over, 50%
or more of the issued and outstanding voting shares of MDS.  In
addition, the credit
facility contains a number of financial and other covenants of
MDS.  As at October 31, 2008, no amounts were drawn down under the
facility.
  3.
              NARRATIVE
      DESCRIPTION OF THE BUSINESSES OF
      MDS
  3.1
              Reportable
      Operating Segments
  The
Company operates under the following three business units:
  
 MDS
      Pharma Services
              A
      leading global provider of pharmaceutical research services, providing
      solutions from pre-clinical development to Phase IV clinical trials for
      innovative and generic pharmaceutical and biotechnology companies, as well
      as consumer product and drug delivery companies.MDS
      Nordion
              A
      leading global provider of medical isotopes for molecular imaging,
      technologies for the sterilization of medical and other products as well
      as contract manufacturing for the radiotherapeutics
    industry.MDS
      Analytical Technologies
              A
      leading global supplier of life sciences tools. This business unit is
      focused on the research, design, manufacture and marketing of
      state-of-the-art tools and services for mass spectrometry, drug discovery
      and bioresearch.
 
 
 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
      Pharma Services
  MDS
operates as a global contract research organization (CRO) through MDS Pharma
Services. MDS Pharma Services is one of the top global CROs, and has been highly
rated for customer service and quality by CenterWatch, a leading industry
publication. MDS Pharma Services is a full-service provider of drug discovery
and development services to the pharmaceutical, biotechnology and generic
industries. MDS Pharma Services operates as a CRO in 29 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,
we provide our customers with services throughout the process of drug discovery
and development.  During this process, certain compounds will fail to
meet the desired effectiveness or safety level and our customers will stop
development work on these compounds.  If this occurs during a trial or
test that we are performing, the contract may be cancelled by the
customer.  In these situations, we normally are 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 focused on being a full-service
provider of drug discovery and 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 largest and most integrated CROs in the
pre-clinical and early clinical segment of the market, and is a developing
competitor in late-stage clinical trials.
  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 and 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. The Company’s
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. The drug discovery and development
process takes place over many years for a given compound, and therefore our
business does not appear to be cyclical and does not demonstrate a significant
seasonal pattern.
  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.
  ·
              Late-stage clinical or
      traditional clinical trials (Phase II – IV), in which
      investigational drugs are tested in patients exhibiting the condition for
      which the drug is intended to determine the relative efficacy of the drug
      under study.
  ·
              Central laboratory, a
      support service for late-stage trials, through which samples taken from
      study participants are run against standard assays to determine the safety
      and effectiveness of the drug.
  Significant
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 clinic locations and diagnostics laboratories, as well as other
facilities.
  Management
of late-stage clinical trials on behalf of clients is conducted globally.
Significant clinical offices include King of Prussia, U.S.; Irvine, U.S.; Paris,
France and Winnersh, U.K., along with smaller offices in a number of other
countries.  In addition, the Company has central laboratory locations
in Toronto, Canada; North Brunswick, U.S.; Baillet, France; Hamburg, Germany;
Beijing, China and Singapore, Singapore.
 
 During
2004, 2006 and 2007, MDS Pharma Services received written communication from the
United Stated Food and Drug Administration (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 customers
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 we believe we have
substantially completed all related generic site audits.  We continue
to receive a limited number of study audit requests from innovator customers,
and expect that we may continue to receive these requests in low numbers in
2009.
  We have
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 3,300 employees work in MDS Pharma Services of which approximately
580 staff are located in Canada, 1,070 in the U.S., 1,390 in Europe, 210 in
Asia, and 60 in the other geographies.
  Strategy
  MDS
Pharma Services is currently one of the leading CROs in the
world.  Management expects to focus on organic growth, and will assess
transactions to focus the business and to expand its global capabilities and
increase profitability.   In addition, LeanSigma and other
operational improvements will be utilized to enhance our ability to serve
customers and also drive profitability. The Company continues to focus this
business in areas that extend leadership in key fields and build on existing
strengths in order to enhance the services we offer our
customers.  From time to time, acquisitions may add capabilities,
scale or geographic reach in our key lines of business.  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 customer
relationships and, through customized processes and proprietary software
solutions, has focused on delivering the services and information that fully
meet our customer’s requirements throughout the drug discovery and development
process.
  Competition
  The
growth of the pharmaceutical research services industry has been dependent on
the increase in outsourcing by pharmaceutical and biotechnology companies. The
market has experienced high growth rates 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, we believe that our expertise and capabilities result in a unique
offering that contributes to our competitive position.  MDS Pharma
Services’ strength in Pharmacology, Phase I and bioanalytical services and its
broad configuration, allows it to integrate its offerings under complete drug
development programs
to help biotech firms move their compounds through the development stages more
rapidly by having one provider take compounds through multiple stages of
development.
  The
majority of competitors have been focused primarily on later stages of the drug
development process (Phase II-IV clinical research). Late-stage competitors
include several multinational companies such as Quintiles Transnational Corp.,
Parexel International, Corp., PPD, Inc., and PharmaNet Development Group,
Inc.  Early-stage (pre-clinical to Phase IIa) competitors include
Covance, Inc. and Charles River Laboratories Inc.  Some of the
Company’s CRO competitors are significantly larger than MDS and may have greater
financial and technical resources.  While there are hundreds of small
CROs with either functional specialties or local geographic presence, the market
continues to consolidate with share being gained by the large, global,
diversified CROs.
  3.3
              MDS
      Nordion
 
 Through
MDS Nordion, MDS is a world leader in medical isotopes for molecular imaging;
sterilization technologies for medical products and food safety; and the
development and manufacture of radiotherapeutics.  MDS Nordion
distributes its products in over 50 countries.
  Industry
Background
  Medical
isotopes can be used in molecular imaging and radiotherapy.  In
molecular imaging, isotopes are used because of their ability to assist in
diagnostic procedures such as Single Photon Emission Computed Tomography (SPECT)
and Positron Emission Tomography (PET). When formulated with chemical compounds
that are attracted to, or accumulate in, particular types of tissue, these
isotopes can aid physicians in the identification and treatment of certain
diseases. Certain other isotopes can be used to deliver direct radiation therapy
to cancerous cells. Using the same principles of targeted therapy isotopes in
radiotherapeutics can be conjugated to anti-cancer antibodies, incorporated into
microspheres (or seeds) or used in nanoparticle delivery systems to place
radiation directly, or in, or near diseased tissue such as a
tumour.
  Processing
raw isotopes into a form suitable for the intended medical use is highly
complex. Many medical isotopes have a limited half-life. This 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. Aging populations worldwide 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 products is a relatively mature industry with 4%-7% annual market
growth. Alternate applications for this technology are continuously under
investigation. The FDA has approved the use of irradiation 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.
 
