MDS Reports Second Quarter 2007 Results



    TORONTO, June 7 /CNW/ - MDS Inc. (TSX: MDS; NYSE:   MDZ), a company
providing products and services to the global life sciences markets, today
reported its second quarter 2007 results. For the quarter, MDS reported
revenues of $273 million, net income of $736 million, and earnings per share
of $5.35, up from $242 million, $14 million and $0.10 respectively over the
same period last year. Earnings per share in the 2007 quarter were driven
principally by the gain generated through the sale of MDS's diagnostic
business. Adjusted EBITDA of $37 million was up from $36 million last year and
adjusted earnings per share were $0.11 compared to $0.08 in the second quarter
of 2006.

    
    Quarterly Highlights

    -   Completed repositioning to a global life sciences company
    -   Closed the sale of the Canadian diagnostics business and recorded a
        $792 million gain
    -   Completed a $441 million (C$500 million) substantial issuer bid
    -   Completed the largest acquisition in the Company's history with the
        $624 million purchase of Molecular Devices Corporation
    -   Recorded $61 million to cover FDA review related costs
    -   Provided a $26 million restructuring charge for MDS Pharma Services
    -   Delivered $273 million in revenues, up 13% over prior year
    -   Earned adjusted EBITDA of $37 million, up from $36 million last year
    -   Increased adjusted earnings per share to $0.11, up 38% over prior
        year
    

    "I am pleased that we continued to make solid progress executing our
strategy," said Stephen P. DeFalco, President and Chief Executive Officer of
MDS Inc. "I am encouraged by the steady improvement at MDS Pharma Services and
the strong start of our newly launched MDS Analytical Technologies business."

    
    Operating Segment Results

    MDS Pharma Services

                                                            % Change
                                                   --------------------------
    ($ millions)             Q2 2007     Q2 2006      Reported       Organic
    -------------------------------------------------------------------------
    Revenue:
      Early-stage                $60         $68          (12%)
      Late-stage                  55          45           22%
    -------------------------------------------------------------------------
                                $115        $113            2%            0%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Adjusted EBITDA:
      $                           $3          $3             -          100%
      %                           3%          3%           n/a           n/a
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    For the second quarter, revenue increased 2% on a reported basis over the
same period last year, and was flat organically. Our late-stage businesses
reported strong growth at 22%. This was offset by a 12% decline in our
early-stage segment, which continues to feel the impact of FDA-related issues
at our Montreal site. Average backlog for the second quarter was $450 million
up 12% year-over-year.
    During the quarter, the team at our Montreal site continued to support
the independent audit activities for our bioanalytical clients. Having
completed approximately 70% of the audits, MDS is now able to estimate the
financial impact of customer accommodations related to the FDA review and has
provided $61 million in the quarter to fund the completion of these
activities. MDS Pharma Services expects to have the FDA audits substantially
complete by the end of fiscal 2007.
    MDS Pharma Services took another major step toward improving business
performance in recording a $26 million charge to restructure and streamline
our business. MDS Pharma Services will use these funds to optimize our global
network through site consolidations, workforce reductions, and operational
enhancements. These initiatives include consolidating our North American
bioanalytical LCMS operations into Lincoln and the refocusing of our Montreal
site on early clinical research, ligand binding services, development and
regulatory services and global clinical development. We believe these actions
will create a strong global foundation to serve our customers more effectively
and position us well for future growth.
    MDS Pharma Services is also making other investments to grow the
business. Work continues on our 300-bed expansion in Phoenix and on new
information systems for our pre-clinical and central lab businesses. We also
continue to explore business development activities to accelerate our global
growth.

    
    MDS Nordion

                                                            % Change
                                                   --------------------------
    ($ millions)             Q2 2007     Q2 2006      Reported       Organic
    -------------------------------------------------------------------------
    Revenue                      $70         $72           (3%)          (2%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Adjusted EBITDA:
      $                          $21         $22           (5%)           4%
      %                          30%         31%           n/a           n/a
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    MDS Nordion revenue for the second quarter was $70 million, down 3% on a
reported basis and 2% organically compared to a strong quarter in 2006, when
we benefited last year from a competitor's inability to ship product. Adjusted
EBITDA was $21 million, down 5% as reported but up 4% organically, as declines
in revenue were offset by productivity initiatives and effective cost
controls.
    During the quarter, MDS Nordion announced a number of developments
related to the radiotherapeutic business including the establishment of four
European Centres of Excellence for TheraSphere(R) and the signing of a
collaboration agreement with Avid Radiopharmaceuticals, Inc. to support
clinical studies for Avid's novel radiopharmaceuticals for the diagnosis and
monitoring of Alzheimer's disease. TheraSphere use continued to expand as
enrollment of patients grew in Europe and India.


    
    MDS Analytical Technologies

                                                            % Change
                                                   --------------------------
    ($ millions)             Q2 2007     Q2 2006      Reported       Organic
    -------------------------------------------------------------------------
    Revenue                      $88         $57           54%            5%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Adjusted EBITDA:
      $                          $20         $19            5%          (32%)
      %                          23%         33%           n/a           n/a
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    MDS Analytical Technologies revenues, which included the results of
Molecular Devices acquisition from March 20, 2007 to the end of the second
quarter, grew 54% to $88 million. Mass spectrometry end user revenue grew 12%.
Year-over-year performance reported for this business was fueled by our
Molecular Devices acquisition and strong demand in most of our markets,
particularly for 4000 series triple quad products and the Elan DRC products.
Adjusted EBITDA of $20 million was up 5% reported, and down 32% organically,
over the same period last year, which included $4 million in benefits related
to R&D tax credits and foreign exchange.
    In the quarter, MDS Analytical Technologies introduced a number of new
products. A first-of-its-kind mass spectrometry platform designed to help
pharmaceutical companies accelerate the drug compound screening process called
FlashQuant(TM) was unveiled by the Sciex division and Applied Biosystems. As
well, Applied Biosystems/MDS Sciex launched enhancements to the
ProteinPilot(TM) software and the 4800 MALDI TOF/TOF(TM) mass spectrometer to
support biomarker research.
    Our new Molecular Devices acquisition also introduced the
Neurotransmitter Transporter Uptake Assay Kit to enable the screening of three
neurotransmitters through one single detection assay.
    Asia remains a key region for MDS Analytical Technologies with continued
strength in India and China for our products. We also continue to accelerate
our manufacturing moves in Singapore and China to strengthen our competitive
cost position.

    Conference Call

    MDS will be holding a conference call today at 10:30 am (EDT) to discuss
the second 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.

    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 6,200 highly skilled people in 28 countries. Find out more at
www.mdsinc.com or by calling 1-888-MDS-7222, 24 hours a day.

    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.

    The use of non-GAAP measures section in the MD&A outlines the definition
of the terms 'organic' and 'adjusted' as used to explain 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.

    MANAGEMENT'S DISCUSSION AND ANALYSIS

    June 5, 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
April 30, 2007 and its financial position as at April 30, 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 period 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 reliable supply of raw materials,
particularly cobalt and critical nuclear isotopes; the impact of the movement
of the US dollar relative to other currencies, particularly the Canadian
dollar and the Euro; changes in interest rate policies of the Bank of Canada
and the Board of Governors of the Federal Reserve System in the United States;
the effects of competition in the markets in which we operate; the timing and
technological advancement of new products introduced by us or by our
competitors; the impact of changes in laws, trade policies and regulations,
and enforcement thereof; judicial judgments and legal proceedings; 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; the possible
impact on our businesses from natural disasters, 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 addition to measures based on generally accepted accounting principles
(GAAP) in this MD&A, we describe certain income and expense items that are
unusual or non-recurring. These terms are not defined by GAAP and 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). Our executive management assesses the performance of our businesses
based on a review of results calculated in this manner and 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 to acquisitions and divestitures. 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.
    Substantially all of the business of the Sciex division of MDS Analytical
Technologies 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 only our direct revenues and 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 for MDS Analytical
Technologies, in addition to the organic growth of our revenues, we also
report growth in end-user revenues. This figure provides information about the
reported growth of the overall worldwide business associated with the sale of
our products and related services and from which we share in the
profitability. We are unable to provide the organic growth in this measure
because we do not have access to the underlying currency data.
    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.

    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. On February 26, 2007, we completed a significant
step in this strategic plan by selling our Canadian diagnostics business to
Borealis Infrastructure Management Inc. MDS received net cash proceeds (after
expenses and taxes) of $929 million and a $65 million non-interest bearing
promissory note due in 2009. After paying transaction costs and income taxes,
we have reported a gain of US$792 million in our second quarter, the details
of which are (US$ millions):

    
    -------------------------------------------------------------------------
    Net selling price                                                $ 1,129
    Less share attributable to minority interests                       (112)
    -------------------------------------------------------------------------
    MDS's share of selling price                                       1,017
    Less:
    Net book value of assets sold                                        (82)
    Transaction costs                                                    (30)
    Income taxes                                                        (113)
    -------------------------------------------------------------------------
    Gain included in income from discontinued operations             $   792
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    On January 29, 2007, we announced another significant step in our
strategic plan with our intent to acquire Molecular Devices Corporation (MD),
a leading provider of high-performance measurement tools for high-content
screening, cellular analysis, and biochemical testing, in a $624 million cash
transaction. This transaction closed and we recorded the acquisition of MD
effective March 20, 2007. Under this agreement, MDS acquired all of the Common
shares of MD for $35.50 per share. Following the acquisition, the MD business
was combined with that of MDS Sciex to create MDS Analytical Technologies (MDS
AT). The MDS Sciex and Molecular Devices brands will continue to be used by
this new business unit.
    This strategic acquisition marks a significant expansion for MDS. By
acquiring Sunnyvale, California-based MD, with its strong brand recognition
and leading-edge products and capabilities, MDS has strengthened its
leadership position as one of the top global providers of life sciences
solutions. We 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.
    The acquisition has been accounted for using the purchase method. The
total cost of the acquisition was $624 million, including the cash cost of the
tender offer, the cash cost to acquire outstanding in-the-money options held
by employees of MD and others, and cash transaction costs. The components of
the purchase cost and the preliminary allocation of the costs are as follows:

    
    -------------------------------------------------------------------------
    Cash paid for tendered shares                                       $589
    Cash paid to acquire vested options                                   27
    Cash transaction costs                                                 8
    -------------------------------------------------------------------------
    Total cost of acquisition                                           $624
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Allocation of cost of acquisition:
    Net tangible assets acquired                                         $71
    Intangible assets acquired                                           182
    Goodwill                                                             371
    -------------------------------------------------------------------------
    Total                                                               $624
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net tangible assets includes $21 million of acquired cash.



