MDS Reports Third Quarter 2008 Financial Results



    Continuing to Take Action to Improve Profitability

    TORONTO, Sept. 4 /CNW/ - MDS Inc. (TSX: MDS; NYSE:   MDZ), a leading
provider of products and services to the global life sciences markets, today
reported its third quarter 2008 results for the period ended July 31, 2008.
For the quarter, MDS reported total revenue of $321 million, net loss of
$10 million and loss per share from continuing operations of $0.08 including
restructuring and asset impairment charges. Net revenue was $298 million and
adjusted EBITDA was $41 million compared to $308 million and $49 million in
the prior year, respectively. Adjusted earnings per share were $0.06, down
from $0.13 in the prior year.

    
    Quarterly Highlights

    -   Reported net revenue of $298 million, down 3% from $308 million in
        the prior year. Excluding the impact of foreign exchange plus
        acquisitions and divestitures, net revenue decreased 5%.

    -   Reported adjusted EBITDA of $41 million, down 16% from $49 million in
        the prior year.

    -   Reported adjusted earnings per share of $0.06, down from $0.13 in the
        prior year.

    -   MDS Pharma Services reported $122 million in net revenue up from
        $118 million in the prior year and a loss of $2 million in adjusted
        EBITDA compared to a gain of $4 million in the prior year. The
        business delivered another quarter of strong new business wins, up
        42% from prior year to $169 million.

    -   MDS Nordion continued to deliver solid performance in the third
        quarter, with adjusted EBITDA of $23 million versus $22 million last
        year. Reported revenue was $72 million, compared to $76 million last
        year which included $7 million in revenue for product lines sold in
        2008.

    -   MDS Analytical Technologies reported $104 million in revenue and
        adjusted EBITDA of $21 million compared to $114 million and
        $27 million in the prior year, respectively.

    -   During the quarter, MDS repurchased 1.0 million Common shares for
        $15 million under its Normal Course Issuer Bid. Year-to-date
        1.9 million shares have been repurchased for $32 million.

    "During the quarter, we took actions to improve profitability across our
businesses and were able to achieve a step-up in adjusted EBITDA versus Q2,"
said Stephen P. DeFalco, President and Chief Executive Officer, MDS Inc. "We
remain focused on profit improvement initiatives at MDS Pharma Services until
we can get the full benefit of our strong orders trajectory."

    Operating Segment Results

    MDS Pharma Services
                                                                    % Change
                                                                   ----------
    ($ millions)                           Q3 2008      Q3 2007     Reported
    -------------------------------------------------------------------------
    Net Revenues:
    Early-stage                                 68           62          10%
    Late-stage                                  54           56          -4%
    -------------------------------------------------------------------------
                                           $   122      $   118           3%
    Reimbursement revenues                      23           25
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total revenues                         $   145      $   143
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Adjusted EBITDA:                       $    (2)     $     4            -
                                           %    (2)     %     3            -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    For the third quarter, MDS Pharma Services net revenue increased 3% over
the prior year driven by revenue growth in early-stage. Foreign exchange rates
had a positive impact on revenues of approximately $6 million or 5%. Adjusted
EBITDA was a loss of $2 million compared to a gain of $4 million last year
attributed to the impact of lower revenue excluding foreign exchange,
unfavourable revenue mix and investments in growth which offset productivity
savings. New business wins of $169 million were up 42% from prior year, and
increased period ending backlog sequentially by $55 million to $486 million.
    As previously announced, MDS Pharma Services initiated headcount
reductions and the closure of several offices to improve profitability which
resulted in an $8 million restructuring charge during the quarter. The balance
of restructuring actions and related charges of $6 million - $8 million are
expected in the fourth quarter.

    
    MDS Nordion
                                                                    % Change
                                                                   ----------
    ($ millions)                           Q3 2008      Q3 2007     Reported
    -------------------------------------------------------------------------
    Revenues                               $    72      $    76          -5%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Adjusted EBITDA:                       $    23      $    22           5%
                                           %    32      %    29            -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    MDS Nordion's revenue for the third quarter was $72 million compared to
$76 million last year. The year-over-year decline was largely attributed to
the sale of two product lines, external beam therapy and self-contained
irradiators, which contributed $7 million in revenue last year. For the
quarter, the positive impact of foreign exchange rates increased revenue by
$2 million. Adjusted EBITDA was $23 million up 5% compared to $22 million in
the third quarter of 2007. Adjusted EBITDA improvement was driven by strong
performance in the sterilization product lines.
    In the third quarter, MDS took action to address the issue of long-term
isotope supply by filing a notice of arbitration and a court claim against
Atomic Energy Canada Limited and the Government of Canada in response to their
intention to discontinue the MAPLE project.

    
    MDS Analytical Technologies
                                                                    % Change
                                                                   ----------
    ($ millions)                           Q3 2008      Q3 2007     Reported
    -------------------------------------------------------------------------
    Revenues                               $   104      $   114          -9%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Adjusted EBITDA                        $    21      $    27         -22%
                                           %    20      %    24            -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    MDS Analytical Technologies reported $104 million in revenue compared to
$114 million in the prior year. The year-over-year decline was largely driven
by lower shipments of mass spectrometer instruments to the joint ventures.
Despite the timing of shipments, end-user revenue for mass spectrometers grew
5%. We saw particular strengths in applied markets and across Asia, but are
being challenged by soft demand for high-end instruments in North America.
Changes in foreign exchange rates during the quarter had a positive impact on
total revenues of $4 million. Adjusted EBITDA for the quarter was $21 million
compared to a strong prior year of $27 million. Sequential growth in end-user
revenue resulted in margin improvement versus the second quarter. To further
improve profitability, MDS Analytical Technologies initiated staff reductions
in North America, which resulted in a $4 million restructuring charge in the
third quarter.
    During the quarter, MDS Analytical Technologies acquired Blueshift
Biotechnologies, a developer of screening platforms for life sciences research
and maker of the IsoCyte(TM) benchtop laser scanning cytometer. This
acquisition expands MDS Analytical Technologies' capabilities in cellular
analysis, and further strengthens the Company's global sales and service
offering. The integration of Blueshift Biotechnologies is progressing well and
market enthusiasm for IsoCyte continues to gain momentum with additional
orders placed during the quarter.

    Guidance

    As a result of slower than expected ramp up of revenue at MDS Pharma
Services, related to the delay in the start of certain customer studies, MDS
has revised its guidance for 2008 net revenue to $1,230 million -
$1,250 million. Adjusted EBITDA and adjusted EPS guidance for the year are
unchanged as cost reduction actions initiated during the quarter are expected
to offset the impact of lower revenues. As a result of the restructuring and
asset impairment charges announced in the third quarter and certain other
adjusting items, net income and basic EPS guidance have been revised to
$18 million - $28 million and $0.15 - $0.23, respectively. In addition,
capital expenditures in 2008 have been reduced by $10 million to $50 million -
$60 million.