 Spices
have been irradiated for over a decade in the U.S. and millions of pounds are
sterilized every year.  Food irradiation in the U.S. and around the
world continues to strengthen and evolve.  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 molecular imaging, sterilization and radiotherapeutics 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 manufactures, processes and repackages isotopes to produce products that
include:
  ·
              medical
      isotopes that are used alone or coupled to target molecules for use in
      clinical research, diagnosis of cardiac function, and other diseases and
      treatment of diseases such as
cancer;
  ·
              industrial
      isotopes and production irradiators for the sterilization of disposable
      medical products and for treating food;
and
  ·
              new
      products developed in collaboration with our partners for the diagnosis
      and treatment of disease.
  MDS
Nordion purchases reactor-produced medical isotopes, principally from AECL, 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. MDS Nordion also manufactures
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, and refines these
materials in its adjacent processing facilities. In addition, MDS Nordion also
has a joint venture with the University of Liege in Belgium to manufacture and
distribute an isotope used in PET imaging.
  The
purified forms of these 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-99 (Tc99m),
which is the most widely used diagnostic isotope in the world. Approximately 130
million scans are performed each year and 80% use a Tc99m
radiopharmaceutical. This number 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. MDS Nordion is the world’s leading supplier
of Mo99.
  MDS
Nordion is the world's principal supplier of Cobalt-60 (Co60). The
majority of raw Co60material is produced under long-term supply contracts with nuclear power
suppliers such as Bruce Power, Quebec Hydro, Ontario Power Generation and
Rosenergoatom (the utility operator responsible for Russia’s nuclear power
plants). 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 who maintain their
own in-house sterilization facility.
  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.
Re-supply 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.
  MDS
Nordion is also focused on the development and manufacture of
radiotherapeutics.  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 towards 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.  In collaboration with commercial
partners, MDS Nordion is developing radiopharmaceuticals to diagnose Alzheimer’s
disease with Avid Radiopharmaceuticals, Inc.; Altropane® to diagnose Parkinson’s
disease with Alseres Pharmaceuticals, Inc.; ZemivaTM to detect cardiac ischemia
and AzedraTM to treat neuroblastoma and pheochromacytoma with Molecular Insight
Pharmaceuticals, Inc.; NeuradiabTM for the treatment of glioblastoma multiform
with Bradmer Pharmaceuticals, Inc., and Iotrex® for the treatment of certain
brain tumors with Hologic, Inc.  MDS Nordion contract manufactures two
commercially available radiotherapeutics; they are Bexxar® and Zevalin® for
GlaxoSmithKline, Inc. and Cell Therapeutics, Inc., 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.  MDS
Nordion has added an 80,000-square-foot manufacturing facility at its Ottawa,
Canada site that is utilized on a partnership basis in the development, and
later, the direct manufacture of radiotherapeutics.
  The
nature of MDS Nordion’s products, and the highly regulated environment in which
we operate, requires compliance with a multitude of regulations as well as
legislation governing radioactive material transportation. The receipt,
processing, handling, shipping and use of radioisotopes is 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 only a few days.
 
 Regulatory
standards include the following:
  ·      Transport
Canada regulations for the Transportation of Dangerous Goods
 ·
              Canadian
      Nuclear Safety Commission 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 commits 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 600 people.
  National Research Universal
Reactor and MAPLE Facilities
  MDS
Nordion’s principal source of Mo99 is the
existing National Research Universal (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 the Atomic Energy of Canada Limited (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 National
Research Universal (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 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 investmentexceedingC$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 byOctober 31, 2008as 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
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$68 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, which we continue to actively
pursue.  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 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 global leader in the international supply 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 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. 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  who may not wish to incur the capital cost or
regulatory delays associated with building their own facilities, and who may
want to leverage MDS Nordion’s highly specialized expertise in
radiopharmaceutical development, clinical and commercial
manufacturing.
 
 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.
 
 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 (PVT) 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 Centers of Excellence in Europe for
TheraSphere®, its innovative liver cancer treatment. The Centers, located in
Spain, France, Germany, and Italy, will serve to train and educate oncology
professionals on the use of the 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 March
2007, MDS Nordion began to invest approximately $6 million to expand its
production facility in Fleurus, Belgium to meet the growing demand for a medical
imaging agent used in cancer diagnosis and treatment. The agent, Fluorine-18
Fluorodeoxyglucose or FDG, is marketed and distributed by MDS Nordion under the
name Glucotrace®. Glucotrace® is used in PET, a highly sensitive medical imaging
technique. As cancer rates continue to rise in Europe, the use of PET is
increasing to diagnose cancer and monitor patient progress while in treatment.
Glucotrace® is a time-sensitive diagnostic pharmaceutical with a limited
lifespan. As a result, it is critical to have the ability to reliably supply
Glucotrace® to hospitals and clinical sites on time. With this expansion, MDS
Nordion expects to be able to serve more customers within France and the Benelux
Economic Union (Belgium, Netherlands and Luxembourg).  The new
facility is expected to be operational in the first half of 2009.
  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 over $2
million in this new centre, which will be 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.
  In
October 2007, MDS Nordion signed a 17-year contract for the supply of Co60 with
Rosenergoatom, the operating utility of Russia’s nuclear power
plants.  This contract expands upon the 2005 agreement providing for
an increased and more consistent supply of Co60 to 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).
  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 Ltd. 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.
  Isotopes
used for sterilization tend to be somewhat more cyclical, due primarily to the
length of time required to convert Cobalt-59 (Co59) into
Co60
and the limited number of facilities in which this can be done
economically.  During 2007, the Company took steps to increase its
supply of cobalt, signing an extension to its 2005 long-term contract with
Rosenergoatom.  This extension is expected to provide for a 30%
increased supply of Co60 to MDS
Nordion by 2016.
  3.4           MDS
Analytical Technologies
  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 (MDC).  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
fuelling a revolution in 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 disease 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
race to develop new and improved drugs to treat diseases, our customers are
constantly 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 significant opportunities
that exist in drug discovery and pharmaceutical research services outsourcing
for drug development companies.
  To
strengthen its leadership position as one of the top global providers of life
sciences solutions, MDS acquired Molecular Devices (MDC) in
2007.   MDC brings to MDS a portfolio of high-performance
measurement tools for high-content screening, cellular analysis, and biochemical
testing.  MDC’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 and
PerkinElmer Canada Inc. (PerkinElmer) to a global customer base; sales outside
of Canada account for more than 95% of revenues from MDS’s Sciex
products.  Total revenues from transactions with these joint venture
partners during fiscal 2008 were $149 million.  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 full profit margin generated once a
piece of equipment is sold to an end-user.  On November 21, 2008
Applied Biosystems merged with Invitrogen Corporation to form Life Technologies
Corporation (Life).
  MDS has
been a major innovator of technologically sophisticated mass spectrometry
instrumentation.  In each of its product lines, MDS has been a
pioneer. 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 revolutionized many of the processes that were fundamental limitations
in the 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, are the market
leader in high-sensitivity LC/MS equipment and have consistently 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 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
through a partnership with PerkinElmer.
  The
following table summarizes the mass spectrometers offered by the Applied
Biosystems/MDS Analytical Technologies and PerkinElmer Sciex Instruments joint
ventures.  MDS Analytical Technologies introduced a newly designed
mass spectrometry platform with the launch of two new systems in October 2008,
the AB SCIEX QTRAP® 5500 and the AB SCIEX Triple QuadTM 5500.
  