    MDS Inc.
    Consolidated Operating Highlights

           Second Quarter                                   Year-to-Date
    -------------------------------                    ----------------------
                       % Change                                      % Change
                   ----------------                                  --------
     2007    2006  Reported Organic                     2007    2006 Reported
    -------------------------------------------------------------------------
    $ 273   $ 242     13%      1%  Net revenues        $ 523   $ 484      8%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                   Operating income
      (80)      2     n/m     n/m   (loss)               (77)     25     n/m
                                   Adjustments:
                                   ------------
       28       1                  Restructuring charges  41       2
        6       6                  Valuation provision     6       6
                                   Mark-to-market on
       (1)      2                   interest rate swaps    -       3
       (3)      9                  MAPLE settlement       (3)      9
                                   Loss on sale of
        3       -                   businesses             1       -
       61       -                  FDA provision          61       -
                                   Acquisition
        3       -                   integration            3       -
    -------------------------------------------------------------------------
                                   Adjusted operating
       17      20                   income                32      45
                                   Depreciation and
       20      16                   amortization          37      29
    -------------------------------------------------------------------------
    $  37   $  36      3%     (7%) Adjusted EBITDA     $  69   $  74     (7%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                   Adjusted EBITDA
      14%     15%                   margin               13%     15%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    n/m = not meaningful
    

    Consolidated revenues for the second quarter of 2007 were up 13% to
$273 million compared to $242 million last year. Revenue from the newly
acquired MD business from the date of acquisition to April 30, 2007 amounted
to $29 million. Our late-stage MDS Pharma Services businesses continued their
strong growth, offsetting weakness in early-stage revenues, where we continue
to feel the impact from the US Food and Drug Administration (FDA) review. MDS
Nordion revenues were down slightly on a reported basis compared with an
unusually strong second quarter in fiscal 2006, when we experienced high
shipments of key isotopes resulting from disruption at a key competitor. On a
reported basis, and excluding the revenues from the MD business, MDS Sciex was
up 4%. The MD business also experienced solid growth as revenues for the
quarter were up 22% compared to a weak quarter in the same three-month period
last year.
    On an organic basis, revenues grew by 1%, driven principally by 5%
organic growth at MDS Analytical Technologies. Revenues from MDS Nordion were
down 2% organically but excluding the impact of unusual market conditions in
the second quarter of 2006 MDS Nordion revenues grew 1% organically. MDS
Pharma Services revenues were level with the prior year on an organic basis,
as strong growth in late-stage revenues was offset by weak early-stage
revenues.
    We reported an operating loss for the quarter of $80 million compared to
operating income of $2 million reported for the same period in 2006. The
operating loss for the current year includes a $61 million provision to cover
future costs to resolve the outstanding FDA issues associated with our
Montreal-area bioanalytical businesses and a restructuring charge of
$28 million, most of which relates to the MDS Pharma Services business.
    Adjusted EBITDA for the quarter was $37 million compared to $36 million
last year and $32 million in the first quarter of fiscal 2007. Adjusted EBITDA
increased 3% on a reported basis, compared to a strong adjusted EBITDA figure
for 2006 that reflects the impact of the unusual market conditions experienced
by MDS Nordion last year and favourable prior year tax credit recoveries at
MDS Sciex in 2006. Factoring in the impact of foreign exchange, adjusted
EBITDA declined 7% organically.
    Adjustments reported for the quarter include $61 million of costs that we
expect to incur to reimburse clients of our Montreal-area bioanalytical
facilities for audit and other costs that they will pay to comply with the FDA
directive issued January 10, 2007. In addition, we have recorded $28 million
of restructuring costs related mostly to ongoing profit improvement
initiatives in MDS Pharma Services. Other adjusting items included a
$3 million gain resulting from the realization of prior year investment tax
credits related to our investment in the MAPLE project, a $6 million valuation
provision on our interest in MDS Capital Corp., a $3 million loss resulting
from the sale of certain businesses, primarily our Hamburg phase 1 facility,
$3 million of integration costs incurred by MDS AT, and a $1 million
mark-to-market gain on deemed ineffective interest rate swaps.
    Selling, general, and administration (SG&A) expenses for the quarter
totalled $67 million and 25% of revenues compared to $56 million and 23% last
year. The increase includes the impact from the addition of MD partway through
the quarter, and includes the cost of their sales and marketing network. In
addition, SG&A for the 2007 quarter includes a foreign exchange loss of
$4 million resulting from the significant weakness in the US dollar over the
last few weeks of the quarter. In the fiscal 2006 quarter we reported a
foreign exchange loss of $2 million.
    We spent $16 million on R&D activities in the second quarter this year
and expensed $7 million, compared to spending of $12 million last year, of
which we expensed $1 million. The majority of the increase in R&D spending
comes from the additional spending in our new MD business. The 2006 spending
was net of $3 million of prior year investment tax credits.
    Consolidated depreciation and amortization expense increased $4 million
compared to last year. Of this increase, $2 million is primarily related to
depreciation on our expanded pre-clinical facility in Lyon, France, our new US
central laboratory, and our new manufacturing facility in Singapore. We also
amortized $2 million of intangible assets acquired as part of the MD
transaction. Capital expenditures for the quarter were $9 million. We reported
no capital expenditures in the second quarter of 2006.
    We reported a loss from continuing operations for the quarter due
primarily to the after-tax impact of the provisions for FDA study audit costs,
long-term investment valuation, and restructuring, which amounted to
$70 million. Excluding adjusting items, income from continuing operations was
$16 million or $0.11 per share.
    Results from discontinued operations for this year include the operating
results of our Canadian diagnostics businesses for the period prior to sale
and the gain resulting from the sale.
    On April 9, 2007, we completed a substantial issuer bid and repurchased
approximately 22.8 million Common shares for C$500 million (US$ 441 million)
at a price of C$21.90 per share. As a result of this issuer bid, we reduced
the number of Common shares outstanding from approximately 144 million to
122 million. The basic weighted average number of shares outstanding for the
quarter was 137 million.
    Reported earnings per share from continuing operations were a loss of
$0.42 for the quarter, compared to a loss of $0.01 in 2006. Adjusted earnings
per share from continuing operations for the quarter were $0.11 compared to
$0.08 earned in the same period last year. Earnings per share from
discontinued operations were $5.77 compared to $0.11, and included $5.76
related to the gain on sale of the diagnostics business. Adjusted earnings per
share for the two periods were as follows:

    
                                            Second Quarter      Year-to-date
    -------------------------------------------------------------------------
                                             2007     2006     2007     2006
    -------------------------------------------------------------------------
    Basic and diluted EPS from
     continuing operations -
     as reported                          $ (0.42) $ (0.01) $ (0.42) $  0.09
    Adjustments:
      Restructuring charges                  0.17        -     0.24     0.01
      Valuation provision                    0.04     0.04     0.04     0.04
      Mark-to market on interest rate
       swaps                                    -     0.01    (0.01)    0.01
      MAPLE settlement                      (0.02)    0.04    (0.02)    0.04
      Loss (gain) on sale of long-term
       investment and businesses             0.03        -     0.02     0.01
      FDA provision                          0.29        -     0.29        -
      Acquisition integration                0.02        -     0.02        -
      Tax rate changes                          -        -        -     0.02
    -------------------------------------------------------------------------
    Adjusted EPS                          $  0.11  $  0.08  $  0.16  $  0.22
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    MDS Pharma Services
    Financial Highlights


           Second Quarter                                   Year-to-Date
    -------------------------------                    ----------------------
                       % Change                                      % Change
                   ----------------                                  --------
     2007    2006  Reported Organic                     2007    2006 Reported
    -------------------------------------------------------------------------
    $  60   $  68    (12%)         Early-stage         $ 126   $ 135     (7%)
       55      45     22%          Late-stage            110      89     11%
    -------------------------------------------------------------------------
    $ 115   $ 113      2%       -  Net Revenue         $ 236   $ 224      5%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

      (78)    (80)                 Cost of revenues     (166)   (159)
                                   Selling, general,
      (34)    (29)                  and administration   (66)    (58)
                                   Depreciation and
       (9)     (7)                  amortization         (18)    (14)
                                   Restructuring
      (26)     (1)                  charges              (34)      -
        -      (1)                 Equity earnings          -     (1)
                                   Other income
      (65)      -                   (expenses)           (65)      -
    -------------------------------------------------------------------------
      (97)     (5)                 Operating loss       (113)     (8)
                                   Adjustments:
                                   Restructuring
       26       1                   charges               34       -
        4       -                  Loss on sale of a
                                    business               4       -
       61       -                  FDA provision          61       -
    -------------------------------------------------------------------------
                                   Adjusted operating
       (6)     (4)                  loss                 (14)     (8)
                                   Depreciation and
        9       7                   amortization          18      14
    -------------------------------------------------------------------------
    $   3   $   3       -    100%  Adjusted EBITDA     $   4   $   6    (33%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                   Capital
    $   5   $   7                   expenditures       $   7   $  14
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    MDS Pharma Services revenues grew 2% on a reported basis and was level
with last year on an organic basis. Reported revenue growth was strong in our
late-stage businesses, reflecting continued strong sales activity, improved
discipline around managing revenues from change orders initiated by our
clients, and efficiency gains in operations. This strong growth in our
late-stage businesses more than offset weakness in early-stage businesses,
where growth continues to be constrained by our bioanalytical business in
Montreal.
    Average monthly pharmaceutical research backlog was $450 million for the
second quarter of 2007, an increase of approximately 12% when compared to the
average for the second quarter of fiscal 2006. A significant contract
cancellation occurred late in the quarter, reducing our backlog to
$425 million at the beginning of the third quarter.