    
    ($ millions, except per share amount)
    -------------------------------------------------------------------------
                                    2007    September 2008         June 2008
                          Actual Results          Guidance          Guidance
    -------------------------------------------------------------------------
    Total Revenues       $         1,210   $ 1,330 - 1,350   $ 1,350 - 1,400
    Net Revenues         $         1,119   $ 1,230 - 1,250   $ 1,250 - 1,290
    Adjusted EBITDA      $           145   $     160 - 170   $     160 - 170
    Adjusted EPS         $          0.34   $   0.27 - 0.33   $   0.27 - 0.33
    Income (loss) from
     continuing
     operations          $           (33)  $       18 - 28   $       45 - 55
    Basic EPS            $         (0.25)  $   0.15 - 0.23   $   0.37 - 0.45
    Capital
     Expenditures        $            71   $       50 - 60   $       60 - 70
    Effective tax rate               41%         10% - 20%         10% - 20%

    The above guidance is based on assumptions described in our MD&A.
    

    Conference Call

    MDS will hold a conference call today at 9:30 a.m. EDT to discuss third
quarter 2008 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 5,500 highly skilled people in 29 countries. Find out more at
www.mdsinc.com or by calling 1-888-MDS-7222, 24 hours a day.

    Caution Concerning Forward-Looking Statements

    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. MDS's actual results could differ materially from those
expressed in the forward-looking statements due to these risks and a number of
other factors, including, but not limited to, successful implementation of
structural changes, including restructuring plans and acquisitions, technical
or manufacturing or distribution issues, the competitive environment for MDS's
products and services, the degree of market penetration of its products and
services, the ability to secure a reliable supply of raw materials, the impact
of our clients' exercising rights to cancel certain contracts, the strength of
the Canadian and U.S. economies, the impact of the movement of the U.S. dollar
relative to other currencies, particularly the Canadian dollar and the euro,
uncertainties associated with critical accounting assumptions and estimates,
and other factors set forth in reports and other documents filed by MDS with
Canadian and U.S. securities regulatory authorities from time to time,
including MDS's quarterly and annual MD&A, annual information form, and annual
report on Form 40-F for the fiscal year ended October 31, 2007 filed with the
Securities & Exchange Commission.
    Also note that all financial data is now shown on a U.S. GAAP basis. MDS
converted to U.S. GAAP reporting with the filing of its 2007 annual report and
financial statements on January 29, 2008.

    Use of Non-GAAP Financial Measures

    The use of non-GAAP measures including terms such as net revenue,
adjusted EBITDA, adjusted EPS, new orders and backlog are used to explain the
operating performance of the Company. These terms are not defined by GAAP and
MDS's use may vary from that of other companies. MDS uses certain non-GAAP
measures so that investors and analysts have a better understanding of the
significant events and transactions that have had an impact on results or may
have an impact on MDS's financial outlook. MDS provides a description of these
non-GAAP measures and a reconciliation of these non-GAAP measures for 2007
actual results to GAAP financial results in the MD&A of its 2007 annual
report.

    
                     MANAGEMENT'S DISCUSSION AND ANALYSIS

    

    September 4, 2008

    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 July 31,
2008 and its financial position as at July 31, 2008. This MD&A should be read
in conjunction with the unaudited consolidated financial statements and notes
that follow. In 2007, MDS chose to adopt United States generally accepted
accounting principles ( GAAP) for financial reporting. As a result of this
change, the Company restated to U.S. GAAP its previously filed financial
statements for the four quarters of 2007. With U.S. GAAP as our primary basis
of accounting, we will reconcile our U.S. GAAP earnings to Canadian generally
accepted accounting principles (Canadian GAAP). This reconciliation will be
done as required by applicable Canadian regulations on an annual and quarterly
basis for fiscal 2008 and 2009. The results discussed in this MD&A are based
on U.S. GAAP. To supplement the U.S. GAAP MD&A included in this document,
please refer to our separately filed Canadian Supplement to this MD&A that
restates, based on financial information of MDS reconciled to Canadian GAAP,
those parts of our MD&A that would contain material differences if they were
based on financial statements prepared in accordance with Canadian GAAP.
    For additional information and details, readers are referred to the 2007
annual financial statements and MD&A and the Company's 2007 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.sec.gov.
    Our MD&A is intended to enable readers to gain an understanding of MDS's
current results and financial position as at and for the period ended July 31,
2008. To do so, we provide information and analysis comparing the results of
operations and financial position for the current interim 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 (SEC), 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 2008, our medium-term goals, and
strategies to achieve those objectives and goals, as well as statements with
respect to our beliefs, plans, objectives, expectations, anticipations,
estimates and intentions. The words "may", "could", "should", "would",
"suspect", "outlook", "believe", "plan", "anticipate", "estimate", "expect",
"intend", "forecast", "objective", "optimistic", and words and expressions of
similar import are intended to identify forward-looking statements.
    By their very nature, forward-looking statements involve inherent risks
and uncertainties, both general and specific, which give rise to the
possibility that predictions, forecasts, projections and other forward-looking
statements will not be achieved. We caution readers not to place undue
reliance on these statements as a number of important factors could cause our
actual results to differ materially from the beliefs, plans, objectives,
expectations, anticipations, estimates and intentions expressed in such
forward-looking statements. These factors include, but are not limited to:
management of operational risks; the strength of the 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 medical isotopes; the impact of the movement
of the U.S. 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 and services introduced by us or by
our competitors; the impact of our clients' exercising rights to cancel
certain contracts; the impact of changes in laws, trade and import/export
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; new accounting policies and guidelines that impact the methods
we use to report our financial condition; uncertainties associated with
critical accounting assumptions and estimates; the possible impact on our
businesses from 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.

