MDS Reports First Quarter 2007 Results



    MDS Completes Transition to Global Life Sciences Company

    TORONTO, March 8 /CNW/ - MDS Inc. (TSX: MDS; NYSE:   MDZ), a company
providing a range of products and services to the global life sciences
markets, today reported its first quarter 2007 results. With the announcement
of its intention to acquire Molecular Devices Corporation and the closing of
the sale of its laboratory services business and the subsequent launch of its
C$500 million share buyback, MDS begins a new chapter in the Company's
history.
    Beginning with the current quarter, the Company has adopted the US dollar
as its reporting currency. Further details on the translation method of
previously reported periods can be found in the MD&A. All amounts unless
otherwise stated are in US dollars.

    Quarterly Highlights

    For the quarter, MDS's revenues, adjusted EBITDA and reported EPS were
$250 million, $32 million and $0.10, respectively. Adjusted EPS was $0.05
versus $0.14 last year.

    
    -  4% organic revenue growth
    -  Adjusted EBITDA of $32 million, down from $38 million last year
    -  St. Laurent FDA related review costs were $4 million
    -  Announced the intention to acquire Molecular Devices Corporation for
       $615 million
    -  Subsequent to the quarter announced the close of the MDS Diagnostic
       Services transaction and launched the C$500 million share buyback.
    

    "I am pleased with the results of our first quarter, particularly in
light of the challenging year over year comparisons in our isotopes business
and the costs associated with our FDA issues. I am encouraged by the path that
the FDA has laid out for us to conclude the bioanalytical issue in Montreal
and by the positive momentum we are seeing in other parts of the MDS Pharma
Services business and look forward to continued improvements as we move
through 2007," said Stephen P. DeFalco, President and Chief Executive Officer
of MDS Inc.

    Operating Segment Results

    
    MDS Pharma Services
                                                             % Change
                                                  ---------------------------
    ($ millions)             Q1 2007     Q1 2006      Reported       Organic
    -------------------------------------------------------------------------
    Revenue:
      Early-stage                $66         $67           (1%)          (4%)
      Late-stage                  55          44           25%           23%
    -------------------------------------------------------------------------
                                $121        $111            9%            7%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Adjusted EBITDA:
      $                           $1          $3          (67%)         (49%)
      %                            -          3%           n/a           n/a
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    MDS Pharma Services' performance began to show signs of improvement with
an $8 million improvement in adjusted EBITDA relative to the fourth quarter of
2006. For the first quarter, revenue increased 9% on a reported basis over the
same period last year. The revenue growth was driven by 25% revenue growth in
our late-stage businesses. There was continued softness in our bioanalytical
and early clinical research services business. Backlog at the end of the first
quarter was $450 million, up 5% over the fourth quarter of 2006 and up 22%
year-over-year. In the quarter, MDS continued a 300 bed expansion of its
Phoenix early clinical research facility, which is expected to open mid-2007.
    In January, the FDA outlined a path that should enable MDS Pharma
Services and its customers to bring closure to issues associated with
bioanalytical studies conducted in our St. Laurent and Blainville facilities.
As a result, MDS has terminated the five-year retrospective review and has
redirected efforts to supporting clients with independent audit activities. In
the quarter, MDS Pharma Services incurred $3 million in costs related to this
effort.
    MDS Pharma Services continued to take steps to improve the overall
performance of the business focusing on improved project selection and
pricing, site and process optimization, and productivity initiatives. During
the quarter, the Company completed its closure of the phase one clinic in New
Orleans, sold a local Spanish clinical development business and completed
negotiations for the February 1, 2007 sale of an early clinical business in
Hamburg.

    
    MDS Nordion
                                                             % Change
                                                  ---------------------------
    ($ millions)             Q1 2007     Q1 2006      Reported       Organic
    -------------------------------------------------------------------------
    Revenue                      $67         $70           (4%)          (3%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Adjusted EBITDA:
      $                          $21         $24          (12%)          (5%)
      %                          31%         34%           n/a           n/a
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    MDS Nordion revenue for the first quarter was $67 million, down 4% on a
reported basis compared to the prior year. Strong revenues were generated by
cobalt shipments and TheraSphere(R). These revenues did not offset the decline
in cardiac imaging revenues over 2006 when we benefited from a competitor's
inability to ship product. Adjusted EBITDA was $21 million.
    During the quarter MDS Nordion announced a number of developments related
to its TheraSphere(R) product, including FDA approval as a humanitarian use
device, for TheraSphere(R) to treat primary liver cancer patients with portal
vein thrombosis.

    
    MDS Sciex
                                                             % Change
                                                  ---------------------------
    ($ millions)             Q1 2007     Q1 2006      Reported       Organic
    -------------------------------------------------------------------------
    Revenue                      $62         $61            2%            4%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Adjusted EBITDA:
      $                          $15         $16           (6%)           8%
      %                          24%         26%           n/a           n/a
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    MDS Sciex revenue for the first quarter grew 2% on a reported basis year-
over-year, led by solid performance in our high-end triple quad products as
well as growth in the markets for our products in India, China and Europe.
End- user revenues in the markets served by our joint ventures grew 10% in the
quarter. The API 4000, API 5000, 4800 and the new products for the applied
markets continued to perform well. Adjusted EBITDA of $15 million was down 6%
reported, up 8% organically, over the same period last year. In the quarter,
MDS Sciex launched the Amino Acid 20/20 Analyzer, a new laboratory system that
employs mass spec in the analysis of amino acids.

    Corporate

    After the quarter, MDS announced the appointment of Doug Prince as
Executive Vice-President Finance and Chief Financial Officer for the Company.
Doug joins MDS after an extensive financial and operations management career
with PerkinElmer and General Electric. He will join MDS effective March 12,
2007.
    The use of non-GAAP measures section in the MD&A outlines the definition
of the terms 'organic' and 'adjusted' as used to reflect the operating
performance of the Company. We use certain non-GAAP measures so that readers
have a better understanding of the significant events and transactions that
have had an impact on our results. We provide a reconciliation of these non-
GAAP measures to our GAAP financial results in the accompanying MD&A.

    Conference Call

    MDS will be holding a conference call today at 10:00 am (EST) to discuss
the fourth quarter results. This call will be webcast live at www.mdsinc.com
and will also be available in archived format at
www.mdsinc.com/news_events/webcasts_presentations.asp after the call.

    Annual and Special Meeting

    MDS will be holding its annual and special shareholders meeting today for
shareholders of record at 4:00 pm EST in Toronto. The AGM will be webcast live
at www.mdsinc.com and will also be available in archived format at
www.mdsinc.com/news_events/webcasts_presentations.asp.

    About MDS

    MDS Inc. (TSX: MDS; NYSE:   MDZ) is a global life sciences company that
provides market-leading products and services that our customers need for the
development of drugs and diagnosis and treatment of disease. We are a leading
global provider of pharmaceutical contract research, medical isotopes for
molecular imaging, radiotherapeutics, and analytical instruments. MDS has more
than 5,600 highly skilled people in 28 countries. Find out more at
www.mdsinc.com or by calling 1-888-MDS-7222, 24 hours a day.

    MDS Forward Looking Statement

    This document contains forward-looking statements. Some forward-looking
statements may be identified by words like "expects", "anticipates", "plans",
"intends", "indicates" or similar expressions. The statements are not a
guarantee of future performance and are inherently subject to risks and
uncertainties. The Company's actual results could differ materially from those
currently anticipated due to a number of factors, including, but not limited
to, successful integration of structural changes, including restructuring
plans, acquisitions, technical or manufacturing or distribution issues, the
competitive environment for the Company's products, the degree of market
penetration of the Company's products, and other factors set forth in reports
and other documents filed by the Company with Canadian and US securities
regulatory authorities from time to time.


    MANAGEMENT'S DISCUSSION AND ANALYSIS

    March 7, 2007

    Following is management's discussion and analysis (MD&A) of the results
of operations for MDS Inc. (MDS or the Company) for the quarter ended
January 31, 2007 and its financial position as at January 31, 2007. This MD&A
should be read in conjunction with the consolidated financial statements and
notes that follow. For additional information and details, readers are
referred to the annual financial statements and MD&A for 2006 and the
Company's Annual Information Form (AIF), all of which are published separately
and are available at www.mdsinc.com and at www.sedar.com. In addition, the
Company's 40-F filing is available at www.edgar.com.
    Our MD&A is intended to enable readers to gain an understanding of MDS's
current results and financial position. To do so, we provide information and
analysis comparing the results of operations and financial position for the
current year to those of the same period in the preceding fiscal year. We also
provide analysis and commentary that we believe is required to assess the
Company's future prospects. Accordingly, certain sections of this report
contain forward-looking statements that are based on current plans and
expectations. These forward-looking statements are affected by risks and
uncertainties that are discussed in this document, as well as in the AIF, and
that could have a material impact on future prospects. Readers are cautioned
that actual events and results will vary.

    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 the Securities Act (Ontario) 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 Canadian
regulators or the United States Securities and Exchange Commission, in reports
to shareholders or in other communications, including public presentations.
These forward-looking statements include, among others, statements with
respect to our objectives for 2007, 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", 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 Canadian and United
States economies and the economies of other countries in which we conduct
business; our ability to secure a sufficient quantity of raw materials,
particularly cobalt; a reliable source of supply of critical nuclear isotopes;
the impact of the movement of the Canadian dollar relative to other
currencies, particularly the US 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; the impact of changes in the laws and
regulations and enforcement thereof; judicial judgments and legal proceedings;
our ability to obtain accurate and complete information from, or on behalf of,
our customers and counter parties; our ability to successfully realign our
organization, resources and processes; our ability to complete strategic
acquisitions and joint ventures and to integrate our acquisitions and joint
ventures successfully; changes in accounting policies and methods we use to
report our financial condition, including uncertainties associated with
critical accounting assumptions and estimates; operational and infrastructure
risks; other factors that may affect future results including changes in trade
policies, timely development and introduction of new products and services,
changes in our estimates relating to reserves and allowances, changes in tax
laws, technological changes, natural disasters such as hurricanes, the
possible impact on our businesses from public health emergencies,
international conflicts and other developments including those relating to
terrorism; and our success in anticipating and managing the foregoing 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.