    
    Average monthly backlog during the quarter
    -------------------------------------------------------------------------
        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
                      Quarter 2                                          450
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    We have reported an operating loss of $97 million for MDS Pharma
Services, reflecting the impact of charges totalling $61 million related to
reimbursing customers for costs they will incur to comply with the FDA
requirements. This provision includes $1 million of costs incurred during the
quarter. In the second quarter of 2006, we incurred $5 million, which was
included in SG&A for the period. Reported results for the quarter also reflect
restructuring charges of $26 million and a loss of $4 million from the sale of
a facility. Both of these charges result from efforts currently underway to
streamline our global operations.
    In addition, the cost of revenues is net of a favourable settlement of
$5 million of outstanding investment tax credits related to work done in
previous years. Results for the prior year quarter include $2 million of
similar claims. These credits are partially offset by foreign exchange losses
of $3 million resulting from the weakness of the US dollar against both the
Canadian dollar and the Euro (2006 - nil).
    Capital expenditures in the pharmaceutical services segment were
$5 million compared to $7 million last year. Fiscal 2007 expenditures include
the expansion of our Phoenix early clinical research facility. 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 believe we are now on a path that will result in final resolution of
the outstanding FDA issues at our Montreal area facilities. We have also
accelerated our profit improvement initiatives by eliminating less profitable
sites, reducing facility costs, and structuring our workforce to most
effectively serve our customers. We believe these actions will position MDS
Pharma Services for growth and improved profitability in the months ahead.
    During the second quarter of 2007, we implemented certain portions of our
operating improvement plan, finalizing the sale of our phase 1 clinical
facility in Hamburg, Germany. Also during the quarter, senior management
approved a significant restructuring plan and we began actions to implement
this plan in May. As a result of the approval of the plan in April, we have
recorded $26 million of restructuring charges, including severance of
$17 million, equipment write-offs of $3 million, a $2 million provision to
reduce the carrying value of certain real estate to our estimate of its
current market value, and $4 million for other costs of the restructuring. We
expect to record a further $6 million in future quarters, as we complete our
withdrawal from certain leased facilities and complete the headcount
reductions. Reflected in this plan is a decision not to re-open LCMS
bioanalytical operations in the Montreal area and, as a direct result, we will
reduce the size of our St. Laurent operations and facility to improve its
operational efficiency, as it focuses on early clinical operations.
    In the first quarter, we reported losses totalling $8 million related to
restructuring activities, bringing our total expenses year-to-date to
$34 million. Restructuring costs in the prior year period were $1 million.

    FDA review of bioanalytical operations

    The January 2007 letters issued by the FDA to sponsors of ANDA (generic
drugs) and NDA (innovative drugs) applications has provided direction and a
path forward that we expect will result in final resolution of the outstanding
FDA issues associated with bioequivalence testing conducted in our St. Laurent
and Blainville facilities during the period January 1, 2000 to December 31,
2004. Subsequent to issuing the letters setting out the path forward, during
the second quarter the FDA provided us with Establishment Inspection Reports
closing the 2004 inspections which gave rise to these issues.
    In the January letters, the FDA directed sponsors of 217 approved and
pending generic drug submissions that contain study data produced in these
facilities during that period 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, we have been in contact with sponsors responsible for
approximately 80% of the 217 ANDA submissions under review. Of these,
approximately 83% have third party audits underway or are expected to commence
third party audits. A small number of the sponsors we have been in touch with
(representing 6% of the total ANDAs under review) have indicated that they
will repeat the studies without auditing the original study data first. The
remaining sponsors have either not yet indicated their preferred course of
action, indicated they do not intend any action, or have yet to contact us.
    In addition to the ANDA reviews ordered by the FDA, we have recently been
advised by certain clients that some European regulators may follow a similar
path to that taken by the FDA. We expect the number of studies subject to
these reviews to be limited.
    In addition to generic studies, the FDA has requested information
regarding submitted NDA applications for innovative drugs that contain data
from bioanalytical studies conducted from January 2000 to December 2004 in our
St. Laurent and Blainville facilities. Although it is difficult to estimate
the full extent of the FDA's intent relative to innovator studies, we expect
NDA sponsors to take action similar to the three actions set out for generic
studies and expect that this will impact a substantially lower number of
studies than the work done for sponsors of ANDA submissions.
    We have approved a reimbursement policy for clients who have incurred or
will incur third party audit costs to complete the work required by the FDA
and other regulators. In addition, we are supporting the sponsors who are
conducting audits by providing their third party auditors with space at our
St. Laurent facility, access to all of the relevant files and study materials,
and support from our technical staff. Based on the audit work conducted at our
facility to date, we have estimated a total cost to complete this work of
$61 million, including the expected reimbursements to clients, audit support
costs, and the expected amount of refunds that will be issued to clients for
studies on which an unqualified third party audit opinion cannot be obtained.
    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
our customers while they complete the study audits. Although we have recorded
a provision in our second quarter that reflects our current best estimate of
the costs we expect to incur with respect to this work and for obligations we
have to clients, there can be no assurance at this time that we will not incur
costs that exceed the amounts we have currently estimated. In addition, there
can be no certainty that the study audits conducted by our clients 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

           Second Quarter                                   Year-to-Date
    -------------------------------                    ----------------------
                       % Change                                      % Change
                   ----------------                                  --------
     2007    2006  Reported Organic                     2007    2006 Reported
    -------------------------------------------------------------------------
    $  70   $  72     (3%)    (2%) Net revenues        $ 137   $ 142     (4%)
      (37)    (37)                 Cost of revenues      (71)    (71)
                                   Selling, general,
      (12)    (13)                  and administration   (23)    (24)
                                   Research and
        -       -                   development           (1)     (1)
                                   Depreciation and
       (3)     (4)                  amortization          (6)     (7)
                                   Other income
        4      (9)                  (expenses)             4      (9)
    -------------------------------------------------------------------------
       22       9                  Operating Income       40      30
                                   Adjustments:
       (3)      9                  MAPLE settlement       (3)      9
                                   Gain on sale of a
       (1)      -                   business              (1)      -
    -------------------------------------------------------------------------
                                   Adjusted operating
       18      18                   income                36      39
                                   Depreciation and
        3       4                   amortization           6       7
    -------------------------------------------------------------------------
    $  21   $  22     (5%)     4%  Adjusted EBITDA     $  42   $  46     (9%)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                   Capital
    $   1   $   -                   expenditures       $   2   $   -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    MDS Nordion revenues were down 3% year-over-year on a reported basis, as
they are being compared to unusually strong results in the second quarter of
2006. The 2006 results were driven by strong sales of medical isotopes during
a period when a major competitor announced a voluntary recall of its products
used primarily for cardiac imaging. While this same competitor had similar
difficulties in the second quarter of 2007, their outage period did not extend
as long and therefore had less of an impact on our 2007 results. We estimate
that revenues in the second quarter of 2006 were approximately $2 million
higher than the current year as a result of this situation. Excluding the
impact of this situation on both years, revenues were up 1% organically.
    Operating income was $22 million compared to $9 million last year in the
same period, due largely to special items. Adjusted EBITDA was $21 million
this year compared to $22 million in 2006, and the adjusted EBITDA margin for
the quarter was 30%, down slightly from last year on lower medical isotope
revenues.
    SG&A expenses and depreciation and amortization were down slightly
compared to the prior year. Other income for the quarter this year includes a
$3 million settlement of investment tax credits related to expenditures on the
MAPLE project in prior years and the release of a $1 million provision for
indemnifications granted to the purchaser of our Therapy Systems business when
it was sold in 2003 and on which the indemnification period has lapsed. Each
of these items has been treated as an adjusting item.
    Capital expenditures in the isotopes segment were $1 million, compared to
none last year. During the quarter, MDS Nordion announced plans to invest
$6 million to expand our Belgian production facility to meet the growing
demand for Glucotrace(R), a medical imaging agent used extensively in positron
emission tomography (PET) scans.
    During the quarter, we continued to deliver TheraSphere to dose patients
in India and Europe for the treatment of liver cancer. We also established
centres of excellence with medical centres in four European countries where
oncologists will be trained in the use of the product and related techniques.
In April, MDS Nordion announced a collaboration agreement with Avid
Radiopharmaceuticals, Inc. to support clinical studies of Avid's novel
radiopharmaceuticals designed to diagnose and monitor Alzheimer's disease. MDS
Nordion will provide the radiolabelling for Avid's proprietary compounds under
the terms of the collaboration.