 Instrument Name
              Joint Venture PartnerAPI
      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 MDC 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.  The Arcturus® products are laser-capture microdissection
products, which help researchers to visualize and extract individual cells or
groups of cells from tissue samples with minimal damage.  As well, the
AquaMax is a line of state-of-the-art microplate washers and other related
tools, including cell harvesters, to 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 all business areas.
  MDC 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 1,200 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 are post
graduate-qualified to Masters and/or PhD level. We include amongst our senior
research staff a number of thought leaders in their respective
fields.
  Strategy
  MDS
Analytical Technologies is a leading global provider of top-of-line life
sciences research and analysis solutions, with a particular focus on the
application of these technologies within the drug discovery and development
process.
  One of
MDS Analytical Technologies’ core strength is designing products to meet
customers’ need to outperform based on sensitivity and speed.  We
invest in research and development to continually fuel our pipeline of new
innovative products to help accelerate the complex process of discovering and
developing new drug compounds.  Expertise in engineering, molecular
and cell biology and chemistry contributes to the recognition of strong
brands.
  Our
customers also expect MDS Analytical Technologies to deliver high-quality
instruments at the right price.  To meet these expectations, MDS
Analytical Technologies is accelerating the shift of our manufacturing base and
our supply chain to Asia.  We are on track with our product transfer
plan, and are now driving to increase our local purchases through our Asia
supply chain team which is located at our Singapore, Singapore and Shanghai,
China facilities.  These teams are working with local suppliers to source
high-quality component parts and sub-assemblies with ongoing commitments to
quality and productivity improvements annually.
  MDS
Analytical Technologies’ products are sold into global markets.  The
Sciex brand products are also sold globally but through our partnerships with
Applied Biosystems and PerkinElmer.  The current key markets are the
U.S., Western Europe and Japan, reflecting the sophistication of the drug
development industry in each of those areas.  The fastest growing
global markets include China and India.
  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 have patent
applications pending in the U.S., Canada and abroad.  In addition to
our patent portfolio, we possess a wide array of unpatented proprietary
technology and know-how.  We also own numerous United States, Canada
and foreign trademarks and trade names for a variety of our product names, and
have applications for the registration of trademarks and trade names pending in
the U.S., Canada and abroad.  We believe that patents and other
proprietary rights are important to develop and maintain the competitive
position of our business.
  In 2006,
MDS leased and built out a 10,000-square-foot manufacturing facility in
Singapore, 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 three high-volume mass
spectrometer product lines have been transferred to Singapore, Singapore and the
site has been expanded to 30,000 square feet.
  The
majority of MDS Analytical Technologies’ infrastructure, manufacturing and
research and development reside 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 and
could be impacted by the cyclical nature of the pharmaceutical industry, the
investment cycle in the biotech industry and the 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 healthcare 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 45% 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, 2008:
 
 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
              125,400Tempe,
      U.S.
              Clinical
      Trials Facility
              Owned
              MDS
      Pharma Services
              104,500Bothell,
      U.S.
              Research
      Laboratory
              Leased
              MDS
      Pharma Services
              95,600Mississauga,
      Canada
              Research
      Laboratory and Kit Preparation
              Leased
              MDS
      Pharma Services
              63,000Vancouver,
      Canada
              Manufacturing
      Plant
              Leased
              MDS
      Nordion
              54,800King
      of Prussia, U.S.
              Division
      Office
              Leased
              MDS
      Pharma Services
              47,100Toronto,
      Canada
              Corporate
      Offices
              Leased
              MDS
      Corporate
              43,000Zurich,
      Switzerland
              Research
      Laboratory
              Leased
              MDS
      Pharma Services
              40,200Neptune,
      U.S.
              Clinical
      Trials Facility
              Leased
              MDS
      Pharma Services
              39,700Taipei,
      Taiwan
              Research
      Laboratory
              Owned
              MDS
      Pharma Services
              39,500Paris,
      France
              Research
      Laboratory
              Leased
              MDS
      Pharma Services
              37,600Fleurus,
      Belgium
              Manufacturing
      Plant
              Leased
              MDS
      Nordion
              36,200Singapore
              Manufacturing
      Plant
              Leased
              MDS
      Analytical Technologies
              30,200Belfast,
      N.  Ireland
              Clinical
      Trials Facility
              Owned
              MDS
      Pharma Services
              28,500Downingtown,
      U.S.
              R&D
              Leased
              MDS
      Analytical Technologies
              27,900Baillet,
      France
              Research
      Laboratory
              Leased
              MDS
      Pharma Services
              26,400Irvine,
      U.S.
              Division
      Office
              Leased
              MDS
      Pharma Services
              24,200Beijing,
      China
              Research
      Laboratory
              Leased
              MDS
      Pharma Services
              24,200Hamburg,
      Germany
              Division
      Office & Kit Preparation
              Leased
              MDS
      Pharma Services
              23,300Baillet,
      France
              Research
      Laboratory
              Owned
              MDS
      Pharma Services
              23,091Shanghai,
      China
              Manufacturing
      Plant
              Leased
              MDS
      Analytical Technologies
              18,900Winnersh,
      U.K.
              Division
      Office
              Leased
              MDS
      Analytical Technologies
              14,000Blackhorse,
      U.S.
              Research
      Laboratory
              Leased
              MDS
      Pharma Services
              13,500Mississauga,
      Canada
              Corporate
      Head Offices
              Leased
              Corporate
              13,400Winnersh,
      U.K.
              Office
              Leased
              MDS
      Pharma Services
              12,500Singapore,
      Singapore
              Research
      Laboratory & Kit Preparation
              Leased
              MDS
      Pharma Services
              6,800
 
 
  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 3 to the
2008 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 the regulated requirements.  It is not
expected that this policy will have a significant impact on capital
expenditures, consolidated earnings, or our competitive position.
  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 31 to 33 of the 2008 MD&A. 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.
   Our business,
financial condition, and results of operations could be subject to significant
fluctuation, and we may not be able to adjust our operations to effectively
address changes we do not anticipate.
 We cannot
reliably predict future sales and profitability. Changes in competitive, market
and economic conditions may require us to adjust our operations, and we may not
be able to make those adjustments or to make them quickly enough to adapt to
changing conditions. A high proportion of our costs are fixed and thus, small
declines in sales could disproportionately affect our business, financial
condition, and results of operations in any particular quarter.
  Factors
that may negatively affect our sales and operating results include:
  ·
                global
      or regional economic downturns including instability of equity markets and
      financial markets;·
                lack
      of demand for, or market acceptance of, our products and
      services;
 ·
              adverse
      changes in industries on which we are dependent, such as the
      pharmaceutical and biomedical
industries;
 ·
              changes
      in the volume or timing of product or service
  orders;
 ·
              our
      access to supplies of key materials, such as nuclear isotopes, required to
      deliver products to our markets;
 ·
              delays
      in delivering/completing clinical trials or testing as a result of changes
      in scheduling by our customers;
 ·
              the
      cancellation of clinical trials or testing by our customers as a result of
      the failure of a drug compound to meet desired
  efficacy;
 ·
              inability
      of our customers to obtain regulatory approval or funding to continue the
      development of certain drug
compounds;
 ·
              changes
      in the portions of our sales represented by our various products,
      services  and customers;
 ·
              delays
      or problems in the introduction of new products or
    services;
 ·
              our
      competitors’ announcement or introduction of new products, services or
      technological innovations;
 ·
              competitive
      pressures resulting in lower selling
prices;
 ·
              changes
      in foreign exchange rates;
 ·
              increased
      costs of raw materials or supplies;
 ·
              delays
      or problems sourcing product inputs, especially in circumstances where
      there are limited suppliers;
 ·
              changes
      in import licenses or duties changes;
or
 ·
              changes
      in the financial stability of our customers or suppliers, including their
      ability to obtain financing at a reasonable
  cost.
 