    Use of non-GAAP measures

    In this MD&A we describe certain income and expense items that are
unusual or non-recurring. These terms are not defined by generally accepted
accounting principles (GAAP). Our usage of these terms may vary from the usage
adopted by other companies. We identify the impact of these amounts on
operating income and on earnings per share (EPS). We provide this detail so
that readers have a better understanding of the significant events and
transactions that have had an impact on our results.
    In addition, terms such as adjusted operating income; adjusted earnings
before interest, taxes, depreciation and amortization (EBITDA); EBITDA margin;
adjusted EPS; and backlog are not defined by GAAP, and our use of such terms
or measurement of such items may vary from that of other companies. Where
relevant, and particularly for earnings-based measures, we provide tables in
this document that reconcile non-GAAP measures used to amounts reported on the
face of the consolidated financial statements.
    We also discuss the results of our operations, isolating variances that
relate to changes in exchange rates and acquisitions. We use the term
"organic" to describe the results presented in this way. To isolate the effect
of currency movements, we eliminate the impact of foreign currency hedging
activities in both the current and prior periods and recalculate the base
figures for the prior period using the exchange rates that were in effect for
the current period.
    The majority of MDS Sciex's business is conducted through joint ventures.
Under the terms of these joint ventures, we are entitled to a 50% share of the
net earnings of the worldwide business that we conduct with our partners in
these joint ventures. These earnings include a share of the profits generated
by our partners that are paid to the joint ventures but which do not qualify
as revenues for the joint ventures.
    Under Canadian GAAP, we report our share of revenues from the joint
ventures and, consequently, we do not report our share of all end-user
revenues, despite the fact that these other businesses contribute to our
profitability. In order to provide readers with a better understanding of the
drivers of adjusted EBITDA growth for MDS Sciex, in addition to the organic
growth of our revenues, we also report growth in end-user revenues, which
reflects the reported growth of the overall worldwide business associated with
the sale of our products and from which we share in the revenues.
    For our pharmaceutical services business, we provide information about
contract backlog. Backlog measures are not defined by GAAP and our measurement
of backlog may vary from that used by others. While we believe that long-term
backlog trends serve as a useful metric for assessing the growth prospects for
our business, backlog is not a guarantee of future revenues and provides no
information about the timing on which future revenue may be recorded.
    Tabular amounts are in millions of United States dollars, except per
share amounts and where otherwise noted.

    Discontinued operations

    All financial references in this document exclude those businesses that
we consider to be discontinued. Our discontinued businesses include our
diagnostics businesses, certain early-stage pharmaceutical research services
operations, and our interest in Source Medical Corporation (Source). All
financial references for the prior year have been restated to reflect this
treatment. From the amounts reported in our first quarter 2006 interim report,
revenues for 2006 have been reduced by $71 million and income from continuing
operations has been reduced by $15 million.

    Change in reporting currency to US dollars

    MDS has historically measured and presented its financial statements in
Canadian dollars and in accordance with Canadian generally accepted accounting
principles ("GAAP"). Effective November 1, 2006, we adopted the US dollar as
our reporting currency. A significant portion of revenues, expenses, assets
and liabilities are denominated in US dollars, the global character of the
Company's operations has increased dramatically following the divestiture of
the diagnostics business, and the majority of the companies with which we
compete report their financial results in US dollars; consequently, we believe
that investors will gain a better understanding of our operating results when
they are presented in US dollars. We will continue to report our financial
results for fiscal 2007 in accordance with Canadian GAAP; however, beginning
this quarter, we are providing a reconciliation of our net income under
Canadian GAAP to that which we would report under US GAAP.
    When there is a change in reporting currency, Canadian accounting
standards require that financial statements for previous years be presented
using a translation method that retains the Canadian dollar as the currency of
measurement. For comparative purposes, we have prepared US dollar historical
financial statements by translating the previously reported Canadian dollar
amounts using the following methods and exchange rates:

    Revenues, expenses, and cash flows - translated into US dollars using the
    weighted-average exchange rate for the applicable quarters.

    Assets and liabilities - translated into US dollars using the exchange
    rate in effect at the end of the applicable period.

    Share capital - share capital as at October 31, 2001 was translated into
    US dollars using the exchange rate in effect on that date. Subsequent
    share capital transactions were translated into US dollars using the
    exchange rate in effect when the transaction occurred.

    Retained earnings - retained earnings as at October 31, 2001 was
    translated into US dollars using the exchange rate in effect on that
    date. Net income transactions for the period from November 1, 2001 to
    October 31, 2006 were translated into US dollars as described above.
    Other transactions affecting retained earnings, principally as a result
    of dividend payments and share repurchases, were translated into
    US dollars using the exchange in effect when the transaction occurred.

    Introduction

    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 contract research, medical isotopes for molecular imaging,
radiotherapeutics, and analytical instruments.

    Strategic initiatives

    On September 1, 2005, we announced our strategic plan to pursue growth in
the global life sciences market and divest of assets that do not contribute to
the Company's areas of focus. During fiscal 2006, we completed a number of
transactions in pursuit of this renewed focus, culminating in the announcement
on October 5, 2006 of the sale of our remaining Canadian diagnostics
businesses to Borealis Infrastructure Management Inc. for gross proceeds of
CDN$1.3 billion, which includes amounts ultimately paid to holders of minority
interests in these businesses.
    On February 26, 2007, we announced the closing of this transaction. Under
the terms of the final agreements, MDS received net cash proceeds (after
expenses and taxes) of CDN$1.0 billion and a CDN$75 million promissory note
due in 2009. After paying costs of the transaction, taxes, and distributions
to our minority partners in these businesses, we expect to report a gain of
approximately US$0.8 billion in our second quarter.
    Also on February 26, 2007, and coinciding with the completion of the sale
of the diagnostics businesses, we announced the launch of a substantial issuer
bid. Under the bid, we are proposing to repurchase up to CDN$500 million of
our Common shares (US$425 million). We expect this bid to close in early
April.
    In our September 2005 announcement, we reconfirmed our commitment to
focus on building our life sciences businesses. On January 29, 2007, we
announced our intention to acquire Molecular Devices Corporation (MDC), a
leading provider of high-performance measurement tools for high-content
screening, cellular analysis, and biochemical testing, in a $615 million cash
transaction. Under this agreement, MDS proposes to acquire all of the Common
shares of MDC for $35.50 per share. The Boards of Directors of both companies
unanimously approved the merger agreement and we commenced a cash tender offer
for all of the outstanding shares of MDC on February 13, 2007.
    This strategic acquisition marks a significant expansion for MDS. By
acquiring Sunnyvale, California-based MDC, with its strong brand recognition
and leading edge products and capabilities, MDS will strengthen its leadership
position as one of the top global providers of life sciences solutions. We
will now offer systems that provide high-content screening, and cellular and
biochemical testing for leading drug discovery and life sciences laboratories
in pharmaceutical, biotechnology, academic, and government institutions.
    Upon completion of this acquisition, we plan to establish a new business
unit, led by the current President of MDS Sciex, Andy Boorn that will combine
the MDC and MDS Sciex businesses. This combined organization will have more
than 1,100 employees, including over 250 scientists and engineers.
    We expect to close this transaction in the second quarter and we will
begin integration activities as soon as the transaction closes.

    MDS Inc.

    
    Consolidated operating highlights
                                                             % Change
                                                  ---------------------------
                                2007        2006      Reported       Organic
    -------------------------------------------------------------------------
    Net revenues              $  250      $  242            3%             4%
    -------------------------------------------------------------------------

    Operating income          $    3      $   23          (87%)
    Adjustments:
    Restructuring charges         13           1
    Gain on sale of investment    (2)          -
    Mark-to-market on interest
     rate swaps                    1           1
    -------------------------------------------------------------------------
    Adjusted operating income     15          25          (40%)
    Depreciation and
     amortization                 17          13
    -------------------------------------------------------------------------
    Adjusted EBITDA           $   32      $   38          (16%)          (2%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Adjusted EBITDA margin       13%         16%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Consolidated revenue for the first quarter of 2007 was up 3% to
$250 million compared to $242 million last year. Strong growth in MDS Pharma
Services, driven by growth in its late-stage businesses, offset a decline in
revenues from MDS Nordion in the quarter compared to the first quarter of
2006. On an organic basis, revenues grew by 4%, driven particularly by 7%
growth in MDS Pharma Services. Revenues from MDS Sciex grew 4% organically,
and MDS Nordion was down 3% organically but excluding the impact of unusual
market conditions in the first quarter of 2006 MDS Nordion revenues grew 8%
organically.
    Adjusted EBITDA of $32 million was down 16% from last year and down 2% on
an organic basis. Adjusted EBITDA was impacted by the non-recurring isotopes
revenues earned last year and continued costs in MDS Pharma Services related
to the self-review of bioequivalence studies conducted at our St. Laurent
facility from 2000 through 2004 (the Retrospective Review). While we suspended
this review at the end of the quarter in response to actions taken by the US
Food and Drug Administration (FDA), costs incurred in the first quarter of
2007 totalled $4 million compared to $5 million in the same quarter last year.
    Adjustments reported for the quarter include restructuring costs totaling
$13 million, of which $8 million relates to ongoing profit improvement
initiatives in MDS Pharma Services. Other restructuring costs amounting to
$5 million were incurred in the quarter as we neared completion of the
transition of our information technology infrastructure and support to a new
provider. Other adjusting items included a $2 million gain realized on the
sale of our debt interest in Hemosol Corp. and a $1 million mark-to-market
loss on deemed ineffective interest rate swaps.
    Selling, general, and administration (SG&A) expenses for the quarter
totalled $53 million and 21% of revenues compared to $48 million and 20% last
year.
    We spent $13 million on R&D activities in the first quarter this year and
last and we expensed $5 million in the first quarter for both years.
    Consolidated depreciation and amortization expense increased $4 million
compared to last year. The increase is principally related to depreciation on
our expanded pre-clinical facility in Lyon, France, our new US central
laboratory, and our new manufacturing facility in Singapore. Capital
expenditures for the quarter were $8 million. In the first quarter of fiscal
2006, we reported capital expenditures of $22 million, reflecting spending on
new facilities in MDS Pharma Services and expenditures related to the MAPLE
facility.
    Results from discontinued operations for this year include only the
results of our remaining Canadian diagnostics businesses, as all other
discontinued business were sold or closed during 2006. The first quarter
results from discontinued operations for 2006 include these businesses, along
with the results of our other discontinued business and include the after-tax
gain resulting from the sale of our interest in Source.
    Reported earnings per share were $0.10 for the quarter, compared to $0.33
in 2006. Adjusted earnings per share from continuing operations for the
quarter were $0.05 compared to $0.14 earned in the same period last year.
Earnings per share from discontinued operations were $0.12 compared to $0.23.
Adjusted earnings per share for the two periods were as follows:

    
                                                          2007          2006
    -------------------------------------------------------------------------
    Basic and diluted EPS from continuing operations
     - as reported                                     $ (0.02)      $  0.10
    Adjusted for:
      Restructuring charges                               0.08          0.01
      Loss (gain) on sale of long-term investment        (0.01)         0.01
      Tax rate changes                                       -          0.02
    -------------------------------------------------------------------------
    Adjusted EPS                                       $  0.05       $  0.14
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    MDS Pharma Services
    Financial Highlights

                                   2007        2006            % Change
                                  $     %     $     %     Reported   Organic
    -------------------------------------------------------------------------
    Early-stage                  66    55    67    60          (1%)      (4%)
    Late-stage                   55    45    44    40          25%       23%
    -------------------------------------------------------------------------
    Net revenues                121   100   111   100           9%        7%
    Cost of revenues            (88)  (73)  (80)  (72)
    Selling, general, and
     administration             (32)  (27)  (28)  (25)
    Depreciation and
     amortization                (9)   (7)   (7)  (6)
    Restructuring charges        (8)   (7)    1    -
    -------------------------------------------------------------------------
    Operating income (loss)     (16)  (14)   (3)  (3)        (433%)
    Adjustment:
    Restructuring charges         8     7    (1)   -
    -------------------------------------------------------------------------
    Adjusted operating income    (8)   (7)   (4)  (3)
    Depreciation and
     amortization                 9     7     7    6
    -------------------------------------------------------------------------
    Adjusted EBITDA               1     -     3    3          (67%)     (49%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capital expenditures          2           7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    A stronger Euro this year compared to 2006 caused revenues for MDS Pharma
Services to grow 9% on a reported basis and 7% on an organic basis. Organic
growth was driven by continued strong results in preclinical discovery and our
late-stage businesses, which were up 6% and 25%, respectively. Both global
clinical development and global central labs services businesses contributed
to the strong revenue growth for late-stage. Revenues from our bioanalytical
business were lower for the first quarter of 2007 than for the same period in
2006, which is attributable to continuing negative results from our
Montreal-area facilities. Early-clinical revenues were also down in the
quarter and we noted a fall in demand immediately after the January 10, 2007
letter issued by the FDA.
    Our late-stage businesses continued to grow their backlog and account for
most of the growth in our reported balance, although we have seen some renewed
growth in backlog for our early-stage businesses this quarter. Our average
monthly pharmaceutical research backlog continues to expand and averaged
$450 million for the first quarter of 2007, an increase of approximately 22%
when compared to the average for the first quarter of fiscal 2006. It is also
up 5% sequentially from the fourth quarter last year.

    
    -------------------------------------------------------------------------
    Fiscal 2005 - Quarter 1                                      $       315
                  Quarter 2                                              305
                  Quarter 3                                              315
                  Quarter 4                                              340
    Fiscal 2006 - Quarter 1                                              370
                  Quarter 2                                              400
                  Quarter 3                                              400
                  Quarter 4                                              430
    Fiscal 2007 - Quarter 1                                              450
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Reported and adjusted EBITDA were impacted by decreased profits in our
bioanalytical and early clinical research businesses.
    Capital expenditures in the pharmaceutical services segment were
$2 million compared to $7 million last year. Expenditures in 2006 related to
an ongoing expansion in Lyon, as well as an expansion of the Skeletech site in
Bothell that had been planned at the time of the acquisition.

    Profit improvement initiatives

    We remain focused on taking action to position MDS Pharma Services for
continued growth and improved and sustainable operating profitability as we
move forward. Over the past several quarters, we implemented a number of steps
designed to focus on MDS Pharma Services' core competencies and strengthen the
business:

    
    -   Appointment of David Spaight as President of MDS Pharma Services
    -   Strengthening our senior management team with new global leaders in
        preclinical discovery, early clinical research, bioanalytical, global
        clinical development, and global central labs
    -   Expansion of our early clinical research capacity in Lincoln (50
        beds), expansion of capacity in our pre-clinical testing business in
        Lyon, and beginning the expansion of our Phoenix early clinical
        research capacity (300 beds)
    -   Selling or closing a number of our smaller, less profitable
        pre-clinical business lines and sites including, Munich, Geneva,
        Taipei, Tampa, Blainville, Bothell and Lincoln
    -   Stringent management of hiring and discretionary spending
    -   Enhanced management review and reporting processes
    -   More selective business development activities, particularly in our
        late-stage businesses
    -   Introduction of LeanSigma as a primary tool to facilitate continuous
        improvement.
    

    During the first quarter of 2007 we continued implementing our operating
improvement plan with the closure of our early clinical research facility in
New Orleans, the sale of the local portion of our Spanish clinical development
business located in Madrid, and completion of negotiations for the February
sale of our phase 1 facility in Hamburg, Germany. These operations were not
profitable and were not considered to be of strategic importance.
    As a result of these activities, we have streamlined our workforce with a
personnel reduction of 8% since the end of the second quarter of 2006, with
the majority of the reduction occurring in the last six months.
    We have reported losses totalling $8 million related to these activities
in the first quarter, all of which are reported as restructuring charges.
    Additional operating improvement initiatives are currently under
evaluation, and we expect to implement these initiatives in the coming months.
We currently expect to announce further workforce reductions and site
rationalizations as we continue to align our global footprint and cost
structure with our business outlook, particularly in our bioanalytical
business. We currently expect to record additional restructuring charges in
the second quarter of 2007 totalling $20 to $25 million related to these
initiatives.

    FDA review of bioanalytical operations

    We are continuing to work to address FDA issues related to bioanalytical
operations in our St. Laurent and Blainville, Canada facilities. Our other
lines of business and other sites where bioanalytical work is conducted are
not the subjects of the FDA review described below. These other lines of
business and sites are subject to routine FDA inspections and we have no
indication that the FDA has any concerns with respect to these operations.
    In October 2006, we met with the FDA regarding the status of the
Retrospective Review and related matters. At this meeting, and in
correspondence with the FDA, MDS responded to concerns previously raised by
the FDA and highlighted upgrades and enhancements to the Retrospective Review.
    In January 2007, the FDA issued statements that outlined a path that will
enable the Company and its clients to bring closure to issues associated with
bioanalytical studies conducted in our St. Laurent and Blainville facilities.
Sponsors of approved and pending generic drug submissions that contain study
data produced in these facilities during the period between January 2000 to
December 2004 have been asked to take one of three actions 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. To date, nearly all of our generic customers have
indicated their intention to pursue the third option and either have or are
intending to commission third party study audits.
    The FDA stated that it was taking this action as a precautionary measure
to ensure that data submitted to the Agency and used in making approval
decisions is of the highest quality. At the same time, the FDA made it clear
that the adverse event surveillance-monitoring program has not detected any
signals or any evidence that any of the drugs involved pose a safety or lack
of efficacy risk. The FDA also made it clear that it does not have any
evidence that there are problems with the quality, purity, or potency of the
affected drug products.
    During the first quarter of fiscal 2007 we continued to expend effort and
resources in conducting the Retrospective Review, incurring direct costs of
$4 million, of which $3 million is included in MDS Pharma Services' results
and $1 million is recorded in our Corporate segment. These amounts include
direct labour, consulting costs, and the cost of related customer
accommodations. In the first quarter of 2006, we incurred review costs
totalling $5 million, all of which was recorded by MDS Pharma Services. Based
on the FDA's new direction, MDS terminated the Retrospective Review in January
2007 and re- directed efforts to support clients with independent audit
activities. Work completed as part of the Retrospective Review is being used,
where applicable, to facilitate independent audit reviews.
    The FDA has identified 217 generic drug applications as being subject to
the new requirements. This total is made up of 140 approved and 77 pending
applications. As of February 28, 2007, independent study audits supporting
approximately 20% of these applications had been completed. We currently
estimate that the reviews of generic drug files will be completed within
calendar 2007. We have been advised that, to date, three generic drug
applications have received FDA approval based on third party audits.
    In addition to generic studies, the FDA has requested information
regarding submitted applications for innovative drugs that contain data from
bioanalytical studies conducted from January 2000 to December 2004 in our
St. Laurent and Blainville facilities. It is not yet clear what work, if any,
the FDA will require with respect to this study category. The number of such
studies that may contain data from these facilities is not currently
estimatable but is expected to be substantially less than the corresponding
number of generic bioequivalency studies.
    Since receipt of the first FDA letter, we have worked closely with our
clients to keep them informed of our ongoing discussions with the FDA. We have
worked especially closely with clients who have had bioanalytical data
produced in our St. Laurent and Blainville facilities questioned by the FDA by
prioritizing study reviews to correspond with their priorities.
    Bioequivalence work for our generic customers has suffered a significant
decline over the period in which we have been addressing the FDA issues. Our
early clinical research business has continued to experience a noticeable
decline in business, generally attributable to reluctance by certain of our
generic customers to place work in the St. Laurent clinic while the review is
underway.
    Full and complete resolution of the FDA issues remains a key focus for
MDS Pharma Services and MDS. We remain committed to working cooperatively with
the FDA and our customers to address all of the FDA's concerns and to assist
them while they complete the study audits mandated by the FDA in a
satisfactory manner.
    The Company is currently assessing the financial impact of addressing the
FDA's new requirements, including the cost of customer accommodations. We are
working closely with study sponsors and currently expect to be in a position
to record a provision for customer accommodations and related costs in our
second quarter. We are not able to estimate the full extent or cost of the
effort required to satisfy the FDA and related client obligations, if any.
There can be no assurance at this time that the study audits will be
acceptable to the FDA or that the FDA will not require additional work. We
also are unable to judge what further impact this situation will have on our
business development activities, particularly for our bioanalytical and early
clinical operations.