    Use of Non-GAAP Measures

    In addition to measures based on generally accepted accounting principles
(GAAP) in this MD&A, we use terms such as adjusted operating income; adjusted
earnings before interest, taxes, depreciation and amortization (EBITDA);
adjusted EBITDA margin; adjusted net income, adjusted earnings per share
(EPS); operating working capital; net revenue; new orders and backlog. These
terms are not defined by GAAP and our use of such terms, or measurement of
such items, may vary from that of other companies. In addition, measurement of
growth is not defined by GAAP and our use of these terms or measurement of
these items may vary from that of other companies. Where relevant, and
particularly for earnings-based measures, we provide tables in this document
that reconcile the non-GAAP measures used to amounts reported on the face of
the consolidated financial statements. Our executive management team assesses
the performance of our businesses based on a review of results comprising GAAP
measures and these non-GAAP measures. We also report on our performance to the
Company's Board of Directors based on these GAAP and non-GAAP measures. In
addition, adjusted EBITDA and operating working capital are the primary
metrics for our annual incentive compensation plan for senior management. We
provide this non-GAAP detail so that readers have a better understanding of
the significant events and transactions that have had an impact on our
results, and can view our results through the eyes of management.
    Throughout this report, when we refer to total revenues we mean revenues
including reimbursement revenues. We use the term net revenues to mean
revenues excluding such amounts. All revenue growth figures and adjusted
EBITDA margin figures are based on net revenues. We use net revenues to
measure the growth and profitability of MDS and MDS Pharma Services because
the pass-through invoicing of reimbursable out-of-pocket expenses varies from
period-to-period, is not a reliable measure of the underlying performance of
the business, and does not have an impact on net income or cash flows in any
significant way. Management assesses and rewards the performance of MDS Pharma
Services and the segment's senior management team using metrics that are based
on net revenues.
    MDS Pharma Services measures and tracks contract backlog. Contract
backlog is a non-GAAP measure that we define to include the amount of contract
value associated with confirmed contracts that have not yet been recognized as
net revenue. A confirmed contract is one for which the Company has received
customer commitment in a manner that is customary for the type of contract
involved. For large, long-term contracts, customer commitment is generally
evidenced by the receipt of a signed contract or confirmation awarding the
work to MDS. For smaller and short-term contracts, customer commitment may be
communicated in other ways, including email messages and oral confirmations.
Only contracts for which such commitments have been received are included in
backlog and the amount of backlog for these contracts is measured based on the
net revenue that is expected to be earned by MDS under the contract terms. A
contract is removed from backlog if the Company receives notice from the
customer that the contract has been cancelled, indefinitely delayed, or
reassigned to another service provider. As of January 31, 2008, we began to
report new orders, which are the confirmed contracts for which we have
received a customer commitment within the fiscal quarter. We have also started
to report period ending backlog which measures our backlog at the period
ending date and we continue to report the average backlog which is the average
of the three month end backlog balances for the interim period.
    Substantially all of the mass spectrometer product family or Sciex brand
products of MDS Analytical Technologies are sold through two 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 from the joint ventures as profit sharing. Under
U.S. GAAP, we report our direct revenues from sales to the joint ventures as
revenues and we report our share of the profits of the joint ventures as
equity earnings. We do not report our share of all end-user revenues, despite
the fact that these revenues contribute substantially to our profitability. In
order to provide readers with a better understanding of the drivers of
profitability for the mass spectrometer product family, we report growth in
end-user revenues as reported by our joint venture partners. This figure
provides management and readers with additional information on the performance
of our global business, including trends in customer demand and our
performance relative to the overall market.
    Tabular amounts are in millions of United States (US) dollars, except per
share amounts and where otherwise noted.

    Adoption of U.S. GAAP

    Effective with the reporting of our fiscal 2007 annual results, we
adopted U.S. GAAP as our primary reporting standard for our consolidated
financial statements. We have adopted U.S. GAAP to improve the comparability
of our financial information with that of our competitors, the majority of
whom are US-based multinational companies. All figures for prior periods
contained in these documents have been revised to reflect the adoption of U.S.
GAAP as our reporting standard.

    Introduction

    MDS is a global life sciences company that provides market-leading
products and services that our customers use for the development of drugs and
the diagnosis and treatment of disease. Through our three business segments,
we are a leading global provider of pharmaceutical contract research services
(MDS Pharma Services), medical isotopes for molecular imaging, sterilization,
and radiotherapeutics (MDS Nordion), and analytical instruments (MDS
Analytical Technologies). Each of these business segments sells a variety of
products and services to customers in markets around the world.

    Discontinued Operations

    All financial references in this document exclude those businesses that
we consider to be discontinued. The results of discontinued operations relate
to the diagnostics business we sold in 2007. All financial references for the
prior year have been restated to reflect this treatment.

    MAPLE Reactor

    In 1996, MDS entered into an agreement with Atomic Energy of Canada,
Limited (AECL), a Crown corporation for the design, development and
construction of two nuclear reactors and a processing facility, known as the
MAPLE project. The project was intended to replace AECL's current National
Research Universal reactor (NRU) which produces approximately 50% of the
world's medical isotopes. AECL agreed to provide interim supply of medical
isotopes from NRU until the MAPLE project was operational. The MAPLE project
was to be completed by the year 2000 at a planned cost to MDS of $145 million.
    By 2005, the project was not yet completed and costs had more than
doubled, with MDS's investment exceeding $350 million. To address these
issues, MDS entered mediation with AECL that resulted in a new agreement
between AECL and MDS on February 22, 2006 providing for both interim and
long-term supply of medical isotopes. Under the interim and long-term supply
agreement (ILTSA), AECL paid the Company $22 million, assumed ownership of the
MAPLE facilities and took responsibility for all costs associated with
completing the project and the future production of medical isotopes from the
MAPLE facilities. The parties retained certain rights related to existing
claims. In addition, AECL acquired $47 million of MAPLE-related inventories in
exchange for a non-interest bearing note having a net present value of
$38 million, to be repaid over four years commencing in 2008. The agreement
requires AECL to supply medical isotopes to MDS Nordion over a 40-year period,
upon the MAPLE facilities meeting certain operational criteria, in exchange
for a fixed percentage of the selling price. In accordance with SFAS No. 153,
"Exchanges of Non-monetary Assets", the Company exchanged the MAPLE asset for
the 40-year supply agreement which was recorded as an intangible asset at its
fair value of $308 million. This amount is to be amortized on a straight-line
basis over a 40-year period once commercial production of MAPLE isotopes
begins. The Company recorded a loss on this transaction of $36 million in
2006.
    On May 16, 2008, AECL and the Government of Canada, announced their
intention to discontinue the development work on the MAPLE reactors located at
Chalk River laboratories, effective immediately. The MAPLE reactors were to
replace the NRU reactor and provide MDS Nordion with a long-term source of
supply of medical isotopes under the ILTSA. MDS has substantial financial
interests in the success of the MAPLE project, primarily through the 40-year
supply commitment from AECL, as part of the exchange of non-monetary assets
contained in the ILTSA.
    The Company was neither consulted nor informed in advance by AECL or the
Canadian government about their decision. Prior to their May 16, 2008
announcement, AECL had consistently maintained in regular project review
meetings with the Company that it would complete the MAPLE project. AECL's
announcement and position represents a different perspective on AECL's
obligations than that held by MDS. On July 9, 2008, MDS served AECL with
notice of arbitration proceedings. MDS will be seeking an order to compel AECL
to fulfill its obligations under the ILTSA and if not granted, will seek
significant monetary damages. MDS has concurrently filed a court claim for
$1.6 billion in damages against AECL, for negligence and breach of contract,
and against the Government of Canada, for inducing breach of contract and for
interference with economic relations.
    AECL and the Government of Canada also announced that its decision will
not impact the current supply of medical isotopes and that AECL will continue
to supply medical isotopes, using the NRU reactor and will pursue an extension
of the NRU operation beyond its current expiry date of October 31, 2011. While
MDS supports this decision, it does not adequately address long-term supply.
    MDS is reviewing the impact on its business from an operational and
financial reporting perspective. The principal U.S. GAAP reporting exposure
for MDS related to the announcement is its intangible asset associated with
the 40-year supply agreement currently carried at $336 million (valued at the
July 31, 2008 exchange rate). MDS will continue to evaluate the intangible
asset for possible impairment and the relevant financial reporting
implications based upon the progress of any dialogue, negotiations or legal
proceedings between AECL, the Government of Canada and the Company. It is the
Company's position that AECL has breached its contract with MDS, and the
Company will continue to monitor the proceedings and potential outcome which,
at this time, we deem to be uncertain.