 We
believe that operating results for any particular quarter are not necessarily a
meaningful indication of future results.  While fluctuations in our
quarterly operating results could negatively or positively affect the market
price of our Common shares, these fluctuations may not be related to our future
overall operating performance.
 
 We
are subject to complex and costly regulation.
 Governmental
agencies throughout the world strictly regulate the drug development
process.  Our facilities devoted to pharmaceutical development are
subject to regular inspection by the FDA, Health Canada, the European Medicines
Agency (EMEA) and other regulatory agencies.  Our customers also are
subject to periodic review by drug approval authorities, principally the FDA in
the United States.  In addition, the terms of a typical CRO contract
provide that our customers can request that our facilities be subjected to the
same levels of review by the authorities.  Our failure, or any of our
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 our business, financial condition or results of
operations.
 All of
our facilities that handle or store radioactive material are also 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 adversely affect our business, financial condition, or results of
operations.
  The
health and life sciences industries are subject to extensive and frequently
changing international and United States federal, state and local laws and
regulations. If we fail to comply with applicable laws and regulations, we could
suffer civil and criminal damages, fines and penalties, loss of various
licenses, certificates and authorizations necessary to operate our business, as
well as incur liabilities from third-party claims, all of which could have a
significant adverse effect our business.
   An
interruption in the supply of reactor-produced isotopes could have a material
adverse effect on our 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 we
contracted with Atomic Energy of Canada Limited (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.
 
 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.  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$68 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.
  MDS
believes that it has a strong case against AECL and the Government of Canada
with respect to the MAPLE agreement, which the Company continues to actively
pursue.  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 we are successful in our claim, the
Company is unable to project a specific outcome for this dispute. An
unfavourable outcome would have an adverse effect on our business, financial
condition, and results of operations which could be material.
  In the
absence of the MAPLE Facilities, we depend upon the NRU reactor operated by AECL
in Chalk River, Canada for the supply of a majority of our reactor-produced
radioisotopes.  The NRU reactor is 50 years old and its current
license extends to 2011.  There is no assurance that the license will
be extended past 2011.  There is no assurance that the NRU reactor
will not experience other planned or unplanned shutdowns in the
future.  Further prolonged planned or unplanned shutdowns would have
an adverse effect on our business, financial condition, and results of
operations which could be material.
  