    
    MDS Nordion
    Financial Highlights

                                   2007        2006            % Change
                                  $     %     $     %     Reported   Organic
    -------------------------------------------------------------------------
    Net revenues                 67   100    70   100          (4%)      (3%)
    Cost of revenues            (34)  (51)  (34)  (49)
    Selling, general,
     and administration         (11)  (17)  (11)  (16)
    Research and development     (1)   (1)   (1)   (1)
    Depreciation and
     amortization                (3)   (4)   (3)   (4)
    -------------------------------------------------------------------------
    Operating income             18    27    21    30
    Depreciation and
     amortization                 3     4     3     4
    -------------------------------------------------------------------------
    Adjusted EBITDA              21    31    24    34         (12%)      (5%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capital expenditures          1          10
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Our isotopes business fell 4% year-over-year on a reported basis, due to
difficult comparison to unusually strong results in the first quarter of 2006.
The 2006 results were driven by very strong sales of medical isotopes during a
period when a major competitor announced a voluntary recall of its products
used primarily for cardiac imaging. Their facility was out of production for
most of the first two quarters of 2006 and we estimate that approximately
$7 million of high-margin revenues were realized in the quarter. Excluding the
impact of this on 2006, revenues were up 8% organically.
    Revenues from cobalt sterilization were strong this quarter and results
from radiotherapeutics were also up due in particular to strong sales of
Therasphere(R) and FDG (Glucotrace(TM)), an imaging agent used in PET scans.
    Adjusted EBITDA margin for the quarter was 31%, down slightly from last
year on lower medical isotope revenues. SG&A, R&D expenses and depreciation
and amortization were level with the prior year. There were no adjusting items
for the quarter.
    Capital expenditures in the isotopes segment were $1 million, compared to
$10 million last year. The expenditures last year reflected amounts spent on
the MAPLE project prior to the February 2006 settlement with AECL and which
were assumed by AECL as part of the MAPLE settlement in the second quarter
last year.
    During the quarter, we announced that we have extended the clinical trial
for Therasphere to Europe and India.

    
    MDS Sciex
    Financial Highlights

                                   2007        2006            % Change
                                  $     %     $     %     Reported   Organic
    -------------------------------------------------------------------------
    Net revenues                 62   100    61   100           2%        4%
    Cost of revenues            (38)  (61)  (38)  (62)
    Selling, general, and
     administration              (5)   (8)   (3)   (5)
    Research and development     (4)   (7)   (4)   (7)
    Depreciation and
     amortization                (5)   (8)   (3)   (5)
    -------------------------------------------------------------------------
    Operating income             10    16    13    21
    Depreciation and
     amortization                 5     8     3     5
    -------------------------------------------------------------------------
    Adjusted EBITDA              15    24    16    26          (6%)       8%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capital expenditures          3           1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Our instruments business grew 2% as reported and 4% on an organic basis.
End-user revenues in the markets served by our joint ventures grew 10% in the
quarter. Growth remains strong in Europe and in the small molecule and applied
markets. Our QStar(TM), 4000Qtrap(TM), and API 4000(TM) have maintained the
sales momentum from 2006. The service business has developed and is showing
solid growth so far this year. MDS Sciex shares in the profitability of the
services business, although we do not report services revenues due to the
terms of our partnership agreements. Inorganic markets were also strong in the
first quarter of 2007, led by sales of our Elan DRC products.
    Organic adjusted EBITDA growth was 8% compared to a strong first quarter
last year, while adjusted EBITDA for the segment was $15 million compared to
$16 million in the same period last year. Higher SG&A expenses in the first
quarter of 2007, largely due to currency losses on long-term debt obligations,
offset the impact of higher revenues. In addition, depreciation and
amortization expense has increased, reflecting principally amortization of
deferred development charges that began to increase late in the first quarter
last year.
    Capital expenditures in the instruments segment (excluding capitalized
development costs) were $3 million this year compared to $1 million for 2006.

    
    Corporate and Other
    Financial Highlights

                                                            2007        2006
                                                               $           $
    -------------------------------------------------------------------------
    Selling, general, and administration                      (5)         (6)
    Restructuring charges                                     (5)         (2)
    Other income (expense)                                     1          (1)
    Equity earnings                                            -           1
    -------------------------------------------------------------------------
    Operating loss                                            (9)         (8)
    Adjustments:
    Gain on sale of investments                               (2)          -
    Mark-to-market adjustments                                 1           1
    Restructuring charges                                      5           2
    -------------------------------------------------------------------------
    Adjusted EBITDA                                           (5)         (5)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capital expenditures                                       2           4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Corporate SG&A expenses were $1 million lower this year compared to 2006
as we have concluded our initial SOx certification initiative and efforts to
contain head office spending continued. Restructuring charges in the quarter
relate to the transition of IT support and infrastructure to a new provider.
These efforts were substantially completed in February 2007.
    On November 3, 2006, we sold a secured debt interest in Hemosol Corp.,
along with an interest in related debtor-in-possession financing for combined
proceeds of $14 million. We recorded a gain of $2 million as a result of this
transaction, and we have treated this as an adjusting item in the quarter.
    Net interest expense was $2 million compared to $1 million last year. In
2006, we capitalized $2 million of interest expense related to the MAPLE
project. Higher cash and short-term investment balances resulted in higher
interest income in the first quarter of 2007 compared to the same period in
2006.

    Income taxes

    The income tax rate is unusual for the quarter as the majority of losses
incurred in MDS Pharma Services cannot be tax-effected. The reported tax rate
for 2006 of 36% approximates a normal tax rate.

    Discontinued operations

    The results of our discontinued businesses for the first quarter of 2007
and 2006 were as follows:

    
                                                            2007        2006
    -------------------------------------------------------------------------
    Net revenues                                      $       75  $      100
    Cost of revenues                                         (46)        (68)
    Selling, general and administrative                       (8)        (15)
    Depreciation and amortization                              -          (3)
    Restructuring charges                                      -          (1)
    Gain on sale of discontinued operations                    -          24
    Equity earnings                                            1           1
    -------------------------------------------------------------------------
    Operating income                                          22          38
    Income taxes                                              (3)         (3)
    Minority interest                                         (3)         (2)
    -------------------------------------------------------------------------
    Income from discontinued operations               $       16  $       33
    -------------------------------------------------------------------------
    Basic earnings per share                          $     0.12  $     0.23
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Income from discontinued operations for fiscal 2007 reflects only the
results of our remaining diagnostics businesses. Results for the first quarter
of 2006 included Source operations up to the sale of that business in late
November 2005 and the results from our Calgary laboratory business, which was
sold in April of 2006. Income from discontinued operations for 2006 also
reflects the gain resulting from the sale of Source.

    
    Liquidity and capital resources

                                          January 31  October 31
                                                2007        2006      Change
    -------------------------------------------------------------------------
    Cash, cash equivalents and
     short-term investments               $      369  $      388         (5%)
    Operating working capital(1)          $      119  $      104         14%
    Current ratio                                2.0         2.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Our measure of operating working capital equals accounts receivable
        plus unbilled revenue and inventory less accounts payable, accrued
        liabilities, and current deferred revenue.
    

    During the first quarter, cash was utilized to pay normal year-end
accruals and, as a result, cash balances are down and operating working
capital has increased. The decrease in the current ratio is attributable to
the classification of a portion of our long-term debt into current liabilities
this period, reflecting the December 2007 repayment obligation.
    Our liquidity needs can be satisfied from cash generated from operations
and short-term borrowings against our available lines of credit. We have
available a C$500 million, five-year committed, revolving credit facility to
fund our liquidity requirements. No funds were borrowed under the facility as
of January 31, 2007. On February 6, 2007 we drew C$500 million from this
facility to ensure that we had adequate funds on hand to complete our planned
acquisition of MDC. We have repaid this advance from the proceeds resulting
from the sale of the diagnostics business.
    To complete the acquisition of MDC and the substantial issuer bid, we
expect to utilize the full proceeds realized from the sale of the diagnostics
business and a portion of our existing cash resources. Following these
transactions, we expect to have sufficient liquidity resources, including our
revolving credit facility, to meet our liquidity requirements.
    Cash used in financing activities (excluding discontinued operations)
during the quarter was $4 million versus $2 million last year. We made no
purchases under our NCIB during the quarter.
    We believe that cash flow generated from operations, coupled with
available borrowings from existing financing sources, will be sufficient to
meet our anticipated requirements for acquisitions, capital expenditures,
research and development expenditures and operations in 2007. At this time, we
do not reasonably expect any presently known trend or uncertainty to affect
our ability to access our current sources of cash. We remain in compliance
with all covenants for our senior unsecured notes and our bank credit
facility.

    Contractual obligations

    There have been no material changes in contractual obligations since
October 31, 2006, and there has been no substantive change in any of our
long-term debt or other long-term obligations since that date. We have not
entered into any new guarantees of the debt of other parties, nor do we have
any off-balance sheet arrangements.

    Derivative instruments

    We use derivative financial instruments to manage our foreign currency
and interest rate exposure. These instruments consisted of forward foreign
exchange and option contracts and interest rate swap agreements entered into
in accordance with established risk management policies and procedures. All
derivative instrument contracts are with banks listed on Schedules I to III to
the Bank Act (Canada) and the Company utilizes financial information provided
by certain of these banks to assist in the determination the fair market
values of the financial instruments.
    The net mark-to-market value of all derivative instruments at January 31,
2007 was a liability of $7 million. We recorded a $1 million mark-to-market
loss on interest rate swaps during the first quarter of 2007.

    
    Capitalization

                                          January 31  October 31
                                                2007        2006      Change
    -------------------------------------------------------------------------
    Long-term debt                        $      383  $      394        (3%)
    Less: cash, cash equivalents,
     and short-term investments                  369         388        (5%)
    -------------------------------------------------------------------------
    Net debt                                      14           6       133%
    Shareholders' equity                       1,358       1,414        (4%)
    -------------------------------------------------------------------------
    Capital employed(1)                   $    1,372  $    1,420        (3%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Capital employed is a measure of how much of our net assets are
        financed by debt and equity.
    