    
    MDS Analytical Technologies
    Financial Highlights

           Second Quarter                                   Year-to-Date
    -------------------------------                    ----------------------
                       % Change                                      % Change
                   ----------------                                  --------
     2007    2006  Reported Organic                     2007    2006 Reported
    -------------------------------------------------------------------------
    $  88   $  57     54%      5%  Net revenues        $ 150   $ 118     27%
      (49)    (33)                 Cost of revenues      (87)    (71)
                                   Selling, general,
      (14)     (4)                  and administration   (19)     (7)
                                   Research and
       (7)     (1)                  development          (11)     (5)
                                   Depreciation and
       (7)     (5)                  amortization         (12)     (8)
                                   Other income
       (1)      -                   (expenses)            (1)      -
    -------------------------------------------------------------------------
       10      14                  Operating income       20      27
                                   Adjustment:
                                   Acquisition
        3       -                   integration            3       -
    -------------------------------------------------------------------------
                                   Adjusted operating
       13      14                   income                23      27
                                   Depreciation and
        7       5                   amortization          12       8
    -------------------------------------------------------------------------
    $  20   $  19      5%    (32%) Adjusted EBITDA      $ 35   $  35       -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                   Capital
    $   2   $   2                   expenditures        $  5   $   3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    The second quarter of 2007 includes the results of MDS Sciex, along with
the results of the newly acquired Molecular Devices business for the 41-day
period from the close of the acquisition on March 20, 2007 to the quarter-end.
    MDS Analytical Technologies grew 54% as reported, including the addition
of MD, and 5% on an organic basis. End-user revenues in the markets served by
our joint ventures grew 12% in the quarter. Growth remains strong in most
end-user markets and our 4000 series instruments have maintained strong sales
momentum. Services revenues continue to be a strong driver of growth and
profitability for the worldwide business and for our share of operating income
from the MDS/Applied Biosystems partnership, although accounting rules prevent
us from reporting this revenue in our financial results. Instrument sales to
customers in inorganic markets also continued their first quarter strength
with strong orders received in the second quarter this year, led by sales of
our Elan DRC products.
    We are very pleased with the results from the Molecular Devices division.
On a comparable three-month period covering our fiscal quarter, MD reported
revenues were 22% higher this year than a weak period last year. MD was also a
solid contributor to adjusted EBITDA in the quarter.
    MDS acquired Molecular Devices effective March 20, 2007, and we are
currently conducting work to determine the fair value of the assets and
liabilities of the acquired company and to finalize our integration planning
and determine the costs associated with the actions we intend to take. The
purchase price allocation reflected in the April 30, 2007 statement of
financial position and the charges recorded in the period related to the
amortization of intangible assets and fair value increments are preliminary
and subject to change. In particular, the fair value increment for inventory
and the value of backlog, are subject to significant judgment and amortize as
expenses to income over a short period. We therefore expect to record further
charges in the third quarter related to these items as acquisition date
inventories are sold and backlog from the pre-acquisition period is shipped.
We expect to advance the determination of the final purchase accounting
substantially in the third quarter and to finalize this by year-end.
    Operating income was $10 million for the second quarter of 2007 compared
to $14 million in the second quarter of 2006. Reported operating income for
2007 includes the results for MD from the date of acquisition, partially
offset by $2 million of inventory provisions and $3 million of integration
costs and purchase accounting adjustments. The 2006 quarterly operating income
included $3 million of R&D tax credits related to claims filed in previous
years and a $1 million foreign exchange gain on the revaluation of US dollar
debt.
    Adjusted EBITDA for the quarter was $20 million compared to $19 million
last year. Adjustments of $3 million for the quarter reflect costs of the
acquisition, including $1 million of costs we have incurred as we begin to
integrate the businesses and $2 million of non-cash fair market value
adjustments applied to inventory as part of the purchase accounting that are
expensed as those inventories are sold. There were no adjustments in the prior
year. Organic adjusted EBITDA fell 32% compared to a strong second quarter
last year. This decline is primarily driven by the investment tax credits and
foreign exchange gains recorded last year and the inventory provision recorded
this year.
    Increased expenses in MDS Analytical Technologies for the second quarter
of 2007 included higher SG&A expenses reflecting the additional costs
associated with the MD business, including their global sales and marketing
network. R&D expense was higher for 2007, due to the additional R&D costs
incurred by the MD division, for which no costs qualify for deferral, and due
to the recording of prior year investment tax credit in 2006, which offset a
portion of the R&D expense otherwise reported for that quarter. Depreciation
and amortization expense was also up, reflecting amortization of intangible
assets acquired as part of the MD acquisition.
    Capital expenditures (excluding capitalized development costs) were
$2 million this year and last.
    MDS Analytical Technologies announced a number of product innovations
during the second quarter, including strong product launches from the
Molecular Devices product lines. MDS Sciex and its joint venture partners
introduced enhancements to the Protein Pilot(TM) software and the 4800 MALDI
TOF/TOF(TM) mass spectrometer to support biomarker research; and the
FlashQuant(TM), a new technology platform that combines triple-quadrupole mass
spectrometry with MALDI technology to streamline the identification of viable
drug candidates through better analysis of the absorption, distribution,
metabolism, and excretion properties of compounds (ADME). Molecular Devices
announced the first live cell kinetic neurotransmitter transport uptake
assembly kit, which aims to improve the quality of assay results while
reducing processing time and cost.


    
    Corporate and Other
    Financial Highlights

     Second Quarter                                            Year-to-Date
    ----------------                                          ---------------
      2007    2006                                              2007    2006
    -------------------------------------------------------------------------
    $   (7) $  (10)  Selling, general, and administration     $  (12)    (16)
        (2)      -   Restructuring charges                        (7)     (2)
        (5)     (2)  Other income (expense)                       (4)     (3)
         -      (4)  Equity earnings                               -      (3)
    -------------------------------------------------------------------------
       (14)    (16)  EBITDA                                      (23)    (24)
                     Adjustments:
         -       -   Gain on sale of investments                  (2)      -
        (1)      2   Mark-to-market adjustments                    -       3
         6       6   Valuation provisions                          6       6
         2       -   Restructuring charges                         7       2
    -------------------------------------------------------------------------
    $   (7) $   (8)  Adjusted EBITDA                          $  (12) $  (13)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Corporate SG&A expenses were $3 million lower this year compared to 2006,
reflecting the conclusion of our initial SOx certification initiative, and
continuing efforts to contain head office spending. Restructuring charges in
the quarter relate to costs incurred as we completed our exit from the
diagnostics business and included staff and facility reductions in our
Corporate offices.
    Other expense for the quarter includes a $1 million mark-to-market gain
on certain debt derivatives and a $6 million valuation provision related to
MDS Capital Corp. As efforts to date to sell the remaining business have not
been successful, ongoing operations are being restructured, and we no longer
expect to fully recover the carrying value of the investment.
    Interest expense, which included $2 million of interest resulting from
our one-month utilization of our revolving credit facility, increased from
$4 million to $8 million as we no longer are able to capitalize interest
incurred related to the MAPLE project. Interest income increased to
    $10 million from $1 million as a result of interest earned on higher cash
balances in the current year quarter and on the cash proceeds resulting from
the sale of the diagnostics business.

    Income taxes

    Our effective income tax rate for the quarter was 27%, below our expected
rate of 36% due primarily to losses incurred in foreign jurisdictions for
which no tax benefit can be recognized. In addition, we are not able to
recognize a tax benefit on the valuation provision recorded on MDS Capital
Corp.
    Income from discontinued operations were taxed at an effective rate of
13%, reflecting capital gains tax rates on the gain on sale of the diagnostics
business. In addition, we have realized available tax loss carryforwards not
previously recognized.

    Discontinued Operations

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

    
                                              Second Quarter    Year-to-date
    -------------------------------------------------------------------------
                                                2007    2006    2007    2006
    -------------------------------------------------------------------------
    Net revenues                              $   20  $   98  $   95  $  198
    Cost of revenues                             (12)    (63)    (58)   (131)
    Selling, general and administration           (5)    (12)    (14)    (27)
    Depreciation and amortization                  -      (2)      -      (5)
    Restructuring charges                          -       -       -      (1)
    Equity earnings                                -       -       1       1
    -------------------------------------------------------------------------
    Operating income                               3      21      24      35
    Gain on sale of discontinued operations      905       -     905      24
    Dividend and interest income                   -       1       1       1
    Income taxes                                (114)     (3)   (117)     (6)
    Minority interest                             (1)     (3)     (4)     (5)
    -------------------------------------------------------------------------
    Income from discontinued
     operations - net of tax                  $  793  $   16  $  809  $   49
    -------------------------------------------------------------------------
    Basic earnings per share                  $ 5.77  $ 0.11  $ 5.74  $ 0.34
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Diluted earnings per share                $ 5.75  $ 0.11  $ 5.73  $ 0.34
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The results from discontinued operations for 2007 reflect only the
Canadian diagnostic services business. The results from discontinued
operations for 2006 include results from the Canadian diagnostic services
business and certain small MDS Pharma Services businesses discontinued in
2005.

    Liquidity and Capital Resources

                                            April 30  October 31
                                                2007        2006      Change
    -------------------------------------------------------------------------
    Cash, cash equivalents and
     short-term investments                  $   322      $  388        (17%)
    Operating working capital(1)             $    75      $  104        (28%)
    Current ratio                                1.6         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 past year, we utilized $66 million of cash, mostly to fund the
acquisition of Molecular Devices and our share repurchase. Net cash proceeds
from the sale of the diagnostics business amounted to $929 million, while net
cash outflows to purchase Molecular Devices and fund the share repurchase
totalled $1,044 million. These investments were partially offset by cash
generated by operations in the period of $54 million.
    We expect our operating cash inflows to remain strong during the latter
half of this year and throughout fiscal 2008. Cash outflows will include FDA
settlements with our customers and the payment of severance obligations
associated with our restructuring activities. In addition, we will make a
principal repayment of $79 million on our long-term debt in December 2007.
These liquidity needs can be satisfied from cash generated from operations and
cash on hand. We also have available a C$500 million, five-year committed,
revolving credit facility to fund our liquidity requirements. 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 MD, in the event we were
unable to close the sale of the diagnostics business prior to taking up MD
shares under our tender offer. We repaid this borrowing in March from the
proceeds resulting from the sale of the diagnostics business and there were no
borrowings under this facility as at April 30, 2007.
    Cash used in financing activities (excluding discontinued operations)
during the quarter was $437 million versus $5 million received from financing
activities last year. Current year financing activities included $441 million
used for the share repurchase. Given the execution of our issuer bid, we made
no purchases under our normal course issuer bid 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, FDA settlements, restructuring costs
and operations in 2007 and 2008. 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 other than those arising from the acquisition of MD, 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 third parties, nor do we have any off-balance sheet
arrangements. The acquisition of MD has added $6 million of annual commitments
related to operating leases and approximately $14 million of inventory
purchase commitments in 2007.