    
    MDS Inc.

    Consolidated operating highlights and reconciliation of consolidated
    adjusted EBITDA
    ($ millions)

    Third Quarter                                               Year-to-date
    --------------                                            ---------------

     2008    2007                                               2008    2007
    -------------------------------------------------------------------------
      321     333   Total revenues                               993     883
      (23)    (25)  Reimbursement revenues                       (73)    (71)
    -------------------------------------------------------------------------
    $ 298   $ 308   Net revenues                               $ 920   $ 812
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

      (10)      7   Income (loss) from continuing operations      18     (48)
        -       1   Income tax expense (recovery)                 (2)    (23)
        2       2   Net interest expense                           4       2
        -       1   Mark-to-market on interest rate swaps         (2)      -
       25      24   Depreciation and amortization                 75      56
    -------------------------------------------------------------------------
       17      35   EBITDA                                        93     (13)
       12       3   Restructuring charges, net                    13      41
       11       -   Asset impairment                              11       -
        -       -   Valuation provisions                           3       6
        1       -   Loss on sale of a business/investment          3       1
        -       -   (Reversal) provision for FDA-related costs   (10)     61
        -      11   Acquisition integration                        2      14
    -------------------------------------------------------------------------
    $  41   $  49   Adjusted EBITDA                            $ 115   $ 110
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      14%     16%   Adjusted EBITDA margin                       13%     14%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Consolidated net revenues which exclude reimbursement revenues associated
with reimbursed expenses in the MDS Pharma Services segment, were down 3% on a
reported basis to $298 million for the third quarter of 2008 compared to
$308 million last year. Foreign exchange impacts increased net revenue in the
third quarter of 2008 compared to the third quarter of 2007 by approximately
$12 million or 4%. A sale of certain product lines within MDS Nordion reduced
revenue by $7 million in the third quarter of 2008 compared to the same period
in the prior year.
    MDS Pharma Services net revenues increased 3% compared to the same period
in 2007, with growth in early-stage, partially offset by declines in
late-stage net revenues. MDS Nordion revenues were down 5% compared to the
same period in 2007, primarily as a result of the sale of certain product
lines in 2008. MDS Analytical Technologies revenues were down 9% primarily due
to the timing of the mass spectrometer shipments to the joint ventures.
End-user revenues for mass spectrometers grew by 5%.
    The loss from continuing operations for the third quarter of 2008 was
$10 million compared to income of $7 million reported for the same period in
2007. The third quarter of 2008 includes an $8 million after-tax charge
associated with restructuring activities at MDS Pharma Services and MDS
Analytical Technologies and a $8 million after-tax asset impairment charge
related to a Pharma Services facility. Income from continuing operations for
the third quarter of 2007 includes an after-tax acquisition integration
expense of $6 million.
    Adjusted EBITDA for the quarter was $41 million, down 16% compared to
$49 million reported for last year. MDS Nordion adjusted EBITDA increased by
$1 million to $23 million in the third quarter of 2008. MDS Analytical
Technologies adjusted EDITDA declined $6 million to $21 million. MDS Pharma
Services reported an adjusted EBITDA loss of $2 million in the quarter
compared to adjusted EBITDA of $4 million last year. The net impact of foreign
exchange impacts on adjusted EBITDA in the third quarter of 2008, compared to
the third quarter of 2007 was an increase of $2 million. In the third quarter
of 2008, we experienced a negative impact of approximately $4 million on
adjusted EBITDA from the net impact of foreign exchange, due to the
year-over-year weakness of the U.S. dollar; however, this was partially offset
by a $2 million foreign exchange gain on the revaluation of net monetary
assets, compared to a $4 million foreign exchange loss on the revaluation of
net monetary assets in the third quarter of 2007.
    Adjustments reported for the third quarter of 2008 include $12 million
expense related to restructuring charges, $2 million of which was reported in
equity earnings related to our MDS Analytical Technologies joint ventures, and
$11 million asset impairment charge related to a MDS Pharma Services facility
in Montreal, Canada and $1 million loss related to sale of business. In the
third quarter of 2007, adjustments included $3 million of restructuring costs
and $11 million of integration costs incurred by MDS Analytical Technologies
associated with the MD acquisition.
    Selling, general, and administration (SG&A) expenses for the quarter
totalled $63 million and 21% of net revenues compared to $66 million and 21%
last year. The decrease is due to lower incentive and stock-based compensation
expense which was partially offset by the impact of foreign exchange.
    We spent $19 million on R&D activities in the third quarter this year,
compared to spending of $20 million last year. The decrease in R&D spending
was due to the reduction in spending in MDS Nordion and on certain MDS
Analytical Technologies projects in the third quarter of 2008 as they neared
completion, which was partially offset by the impact of foreign exchange.
    Consolidated depreciation and amortization expense increased $1 million
compared to last year. Capital expenditures for the quarter were $14 million
compared to $27 million in the third quarter of 2007. Capital expenditures
were higher in 2007 due to an investment in an early-stage MDS Pharma Services
facility, which was completed in the first quarter of 2008.
    Other income for the quarter includes the $2 million foreign exchange
gain compared to a $4 million foreign exchange loss in the third quarter of
2007, described above.
    In the third quarter of 2008, we repurchased 1.0 million shares for
$15 million as part of our Normal Course Issuers Bid (NCIB), and we have
121 million Common shares outstanding as of July 31, 2008.
    Reported loss per share from continuing operations was $0.08 for the
quarter, compared to earnings per share of $0.05 in 2007 which included a
$0.01 loss per share from discontinued operations. Adjusted earnings per share
from continuing operations for the quarter were $0.06 compared to $0.13 earned
in the same period last year, primarily as a result of lower adjusted EBITDA,
and higher adjusted tax expense. Adjusted earnings per share and adjusted
income from continuing operations for the two periods were as follows:

    
    Earnings Per Share
                                   Third Quarter              Year-to-date
    -------------------------------------------------------------------------
                                 2008         2007         2008         2007
    -------------------------------------------------------------------------
    Basic earnings (loss) per
     share from continuing
     operations - as
     reported                 $ (0.08)     $  0.06      $  0.15      $ (0.36)
    Adjusted for (after tax):
      Restructuring charges,
       net                       0.06         0.01         0.07         0.24
      FDA-related provision         -            -        (0.06)        0.30
      Asset impairment           0.06            -         0.06
      Valuation provisions          -            -         0.03         0.04
      Mark-to-market on
       interest rate swaps          -         0.01        (0.02)        0.01
      MAPLE investment
       tax credits                  -            -            -        (0.02)
      Loss on sale of
       business and
       long-term investments     0.02            -         0.02         0.02
      Acquisition integration       -         0.05         0.01         0.07
      Tax rate changes              -            -        (0.09)           -
    -------------------------------------------------------------------------
    Adjusted EPS              $  0.06      $  0.13      $  0.17      $  0.30
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Income from Continuing Operations
    ($ millions)                   Third Quarter             Year-to-date
    -------------------------------------------------------------------------
                                 2008         2007         2008         2007
    -------------------------------------------------------------------------
    Income (loss) from
     continuing
     operations - as
     reported                 $   (10)     $     7      $    18      $   (48)
    Adjusted for (after tax):
      Restructuring charges,
       net                          8            2            9           35
      FDA-related provision         -            -           (7)          40
      Asset impairment              8            -            8            -
      Valuation provisions          -            -            3            5
      Mark-to-market on
       interest rate swaps          -            1           (2)           -
      MAPLE investment
       tax credits                  -            -            -           (2)
      Loss sale of business
       and long-term
       investments                  2            -            2            2
      Acquisition integration       -            6            1            8
      Tax rate changes              -            -          (11)           -
    -------------------------------------------------------------------------
    Adjusted income from
     continuing operations    $     8      $    16      $    21      $    40
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    MDS Pharma Services
    Financial Highlights
    ($ millions)

               Third Quarter                               Year-to-date
    ------------------------------             ------------------------------
          % of net        % of net                   % of net        % of net
     2008 revenues   2007 revenues              2008 revenues   2007 revenues
    -------------------------------------------------------------------------
    $  68     56%   $  62     53%  Early-stage $ 199     54%   $ 188     53%
       54     44%      56     47%  Late-stage    171     46%     166     47%
    -------------------------------------------------------------------------
                                   Net
      122    100%     118    100%  revenues      370    100%     354    100%
                                   Reimburse-
                                    ment
    $  23       -   $  25       -   revenues   $  73       -   $  71       -
    -------------------------------------------------------------------------
                                    Total
      145             143       -   revenues     443             425       -
                                   Cost of
      (94)   (77%)    (82)   (69%)  revenues    (277)   (75%)   (251)   (71%)
                                   Reimbursed
      (23)      -     (25)      -   expenses     (73)      -     (71)      -
                                   Selling,
                                    general,
                                    and
                                    administ-
      (31)   (25%)    (30)   (25%)  ration       (93)   (25%)    (95)   (27%)
                                   Depreciation
                                    and
       (9)    (7%)     (8)    (7%)  amortization (26)    (7%)    (26)    (7%)
                                   Restructuring
       (8)    (7%)     (1)    (1%)  charges       (9)    (2%)    (32)    (9%)
                                   Asset
      (11)    (9%)      -       -   impairment   (11)    (3%)      -       -
                                   Other income
        -       -      (2)    (2%)  (expense)     14     (4%)    (68)   (19%)
    -------------------------------------------------------------------------
                                   Operating
                                    income
      (31)   (25%)     (5)    (4%)  (loss)       (32)    (9%)   (118)   (33%)
                                   Adjustments:
                                   Reversal
                                    (provision)
                                    for FDA-
                                    related
        -       -       -       -   costs        (10)    (3%)     61     17%
                                    Restruct-
                                     uring
        8      7%       1      1%    charges       9      2%      32      9%
                                   Asset
       11      9%       -       -   impairment    11      3%       -       -
                                   Loss (gain)
                                    on sale of
        1      1%       -       -   a business    (1)      -       4      1%
                                   Depreciation
                                    and amorti-
        9      7%       8      7%   zation        26      7%      26      7%
    -------------------------------------------------------------------------
                                   Adjusted
    $  (2)    (2%)  $   4      3%   EBITDA     $   3      1%   $   5      1%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                   Margins:
                                   Gross
      23%             31%       -   margin       25%             29%       -
                                   Adjusted
      (2%)             3%       -   EBITDA        1%              1%       -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                   Capital
                                    expendi-
    $   7       -   $  21       -   tures      $  22       -   $  28       -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    In the third quarter of 2008, MDS Pharma Services net revenues increased
by 3% as reported versus the prior year quarter. The impact on revenue of the
change in foreign exchange rates from the third quarter of 2007 to the third
quarter of 2008 was an increase of approximately $6 million or 5%. Our early-
stage business had higher revenue as a result of increased Phase I activity at
our new Phoenix facility and increased demand in bioanalytical services. The
late-stage revenue decreased primarily as a result of delays in the start of
projects in both our central lab and Phase II-IV businesses in the third
quarter of 2008.
    New orders in the third quarter of 2008 were $169 million, up 42%
compared to the same period last year. We saw a $55 million or 13% increase in
period-end backlog and 13% increase in average backlog from the second quarter
of 2008. Period-end backlog was up 19% compared to the same period in 2007.