 An
interruption in our ability to manufacture our products or deliver our services
or an inability to obtain key components or raw materials may adversely affect
our business.
 A number
of our 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 our facilities,
could create conditions that prevent us from manufacturing products at previous
levels or at all.
  In
addition, we purchase certain components and raw materials from sole suppliers
and we 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
business, financial condition or results of operations.
  We
face significant competition and we 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 our own, and development of new
products or services that are more cost-effective, or have superior performance
than our current products or services.  Our products or services can
be rendered obsolete or uneconomical as a result of this
competition.  Failure to compete effectively could cause us to lose
market share to our competitors and have a material adverse effect on our
business, financial condition and results of operations.
  We also
face 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
ours.  These companies and institutions compete with us in recruiting
and retaining qualified scientific and management personnel as well as in
acquiring necessary product technologies.
  Globalization
of our industries also impacts our competitiveness.  As competitors
and new entrants establish operations in lower-cost labour markets, pricing in
our industries may be reduced resulting in lower revenues and
profitability.
  Changes
in government and regulatory policies may reduce demand for our products and
services, and increase our expenses.
 We
compete in markets in which we, or our 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 our products and services. Because
of the high cost to develop, configure, and market our products and services to
meet customer needs, any significant change in these regulations could reduce
demand for our products or services or increase our costs of producing these
products and services.
  In
addition, if government health-care reimbursement policies were changed, it
could have a significant impact on spending decisions of certain of our
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 us both in the
U.S. and abroad.
  Changes
in trends in the pharmaceutical and biotechnology industries could adversely
affect our operating results.
 Industry
trends and economic and political factors that affect pharmaceutical and
biotechnology companies and academic and government entities that sponsor
clinical research, also affect our business. For example, the practice of many
companies in these industries and government organizations has been to hire
companies to conduct large development projects. Research and development
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.  Our 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 or private
foundations.
  We
may be unable to effectively introduce and market new products and services, or
may fail to keep pace with advances in technology.
 We sell
many of our products and services in industries characterized by rapid
technological change, frequent new product and service introductions, and
evolving industry standards. Without the timely introduction of new products and
enhancements, our products could become technologically obsolete over time, in
which case our business, financial condition and results of operations would
suffer. Our new product offerings will not succeed if we are unable
to:
  ·      accurately
anticipate customer needs;
 ·      accurately
anticipate evolving government and regulatory policies;
 ·      innovate
and develop new technologies and applications;
 ·      successfully
commercialize new technologies in a timely manner;
 ·      price
our products competitively;
 ·      source,
manufacture and deliver high-quality products in sufficient volumes and on time;
or
 ·      differentiate
our product offerings from our competitors’ product offerings.
  Developing
new products may require significant investments before we can determine the
commercial viability of the new product.  We may invest heavily in
research and development of products that do not become commercially
viable.
  In
addition, some of our licensed technology is subject to contractual
restrictions, limiting our ability to develop or commercialize products for some
applications. For example, some of our license agreements are limited to the
field of life sciences research, and exclude clinical diagnostics
applications.
  The
volatility and disruption of the capital and credit markets and adverse changes
in the global economy may negatively impact our business, short-term liquidity
and our ability to access financing.
 We have
exposure to many different industries and counterparties, including commercial
banks, investment banks, suppliers and customers (which include distributors,
governments and health-care organizations) that may experience liquidity issues
in the current economic environment. Any such issues may impact these parties’
ability to fulfill contractual obligations to us or might limit or place
burdensome conditions upon future transactions with us.
  Customers
may also reduce spending during times of economic uncertainty, and it is
possible that suppliers may be negatively impacted. Decreased consumer spending
levels, increased difficulty in collecting accounts receivable and increased
pressure on prices for our products and services could all result in decreased
revenues and have a material adverse effect on our business, financial condition
and results of operations.
  In
addition, although we intend to finance ongoing operations, capital expenditures
and restructuring projects with existing cash, cash flow from operations and
borrowing under our existing credit facilities, we may require additional
financing to support our continued growth. Due to the existing uncertainty in
the capital and credit markets, our access to capital may not be available on
terms acceptable to the Company or at all. Further, general economic conditions
have resulted in severe downward pressure on the stock and credit markets, which
could reduce the investment return available on surplus cash, reduce the return
on investments under pension plans thereby potentially increasing funding
obligations, and introduce greater risk of impairment to the value of assets and
our investment portfolio, all of which, if severe and sustained, could have a
material adverse effect on our business, financial condition and results of
operations.
  The
health of the global economy could also impact interest rates.  Our
Senior Unsecured Notes bear interest at fixed rates between 5.52% and 6.19% per
annum and have maturities ranging from December 2008 to December
2014.  Interest rates on our committed revolving line of credit which
is currently undrawn and which expires in July 2010 are at floating
rates.  Interest rate volatility can have a direct impact on both our
short-term cash flows and earnings.
  Restrictions in
our Senior Unsecured Notes and bank credit facilities and other debt instruments
may limit our activities.
 Our
Senior Unsecured Notes issued in fiscal 2003, as well as 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
4.3  – 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
   We are
also required to meet specified financial ratios under the terms of the note
purchase agreement relating to our Senior Unsecured Notes and our revolving
credit facility. Our failure to comply with these financial restrictions may
result in an event of default under the note purchase agreement, which could
result in acceleration of our indebtedness under our Senior Unsecured Notes and
require us to prepay our Senior Unsecured Notes before their scheduled due date.
Non-compliance with certain debt covenants could also impair our ability to draw
funds on our revolving credit facility.  Future debt instruments to
which we may become subject could also contain similar provisions.
  Under a
restricted payments covenant in our Senior Unsecured Notes, we are currently
unable to pay dividends or repurchase Common shares which may limit our access
to new capital and may negatively affect our share price.
  Foreign
currency exchange rates may adversely affect our results.
  We derive
a large portion of our net revenues from international
operations.  For the year ended October 31, 2008, we derived
approximately 52% of our total revenues, including reimbursement revenues, from
outside the U.S.  Our financial statements are denominated in U.S.
dollars.  Our international operations typically use their local
currency as the functional currency for that entity, thereby incurring
foreign-exchange exposure to all other currencies in which they may transact
business. For example, in certain circumstances, we may incur costs in one
currency related to our services or products for which we are paid in a
different currency.  As a result, factors associated with
international operations, including changes in foreign currency exchange rates,
could significantly affect our business, financial condition and results of
operations.
  As a
global company, our 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
      derivates based on the currency of certain contracts we enter into with
      customers and suppliers are valued at market rates. We may report
      significant gains or losses based on changes in current and expected
      future, or commonly referred to as forward, exchange
  rates.
 ·
              Our
      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 our cash flows and our
      results of operations.
 ·
              Certain
      long-term contracts with suppliers or customers may experience significant
      fluctuations in foreign exchange rates over several years thereby
      impacting our cash flows and our results of
  operations.
 ·
              Our
      manufacturing and distribution organization is multinational in nature
      resulting in a variety of intercompany transactions that are billed and
      paid in many different currencies. Our cash flows and our results of
      operations are therefore directly impacted by volatility in these
      currencies.
 ·
              The
      cash flow needs of each of our 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 our subsidiaries.  These advances, being
      denominated in currencies other than a particular entity’s functional
      currency, can expose us to volatility in exchange rates that can adversely
      impact both our cash flows and results of
  operations.
 ·
              To
      repay debt or take advantage of tax saving opportunities, we may remit
      cash from our foreign locations to Canada.  When this occurs, we
      are liquidating foreign-currency net asset positions and converting them
      into Canadian or U.S. dollars.  Our cash flows and our results
      of operations may therefore be adversely impacted by these
      transactions.
  We
continue to implement restructuring actions in various parts of our business and
may be required to incur additional charges in the future to implement
additional restructuring.
 We
operate in markets in which demand for products and services may vary on a
global basis.  As a result of these factors, we may implement
restructuring programs to better align our workforce and facilities to match
demand and to maintain or improve our mid- to long-term
profitability.  Significant restructuring actions and consequent
workforce reductions could have the effect of reducing our talent pool and
available resources.  Consequently this could have long-term effects
on our business by decreasing or slowing improvements in our products, thereby
affecting our ability to respond to customer demand, and limiting our ability to
hire and retain key personnel.  In addition, restructuring costs may
have a negative impact on our operations, and these actions may not achieve the
desired improvement in profitability.
  We are dependent
upon the services of key personnel.
 Our
success depends, to a significant extent, upon the continued service of our
executive officers and key management and technical personnel - particularly our
scientific, technical and sales staff - and our 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 our key personnel could have a material adverse effect on our operating
results.  The investment required to retain key staff, including the
provision of compensation packages that are competitive, could have an impact on
the profitability of our business. We do not maintain key person life insurance
policies on any of our officers or employees.
  Our business
depends on the continued and uninterrupted performance of our information
technology systems and the communication systems that support those systems,
including the Internet.
 Our
business depends, in part, on the continued and uninterrupted performance of our
information technology systems.  Sustained system failures or
interruptions could disrupt our ability to perform many of the functions that
are critical to our business, including processing customer orders,
transportation of our 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, we are required to
deliver the results of testing within certain preset time
intervals.  If we fail to deliver the results of testing on time, or
the integrity of results are compromised, this could impact the safety of
clinical trial participants and affect the success of the client’s clinical
trial.  Our business, results of operations and financial condition
could be adversely affected by a prolonged system failure.
  Our
computer systems are vulnerable to damage from a variety of sources, including
telecommunications failures, malicious human acts, and natural
disasters.  Additionally, unanticipated problems affecting our systems
could cause interruption in our information technology systems.  Our
insurance policies may not adequately compensate us for any losses that may
occur due to any failures in our information technology systems.
  We
may not be able to successfully execute strategic transactions.
 We may be
unable to complete the acquisition of promising businesses, divestitures of all
or portions of businesses 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 us, or others, to raise capital to fund
      transactions;
 ·
              current
      valuations of businesses and
technologies;
 ·
              restrictions
      in the instruments governing our indebtedness, including our Senior
      Unsecured Notes and our revolving credit
  facility;
 ·
              restrictions
      in contracts with joint venture partners;
or
 ·
              regulatory
      or statutory restrictions including foreign ownership of shares of MDS
      (Canada) Inc. (see Section 2.4.4 - Strategic
      Considerations).
  In
addition, any business we may seek to acquire or technology we 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 our
earnings.
  We may not be
able to integrate acquired businesses or licensed technologies into our existing
business, or make acquired businesses or licensed technologies
profitable.
 We may be
unable to integrate acquired businesses or licensed technologies in to our
existing business, or make the acquired businesses or licensed technologies
profitable for various reasons including:
  ·      our
ability to retain key employees;
 ·      our
ability to integrate business information systems and processes;
 ·      our
ability to complete the development of products and sell them into the market;
or
 ·      incompatible
management or other cultural differences.
  From
time to time during the normal course of business, the Company and its
subsidiaries are subject to litigation.
 From time
to time, we may be the plaintiff or defendant in litigation, including potential
litigation regarding products and services we provide or products and services
we expect or receive from others.  Lack of success in such litigation
may expose the Company to financial loss or prevent us from enforcing rights
that are important to the Company, thereby having an adverse effect on our business
or results of operations.  Material litigation that is not covered by
our insurance policies, or falls within our retained liability under our
policies, could have a material adverse impact on our results and our financial
position.
  Our 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 the Company.
 We
maintain a global liability insurance policy covering all of our operating
units.  The policy provides coverage for normal operating risks and
includes annual liability coverage of up to US$50 million for MDS
Analytical Technologies and US$100 million for MDS Pharma Services and MDS
Nordion.  We also maintain a global policy covering property and business
interruption risks with a total insured value of US$ 1.9 billion and
directors’ and officers’ insurance having a limit of US$120 million. 
There is no certainty that the amount of coverage is adequate to protect us in
all circumstances or that we will be able to acquire such insurance on an
ongoing basis at rates acceptable to us.
  We
are subject to a number of risks due to the fact that we carry on business in
several countries.
 Our
operations are subject to the risks of carrying on business in certain countries
in North America, Europe, Asia and Latin America.  Accordingly, our
future results of operations could be 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 we rely
      on;
 ·
              differing
      tax laws and changes in those laws including investment tax credits, or
      changes in the countries in which we are subject to
  tax;
 ·
              differing
      cultural and business practices associated with foreign
      operations;
 ·
              difficulty
      in staffing and managing widespread
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.
  Our
access to cash for ongoing operations or for strategic transactions may be
restricted due to the cost or availability of financing, government regulations
and/or the expiry of our revolving credit facilities in 2010.
 While we
intend to finance ongoing operations, capital expenditures and restructuring
projects from existing cash, cash flow from operations, and borrowing from our
existing credit facilities, cash required for large strategic transactions or
unexpected operating needs may prove costly, and difficult or impossible to
obtain.  In addition, a portion of our existing cash is held in
foreign subsidiaries
and our ability to effectively access that cash through loans or dividends may
be affected by tax consequences, government regulations or other factors which
might cause us to incur additional costs to repatriate it.  As well,
we periodically utilize our revolving credit facilities for short-term cash
requirements and this credit facility is not available after June
2010.  If we are unable to negotiate a new credit facility on terms
acceptable to us, or if we can not access cash from foreign subsidiaries, our
short-term liquidity may be affected.
 