    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 of fair market values
of the financial instruments.
    The net mark-to-market value of all derivative instruments at April 30,
2007 was an asset of $2 million. We recorded a $1 million mark-to-market gain
on interest rate swaps during the second quarter of 2007.

    Capitalization

    
                                             April 30 October 31
                                                 2007       2006     Change
    -------------------------------------------------------------------------
    Long-term debt                            $   384    $   394         (3%)
    Less: cash and cash equivalents
     and short-term investments                   322        388        (17%)
    -------------------------------------------------------------------------
    Net debt                                       62          6        933%
    Shareholders' equity                        1,722      1,414         22%
    -------------------------------------------------------------------------
    Capital employed(1)                       $ 1,784    $ 1,420         26%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Debt to Total Capital                         18%        22%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Capital employed is a measure of how much of our net assets is
        financed by debt and equity.
    

    Long-term debt decreased $10 million due to $6 million of principal
payments in December and currency re-valuation. Changes in the value of the
US-dollar denominated debt, which is treated as a hedge in the US net
investment, are reflected in Accumulated Other Comprehensive Income in the
Statement of Financial Position. The current portion of the long-term debt is
$93 million compared to $20 million at October 31, 2006, reflecting the
transfer to current portion of $79 million of long-term debt which will be
repaid in December 2007.

    US GAAP Reconciliation

    Note 17 to our consolidated financial statements for the second 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 and the year-to-date is deferred development costs that are
capitalized for Canadian purposes and expensed under US GAAP and the write off
of acquired in-process research and development. The net impact of these items
was a $4 million increase in the loss from continuing operations in the
quarter for US GAAP purposes (2006-$1million).

    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      Apr      Jan      Oct     July
                                Quarters     2007     2007     2006     2006
    -------------------------------------------------------------------------
    Net revenues                 $ 1,041  $   273  $   250  $   260  $   258
    Operating income (loss)      $   (54) $   (80) $     3  $    18  $     5

    Income (loss) from
     continuing operations       $   (42) $   (57) $    (2) $    14  $     3
    Net income (loss)            $   815  $   736  $    14  $    47  $    19
    Earnings (loss) per share
     from continuing operations
      Basic and diluted          $ (0.32) $ (0.42) $ (0.02) $  0.10  $  0.02
    Earnings (loss) per share
      Basic and diluted          $  5.92  $  5.36  $  0.10  $  0.33  $  0.13
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

                                Trailing
                                    Four      Apr      Jan      Oct     July
                                Quarters     2006     2006     2005     2005
    -------------------------------------------------------------------------
    Net revenues                 $   972  $   242  $   242  $   257  $   231
    Operating income (loss)      $    (2) $     2  $    23  $   (39) $    12

    Income (loss) from
     continuing operations       $   (14) $    (2) $    14  $   (33) $     7
    Net income (loss)            $    35  $    14  $    47  $   (41) $    15
    Earnings (loss) per share
     from continuing operations
      Basic and diluted          $ (0.09) $ (0.01) $  0.10  $ (0.23) $  0.05
    Earnings (loss) per share
      Basic and diluted          $ (0.24) $  0.10  $  0.33  $ (0.29) $  0.10
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Items that impact the comparability of operating income include:

    -   Results for the quarter ended April 30, 2007 reflect a $792 million
        net gain from the sale of our diagnostics businesses, the 41 days of
        operating results of Molecular Devices, $61 million of charges
        related to assisting clients in respect of the FDA review, and
        $28 million of restructuring charges.
    -   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

    Our second quarter in 2007 included three significant transactions that
complete our transition to a global life sciences company. In addition, we
made meaningful progress in resolving the outstanding FDA matter, assisting a
majority of our generic pharmaceutical clients to conduct the study audits
required by the FDA. We believe our businesses are well positioned for growth.
    We launched MDS Analytical Technologies during the quarter, combining the
Molecular Devices acquisition with our MDS Sciex division. Since then, the
business has announced several new products and attended a highly successful
Society for Biomolecular Sciences conference in April. Customer interest in
our newly expanded product line is strong and we have seen continued strength
in orders.
    Our goal is to maintain an ongoing supply of high-quality products and
services as we introduce exciting new technologies to increase our customers'
productivity. Our focus for the balance of the year is to continue to serve
our customers well as we drive a smooth integration of the MDS Sciex and
Molecular Devices businesses. We believe that there are significant synergies
available to these businesses as they become one. We will achieve these as
rapidly as possible, while maintaining the hard-earned reputation of both
businesses for providing superior solutions to meet our customers' complex
needs.
    In recent quarters, management of MDS Pharma Services has focused
significant attention on resolving the FDA issue at our Montreal site. With
this matter on a path to final resolution, management has renewed its
attention on customers and building for the future. A substantial realignment
of the business has begun and we recorded a charge in the second quarter for
this. Looking forward, attention is focused on sustaining the strong
performance of our late-stage businesses and restoring the growth and
profitability of our early-stage business by building on the solid platforms
we have in early clinical research and drug safety. We are working hard to
reassure our clients that they can rely on MDS Pharma Services for work that
is of the highest quality.
    MDS Nordion has posted solid performance so far this year and has
continued to grow its business outside of its traditional medical isotopes
platforms. New commercial relationships with companies like Avid
Radiopharmaceuticals and others provide opportunities to expand in the
molecular imaging market. We see continued strong demand for TheraSphere in
Europe and, more recently, in India and we believe the potential for this
innovative therapy is high. We are also investing to serve the rapidly growing
market for PET scans by expanding our capacity to manufacturer Glucotrace, an
imaging agent, in Europe. We believe these initiatives, combined with others
that are in earlier stages of development, position this business well for the
future.
    We continue to monitor currency markets and there has been significant
volatility in the value of the US dollar since year-end. Although we have
hedged a significant portion of our net US-dollar cash flows from our
Canadian-based businesses, currency markets will continue to have an impact on
our reported results and we will continue to report organic measures of
revenue and adjusted EBITDA growth to help readers understand the impact of
these market dynamics.

    
    CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
    (UNAUDITED)


                                                            2007        2006
    As at April 30 with comparatives at October 31                  (Revised
    (millions of US dollars)                                          Note 7)
    -------------------------------------------------------------------------
    ASSETS
    Current
    Cash and cash equivalents                         $      301  $      253
    Short-term investments                                    21         135
    Accounts receivable                                      244         229
    Unbilled revenue                                         111         121
    Inventories                                              152          86
    Income taxes recoverable                                  63          42
    Prepaid expenses and other                                24          21
    Assets held for sale (note 7)                              1         196
    -------------------------------------------------------------------------
                                                             917       1,083

    Property, plant and equipment                            337         339
    Future tax assets                                          -          37
    Long-term investments and other                          218         170
    Goodwill                                                 782         417
    Intangibles                                              519         338
    -------------------------------------------------------------------------
    Total assets                                      $    2,773  $    2,384
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND SHAREHOLDERS' EQUITY
    Current
    Accounts payable and accrued liabilities          $      340  $      239
    Deferred revenue                                          92          93
    Income taxes payable                                      56           8
    Future tax liabilities                                     8           -
    Current portion of long-term debt                         93          20
    Liabilities related to assets held for sale (note 7)       -         114
    -------------------------------------------------------------------------
                                                             589         474

    Long-term debt                                           291         374
    Deferred revenue                                          16          17
    Other long-term obligations                               26          23
    Future tax liabilities                                   129          82
    -------------------------------------------------------------------------
                                                      $    1,051  $      970
    -------------------------------------------------------------------------
    Shareholders' equity
    Share capital (note 5)                                   462         572
    Retained earnings                                        923         495
    Cumulative translation adjustment                        n/a         347
    Accumulated other comprehensive income (note 4)          337         n/a
    -------------------------------------------------------------------------
                                                           1,722       1,414
    -------------------------------------------------------------------------
    Total liabilities and shareholders' equity        $    2,773  $    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              Six months
                                         to April 30             to April 30
    -------------------------------------------------------------------------
                                    2007        2006        2007        2006
    (millions of US dollars,                (Revised                (Revised
     except per share amounts)                Note 7)                 Note 7)
    -------------------------------------------------------------------------
    Net revenues              $      273  $      242  $      523  $      484
    Cost of revenues                (164)       (150)       (324)       (301)
    Selling, general and
     administration                  (67)        (56)       (120)       (105)
    Research and development
     (note 8)                         (7)         (1)        (12)         (6)
    Depreciation and
     amortization                    (20)        (16)        (37)        (29)
    Restructuring charges -
     net (note 9)                    (28)         (1)        (41)         (2)
    Other expenses - net
     (note 11)                       (67)        (11)        (66)        (12)
    Equity earnings                    -          (5)          -          (4)
    -------------------------------------------------------------------------
    Operating income (loss)          (80)          2         (77)         25
    -------------------------------------------------------------------------