    Long-term debt decreased $11 million due principally to revaluation of
our Canadian dollar denominated long-term debt and reflecting the strength of
the US dollar in the quarter. Changes in the value of the US-dollar
denominated debt, which is treated as a hedge in the US net investment, are
reflected in Other Comprehensive Income in the Statement of Financial
Position.

    US GAAP Reconciliation

    Note 17 to our consolidated financial statements for the first quarter of
2007 contains a reconciliation of results reported in Canadian GAAP to the net
income we would report in US GAAP. The only material reconciling item in the
quarter is deferred development costs that are capitalized for Canadian
purposes and expensed under US GAAP. As these amounts are tax deductible, the
net impact on report income is nil for the quarter.

    Quarterly highlights

    Following is a summary of selected financial information derived from the
Company's unaudited interim period consolidated financial statements for each
of the eight most recently completed quarters. This financial data has been
prepared in accordance with Canadian GAAP and prior periods have been restated
to reflect the discontinuance of the operations discussed above.

    
    (millions of US dollars, except earnings per share)
    -------------------------------------------------------------------------

                            Trailing
                                Four       Jan       Oct      July       Apr
                            Quarters      2007      2006      2006      2006
    -------------------------------------------------------------------------
    Net revenues            $  1,010  $    250  $    260  $    258  $    242
    Operating income (loss) $     28  $      3  $     18  $      5  $      2

    Income (loss) from
     continuing operations  $     16  $      1  $     14  $      3  $     (2)
    Net income (loss)       $     93  $     13  $     47  $     19  $     14
    Earnings (loss) per
     share from continuing
     operations
      Basic and diluted     $   0.09  $  (0.02) $   0.10  $   0.02  $  (0.01)
    Earnings (loss)
     per share
      Basic and diluted     $   0.65  $   0.09  $   0.33  $   0.13  $   0.10
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    (millions of US dollars, except earnings per share)
    -------------------------------------------------------------------------

                            Trailing
                                Four       Jan       Oct      July       Apr
                            Quarters      2006      2005      2005      2005
    -------------------------------------------------------------------------
    Net revenues            $    955  $    242  $    257  $    231  $    225
    Operating income (loss) $     12  $     23  $    (39) $     12  $     16

    Income (loss) from
     continuing operations  $     (1) $     14  $    (33) $      7  $     11
    Net income (loss)       $     45  $     47  $    (41) $     15  $     24
    Earnings (loss) per
     share from continuing
     operations
      Basic and diluted     $      -  $   0.10  $  (0.23) $   0.05  $   0.08
    Earnings (loss)
     per share
      Basic and diluted     $   0.31  $   0.33  $  (0.29) $   0.10  $   0.17
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Items that impact the comparability of operating income include:

    -   Results for the quarter ended January 31, 2007 reflect the impact of
        restructuring charges totalling $13 million.
    -   Results for the quarter ended April 30, 2006 reflect a loss of
        $9 million resulting from the completion of the MAPLE settlement.
    -   Results for the quarter ended October 31, 2005 reflect restructuring
        charges of $47 million and valuation provisions on certain long-term
        investments totalling $11 million.
    

    Outlook

    As we enter the second quarter of fiscal 2007, we believe that we now
have a path forward to resolution of our FDA issues. We have completed a
number of key outstanding matters, including the sale of our Canadian
diagnostics business and launching a large share repurchase offer. At the end
of the first quarter, we announced our intention to materially expand our
instruments business with the acquisition of MDC. We have also taken steps to
clarify our financial reporting and to make it more comparable to others in
our sector by adopting the US dollar as our reporting currency and including
US GAAP reconciliation information in the notes to our consolidated financial
statements.
    Our businesses are well positioned to gather momentum as the year
progresses. Customer demand and market growth in all segments remains strong
and both MDS Nordion and MDS Sciex have shown growth in the current quarter,
taking into account the unexpected strength in the medical isotopes market in
2006. MDS Pharma Services delivered very strong growth in late-stage services
and in backlog, but the FDA issue continued to impact earnings. We are
confident that we now have a path forward on this matter and we are taking
steps to improve the operating performance of this business.
    The Molecular Devices transaction is proceeding as expected towards
closure. On March 2, the waiting period for Hart Scott Rodino pre-merger
clearance in the US expired. We are awaiting conclusion of regulatory
approvals in other jurisdictions. The closing of the transaction remains
subject to other customary conditions, including other regulatory approvals,
which we anticipate will be satisfied over the next several weeks.
    MDS Sciex continues to transfer production to our new Singapore facility.
We expect to move production of additional lines to Singapore over the course
of the year and realize cost savings as a result. We see continued market
strength in most of our markets for the second quarter.
    MDS Nordion has had a good start to the year and we are comfortable with
the momentum entering the second quarter. The Therasphere clinical trial will
drive both revenues and R&D expense in future quarters, but successful
registration of this medical device is expected to enable us to expand the
market for the product.
    The nature of our isotope products makes them subject to considerable
regulation. Ongoing interest in safety and security may impact the cost of
regulatory compliance for products such as cobalt and cesium and may affect
patterns of customer demand. We continue to be involved in discussions on
these issues.
    With the completion of the sale of our diagnostics business, we are now a
focused life sciences company and we are well positioned to take advantage of
the opportunities available in this industry. We have a strong balance sheet
and the financial resources to pursue selected growth opportunities, including
acquisitions. Our selection of appropriate opportunities to pursue will be
made using a disciplined and methodical approach.

    
    CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
    (UNAUDITED)

                                                            2007        2006
    As at January 31 with comparatives at October 31                (Revised
    (millions of US dollars)                                          Note 7)
    -------------------------------------------------------------------------
    Assets
    Current
    Cash and cash equivalents                         $      340  $      253
    Short-term investments                                    29         135
    Accounts receivable                                      212         229
    Unbilled revenue                                         138         121
    Inventories                                               90          86
    Income taxes recoverable                                  29          42
    Prepaid expenses and other                                33          21
    Assets held for sale (note 7)                            181         196
    -------------------------------------------------------------------------
                                                           1,052       1,083

    Property, plant and equipment                            325         339
    Future tax asset                                          17          37
    Long-term investments and other                          154         170
    Goodwill                                                 413         417
    Intangibles                                              322         338
    -------------------------------------------------------------------------
    Total assets                                      $    2,283  $    2,384
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND SHAREHOLDERS' EQUITY
    Current
    Accounts payable and accrued liabilities          $      212  $      239
    Deferred revenue                                         109          93
    Income taxes payable                                       9           8
    Current portion of long-term debt                         93          20
    Liabilities related to assets held for sale (note 7)      98         114
    -------------------------------------------------------------------------
                                                             521         474

    Long-term debt                                           290         374
    Deferred revenue                                          16          17
    Other long-term obligations                               23          23
    Future tax liabilities                                    75          82
    -------------------------------------------------------------------------
                                                      $      925  $      970
    -------------------------------------------------------------------------
    Shareholders' equity
    Share capital (note 5)                                   578         572
    Retained earnings                                        505         495
    Cumulative translation adjustment                        n/a         347
    Accumulated other comprehensive income (note 4)          275         n/a
    -------------------------------------------------------------------------
                                                           1,358       1,414
    -------------------------------------------------------------------------
    Total liabilities and shareholders' equity        $    2,283  $    2,384
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes

    N/A - Not applicable. Effective November 1, 2006, certain new accounting
    pronouncements issued by the Canadian Institute of Chartered Accountants
    (CICA) were adopted by the Company (see note 3). Certain financial
    statement categories were rendered not applicable by these new
    pronouncements.



    CONSOLIDATED STATEMENTS OF INCOME
    (UNAUDITED)
                                               Three months ended January 31
                                                            2007        2006
                                                                    (Revised
    (millions of US dollars, except per share amounts)                Note 7)
    -------------------------------------------------------------------------
    Net revenues                                      $      250  $      242
    Cost of revenues                                        (160)       (152)
    Selling, general and administration                      (53)        (48)
    Research and development (note 8)                         (5)         (5)
    Depreciation and amortization                            (17)        (13)
    Restructuring charges - net (note 9)                     (13)         (1)
    Other income (expense) - net (note 11)                     1          (1)
    Equity earnings                                            -           1
    -------------------------------------------------------------------------
    Operating income                                           3          23
    -------------------------------------------------------------------------

    Interest expense                                          (6)         (3)
    Dividend and interest income                               4           2
    -------------------------------------------------------------------------
    Income from continuing operations before income taxes      1          22
    Income taxes (note 16)                                    (3)         (8)
    -------------------------------------------------------------------------
    Income (loss) from continuing operations                  (2)         14

    Income from discontinued operations
     - net of tax (note 7)                                    16          33
    -------------------------------------------------------------------------
    Net income                                        $       14  $       47
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted earnings (loss)
     per share (note 10)
    - from continuing operations                      $    (0.02) $     0.10
    - from discontinued operations                          0.12        0.23
    -------------------------------------------------------------------------
    Basic and diluted earnings per share              $     0.10  $     0.33
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes



    CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
    (UNAUDITED)

                                               Three months ended January 31
    (millions of US dollars)                                2007        2006
    -------------------------------------------------------------------------
    Retained earnings, beginning of period            $      495  $      385
    Net income                                                14          47
    Dividends - cash                                          (3)         (3)
    Dividends - stock                                         (1)         (1)
    -------------------------------------------------------------------------
    Retained earnings, end of period                  $      505  $      428
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes



    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
    (UNAUDITED)

                                               Three months ended January 31
    (millions of US dollars)                                            2007
    -------------------------------------------------------------------------
    Net income                                                    $       14
    -------------------------------------------------------------------------
    Other comprehensive income (loss) - net of income tax:
    Change in unrealized gains (losses) on derivatives
     designated as cash flow hedges, net of tax of $1                     (6)
    Reclassification of gains (losses) on derivatives
     designated as cash flows hedges to net income                         1
    Change in unrealized gains (losses) on translation
     of debt designated as a hedge of self-sustaining
     foreign operations, net of tax of $2                                (11)
    Change in foreign currency translation gains (losses)
     on self-sustaining foreign operations                                16
    Change in translation gains (losses) resulting from
     the application of US dollar reporting                              (55)
    -------------------------------------------------------------------------
                                                                         (55)
    -------------------------------------------------------------------------
    Comprehensive loss                                            $      (41)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes



    CONSOLIDATED STATEMENTS OF CASH FLOWS
    (UNAUDITED)

                                               Three months ended January 31
                                                            2007        2006
                                                                    (Revised
    (millions of US dollars)                                          Note 7)
    -------------------------------------------------------------------------
    Operating activities
    Net income                                        $       14  $       47
    Income from discontinued operations - net of tax          16          33
    -------------------------------------------------------------------------
    Income (loss) from continuing operations                  (2)         14
    Adjustments to reconcile net income to cash
     provided by operating activities relating
     to continuing operations (note 13)
      Items not affecting current cash flow                   13          12
      Changes in non-cash working capital
       balances relating to operations                       (28)        (43)
    -------------------------------------------------------------------------
    Cash used in operating activities
     of continuing operations                                (17)        (17)
    Cash provided by operating activities
     of discontinued operations                               16          13
    -------------------------------------------------------------------------
                                                              (1)         (4)
    -------------------------------------------------------------------------
    Investing activities
    Increase in deferred development charges                  (2)         (1)
    Purchase of property,
     plant and equipment (note 14)                            (8)        (22)
    Proceeds on sale of short-term investments               126           -
    Purchase of short-term investments                       (22)          -
    Other                                                     12         (17)
    -------------------------------------------------------------------------
    Cash provided by (used) in investing
     activities of continuing operations                     106         (40)
    -------------------------------------------------------------------------
    Cash provided by investing activities
     of discontinued operations                                -          68
    -------------------------------------------------------------------------
    Financing activities
    Repayment of long-term debt                               (6)          -
    Increase (decrease) in deferred revenue
     and other long-term obligations                           1          (9)
    Payment of cash dividends                                 (3)         (3)
    Issuance of shares                                         4          10
    -------------------------------------------------------------------------
    Cash used in financing activities
     of continuing operations                                 (4)         (2)
    -------------------------------------------------------------------------
    Cash used in financing activities
     of discontinued operations                               (2)         (7)
    -------------------------------------------------------------------------
    Effect of foreign exchange rate changes
     on cash and cash equivalents                            (12)          9
    -------------------------------------------------------------------------
    Increase in cash and cash equivalents
     during the period                                        87          24
    Cash and cash equivalents, beginning of period           253         224
    -------------------------------------------------------------------------
    Cash and cash equivalents, end of period          $      340  $      248
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes



    NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
    (All tabular amounts in millions of Dollars, except where noted)

    1.  Basis of Presentation

    These interim consolidated financial statements of MDS Inc. (MDS or the
    Company) have been prepared in accordance with Canadian generally
    accepted accounting principles (GAAP) and follow the same accounting
    policies and methods of application as the Company's consolidated
    financial statements for the year ended October 31, 2006, except as
    described in Note 3. Under GAAP, additional disclosures are required in
    the annual financial statements and accordingly, these interim
    consolidated financial statements should be read in conjunction with the
    audited consolidated financial statements for the year ended October 31,
    2006 and the accompanying notes on pages 32 to 63 of the Company's annual
    report.

    Prior year amounts have been revised to reflect the results of
    discontinued operations.

    2. Reporting Currency

    The Company has historically prepared its consolidated financial
    statements in Canadian dollars and in accordance with Canadian generally
    accepted accounting principles (GAAP). Effective November 1, 2006, the
    Company adopted the United States (US) dollar as the reporting currency
    for presentation of its consolidated financial statements. A significant
    portion of revenues, expenses and assets and liabilities are denominated
    in US dollars and the international focus of the Company's sales and
    operations is continuing to increase; consequently, the Company believes
    that investors will gain a better understanding of the operating results
    when presented in US dollars. The Company will continue to report its
    financial results for fiscal 2007 in accordance with Canadian GAAP. In
    accordance with Canadian generally accepted accounting principles, the
    Company is required to restate all amounts presented in US dollars, using
    the current rate method whereby all revenues, expenses and cash flows for
    each year (or period) are translated into the reporting currency using
    the rates in effect at the date of the transactions, and assets and
    liabilities are translated using the exchange rate at the end of that
    year or period. All resulting exchange differences are reported as a
    separate component of shareholders' equity. The functional currency of
    each of the Company's operations is unchanged. Assets and liabilities of
    the Company's operations having a functional currency other than US
    dollars are translated into US dollars using the exchange rate in effect
    at the end of the period, and revenues and expenses are translated at the
    average rate during the period.

    As a result of the change in the reporting currency, the Company has
    recorded a cumulative translation adjustment balance of $347 million as
    at October 31, 2006.

    All comparative financial information has been restated to reflect the
    Company's results as if they had been historically reported in US
    dollars.

    3.  Changes in Accounting Policies

    The Company adopted the Canadian Institute of Chartered Accountants
    (CICA) Handbook Sections 1530, "Comprehensive Income"; 3855, "Financial
    Instruments - Recognition and Measurement"; 3861, Financial Instruments -
    Disclosure and Presentation" and 3865, "Hedges" on November 1, 2006. The
    adoption of these new standards resulted in changes in the accounting for
    financial instruments and hedges, as well as the recognition of certain
    transition adjustments, that have been recorded in opening accumulated
    comprehensive income as described below. The comparative interim
    consolidated financial statements have not been restated, except for the
    presentation of translation gains or losses on self-sustaining foreign
    operations. With the adoption of these standards, the Company's
    accounting for financial instruments is now largely harmonized with US
    GAAP for this area. The principal changes in the accounting for financial
    instruments and hedges due to the adoption of these accounting standards
    are described below.

    (a) Comprehensive Income

    Comprehensive income is composed of the Company's net income and other
    comprehensive income. Other comprehensive income includes unrealized
    exchange gains and losses on translation of self-sustaining foreign
    operations, translation gains and losses resulting from the application
    of US dollar reporting, unrealized gains and losses on translation of
    debt designated as a hedge, and changes in the fair market value of
    derivative instruments designated as cash flow hedges, net of applicable
    income taxes. The components of comprehensive income are disclosed in the
    consolidated statement of comprehensive income.

    (b)  Financial Assets and Financial Liabilities

    Under the new standards, all financial instruments are classified into
    one of the following five categories: held for trading, held-to-maturity
    investments, loans and receivables, available-for-sale financial assets
    or other financial liabilities. All financial instruments, including
    derivatives, are included on the consolidated statement of financial
    position and are measured at fair value except for loans and receivables,
    held-to-maturity investments and other financial liabilities which are
    measured at amortized cost. Held for trading financial investments are
    subsequently measured at fair value and all gains and losses are included
    in net income in the period in which they arise. Available-for-sale
    financial instruments are subsequently measured at fair value with
    revaluation gains and losses included in other comprehensive income until
    the instrument is derecognized or impaired. As a result of the adoption
    of these standards, the Company has classified its cash and cash
    equivalents as held-for-trading. Short-term investments are classified as
    available-for-sale investments. Accounts receivable, and long-term note
    receivables are classified as loans and receivables. The financial
    instruments pledged as security on long-term debt is classified as held-
    to-maturity investments. Accounts payable, long-term debt and capital
    lease obligations have been classified as other financial liabilities,
    all of which are measured at amortized cost.

    (c) Derivatives and Hedge Accounting

    Derivatives
    -----------

    All derivative instruments, including embedded derivatives, are recorded
    in the statement of financial position at fair value unless exempted from
    derivative treatment as a normal purchase and sale. All changes in their
    fair value are recorded in income unless cash flow hedge accounting is
    used, in which case changes in fair value are recorded in other
    comprehensive income. The Company has elected to apply this accounting
    treatment for all embedded derivatives in host contracts entered into on
    or after November 1, 2003. The impact of the change in the accounting
    policy related to embedded derivatives was not material.

    Hedge Accounting
    ----------------

    At the inception of a hedging relationship, the Company documents the
    relationship between the hedging instrument and the hedged item, as well
    as the risk management objectives and strategy for undertaking various
    hedge transactions. This process includes linking all derivatives to
    specific assets and liabilities on the consolidated statement of
    financial position or to specific firm commitments or forecasted
    transactions. The Company also assesses, both at the inception of the
    hedge and on an ongoing basis, whether the derivatives that are used are
    effective in offsetting changes in fair values or cash flows of hedged
    items.

    Under the previous standards, derivatives that met the requirements for
    hedge accounting were generally accounted for on an accrual basis. Under
    the new standards, all derivatives are recorded at fair value.

    All gains and losses from changes in the fair value of derivatives not
    designated as a part of a hedging relationship are recognized in the
    statement of income. These gains and losses are reported in other income
    (expense).

    When derivatives are designated as hedges, the Company classifies them
    either as: (i) hedges in the change in fair value of recognized assets or
    liabilities or firm commitments (fair value hedges); (ii) hedges of the
    variability in highly probable future cash flows attributable to a
    recognized asset or liability, or a forecasted transaction (cash flow
    hedges); or (iii) hedges of net investments in a foreign operation (net
    investment hedges).

     Cash flow hedge
     ---------------

    The Company operates globally, which gives rise to risks that its
    earnings and cash flows may be adversely impacted by fluctuations in
    foreign exchange rates. The Company enters into foreign currency forward
    contracts and foreign currency option contracts to hedge foreign exchange
    exposures on anticipated sales.

    The effective portion of changes in the fair value of derivatives that
    are designated and qualify as cash flow hedges is recognized in other
    comprehensive income. Any gain or loss in fair value relating to the
    ineffective portion is recognized immediately in the statement of income
    in other income (expense).