 We
could be subject to tax reassessment and may be required to pay additional
income taxes.
 Our tax
filings are subject to audit and review by government tax authorities who may
disallow certain deductions or disagree with our interpretation of tax laws,
which may result in our having to pay additional taxes and incur additional tax
expense.
  Our cost of
research and development could increase in the event certain tax credits were to
become unavailable.
 Most of
the research and development activities that we conduct in Canada - both for our
own account and for defined groups of arm’s length customers - are eligible for
tax credits.  Elimination or significant reduction of these tax
credits would have a material impact on the cost of our research and
development, which would have a material adverse effect on our business,
financial condition, or results of operations.
  An
increase in the price of our Common shares may result in an increase in
operating costs as certain of our incentive compensation programs are linked to
the price of our Common shares.
 We have
performance-based share units which are paid to employees in cash or shares if
certain performance targets are met.  The value of the incentive
payouts are based on the number of units awarded which is determined by actual
or projected achievement of specific performance targets, multiplied by the
current or projected average share price.  As our share price
increases, the amount of incentive compensation expense will increase resulting
in lower profitability and higher cash outflows.
  We
may bear financial risk if we under price our contracts or overrun cost
estimates.
 Since our
contracts are often structured as fixed price or fee-for-service with a cap, we
bear the financial risk if we initially under price our contracts or otherwise
overrun our 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 our business,
results of operations, financial condition, and cash flows.
  The terms of MDS
Pharma Services’ contracts entitle clients to cancellation rights, which, if
exercised, could adversely affect our business, financial condition, and results
of operations.
 The
majority of the revenues earned by MDS Pharma Services are under contracts that
typically run several months for drug discovery through Phase I clinical trials
and as much as several years for Phase III/IV 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.
  If
we are unable to attract suitable participants for our clinical trials, our
business might suffer.
 The
clinical research studies that we run rely on the ready accessibility and
willing participation of subjects.  Our clinical research activities
could be adversely affected if we are unable to attract suitable and willing
participants on a consistent basis.
  We could be
subject to claims as a result of product failure in clinical trials
testing.
 During
clinical trials testing, we will typically administer pharmaceutical products
owned and developed by others to individuals acting as test
subjects.  The terms of the contracts we enter into with the sponsor
of the product vary and do not prevent individuals to whom the products have
been administered from filing claims against us even though we 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 us 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, we face 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.
  We also
contract with physicians, also referred to as investigators, to conduct the
clinical trials to test new drugs on human volunteers.  These tests can
create a risk of liability for personal injury or death to volunteers, resulting
from negative reactions to the drugs administered or from professional
malpractice by third party investigators.  We believe that our risks in
this area are generally reduced by the following:
  ·
              contract
      provisions entitling us to be indemnified or entitling us to a limitation
      of liability;
 ·
              insurance
      maintained by our clients, investigators, and by us;
  and
 ·
              our
      efforts to comply with various regulatory requirements we must follow in
      connection with our business.
  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
our compliance with applicable privacy and data protection
regulations.
 Contractual
indemnifications and some limitations may not generally protect us against
liability arising from certain of our own actions, such as negligence or
misconduct.  We could be materially and adversely affected if we 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 us does not fulfill its indemnification obligations or which
is beyond the level of our insurance
coverage.  There can be no assurance that we will be able to maintain such
insurance coverage on terms acceptable to us.
 