    
    Orders                                     New      Average   Period End
                                            Orders      Backlog      Backlog
    -------------------------------------------------------------------------
              Fiscal 2007 - Quarter 1          159          450          472
                            Quarter 2          103          450          428
                            Quarter 3          119          420          408
                            Quarter 4          134          385          375
              Fiscal 2008 - Quarter 1          177          360          395
                            Quarter 2          165          405          431
                            Quarter 3          169          456          486
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    MDS Pharma Services had an operating loss of $31 million for the quarter,
compared to a loss of $5 million for the same period last year. In the third
quarter of 2008, we recorded an $8 million restructuring charge to improve
profitability at MDS Pharma Services compared to a $1 million charge in the
third quarter of 2007. As well, in the third quarter of 2008, a $11 million
asset impairment charge was recorded related to a facility in Montreal, Canada
and $1 million loss on sale of business.
    MDS Pharma Services adjusted EBITDA for the third quarter of 2008
decreased by $6 million to a loss of $2 million compared to the same period in
2007. This decrease was primarily the result of lower sales excluding the
impact of foreign exchange, higher margin services reported in our late-stage
business in the third quarter of 2007 and increased investments in customer
facing business development and the ramp-up of our Phoenix Phase 1 clinic in
2008. These factors plus inflation offset the impact of savings achieved from
our restructuring activities that were completed 2007. The negative impact of
foreign exchange on our operations resulting from the decline of the U.S.
dollar from the third quarter of 2007 to the third quarter of 2008 was
approximately $3 million. This was offset by a $3 million increase in adjusted
EBITDA from the impact of foreign exchange on the revaluation of certain
assets and liabilities which was a $1 million gain in the third quarter of
2008, versus a $2 million loss in the third quarter of 2007. In addition, we
recorded a $1 million provision associated with customer settlements in the
third quarter of 2008.
    SG&A of $31 million in the third quarter of 2008 was $1 million higher
than the third quarter of 2007 due primarily to the negative impact of foreign
exchange on spending from the strengthening of the Canadian dollar, British
pound and the euro over the same period and increased investment in customer
facing business development, which was partially offset by lower stock-based
compensation.
    During the third quarter of 2008, we initiated our restructuring plan
announced on July 18, 2008, including additional headcount reductions and the
closure of several offices. Savings from these actions will be realized over
the next two quarters. In the fourth quarter of 2008, we expect to incur
approximately $6 million - $8 million of additional restructuring charges
related to these activities.
    Capital expenditures in the pharmaceutical services segment were
$7 million compared to $21 million in the third quarter of 2007. In the third
quarter of 2007 capital expenditures were higher due to expansion of our 
early-stage facilities in Phoenix, Arizona.

    Regulatory Review of Montreal Bioanalytical Operations

    The six-month time limit imposed by the FDA for generic audits has
passed, and we believe we have substantially completed all required site
audits for generic customers. We continue to receive a limited number of study
audit requests from innovator customers and expect we may continue to receive
these requests in low numbers in the coming months.
    We have responded to questions from European regulators about the nature
of the work that was done for the FDA. We have received a response from the
European regulators that they are satisfied with the work completed for the
FDA and do not expect to incur any significant costs associated with actions,
if any of European regulators.
    During the second quarter of 2007, we approved and recorded a $61 million
provision to reimburse clients who have incurred or will incur third party
audit costs or study re-run costs to complete the work required by the FDA and
other regulators. We have utilized $19 million of this reserve for such costs,
an amount that was partially offset by a foreign currency translation gain on
the US-dollar denominated components of the cost estimate and we reversed
$10 million of this provision in the second quarter of 2008. Although we
believe we have substantially completed the majority of all required site
audits, we still await final reimbursement requests for many of these audits.
Based on information currently available, we believe the remaining a reserve
of $32 million is sufficient to cover any agreements reached with clients for
study audits, study re-runs, and other related costs.

    
    MDS Nordion
    Financial Highlights
    ($ millions)

               Third Quarter                               Year-to-date
    ------------------------------             ------------------------------
          % of net        % of net                   % of net        % of net
     2008 revenues   2007 revenues              2008 revenues   2007 revenues
    -------------------------------------------------------------------------
                                   Product
    $  72    100%   $  76    100%   revenues   $ 207     98%   $ 210     98%
                                   Service
        -               -       -   revenues       5      2%       4      2%
    -------------------------------------------------------------------------
       72    100%      76    100%  Net revenues  212    100%     214    100%
                                     Cost of
                                      product
      (35)   (49%)    (39)   (51%)    revenues  (111)   (52%)   (108)   (50%)
                                     Cost of
                                      service
       (1)    (1%)      -       -     revenues    (3)    (1%)     (2)    (1%)
                                     Selling,
                                      general,
                                      and
                                      admini-
      (12)   (17%)    (13)   (17%)    stration   (36)   (17%)    (36)   (17%)
                                     Research
                                      and
                                      develop-
        -       -      (1)    (1%)    ment        (2)    (1%)     (3)    (1%)
                                     Depreciation
                                      and amort-
       (3)    (4%)     (4)    (5%)    ization     (9)    (4%)    (10)    (5%)
                                     Other income
       (1)    (1%)     (1)    (1%)    (expense)   (6)    (3%)      -       -
    -------------------------------------------------------------------------
                                   Operating
       20     28%      18     24%   income        45     21%      55     26%
                                   Adjustments:
                                     Loss (Gain)
                                      on a sale
                                      of a
        -       -       -       -     business     4      2%      (1)    (1%)
                                     Depreciation
                                      and amorti-
        3      4%       4      5%     zation       9      4%      10      5%
    -------------------------------------------------------------------------
                                   Adjusted
    $  23     32%   $  22     29%   EBITDA     $  58     25%   $  64     30%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                   Margins:                -
                                     Gross
      50%       -     49%       -     margin     47%       -     49%       -
                                     Adjusted
      32%       -     29%       -     EBITDA     25%       -     30%       -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                   Capital
                                    expend-
    $   3       -   $   3       -   itures     $   9       -   $   5       -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    MDS Nordion revenues were down $4 million or 5% from the third quarter of
2007 on a reported basis. In the third quarter of 2007, we reported $7 million
of revenue associated with the external beam therapy and self-contained
irradiator product lines that were sold on the first day of the third quarter
of 2008. Reported revenues increased due to a foreign exchange impact of
$2 million related to the decline of the U.S. dollar in the third quarter of
2008 compared to the third quarter of 2007. Excluding the impact of divestures
and foreign exchange third quarter 2008 revenues were up $1 million compared
to the same period in 2007 primarily driven by higher cobalt sales.
    Operating income in the third quarter of 2008 was $20 million up
$2 million compared to last year and adjusted EBITDA was $23 million this year
compared to $22 million in 2007. The impact of lower revenue was offset by
higher gross margins on increased cobalt sales.
    SG&A in the third quarter of 2008 was down $1 million to $12 million
compared to the same period last year. R&D investment was nil and $l million
in the third quarter of 2008 and 2007, respectively.
    Capital expenditures for MDS Nordion were $3 million, essentially flat to
last year.
    Effective May 1, 2008, we completed the sale of our external beam therapy
and self-contained irradiator product lines to Best Medical International Inc.
The $4 million loss was previously recorded in the first quarter of 2008. The
operating results for these product lines were not reported in the MDS Nordion
segment in the third quarter of 2008, however the operating results were
included in 2007 and up to the end of the second quarter of 2008.