    Amounts accumulated in other comprehensive income are reclassified to the
    statement of income in the period in which the hedged item affects
    income. When a hedging instrument expires or is sold, or when a hedge no
    longer meets the criteria for hedge accounting, any cumulative gain or
    loss existing in other comprehensive income at that time remains in other
    comprehensive income as long as the forecasted transaction is still
    probable of occurring and would be recognized in the statement of income
    in the period the hedged transaction impacts income. When a forecasted
    transaction is no longer expected to occur, the cumulative gain or loss
    that was reported in other comprehensive income is immediately
    transferred to the statement of income. Upon adoption of the new
    standards, the Company recorded a net increase in derivatives assets
    included in accounts receivables of $1 million designated as cash flow
    hedges and an increase of $1 million pre-tax in accumulated other
    comprehensive income.

    Net investment hedges
    ---------------------

    Hedges of net investments in foreign operations are accounted for similar
    to cash flow hedges. Any gain or loss on the hedging instrument relating
    to the effective portion of the hedge is recognized in other
    comprehensive income. The gain or loss relating to the ineffective
    portion is recognized immediately in the statement of income. Gains and
    losses accumulated in other comprehensive income are included in the
    statement of income upon the repatriation, reduction or disposal of the
    investment in the foreign operation. The adoption of the new standards
    resulted in the reclassification of $326 million previously recorded in
    the foreign currency translation adjustment account to opening
    accumulated comprehensive income.

    Carrying value and fair value of financial assets and liabilities as at
    January 31, 2007 are summarized as follows:

    -------------------------------------------------------------------------
    Classification                                Carrying Value  Fair Value
    -------------------------------------------------------------------------
    Held-for-trading                                         340         340
    Held-to-maturity                                          38          38
    Loans and receivables                                    260         260
    Available-for-sale                                        29          29
    Other liabilities                                        725         725
    -------------------------------------------------------------------------

    (d) Measurement Uncertainty

    To determine the assets held for sale related to those operations
    classified as discontinued operations, we are required to make estimates
    and assumptions that affect the reported amounts of these assets and
    liabilities and, therefore, these amounts are subject to measurement
    uncertainty.

    4.  Accumulated Other Comprehensive Income

    The accumulated balances related to each component of other comprehensive
    income (loss), net of income taxes are as follows:

    -------------------------------------------------------------------------
    Accumulated other comprehensive income, net of income taxes
    -------------------------------------------------------------------------
                                                                       As at
                                                            January 31, 2007
    -------------------------------------------------------------------------
    Unrealized gains (losses) on derivatives
     designated as cash flow hedges                               $       (5)
    Unrealized gains (losses) on translation of
     debt designated as a hedge                                          105
    Foreign currency translation gains (losses)
     on self-sustaining foreign operations                              (139)
    Unrealized gain on translation resulting
     from the application of US dollar reporting                         314
    -------------------------------------------------------------------------
    Accumulated other comprehensive income
     balance as at January 31, 2007                               $      275
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Income taxes liability (asset) related to the above components of
    accumulated other comprehensive income (loss) for unrealized gains
    (losses) on derivatives designated as cash flow hedges and unrealized
    gains (losses) on translation of debt designated as a hedge are
    ($1) million and $18 million respectively.

    5.  Share Capital and Stock Options

    The following table summarizes information on share capital and stock
    options and related matters as at January 31, 2007:

    (number of shares in thousands)                       Number      Amount
    -------------------------------------------------------------------------
    Common shares
    Balance as at October 31, 2006                       144,319  $      572
    Issued during the period                                 372           6
    -------------------------------------------------------------------------
    Balance as at January 31, 2007                       144,691  $      578
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the quarter, the Company did not repurchase or cancel any Common
    shares.

                                                                     Average
                                                                    Exercise
    (number of shares in thousands)                       Number       Price
    -------------------------------------------------------------------------
    Stock options
    Balance as at October 31, 2006                         5,850  $    18.76
    Activity during the period:
      Granted                                                 59       20.71
      Exercised                                             (309)      14.36
      Cancelled or forfeited                                 (91)      20.10
    -------------------------------------------------------------------------
    Balance as at January 31, 2007                         5,509  $    19.00
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    There were 3,938 stock options exercisable as at January 31, 2007.

    6.  Pending Acquisition

    On January 29, 2007, MDS announced the signing of a definitive agreement
    to offer to purchase all of the outstanding shares of Common stock of
    Molecular Devices Corporation (MDC), a Delaware corporation at a price of
    $35.50 per share, net to the seller in cash, without interest thereon,
    upon the terms and subject to the conditions set forth in the Offer to
    Purchase filed on February 13, 2007.

    MDC is principally involved in the design, development, manufacture, sale
    and service of bioanalytical measurement systems that accelerate and
    improve drug discovery and other life sciences research. As a result of
    this acquisition, a new business unit will be created that will combine
    the MDC and MDS Sciex businesses.

    The transaction, which is conditional upon certain regulatory approvals
    and upon MDS acquiring in excess of 50% of the fully diluted shares
    outstanding, is expected to close in the second quarter of 2007. The
    Company estimates that the total amount of funds required to purchase all
    16,493,470 shares that were outstanding as of January 25, 2007 plus any
    stock options that have subsequently been converted to shares pursuant to
    the Offer and to pay related fees and expenses will be approximately
    $615 million.

    7.  Discontinued Operations

    In October 2006, the Company signed an agreement to sell its Canadian
    laboratory services business, MDS Diagnostic Services in a
    C$1.325 billion transaction. This strategic sale is designed to shift the
    Company's business focus to the global life sciences market. In 2005, the
    Company approved a plan to divest of its interests in Source Medical
    Corporation, Calgary Laboratory Services LP and certain MDS Pharma
    Services businesses. As a result of these actions, these businesses are
    classified as discontinued operations.

    The results of discontinued operations in the quarter were as follows:

                                               Three months ended January 31
    -------------------------------------------------------------------------
                                                            2007        2006
    -------------------------------------------------------------------------
    Net revenues                                      $       75  $      100
    Cost of revenues                                         (46)        (68)
    Selling, general and administration                       (8)        (15)
    Depreciation and amortization                              -          (3)
    Gain on sale of discontinued operations                    -          24
    Restructuring charges                                      -          (1)
    Equity earnings                                            1           1
    -------------------------------------------------------------------------
    Operating income                                          22          38
    Income taxes                                              (3)         (3)
    Minority interest - net of tax                            (3)         (2)
    -------------------------------------------------------------------------
    Income from discontinued operations - net of tax  $       16  $       33
    -------------------------------------------------------------------------
    Basic and diluted earnings per share              $     0.12  $     0.23
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    In accordance with Section 3475 of the CICA Handbook, long-lived assets
    classified as held for sale are measured at the lower of carrying value
    and fair value less costs to sell.

    Assets held for sale and liabilities related to assets held for sale
    comprised:

                                                           As at       As at
                                                      January 31  October 31
                                                            2007        2006
    -------------------------------------------------------------------------
    Assets held for sale
    Accounts receivable                               $       28  $       31
    Inventories                                                3           3
    Prepaid expenses and other                                 5           3
    Property, plant and equipment                             24          28
    Future tax asset                                          55          63
    Long-term investments and other                           13          13
    Goodwill                                                  52          54
    Intangibles                                                1           1
    -------------------------------------------------------------------------
    Total assets held for sale                               181         196
    Less: Current assets held for sale(1)                   (181)       (196)
    -------------------------------------------------------------------------
    Long-term assets held for sale                    $        -  $        -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities related to assets held for sale
    Accounts payable and accrued liabilities          $       24  $       33
    Income taxes payable                                       1           -
    Long-term debt                                             3           4
    Other long-term obligations                                6           6
    Future tax liabilities                                    48          55
    Minority interest                                         16          16
    -------------------------------------------------------------------------
    Total liabilities related to assets held for sale         98         114
    Less: Current liabilities related
           to assets held for sale(1)                        (98)       (114)
    -------------------------------------------------------------------------
    Long-term liabilities related
     to assets held for sale                          $        -  $        -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Assets held for sale and liabilities related to assets held for sale
        have been classified as current if the Company has signed agreements
        where such assets are expected to be disposed of within one year.

    8.  Research and Development

                                               Three months ended January 31
    -------------------------------------------------------------------------
                                                            2007        2006
    -------------------------------------------------------------------------
    Gross expenditures                                $       13  $       13
    Investment tax credits                                    (1)         (1)
    Recoveries from partners                                  (5)         (6)
    Development costs deferred                                (2)         (1)
    -------------------------------------------------------------------------
    Research and development expense                  $        5  $        5
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the three months ended January 31, 2007, depreciation and
    amortization includes $1 million (2006 - $1 million) related to equipment
    used for research and development.

    9.  Restructuring Charges

    An analysis of the activity in the provision through January 31, 2007 is
    as follows:
                                            Cumulative drawdowns   Provision
                                           ---------------------  Balance at
                           Restructuring                          January 31,
                                  Charge        Cash    Non-cash        2007
    -------------------------------------------------------------------------
    2005:
      Workforce reductions    $       34  $      (30) $       (1) $        3
      Equipment and other asset
       write-downs - adjustment        7           -          (7)          -
      Contract cancellation
       charges                        10          (2)         (8)          -
    -------------------------------------------------------------------------
                              $       51  $      (32) $      (16) $        3
    -------------------------------------------------------------------------
    2006:
      Workforce reductions    $        1  $       (1) $        -  $        -
      Contract cancellation
       charges                        (8)         (1)          9           -
    -------------------------------------------------------------------------
                              $       (7) $       (2) $        9  $        -
    -------------------------------------------------------------------------
    2007:
      Workforce reductions    $        3  $       (2) $        -  $        1
      Contract cancellation
       charges                         5          (5)          -           -
      Other                            5          (1)          -           4
    -------------------------------------------------------------------------
                              $       13  $       (8) $        -  $        5
    -------------------------------------------------------------------------
                                                                  $        8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Company has continued to utilize the reserves established in prior
    years relating to change initiatives affecting support services, senior
    management reductions, and system implementations.