 Failure to gain
FDA acceptance of Study Review could have a continuing material adverse effect
on the financial results 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 our 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 our Montreal bioanalytical facilities would be required to take to
resolve any outstanding issues.  The FDA directed sponsors of approved
and pending generic drug submissions or Abbreviated New Drug Applications (ANDA)
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.
  We have
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.
  While our
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 our ability to attract and
retain work, cause us 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.
  Operating
licenses related to handling and storage of radioactive materials could be
subject to cancellation by the Canadian Nuclear Safety Commission (CNSC) under
certain circumstances.
 All of
our facilities that handle or store radioactive materials are government
regulated and inspected.  Failure to obtain future operating licenses
could impact our ability to receive, store, process or ship products and could
adversely affect our business, financial condition, or results of
operations.
  Our operations
may be affected by a disruption to air or ground
transportation.
 Our
business relies heavily on both air and ground transportation, including the
highly regulated, time sensitive transport of isotopes.  In addition,
shipment of radioactive materials is also subject to international regulations
which are subject to changes over time.  Any material disruption to
air or ground transportation systems or significant change to international
shipping regulations could have a material adverse effect on our
business.  Contingency plans might not be effective or sufficient to
avert such a material adverse effect.
  We are dependent
upon access to nuclear power reactors to install or remove cobalt and such
access is dependent upon third parties.
 We
purchase Cobalt59
(Co59) as a
commodity.  The processed Co59 is
inserted into nuclear reactors for approximately 18 - 60 months to convert it to
Co60.  Access
to these nuclear reactors to either install or remove cobalt is based on the
routine maintenance schedule for the reactor facility as determined by the
reactor owner.  Any significant change in a maintenance schedule to
install or remove cobalt could have a material impact on the availability of
Co60
in any given quarter or year.  This could have an adverse effect on
our business, financial condition, and results of operations.
  Certain
of our businesses are exposed to attention from special interest groups and are
subject to related political risks.
 Among our
products and services are those that involve radioactive materials for medical
isotopes or sterilization technologies, and drug safety services which involve
the testing of drug compounds in animals as required by drug regulators. From
time to time, these have garnered negative attention from special interest
groups and are therefore at risk of disruption as a result of such
attention.  A significant disruption could have a material adverse
effect on our business, financial condition, or results of
operations.
  Our
business could suffer if we are unsuccessful in negotiating new collective
bargaining agreements.
 Certain
Company sites employ personnel subject to collective bargaining
agreements.  If we are unable to negotiate acceptable agreements with
the association(s) representing our employees upon expiration of existing
contracts, we could experience strikes or work stoppages.  Even if we
are successful in negotiating new agreements, the new agreements could call for
higher wages or benefits paid to members, which would increase our operating
costs and could adversely affect our profitability.  We are currently
in negotiations with the Public Service Alliance of Canada with regard to a new
collective agreement for certain unionized employees at our MDS Nordion site in
Ottawa, Ontario.
  Labour
disruptions within the companies that supply our isotopes or other sole source
raw materials could have a material adverse affect on our financial
results.
 We are
dependent upon certain suppliers as our primary source of
isotopes.  In addition, other MDS business units utilize certain
suppliers as the sole source for specialized raw materials. The majority of our
isotope suppliers employ unionized personnel. Any labour disruptions or other
prolonged disruption at any critical supplier could have a material adverse
effect on our business, financial condition, and results of
operations.
  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 fuel in the reactor.  AECL obtains the majority
of its uranium from the United States.  The U.S. Department of Energy
(DOE) strictly controls exports of highly enriched uranium
(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 manufacturersto 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 our isotope business.
  Our
operations are exposed to risk of material environmental liabilities, litigation
and violations.
 We are
subject to numerous environmental protection and health and safety laws in
jurisdictions in which we carry on business governing, among other
things:
  ·
              the
      generation, use, transportation, storage and disposal of hazardous
      materials;
 ·
              emissions
      or discharges of substances into the
  environment;
 ·
              investigation
      and remediation of hazardous substances or materials at various sites;
      and
 ·
              the
      health and safety of our customers, participants and
      employees.
  We may
not have been, or we may not at all times be, in compliance with all
environmental and health and safety laws. If we violate these laws, we could be
fined, criminally charged or otherwise sanctioned by regulators.
  Certain
materials we handle can have a significant and pernicious impact on the
environment.  As a result, we are exposed to risk of costs associated
with environmental clean-up, as well as exposure to claims from others who have
suffered a loss as a result of an environmental spill or
accident.  Although the Company maintains liability insurance
coverage, material losses or litigation that is not covered by our insurance
policies or that falls within our retained liability under our policies could
have a material adverse impact on our results and our financial
position.
  We depend 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.
  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.
 We are
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.
  If
we are unable to renew our licenses or otherwise lose our licensed rights, we
may have to stop selling products or we may lose a competitive
advantage.
 If we
lose the rights to a patented or other proprietary technology, we may be forced
to stop selling products incorporating that technology and possibly other
products, or third parties may obtain the right to sell products incorporating
such technology in competition with us.  We may need to redesign our
products, thereby incurring significant cost and/or losing a competitive
advantage. Competitors could in-license technologies that we fail to license and
erode our market share leading to lower revenue and profitability.
 Our
licenses typically subject us to various economic and commercialization
obligations. If we fail to comply with these obligations, we could lose
important rights under a license, such as the right to exclusivity in a market.
In some cases, we could lose all rights under the license. In addition, rights
granted under the license could be lost for reasons out of our control. For
example, the licensor could lose patent protection for a number of reasons,
including invalidity of the licensed patent, or a third party could obtain a
patent that curtails our freedom to operate under one or more
licenses.
  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.
 We have
applied, or intend to apply, for additional patents to cover our newest
products. We 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 we
currently hold, 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, we possess an array of unpatented proprietary
technologies and know-how. We also license intellectual property rights to and
from third parties. The measures that we employ 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 we fail to
meet specified performance targets.
  We 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 significant
adverse affect on our financial results.
  Our
reported results of operations will be adversely affected if the intangible
assets or goodwill we acquired as part of acquisitions are determined to be
impaired.
 As at
October 31, 2008, our total assets included approximately $452 million of
goodwill and $155 million of intangible assets.  Goodwill represents
the value we paid to acquire a business in excess of its tangible and intangible
assets and liabilities. We review 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 11 - Goodwill in the Notes to Consolidated
Financial Statements).
  We
make accounting estimates and judgements in preparing our financial statements.
If these are incorrect, our operations may be adversely affected.
 The
preparation of the consolidated financial statements requires management to make
estimates and assumptions.  These estimates and assumptions affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements, and the
reported amounts of revenue and expenses during the reported
period.  The Company’s estimates are based on the facts and
circumstances available at the time estimates are made, historical experience,
risk of loss, general economic conditions and trends, and the Company’s
assessments of the probable future outcomes of these matters.  Actual
results could differ from those estimates and as a result, future liabilities
and associated cash outflows may be higher than those reflected in our
consolidated statement of financial position.
 In the
past two years, we have had to restate our results twice due to incorrect
application of U.S. GAAP.  A significant restatement could impact our
performance relative to debt covenants and therefore, our liquidity
position.  As well, during a period while a restatement is being
completed, we may not be able to complete certain strategic
transactions.
 
  3.10.2
              Legal
      Proceedings and Regulatory Actions
 
 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$68 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. MDS believes that it has a strong case against
AECL and the Government of Canada with respect to the MAPLE agreement, which the
Company continues to actively pursue.  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 we are successful in
our claim, the Company is unable to project a specific outcome for this
dispute.  An unfavourable outcome would have an adverse effect on our
business, financial condition, and results of operations which could be
material.
  The
Company is a defendant in certain other litigation which, net of insurance
coverage and amounts reserved, is not anticipated at this time to have a
material impact on the results of operations.
 
  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, 2003.
  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
  The
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 5.15% and 6.19% and have various terms between five and
      twelve years, (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 3.3 – MDS Nordion: NRU
      and MAPLE Facilities).
  (d)
              ValueAct
      and Associates Agreement - April 21,
2008
  (e)
              Obrem
      Capital Offshore Master, L.P. and Obrem Capital (QP), L.P. Agreement –
      November 19, 2008
  The terms
of our Senior Unsecured Notes and credit facility are typical for debt
instruments of this nature (see 3.10.1 - Risk
Factors).
  
  3.10.6
              Experts
  The 2008
Financial Statements have been audited by Ernst & Young LLP, Box 251, 222
Bay Street, Toronto, Ontario, M5K 1J7. During fiscal 2008, 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.
  4.
              SELECTED
      CONSOLIDATED FINANCIAL INFORMATION
  4.1
              Summary
      Annual Information (Year to October
31)
 
 (amounts
      in US$ millions except per share amounts)
              2008
              2007
              2006(restated)
              (restated)Consolidated
      Statements of Operations(U.S.GAAP)Total
      revenues
              1,315
              1,210
              1,060Operating
      loss
              (693)
              (108)
              (20)(Loss)
      Income from continuing operations
              (644)
              (44)
              30Net
      (loss) income
              (553)
              781
              150(Loss)
      earnings per share – basic
              (4.54)
              5.93
              1.04(Loss)
      earnings per share – diluted
              (4.54)
              5.92
              1.04
 
 
 2008
              2007
              2006(restated)
              (restated)Consolidated
      Statements of Financial Position(U.S.GAAP)Total
      assets
              1,872
              3,243
              2,448Long-term
      debt
              282
              384
              394Total
      shareholders’ equity
              1,090
              1,941
              1,384Weighted
      average shares outstanding
              122
              132
              144Long-term
      debt/shareholders’ equity
              26%
              20%
              28%
 
 
 
 
 2008
              2007
              2006(restated)
              (restated)Consolidated
      Statements of Cash Flows(U.S.GAAP)Cash
      from (used in) continuing operating activities
              (18)
              176
              20Capital
      assets purchased
              (52)
              (71)
              (51)Cash
      from discontinued operations, net
              -
              (56)
              104Net
      issue (repayment) of long-term debt
              (89)
              (18)
              (7)
 