    
    MDS Analytical Technologies
    Financial Highlights
    ($ millions)

               Third Quarter                               Year-to-date
    ------------------------------             ------------------------------
          % of net        % of net                   % of net        % of net
     2008 revenues   2007 revenues              2008 revenues   2007 revenues
    -------------------------------------------------------------------------
                                   Product
    $  83     80%   $  94     82%   revenues   $ 268     79%   $ 194     80%
                                   Service
       21     20%      20     18%   revenues      70     21%      50     20%
    -------------------------------------------------------------------------
                                   Net
      104    100%     114    100%   revenues     338    100%     244    100%
                                     Cost of
                                      product
      (60)   (58%)    (70)   (61%)    revenues  (185)   (55%)   (155)   (64%)
                                     Cost of
                                      service
       (3)    (3%)     (1)    (1%)    revenues   (11)    (3%)     (2)    (1%)
                                     Selling,
                                      general,
                                      and admin-
      (18)   (18%)    (20)   (18%)    istration  (59)   (17%)     (37)  (15%)
                                     Research
                                      and
                                      develop-
      (19)   (18%)    (19)   (17%)    ment       (59)   (17%)     (45)  (18%)
                                     Depreciation
                                      and amorti-
      (12)   (12%)    (12)   (11%)    zation     (39)   (12%)     (19)   (8%)
                                     Restru-
                                      cturing
       (2)    (2%)      -       -     charges     (2)    (1%)       -      -
                                     Other
                                      income
        1     (1%)     (3)    (3%)    (expense)   (1)      -       (5)   (2%)
    -------------------------------------------------------------------------
                                   Operating
       (9)    (9%)    (11)   (10%)  loss         (18)    (5%)     (19)   (8%)
                                   Adjustments:
                                     Equity
       14     13%      15     13%     earnings    38     11%       40    16%
                                     Restruc-
                                      turing
        4      4%       -       -     charges      4      1%        -      -
                                     Acquis-
                                      ition
                                      integr-
        -       -      11     10%     ation        2      1%       14     6%
                                     Deprec-
                                      iation
                                      and
                                      amorti-
       12     12%      12     11%     zation      39     12%       19     8%
    -------------------------------------------------------------------------
                                   Adjusted
    $  21     20%   $  27     24%   EBITDA     $  65     19%    $  54    22%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                   Margins:
                                     Gross
      39%       -     38%       -     margin     42%       -      35%      -
                                     Adjusted
      20%       -     24%       -     EBITDA     19%       -      22%      -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                   Capital
                                    expend-
    $   2           $   2           itures     $   5            $   6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    The mass spectrometer product family of MDS Analytical Technologies
carries out the majority of its business through joint ventures. Currently,
MDS generates the large majority of its income associated with these joint
ventures from the net income of the joint ventures, and not from its sales to
the joint ventures. We equity account for the joint ventures and therefore the
majority of the income related to the mass spectrometer product family is
reflected in equity earnings, which represents our share of the net income of
the joint ventures. Our reported revenues are related to products manufactured
and services performed for the joint ventures and are not a direct indicator
of end-customer revenues. We include equity earnings in our calculation of
adjusted EBITDA, however, these earnings are not included in operating income.
    MDS Analytical Technologies revenue decreased by $10 million to
$104 million in the third quarter of 2008, compared to the same period in the
prior year, despite an increase due to a foreign exchange of $4 million
related to the decline of the U.S. dollar in the third quarter of 2008
compared to the third quarter of 2007. Revenues in our mass spectrometer, drug
discovery and bio-research product families were down in the third quarter of
2008 compared to the same three-month period in 2007. The declines in mass
spectrometers revenues were primarily a result of lower volume of units
shipped to our joint ventures. End-user revenues for mass spectrometer
products grew 5% in the third quarter including the impact of foreign exchange
with strong growth in service revenue. Compared to the same period last year
end-user unit volume was essentially flat. The decline in drug discovery was
primarily a result of lower sales of high-end instruments in North America.
    MDS Analytical Technologies reported an operating loss of $9 million for
the third quarter of 2008 compared to a $11 million loss in the third quarter
of 2007. Equity earnings, which are not included in operating income and
represent our share of earnings from the mass spectrometer joint ventures,
were $14 million for the third quarter of 2008 versus $15 million for the
third quarter of 2007. During the third quarter of 2008, a $2 million
restructuring charge was recorded to improve profitability of our bio-research
and drug discovery product families. In addition, the equity earnings for the
third quarter of 2008 included a $2 million restructuring charge representing
our share of restructuring activities at the joint ventures. In the third
quarter of 2007, $11 million of acquisition integration costs were reported.
    Adjusted EBITDA for the quarter was $21 million compared to $27 million
during the same period last year. The $6 million decrease was primarily due to
lower revenues, and higher costs including manufacturing overhead. The
adjusting items were $4 million for restructuring charges in the third quarter
of 2008 and $11 million of integration expense related to the Molecular
Devices acquisition for the third quarter of 2007.
    SG&A decreased for the third quarter of 2008 by $2 million to
$18 million. The third quarter of 2007 included integration costs associated
with the MD acquisition. R&D expense was flat at $19 million for the third
quarter of 2008 and 2007. Depreciation and amortization expense was also flat
compared to last year.
    During the third quarter of 2008, we initiated restructuring plans
previously announced on July 18, 2008 primarily related to headcount
reductions. Savings from these actions will be realized over the next two
quarters.
    Capital expenditures were $2 million this year and last.
    During the quarter, MDS Analytical Technologies acquired Blueshift
Biotechnologies, a developer of screening platforms for life sciences research
and maker of the IsoCyte(TM) benchtop laser scanning cytometer. This
acquisition expands MDS Analytical Technologies' capabilities in cellular
analysis, and further strengthens the company's global sales and service
offering. Integration of Blueshift is progressing well and market enthusiasm
for IsoCyte continues to gain momentum with additional orders placed during
the quarter.

    
    Corporate and Other
    Financial Highlights
    ($ millions)

    Third Quarter                                               Year-to-Date
     2008    2007                                               2008    2007
    -------------------------------------------------------------------------
    $  (2)  $  (3)  Selling, general, and administration       $ (14)  $ (13)
       (1)      -   Depreciation and amortization                 (1)     (1)
        -      (2)  Restructuring charges                          -      (9)
        1      (1)  Other income (expense)                         -      (4)
    -------------------------------------------------------------------------
       (2)     (6)  Operating loss                               (15)    (27)
                    Adjustments:
        -       -     Gain on sale of investments                  -      (2)
        -       -     Valuation provisions                         3       6
        -       2     Restructuring                                -       9
        1       -     Depreciation and amortization                1       1
    -------------------------------------------------------------------------
    $  (1)  $  (4)  Adjusted EBITDA                            $ (11)  $ (13)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Corporate SG&A expenses were $2 million in the third quarter of 2008 down
$1 million from the third quarter of 2007, primarily due to lower stock-based
compensation.
    Other income of $1 million for the third quarter of 2008 includes a
$1 million foreign exchange gain associated with the revaluation of certain
assets and liabilities. The third quarter of 2007 included a $1 million
foreign exchange loss. The 2007 $2 million charge related to restructuring was
an adjusting item.
    In the third quarter of 2008 net interest expense was $2 million level
with the third quarter of 2007.