    Interest expense                  (8)         (4)        (14)         (7)
    Dividend and interest
     income                           10           1          14           3
    -------------------------------------------------------------------------
    Income (loss) from
     continuing operations
     before income taxes             (78)         (1)        (77)         21
    Income taxes recovery
     (expense) (note 16)              21          (1)         18          (9)
    -------------------------------------------------------------------------
    Income (loss) from
     continuing operations           (57)         (2)        (59)         12
    Income from discontinued
     operations - net of
     tax (note 7)                    793          16         809          49
    -------------------------------------------------------------------------
    Net income                $      736  $       14  $      750  $       61
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic earnings (loss) per
     share (note 10)
    - from continuing
      operations              $    (0.42) $    (0.01) $    (0.42) $     0.09
    - from discontinued
      operations                    5.77        0.11        5.74        0.34
    -------------------------------------------------------------------------
    Basic earnings per share  $     5.35  $     0.10  $     5.32  $     0.43
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Diluted earnings (loss)
     per share (note 10)
    - from continuing
      operations              $    (0.41) $    (0.01) $    (0.42) $     0.09
    - from discontinued
      operations                    5.75        0.11        5.72        0.34
    -------------------------------------------------------------------------
    Diluted earnings per
     share                    $     5.34  $     0.10  $     5.30  $     0.43
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes



    CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
    (UNAUDITED)

                                        Three months              Six months
                                         to April 30             to April 30
    -------------------------------------------------------------------------
    (millions of US dollars)        2007        2006        2007        2006
    -------------------------------------------------------------------------
    Retained earnings,
     beginning of period      $      505  $      428  $      495  $      385
    Net income                       736          14         750          61
    Repurchase of shares            (318)          -        (318)          -
    Dividends - cash                   -          (3)         (3)         (6)
    Dividends - stock                  -          (1)         (1)         (2)
    -------------------------------------------------------------------------
    Retained earnings, end of
     period                   $      923  $      438  $      923  $      438
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes



    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
    (UNAUDITED)

                                                           Three         Six
                                                       months to   months to
                                                        April 30    April 30
    -------------------------------------------------------------------------
    (millions of US dollars)                                2007        2007
    -------------------------------------------------------------------------
    Net income                                        $      736  $      750
    Other comprehensive income (loss) - net of
     income tax:
    Unrealized gains (losses) on derivatives
     designated as cash flow hedges, net of tax of $3          7           4
    Reclassification of gains (losses) on derivatives
     designated as cash flows hedges to net income            (2)         (1)
    Unrealized gains (losses) on translation of debt
     designated as a hedge of self-sustaining foreign
     operations, net of tax of $3                             14           3
    Foreign currency translation gains (losses) on
     self-sustaining foreign operations                      (21)         (5)
    Translation gains (losses) resulting from the
     application of US dollar reporting                       64           9
    -------------------------------------------------------------------------
                                                              62          10
    -------------------------------------------------------------------------
    Comprehensive income                              $      798  $      760
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes



    CONSOLIDATED STATEMENTS OF CASH FLOWS
    (UNAUDITED)

                                        Three months              Six months
                                         to April 30             to April 30
    -------------------------------------------------------------------------
                                    2007        2006        2007        2006
                                            (Revised                (Revised
    (millions of US dollars)                  Note 7)                 Note 7)
    -------------------------------------------------------------------------
    Operating activities
    Net income                $      736  $       14  $      750  $       61
    Income from discontinued
     operations - net of tax         793          16         809          49
    -------------------------------------------------------------------------
    Income (loss) from
     continuing operations           (57)         (2)        (59)         12
    Adjustments to reconcile
     net income to cash
     provided by operating
     activities relating to
     continuing operations
     (note 13)
    Items not affecting
     current cash flow                82          20          95          32
    Changes in non-cash
     working capital balances
     relating to operations           98         (10)         70         (53)
    -------------------------------------------------------------------------
    Cash provided by (used in)
     operating activities of
     continuing operations           123           8         106          (9)
    Cash provided by (used in)
     operating activities of
     discontinued operations         (69)         21         (53)         34
    -------------------------------------------------------------------------
                                      54          29          53          25
    -------------------------------------------------------------------------
    Investing activities
    Acquisitions (note 6)           (603)          -        (603)          -
    Increase in deferred
     development charges               -          (2)         (2)         (3)
    Proceeds from MAPLE
     transaction                       -          24           -          24
    Purchase of property,
     plant and
     equipment (note 14)              (9)          -         (17)        (22)
    Proceeds on sale of
     short-term investments           25           -         151           -
    Purchases of short-term
     investments                     (15)          -         (37)          -
    Proceeds on sale of
     long-term investment              -           -          13           -
    Other                              1           1           -         (16)
    -------------------------------------------------------------------------
    Cash provided by (used in)
     investing activities of
     continuing operations          (601)         23        (495)        (17)
    -------------------------------------------------------------------------
    Cash provided by
     investing activities of
     discontinued operations         929           9         929          77
    -------------------------------------------------------------------------
    Financing activities
    Repayment of long-term
     debt                             (1)         (1)         (7)         (1)
    Decrease in deferred
     revenue and other
     long-term obligations            (1)          -           -          (9)
    Payment of cash dividends          -          (3)         (3)         (6)
    Issuance of shares                 6           9          10          19
    Repurchase of shares            (441)          -        (441)          -
    -------------------------------------------------------------------------
    Cash provided by (used in)
     financing activities of
     continuing operations          (437)          5        (441)          3
    -------------------------------------------------------------------------
    Cash used in financing
     activities of
     discontinued operations           -          (1)         (2)         (8)
    -------------------------------------------------------------------------
    Effect of foreign
     exchange rate changes on
     cash and cash
     equivalents                      16           8           4          17
    -------------------------------------------------------------------------
    Increase (decrease) in
     cash and cash equivalents
     during the period               (39)         73          48          97
    Cash and cash equivalents,
     beginning of period             340         248         253         224
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period            $      301  $      321  $      301  $      321
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes



    NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
    (All tabular amounts in millions of US 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
    recorded at cost as they are initiated and 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
    also initially recorded at cost and are subsequently measured at fair
    value with revaluation gains and losses included in other comprehensive
    income until the instrument is disposed, 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 instrument pledged as security on long-term debt is classified
    as a held-to-maturity investment. 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 $347 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
    April 30, 2007 are summarized as follows:

    -------------------------------------------------------------------------
    Classification
    -------------------------------------------------------------------------
    Held-for-trading                                              $      301
    Held-to-maturity                                                      39
    Loans and receivables                                                358
    Available-for-sale                                                    21
    Other liabilities                                             $      806
    -------------------------------------------------------------------------

    (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.

    (e) Future Changes in Accounting Policies

    Capital Disclosures

    The CICA issued a new accounting standard, Section 1535 - Capital
    Disclosures, which requires the disclosure of both qualitative and
    quantitative information that enables users of financial statements to
    evaluate the entity's objectives, policies and processes for managing
    capital. This new standard is effective for the Company beginning
    November 1, 2007.

    Financial Instruments

    The CICA issued two new accounting standards, Section 3862 - Financial
    Instruments - Disclosures, and Section 3863, Financial Instruments -
    Presentation, which apply to interim and annual financial statements
    relating to fiscal years beginning on or after October 1, 2007. The
    Company intends to adopt these new standards effective November 1, 2007.

    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
                                                              April 30, 2007
    -------------------------------------------------------------------------
    Unrealized gains on derivatives designated as cash
     flow hedges                                                  $        2
    Unrealized gains on translation of debt designated as
     a hedge                                                             119
    Foreign currency translation (losses) on self-sustaining
     foreign operations                                                 (162)
    Unrealized gain on translation resulting from the
     application of US dollar reporting                                  378
    -------------------------------------------------------------------------
    Accumulated other comprehensive income balance as at
     April 30, 2007                                               $      337
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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 $21 million respectively.

    5.  Share Capital and Stock Options

    The following table summarizes information on share capital and stock
    options and related matters as at April 30, 2007:

    (number of shares in thousands)                       Number      Amount
    -------------------------------------------------------------------------
    Common shares
    Balance as at October 31, 2006                       144,319  $      572
    Issued during the period                                 800          13
    Repurchased during the period                        (22,831)       (123)
    -------------------------------------------------------------------------
    Balance as at April 30, 2007                         122,288  $      462
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the quarter, the Company repurchased and cancelled 22,831 Common
    shares, under the terms of a substantial issuer bid.

                                                                     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                                                340       21.64
      Exercised                                             (710)      15.66
      Cancelled or forfeited                                (163)      20.10
    -------------------------------------------------------------------------
    Balance as at April 30, 2007                           5,317  $    19.31
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    There were 3,661 stock options exercisable as at April 30, 2007.

    6.  Acquisition of Molecular Devices Corporation

    On March 20, 2007, the Company completed a tender offer which resulted in
    MDS acquiring 100% of the shares of Molecular Devices Corporation (MD), a
    California-based company with global operations. MD designs, develops,
    manufactures, sells and services bioanalytical measurement systems that
    accelerate and improve drug discovery and other life sciences research.
    The Company acquired MD primarily to add their leading-edge products to
    those of MDS Sciex to strengthen MDS's position as one of the top global
    providers of analytical instrumentation and related products marketed to
    life sciences customers.

    The operations for this acquisition are reported within the results of
    the Company's newly formed MDS Analytical Technologies segment (which
    combines MD with the previous Instruments segment) in the consolidated
    financial statements from the acquisition date.

    The aggregate purchase consideration (net of cash acquired of
    $21 million) was approximately $603 million paid in cash from existing
    cash on hand. Included in the consideration is the cash cost of
    $27 million to settle all outstanding in-the-money options of MD at the
    closing date of the acquisition. Direct and incremental third party
    acquisition costs associated with the acquisition were approximately
    $8 million.