 Items on
the pre-tax basis that impact the comparability of operating income
include:
  ·
              Results
      for the year ended October 31, 2008, reflect the $246 million write-off of
      the MAPLE Facilities, $320 million MDS Pharma Services goodwill
      write-down, and $13 million of restructuring
  charges.
 ·
              Results
      for the year ended October 31, 2007 reflect a $791 million net gain from
      the sale of our diagnostics businesses, operating results of Molecular
      Devices from date of acquisition, March 20, 2007, $61 million of charges
      related to assisting clients in respect to the FDA review, and $37 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 could restrict the amount of any dividend
payment.  However, 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
      Share2006
              C$0.13002007
              C$0.03252008
              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, 2008, a certain debt
covenant under our Senior Unsecured Notes will restrict us from further share
repurchases for the foreseeable future.
    4.3           Capital
Structure
  MDS uses
a combination of equity and long-term debt to finance its
business.  The Company has one class of Common shares authorized and
outstanding.  As at October 31, 2008, 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
currently has a Normal Course Issuer Bid (NCIB) in place to purchase up to
4,136,766 Common shares that expires on July 2, 2009.  As at October
31, 2008, 1,417,900 Common Shares had been purchased in 2008 under this NCIB,
and an additional 1,485,300 shares were repurchased in fiscal 2008 under our
prior NCIB.  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 will restrict us from further share repurchases for the
foreseeable future.
  The
Company has Senior Unsecured Notes payable totalling $227 million, has a
defeased non-interest bearing government loan, and has various other forms of
long-term credit, mostly associated with the purchase of specific
assets.  At October 31, 2008, the value of all of the Company’s
outstanding debt was $282 million.  In addition, the Company has
available C$500 million of undrawn committed term credit facilities at October
31, 2008.
  5.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS
  Please
refer to the disclosure contained on pages 1 to 44 of the 2008 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  (C$)
              NYSE
      (US$)Month
              Volume
                (Total
      Month)
              High
      Price
              Low
      Price
              Volume
                (Total
      Month)
              High
      Price
              Low
      PriceNov
      2007
              7,177,
      230
              21.29
              19.56
              2,319,760
              22.55
              19.87Dec
      2007
              7,581,060
              20.40
              18.25
              3,500,100
              20.32
              18.29Jan
      2008
              12,060,660
              19.57
              16.43
              4,622,985
              19.76
              16.34Feb
      2008
              11,105,865
              17.15
              16.15
              2,707,766
              17.18
              15.68Mar
      2008
              15,219,789
              20.00
              16.23
              3,490,176
              19.48
              16.33Apr
      2008
              10,773,300
              20.88
              19.79
              3,064,755
              20.60
              19.42May
      2008
              8,798,903
              20.43
              18.13
              2,879,493
              20.22
              18.29Jun
      2008
              11,432,195
              18.89
              15.75
              7,221,255
              18.75
              15.39Jul
      2008
              11,712,712
              16.45
              13.81
              3,887,745
              16.54
              13.52Aug
      2008
              8,171,208
              16.65
              14.10
              4,825,086
              15.68
              13.64Sep
      2008
              11,381,891
              16.55
              11.58
              6,536,930
              15.42
              11.13Oct
      2008
              9,316,350
              13.45
              10.50
              6,582,093
              12.41
              8.54
 
 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 7, 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,
      CanadaStephen
      P. DeFalco
              President
      and Chief Executive Officer (CEO)
              Ontario,
      CanadaMary
      E. Federeau
              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,
      CanadaDavid
      Spaight
              President
                MDS
      Pharma Services
              Pennsylvania,
      U.S.Steven
      M. West
              President
                MDS
      Nordion
              Ontario,
      Canada
  Andrew W.
Boorn, Mary E. Federeau, 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)
              Stephen DeFalco joined
      MDS in 2005 and was previously Chairman and CEO of U.S. Genomics and prior
      to that role served as President of PerkinElmer Instruments and Senior
      Vice-President of PerkinElmer, Inc.
  b)
              Thomas E. Gernon joined
      MDS in 2005, was previously Chief Operating Officer of D2Hawkeye Inc., a
      healthcare software development company and held CIO positions at both
      PerkinElmer, Inc. and J.P. Morgan
Investments.
  c)
              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.
  d)
              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.
  e)
              DouglasS. 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.
  f)
              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.
  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 62,023 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 ten 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 ten 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 ten 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 five members: William
D. Anderson (Chair), William G. Dempsey, Robert W. Luba, Richard H. McCoy, and
Kathleen M. O’Neill.  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, Robert W. Luba, and Kathleen M. O’Neill is 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).  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 on the audit committees of TransAlta
Corporation and Gildan Activeware Inc.
  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.
  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 as the Chairman
and 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 ACE Aviation Holding Inc.; 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.
  Kathleen M. O’Neill is a
Corporate Director and was an Executive Vice-President with BMO Bank of Montreal
(a major Canadian chartered bank) until January 2005. Prior to joining BMO Bank
of Montreal in 1994, Ms. O’Neill was a partner at
PricewaterhouseCoopers.  Ms. O’Neill is a Fellow of the Institute of
Chartered Accountants (FCA) of Ontario.  In 2005, Ms. O’Neill was
accredited to the ICD/Rotman School of Management Directors Education
Program.  Ms. O’Neill is also a director of Canadian Tire
Bank.  Ms. O’Neill is Chair of St. Joseph’s Health Centre Foundation
and a past-Chair of the Board of St. Joseph’s Health Centre in Toronto and is
also active on several other non-profit boards.  Ms. O’Neill currently
serves on the public boards of Finning International Inc. and TMX Group
Inc.  She also serves on the audit committees of Finning International
Inc. and TMX Group Inc.
  8.2
              Auditor
      Service Fees
 
 The fees
for all services performed by the auditors for the years ended October 31, 2008
and October 31, 2007 are set out below.
  2008
      (US$‘000s)
              
              2007
      (US$‘000s)Audit
      services
              $6,100
              
              $
      6,274Audit-related
      services
              872
              
              650Tax
      services
              271
              
              341Total
              $7,243
              
              $
7,265
  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:
  (1)
              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.
  (2)
              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.
  (3)
              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 2008 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 12, 2009.
  Additional
financial information is provided in the 2008 Financial Statements and the 2008
MD&A, each included in the 2008 Annual Report Financial Review of MDS for
its fiscal year ended October 31, 2008.
  Copies of
this AIF, as well as copies of the 2008 Annual Report Financial Review of MDS
for the year ended October 31, 2008 and the Management Proxy Circular dated
January 7, 2009 may be obtained from:
 
 Peter
      Brent
                Senior
      Vice-President Legal & Corporate Secretary, MDS Inc.
                Telephone:                                
      416-213-4082
                Fax:                        416-213-4222
                Email:                                peter.brent@mdsinc.com
              2700
      Matheson Blvd., Suite 300, West Tower
                Mississauga,
      Ontario, L4W 4V9
                Canada
  
   APPENDIX
I – MDS INC. AUDIT COMMITTEE CHARTER
 
 
 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"
To MDS INC. AUDIT COMMITTEE CHARTER
  
 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
              Canadian
      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 in order 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.MDC
              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).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.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.