    10. Earnings Per Share

    a) Dilution

                                               Three months ended January 31
    -------------------------------------------------------------------------
    (number of shares in millions)                          2007        2006
    -------------------------------------------------------------------------
    Weighted average number of Common
     shares outstanding
      - basic                                                145         143
    Impact of stock options assumed exercised                  -           1
    -------------------------------------------------------------------------
    Weighted average number of Common
     shares outstanding
      - diluted                                              145         144
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    b) Pro-Forma Impact of Stock-Based Compensation

    Compensation expense related to the fair value of stock options granted
    prior to November 1, 2003 is excluded from the determination of net
    income and is, instead, calculated and disclosed on a pro-forma basis in
    the notes to the consolidated financial statements. Compensation expense
    for purposes of these pro-forma disclosures is determined in accordance
    with a methodology prescribed in CICA Handbook Section 3870 "Stock-Based
    Compensation and Other Stock-Based Payments". The Company used the
    Black-Scholes option valuation model to estimate the fair value of
    options granted.

    For purposes of these pro-forma disclosures, the Company's net income and
    basic and diluted earnings per share would have been:

                                               Three months ended January 31
    -------------------------------------------------------------------------
                                                            2007        2006
    -------------------------------------------------------------------------
    Net income                                        $       14  $       47
    Compensation expense for options
     granted prior to November 1, 2003                         -          (1)
    -------------------------------------------------------------------------
    Net income - pro-forma                            $       14  $       46
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Pro-forma basic earnings per share                $     0.10  $     0.32
    Pro-forma diluted earnings per share              $     0.10  $     0.32
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the quarter, the Company granted 59,000 options (2006 - 934,450)
    at an average exercise price of C$20.71 (2006 - C$19.98). These options
    have a fair value determined using the Black-Scholes model of C$4.40 per
    share (2006 - C$4.13) based on the following assumptions:

                                                            2007        2006
    -------------------------------------------------------------------------
    Risk-free interest rate                                 4.0%        3.9%
    Expected dividend yield                                 0.0%        0.7%
    Expected volatility                                    0.22        0.23
    Expected time to exercise (years)                      3.25        3.25
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    11. Other Income (Expense) - Net

                                               Three months ended January 31
    -------------------------------------------------------------------------
                                                            2007        2006
    -------------------------------------------------------------------------
    Write-down of other long-term assets              $        -  $       (1)
    Gain on sale of investment                                 2           -
    Unrealized loss on interest rate swaps                    (1)          -
    -------------------------------------------------------------------------
    Other income (expense) - net                      $        1  $       (1)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    12. Post Employment Obligations

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

    The post employment obligation expense for the quarter was $1 million
    (2006 - $1 million).

    13. Supplementary Cash Flow Information

    Non-cash items affecting net income comprise:

                                               Three months ended January 31
    -------------------------------------------------------------------------
                                                            2007        2006
    -------------------------------------------------------------------------
    Depreciation and amortization                     $       17  $       13
    Stock option compensation                                  1           2
    Deferred revenue                                          (2)         (3)
    Future income taxes                                       (2)         (2)
    Gain on sale of investment                                (2)          -
    Unrealized loss on interest rate swaps                     1           -
    Other                                                      -           2
    -------------------------------------------------------------------------
                                                      $       13  $       12
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Changes in non-cash working capital balances relating to operations
    include:

                                               Three months ended January 31
    -------------------------------------------------------------------------
                                                            2007        2006
    -------------------------------------------------------------------------
    Accounts receivable                               $       16  $       36
    Unbilled revenue                                         (16)          8
    Inventories                                               (4)         (2)
    Prepaid expenses and other                               (26)        (13)
    Accounts payable and deferred revenue                    (10)        (77)
    Income taxes                                              12           5
    -------------------------------------------------------------------------
                                                      $      (28)  $     (43)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    14. Segmented Information

                                            Three months to January 31, 2007
    -------------------------------------------------------------------------
                          MDS Pharma       MDS       MDS  Corporate
                            Services   Nordion     Sciex  and Other    Total
    -------------------------------------------------------------------------
    Net revenues            $    121  $     67  $     62  $      -  $    250
    Cost of revenues             (88)     (34)       (38)        -      (160)
    Selling, general
     and administration          (32)     (11)        (5)       (5)      (53)
    Research and development       -       (1)        (4)        -        (5)
    Depreciation and
     amortization                 (9)      (3)        (5)        -       (17)
    Restructuring
     charges - net                (8)       -          -        (5)      (13)
    Other income
     (expense) - net               -        -          -         1         1
    Equity earnings (loss)         -        -          -         -         -
    -------------------------------------------------------------------------
    Operating income (loss) $    (16) $    18  $      10  $     (9) $      3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Total assets            $    865  $   602  $     162  $    473  $  2,102
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capital expenditures    $      2  $     1  $       3  $      2  $      8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



                                            Three months to January 31, 2006
    -------------------------------------------------------------------------
                          MDS Pharma       MDS       MDS  Corporate
                            Services   Nordion     Sciex  and Other    Total
    -------------------------------------------------------------------------
    Net revenues            $    111  $     70  $     61  $      -  $    242
    Cost of revenues             (80)      (34)      (38)        -      (152)
    Selling, general
     and administration          (28)      (11)       (3)       (6)      (48)
    Research and development       -        (1)       (4)        -        (5)
    Depreciation and
     amortization                 (7)       (3)       (3)        -       (13)
    Restructuring
     charges - net                 1         -         -        (2)       (1)
    Other income
     (expense) - net               -         -         -        (1)       (1)
    Equity earnings (loss)         -         -         -         1         1
    -------------------------------------------------------------------------
    Operating income (loss) $     (3) $     21  $     13  $     (8) $     23
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Total assets            $    732  $    692  $    161  $    448  $  2,033
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capital expenditures    $      7  $     10  $      1  $      4  $     22
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    15. Financial Instruments

    The carrying amounts and fair values for all derivative financial
    instruments are as follows:

                                    As at January 31        As at January 31
    -------------------------------------------------------------------------
                                                2007                    2006
    -------------------------------------------------------------------------
                                Carrying        Fair    Carrying        Fair
                                  Amount       Value      Amount       Value
    -------------------------------------------------------------------------
    Asset (liability) position:
      Currency forward and
       option  - asset        $        -  $        -  $        2  $        5
      Currency forward and
       option  - liabilities  $       (4) $       (4) $        -  $        -
    Interest rate swap and
     option contracts         $       (3) $       (3) $       (2) $       (2)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As of January 31, 2007, the Company had outstanding foreign exchange
    contracts and options in place to sell up to US$178 million at a weighted
    average exchange rate of C$1.1468 maturing over the next 12 months. The
    Company also had interest rate swap contracts that economically convert a
    notional amount of US$80 million of debt from a fixed to a floating
    interest rate.

    Foreign exchange options and interest rate swaps not eligible for hedge
    accounting are included in accounts payable and are marked to market each
    period.

    16. Income Taxes

    A reconciliation of expected income taxes to reported income tax expense
    is provided below. Income before taxes for continuing operations for the
    quarter ended January 31, 2007 include losses incurred in foreign
    jurisdictions for which no tax effect has been recorded. As a result,
    income tax expense for the quarter of $3 million exceeded the amount
    expected based on statutory rates.

                                               Three months ended January 31
    -------------------------------------------------------------------------
                                                            2007        2006
    -------------------------------------------------------------------------
    Expected income taxes expense at MDS's 35%
     (2006 - 35%) statutory rate                      $        -  $        8
    Increase (decrease) to tax expense as a result of:
      Impact of tax rate changes on future tax balances        -           2
      Foreign tax losses not recognized                        4           -
      Other                                                   (1)         (2)
    -------------------------------------------------------------------------
    Reported income tax expense                       $        3  $        8
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    17. Differences Between Canadian and United States Generally Accepted
        Accounting Principles

    The consolidated financial statements have been prepared in accordance
    with Canadian GAAP.  The principles adopted in these financial statements
    conform in all material respects to those of US GAAP except as summarized
    below.  Significant differences between Canadian and US GAAP would have
    the following effect on net income of the Company:

                                               Three months ended January 31
    -------------------------------------------------------------------------
                                                            2007        2006
    -------------------------------------------------------------------------
    Net income (loss) from continuing operations
     in accordance with Canadian GAAP                 $       (2) $       14
    US GAAP adjustments:
      Deferred development costs                              (1)          -
      Reduction in income tax expense arising
       from GAAP adjustments                                   1           -
    -------------------------------------------------------------------------
    Net income (loss) from continuing operations
     in accordance with US GAAP                               (2)         14
    Income from discontinued operations in accordance
     with Canadian and US GAAP - net of tax                   16          33
    -------------------------------------------------------------------------
    Net income in accordance with US GAAP             $       14  $       47
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted earnings (loss) per share
     in accordance with US GAAP
      - from continuing operations                    $    (0.02) $     0.10
      - from discontinued operations                        0.12        0.23
    -------------------------------------------------------------------------
                                                      $     0.10  $     0.33
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    18. Subsequent Events

    a)  On February 26, 2007, MDS announced that it has finalized the sale of
        its Canadian laboratory services business, MDS Diagnostic Services,
        to Borealis Infrastructure Management Inc. in a C$1.325 billion
        transaction. From the total transaction price of C$1.325 billion, MDS
        will realize net proceeds of approximately C$1.052 billion, comprised
        of C$977 million in cash and C$75 million in an unconditional note,
        payable in March 2009, after provision for taxes, expenses and
        amounts attributable to minority interests. Also on February 26, 2007
        and coinciding with the completion of the sale of the diagnostics
        business, MDS announced the launch of a substantial issuer's bid.
        Under the bid, the Company proposes to repurchase up to C$500 million
        of the Company's outstanding Common shares (US$425 million). The
        Company expects this bid to close in early April.

    b)  On February 6, 2007, the Company drew C$500 million from its
        five-year committed revolving credit facility.

    19. Comparative Figures

    All comparative financial information has been restated to reflect the
    Company's results as if they had been historically reported in US
    dollars. Certain figures for the previous year have been reclassified to
    conform to the current year's financial statement presentation. In
    addition, segmented information for 2006 has been revised to reflect the
    discontinued operations reported.
    




For further information:

For further information: For further MDS information contact: Investor
Inquiries: Sharon Mathers, Vice-President, Investor Relations and External
Communications, (416) 675-6777 ext. 34721, sharon.mathers@mdsinc.com; Media
Inquiries: Catherine Melville, Director, External Communications, (416)
675-6777 ext. 32265, catherine.melville@mdsinc.com

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