    The acquisition has been accounted for as a purchase in accordance with
    CICA Handbook Section 1581 "Business Combinations" and the Company has
    accordingly allocated the purchase price of the acquisition based upon
    the preliminary fair values of the assets acquired and liabilities
    assumed. The purchase price and related allocations have not been
    finalized and may be revised as a result of adjustments made to the
    purchase price as additional information regarding liabilities incurred
    and revisions are made to preliminary estimates of fair values made at
    the acquisition date. In connection with determining the fair value of
    the assets acquired and liabilities assumed, management, assisted by
    valuation consultants, performed assessments of intangible assets using
    customary valuation procedures and techniques.

    The components of the preliminary purchase price allocation for the
    acquisition cost of MD are as follows:

    -------------------------------------------------------------------------
    Consideration and acquisition costs:
      Cash and payments, net of cash acquired                     $      595
      Transaction costs                                                    8
    -------------------------------------------------------------------------

        Net consideration and acquisition costs                   $      603
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Allocation of purchase price
      Net tangible assets acquired                                $       50
      Intangible assets acquired:
        Developed technology                                             111
        In process research and development                               11
        Brands                                                            60
      Goodwill (non-tax deductible)                                      371
    -------------------------------------------------------------------------
      Total purchase price                                        $      603
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The following table summarizes the components of the tangible assets
    acquired at fair value:

    -------------------------------------------------------------------------
      Inventories                                                 $       60
      Property, plant and equipment                                       12
      Other assets and liabilities, net                                  (22)
    -------------------------------------------------------------------------
      Net tangible assets acquired                                $       50
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Other assets and liabilities includes $23 million of net future tax
    liabilities. Net tangible assets acquired include a charge of $4 million
    to eliminate redundant positions at MD over the course of the next year.
    The developed technology and in-process research and development will be
    amortized over their estimated lives, which are between five and seven
    years while the brands have an indefinite life and are not amortized.

    7.  Sale of Canadian Diagnostics Business and Discontinued Operations

    In 2005, The Board of Directors of the Company approved a strategic plan
    to focus the Company on its life sciences businesses and to close or
    divest of businesses that were not strategic to this plan. As a result,
    the Company had reclassified its Canadian diagnostics business as
    discontinued operations.

    On February 26, 2007, the Company completed the sale of its Canadian
    diagnostic services business to Borealis Infrastructure Management Inc.
    for gross proceeds of C$1.325 billion. The sale was structured as an
    asset purchase transaction and after provision for taxes, expenses and
    amounts attributable to minority interests, resulted in net proceeds of
    US$988 million comprising $929 million in cash and $65 million in an
    unconditional non-interest bearing note payable in March 2009. This note
    was recorded at an effective interest rate of 4.4% and had a book value
    of $59 million. Included in income from discontinued operations, the
    Company recorded a net gain of US$792 million on the transaction in the
    quarter.

    As a result of the sale, MDS sold $82 million in net assets consisting
    of:

    -------------------------------------------------------------------------
    Accounts receivable                                           $       31
    Property, plant and equipment                                         27
    Long-term investments and other                                       18
    Goodwill                                                              57
    Accounts payable and accrued liabilities                             (27)
    Long-term debt and other long-term obligations                       (24)
    -------------------------------------------------------------------------

    Net assets                                                    $       82
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The results of discontinued operations in the quarter and the six-months
    ended April 30 were as follows:

                                        Three months              Six months
                                         to April 30             to April 30
    -------------------------------------------------------------------------
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Net revenues              $       20  $       98  $       95  $      198
    Cost of revenues                 (12)        (63)        (58)       (131)
    Selling, general and
     administration                   (5)        (12)        (14)        (27)
    Depreciation and
     amortization                      -          (2)          -          (5)
    Restructuring charges              -           -           -          (1)
    Equity earnings                    -           -           1           1
    -------------------------------------------------------------------------
    Operating income                   3          21          24          35
    Gain on sale of
     discontinued operations         905           -         905          24
    Dividend and interest
     income                            -           1           1           1
    Income taxes                    (114)         (3)       (117)         (6)
    Minority interest - net
     of tax                           (1)         (3)         (4)         (5)
    -------------------------------------------------------------------------
    Income from discontinued
     operations - net of tax  $      793  $       16  $      809  $       49
    -------------------------------------------------------------------------
    Basic earnings per share  $     5.77  $     0.11  $     5.74  $     0.34
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Diluted earnings per
     share                    $     5.75  $     0.11  $     5.73  $     0.34
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The results from discontinued operations for 2007 reflect only the
    Canadian diagnostic services business. The results from discontinued
    operations for 2006 include results from the Canadian diagnostic services
    business and certain small MDS Pharma Services businesses discontinued in
    2005. 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
                                                        April 30  October 31
                                                            2007        2006
    -------------------------------------------------------------------------
    Assets held for sale
    Accounts receivable                               $        -  $       31
    Inventories                                                -           3
    Prepaid expenses and other                                 -           3
    Property, plant and equipment                              -          28
    Future tax asset                                           -          63
    Long-term investments and other                            1          13
    Goodwill                                                   -          54
    Intangibles                                                -           1
    -------------------------------------------------------------------------
    Total assets held for sale                                 1         196
    Less: Current assets held for sale(1)                     (1)       (196)
    -------------------------------------------------------------------------
    Long-term assets held for sale                    $        -  $        -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities related to assets held for sale
    Accounts payable and accrued liabilities          $        -  $       33
    Income taxes payable                                       -           -
    Long-term debt                                             -           4
    Other long-term obligations                                -           6
    Future tax liabilities                                     -          55
    Minority interest                                          -          16
    -------------------------------------------------------------------------
    Total liabilities related to assets held for sale          -         114
    Less: Current liabilities related to assets held
          for sale(1)                                          -        (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              Six months
                                         to April 30             to April 30
    -------------------------------------------------------------------------
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Gross expenditures        $       16  $       12  $       29  $       25
    Investment tax credits            (1)         (4)         (2)         (5)
    Recoveries from partners          (6)         (6)        (11)        (12)
    Development costs
     deferred                         (2)         (1)         (4)         (2)
    -------------------------------------------------------------------------
    Research and development
     expense                  $        7  $        1  $       12  $        6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    For the three months ended April 30, 2007 depreciation and amortization
    includes $1 million (2006 - $2 million) related to equipment used for
    research and development, and $3 million from amortization of deferred
    development costs (2006 - $3 million).

    9.  Restructuring Charges

    An analysis of the activity in the provision through April 30, 2007 is as
    follows:

                                           Cumulative drawdowns    Provision
                                         ------------------------ Balance at
                           Restructuring                            April 30,
                                  Charge        Cash    Non-cash        2007
    -------------------------------------------------------------------------
    2005:
      Workforce reductions    $       34  $      (32) $       (1) $        1
      Equipment and other
       asset write-downs
       - adjustment                    7           -          (7)          -
      Contract cancellation
       charges                        10          (2)         (8)          -
    -------------------------------------------------------------------------
                              $       51  $      (34) $      (16) $        1
    -------------------------------------------------------------------------
    2006:
      Workforce reductions    $        1  $       (1) $        -  $        -
      Contract cancellation
       charges                        (8)         (1)          9           -
    -------------------------------------------------------------------------
                              $       (7) $       (2) $        9  $        -
    -------------------------------------------------------------------------
    2007:
      Workforce reductions    $       19  $       (3) $        -  $       16
      Equipment and other
       asset write-downs               5           -          (3)          2
      Contract cancellation
       charges                         5          (5)          -           -
      Other                           12          (5)         (2)          5
    -------------------------------------------------------------------------
                              $       41  $      (13) $       (5) $       23
    -------------------------------------------------------------------------
                                                                  $       24
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the quarter ended April 30, 2007, management of the Company
    approved a restructuring plan designed principally to improve the
    profitability of MDS Pharma Services. The Company recorded a
    restructuring provision of $28 million in the quarter including
    $17 million for severance, $5 million to reduce the carrying value of
    certain assets and $6 million for other costs.

    10. Earnings Per Share

    a)  Dilution

                                     Three months to           Six months to
                                            April 30                April 30
    -------------------------------------------------------------------------
    (number of shares in millions)  2007        2006        2007        2006
    -------------------------------------------------------------------------
    Weighted average number
     of Common shares outstanding
     - basic                         137         143         141         143
    Impact of stock options
     assumed exercised                 1           1           -           1
    -------------------------------------------------------------------------
    Weighted average number of
     Common shares outstanding
     - diluted                       138         144         141         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 to           Six months to
                                            April 30                April 30
    -------------------------------------------------------------------------
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Net income                $      736  $       14  $      750  $       61
    Compensation expense for
     options granted prior to
     November 1, 2003                 (1)          -          (1)         (1)
    -------------------------------------------------------------------------
    Net income - pro-forma    $      735  $       14  $      749  $       60
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Pro-forma basic earnings
     per share                $     5.35  $     0.10  $     5.32  $     0.43
    Pro-forma diluted
     earnings per share       $     5.34  $     0.10  $     5.30  $     0.43
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    c)  Stock Options

    During the quarter, the Company granted 280,500 options (2006 - 49,700)
    at an average exercise price of C$21.84 (2006 - C$19.72). These options
    have a fair value determined using the Black-Scholes model of C$4.62 per
    share (2006 - C$4.39) based on the following assumptions:

                                                            2007        2006
    -------------------------------------------------------------------------
    Risk-free interest rate                                3.9 %       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 to           Six months to
                                            April 30                April 30
    -------------------------------------------------------------------------
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Write-down of other
     long-term assets         $        -  $        -  $        -  $       (1)
    Write-down of investments         (6)          -          (6)          -
    Gain on sale of investment         -           -           2           -
    Loss on sale of Hamburg
     clinic                           (4)          -          (4)          -
    Gain on sale of business           1           -           1           -
    Acquisition integration
     costs                            (1)          -          (1)          -
    FDA Provision                    (61)          -         (61)          -
    Unrealized gain (loss)
     on interest rate swaps            1          (2)          -          (2)
    MAPLE settlement                   3          (9)          3          (9)
    -------------------------------------------------------------------------
    Other income (expense)
     - net                    $      (67) $      (11) $      (66) $      (12)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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 to           Six months to
                                            April 30                April 30
    -------------------------------------------------------------------------
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Depreciation and amor-
     tization                 $       20  $       16  $       37  $       29
    Stock option compensation          -           1           1           3
    Deferred revenue                   -          (2)         (2)         (5)
    Future income taxes               48          (7)         46          (9)
    Equity earnings - net of
     distribution                      -           7           -           7
    Write-down of MAPLE
     assets                            -           9           -           9
    Write-down of investments          6           -           6           -
    Loss on sale of Hamburg
     clinic                            4           -           4           -
    Equipment and other asset
     write-downs                       5           -           5           -
    Gain on dilution of
     investment                        -           -          (2)          -
    Other                             (1)         (4)          -          (2)
    -------------------------------------------------------------------------
                              $       82  $       20  $       95  $       32
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

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

                                     Three months to           Six months to
                                            April 30                April 30
    -------------------------------------------------------------------------
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Accounts receivable       $       (1) $      (40) $       15  $       (4)
    Unbilled revenue                  27         (37)         11         (29)
    Inventories                       (2)         40          (6)         38
    Prepaid expenses and
     other                            37           8          10          (5)
    Accounts payable and
     deferred revenue                 59          23          49         (54)
    Income taxes                     (22)         (4)         (9)          1
    -------------------------------------------------------------------------
                              $       98  $      (10) $       70  $      (53)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    14. Segmented Information

                                               Three months to April 30, 2007
    -------------------------------------------------------------------------
                                                     MDS
                      MDS Pharma       MDS    Analytical  Corporate
                        Services   Nordion  Technologies  and Other    Total
    -------------------------------------------------------------------------
    Net revenues         $   115   $    70       $    88    $     -  $   273
    Cost of revenues         (78)      (37)          (49)         -     (164)
    Selling, general and
     administration          (34)      (12)          (14)        (7)     (67)
    Research and
     development               -         -            (7)         -       (7)
    Depreciation and
     amortization             (9)       (3)           (7)        (1)     (20)
    Restructuring charges
     - net                   (26)        -             -         (2)     (28)
    Other income
     (expense) - net         (65)        4            (1)        (5)     (67)
    Equity earnings
     (loss)                    -         -             -          -        -
    -------------------------------------------------------------------------
    Operating income
     (loss)              $   (97)  $    22       $    10    $   (15) $   (80)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Total assets         $   827   $   659       $   851    $   435  $ 2,772
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capital
     expenditures        $     5   $     1       $     2    $     1  $     9
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                              Three months to April 30, 2006
    -------------------------------------------------------------------------
                                                     MDS
                      MDS Pharma       MDS    Analytical  Corporate
                        Services   Nordion  Technologies  and Other    Total
    -------------------------------------------------------------------------
    Net revenues         $   113   $    72       $    57    $     -  $   242
    Cost of revenues         (80)      (37)          (33)         -     (150)
    Selling, general and
     administration          (29)      (13)           (4)       (10)     (56)
    Research and
     development               -         -            (1)         -       (1)
    Depreciation and
     amortization             (7)       (4)           (5)         -      (16)
    Restructuring charges
     - net                    (1)        -             -          -       (1)
    Other income
     (expense) - net           -        (9)            -         (2)     (11)
    Equity earnings
     (loss)                   (1)        -             -         (4)      (5)
    -------------------------------------------------------------------------
    Operating income
     (loss)              $    (5)  $     9       $    14     $  (16)  $    2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Total assets         $   790   $   661       $   168     $  499  $ 2,118
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capital
     expenditures        $     7   $   (10)      $     2     $    1  $     -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                Six months to April 30, 2007
    -------------------------------------------------------------------------
                                                     MDS
                      MDS Pharma       MDS    Analytical  Corporate
                        Services   Nordion  Technologies  and Other    Total
    -------------------------------------------------------------------------
    Net revenues         $   236   $   137       $   150    $     -  $   523
    Cost of revenues        (166)      (71)          (87)         -     (324)
    Selling, general and
     administration          (66)      (23)          (19)       (12)    (120)
    Research and
     development               -        (1)          (11)         -      (12)
    Depreciation and
     amortization            (18)       (6)          (12)        (1)     (37)
    Restructuring charges
     - net                   (34)        -             -         (7)     (41)
    Other income
     (expense) - net         (65)        4            (1)        (4)     (66)
    Equity earnings
     (loss)                    -         -             -          -        -
    -------------------------------------------------------------------------
    Operating income
     (loss)              $  (113)  $    40       $    20    $   (24) $   (77)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capital
     expenditures        $     7   $     2       $     5    $     3  $    17
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                Six months to April 30, 2006
    -------------------------------------------------------------------------
                                                     MDS
                      MDS Pharma       MDS    Analytical  Corporate
                        Services   Nordion  Technologies  and Other    Total
    -------------------------------------------------------------------------
    Net revenues         $   224   $   142       $   118    $     -  $   484
    Cost of revenues        (159)      (71)          (71)         -     (301)
    Selling, general and
     administration          (58)      (24)           (7)       (16)    (105)
    Research and
     development               -        (1)           (5)         -       (6)
    Depreciation and
     amortization            (14)       (7)           (8)         -      (29)
    Restructuring charges
     - net                     -         -             -         (2)      (2)
    Other income
     (expense) - net           -        (9)            -         (3)     (12)
    Equity earnings
     (loss)                   (1)        -             -         (3)      (4)
    -------------------------------------------------------------------------
    Operating income
     (loss)              $    (8)  $    30       $    27    $   (24) $    25
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capital
     expenditures        $    14   $     -       $     3    $     5  $    22
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    15. Financial Instruments

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

                                      As at April 30          As at April 30
    -------------------------------------------------------------------------
                                                2007                    2006
    -------------------------------------------------------------------------
                                Carrying        Fair    Carrying        Fair
                                  Amount       Value      Amount       Value
    -------------------------------------------------------------------------
    Asset (liability) position:
      Currency forward and
       option - asset         $        4  $        4  $        2  $        8
      Currency forward and
       option - liabilities   $        -  $        -  $        -  $       (1)
    Interest rate swap and
     option contracts         $       (2) $       (2) $       (4) $       (4)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As of April 30, 2007, the Company had outstanding foreign exchange
    contracts in place to sell US$90 million at a weighted average exchange
    rate of C$1.1541 maturing over the next ten months. The Company also had
    interest rate swap contracts that 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 the reported income tax
    recovery is provided below.

    The Company's tax recovery for the quarter was lower than expected as
    portions of the restructuring charge related to foreign jurisdictions
    where full valuation allowances have been recorded against existing tax
    assets. In addition, the Company was unable to recognize any tax benefit
    on the Hamburg clinic loss or valuation provision recorded this quarter.


                                                    Three months to April 30
    -------------------------------------------------------------------------
                                                            2007        2006
    -------------------------------------------------------------------------
    Expected income tax expense (recovery) at
     MDS's 35% (2006 - 35%) statutory rate            $      (27) $        -
    Increase (decrease) to taxes expense as a
     result of:
      Foreign tax losses not recognized                        4           -
      Valuation provision on MDS Capital Corp.                 2           -
      Loss on sale of Hamburg clinic                           1           -
      Other                                                   (1)          1
    -------------------------------------------------------------------------
    Reported income tax expense (recovery)            $      (21) $        1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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 to           Six months to
                                            April 30                April 30
    -------------------------------------------------------------------------
                                    2007        2006        2007        2006
    -------------------------------------------------------------------------
    Net income (loss) from
     continuing operations in
     accordance with Canadian
     GAAP                     $      (57) $       (2) $      (59) $       12
    US GAAP adjustments:                           -
      Deferred development
       costs                          (1)         (1)         (2)         (1)
      Deferred development
       costs written off               3           -           3           -
      In-process research and
       development                   (11)          -         (11)          -
      Reduction in income tax
       expense arising from
       GAAP adjustments                5           -           5
    -------------------------------------------------------------------------
    Net income (loss) from
     continuing operations in
     accordance with US GAAP         (61)         (3)        (64)         11
    Income from discontinued
     operations in accordance
     with Canadian and
     US GAAP - net of tax            793          16         809          49
    -------------------------------------------------------------------------
    Net income in accordance
     with US GAAP             $      732  $       13  $      745  $       60
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic earnings (loss) per
     share in accordance with
     US GAAP
      - from continuing
        operations            $    (0.45) $    (0.02) $    (0.45) $     0.08
      - from discontinued
        operations                  5.77        0.11        5.74        0.34
    -------------------------------------------------------------------------
    Basic earnings per share  $     5.32  $     0.09  $     5.29  $     0.42
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Diluted earnings (loss)
     per share in accordance
     with US GAAP
      - from continuing
        operations            $    (0.44) $    (0.02) $    (0.45) $     0.08
      - from discontinued
        operations                  5.75        0.11        5.73        0.34
    -------------------------------------------------------------------------
    Diluted earnings per
     share                    $     5.31  $     0.09  $     5.28  $     0.42
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    18. 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, Senior Vice-President, Investor Relations and
External Communications, (416) 213-4721, sharon.mathers@mdsinc.com;   Media
Inquiries: Catherine Melville, Director, External Communications,  (416)
675-6777 ext. 32265, catherine.melville@mdsinc.com

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