    Income taxes

    We reported no tax expense this quarter. The expected tax recovery on the
loss we reported this quarter was offset by $4 million relating to losses
incurred in foreign jurisdictions where we currently have full valuation
allowances recorded against our deferred tax assets. And we recorded
$1 million of additional tax expense relating to the disposition of a business
by Nordion.

    Discontinued Operations

    The results of our discontinued businesses for the third quarter of 2008
were as follows:

    

    ($ millions)                   Third Quarter             Year-to-date
    -------------------------------------------------------------------------
                                 2008         2007         2008         2007
    -------------------------------------------------------------------------
    Net revenues             $      -     $      -     $      -     $     95
      Cost of revenues                                                   (57)
      Selling, general and
       administration                                                    (15)
    -------------------------------------------------------------------------
    Operating income                -            -            -           23
      Gain on sale of dis-
       continued operations                                              904
      Interest income                                                      1
      Income taxes                                                      (117)
      Minority interest                                                   (4)
      Equity earnings                                                      1
    -------------------------------------------------------------------------
    Income from discontinued
     operations                     -            -            -          808
    -------------------------------------------------------------------------
    Basic EPS from dis-
     continued operations    $      -    $       -     $      -     $   5.99
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The results from discontinued operations for 2007 reflect only the
Canadian diagnostic services business.

    Liquidity and Capital Resources

                                           July 31,  October 31,
    ($ millions except current ratio)         2008         2007       Change
    -------------------------------------------------------------------------
    Cash, cash equivalents and
     short-term investments              $     130     $    324         (60%)
    Operating working capital(1)         $     112     $     59          90%
    Current ratio (excludes net
     assets held for sale)                     1.9          1.6          19%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (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 third quarter of 2008, $5 million of cash was generated. For
the first nine months of 2008, $194 million of cash and short-term investments
were utilized including $89 million of scheduled long-term debt principle and
interest repayments, $65 million of income taxes related to the 2007 gain on
the sale of the diagnostics business, an increase in operating working capital
resulting from first quarter payouts for year-end compensation and fourth
quarter capital expenditures. The increase in the current ratio is primarily
attributable to the reduction of current liabilities related to the payment of
long term debt and income taxes payable and the movement of an $83 million
note receivable to current.
    We expect to have net operating cash inflows for the last quarter of
fiscal 2008. Expected cash outflows include FDA-related reimbursements to our
customers and the payment of severance obligations associated with
restructuring activities. In addition to cash generated by operations and cash
on hand, we have available a CAD$500 million, five-year, committed, revolving
credit facility, that expires in July, 2010, to fund our liquidity
requirements. We borrowed CAD$15 million under this facility to fund working
capital requirements over the quarter end. There were no borrowings under this
facility at September 4, 2008.
    Cash used by investing activities for continuing operations totalled
$13 million for the third quarter of 2008, compared to outflows of $94 million
for the third quarter of 2007. Capital expenditures for the quarter totalled
$14 million, compared to $27 million of expenditures in the third quarter of
2007 which was higher due to investment in our Phase I facility in Phoenix,
USA. We received $15 million in cash from the sale of our external beam
therapy and self-contained irradiator product lines. Also in the quarter, we
acquired Blueshift Biotechnologies for $13 million, expanding MDS Analytical
Technologies' capabilities in cellular analysis. $1.5 million of the purchase
price has been placed in escrow. This escrow amount less claims for
indemnifications will be released to the vendors on June 26, 2009. An
additional amount of $0.5 million has been placed in escrow which is
contingent on the achievement of certain milestones. In the third quarter of
2007, we made $67 million in net purchases of short-term investments, which
were subsequently sold to pay off long-term debt.
    Financing activities generated $1 million of cash in the quarter, which
included the CAD$15 million draw on our credit facility. This was offset by
$15 million of purchases under our NCIBs during the quarter which retired
1.0 million Common shares representing less than 1% of our outstanding Common
shares. On a year-to-date basis, we have purchased 1.9 million shares for
$32 million under our NCIB. Under the terms of our current NCIB, we are
entitled to purchase 4.1 million Common shares between July 3, 2008 and July
2, 2009, of which 0.4 million shares have been purchased to date. Cash
generated from financing activities for the third quarter of fiscal 2007 was
$5 million, primarily driven by share issuance related to stock options
exercised in the period.
    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 operations, capital expenditures,
research and development expenditures, FDA settlements and restructuring
costs. 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.

    Asset Backed Commercial Paper (ABCP)

    The Company owns investments in non-bank sponsored ABCP issued by two
trusts with an original cost of $17 million. These investments matured in
September 2007, but as a result of liquidity issues in the ABCP market, they
did not settle at maturity.
    In September 2007, a Pan-Canadian Investors Committee for Third Party
Asset Backed Commercial Paper (the Committee) was formed to propose a solution
to the liquidity problem in the ABCP market. At that time, the Company
performed a probability-weighted discounted cash flow adjustment valuation
reflecting the uncertainties in the timing and the amount of its investment to
be recovered. This analysis was performed for both a short-term and long-term
hold scenario and based on this, MDS took a provision of 10% or $2 million in
the fourth quarter 2007.
    In March 2008, the Committee filed with the Ontario Superior Court of
Justice a restructuring arrangement to convert the ABCP into various long-term
floating rate notes with maturities matching the maturities of the underlying
assets. A substantial majority of ABCP holders voted in favour of the
Committee's restructuring plan, subject to final judicial approval. Prior to
any distribution, an appeal was issued by dissenting investors, delaying the
settlement of the restructuring proposal. Subsequent to quarter end, the
Ontario Court of Appeal denied this motion and the investor committee
announced a targeted completion date of September 30, 2008. The dissenting
investor group have since filed an appeal with the Supreme Court of Canada.
    In the second quarter, the Company revised its valuation of its
investment in ABCP to reflect the additional information available in the
market and to consider the impact of the Committee's restructuring plan to
convert the ABCP into various long-term floating rate notes with revised
maturities. The DBRS rating for the majority of the new notes is expected to
be AA and BB. As a result, in the second quarter of 2008 an additional
provision of $3 million was recorded to bring the total reserve to $5 million
or 30% of face value.
    The Company has continued to use a scenario-based probability-weighted
discounted cash flow approach to value its investment at July 31, 2008 which
considered the revised credit quality of the investments, estimated
renegotiated maturity dates of approximately five to eight years, estimated
coupon rates of 3.1% to 3.6% and estimated restructuring fees. During the
quarter, market conditions surrounding liquidity of ABCP continued to
experience some volatility, however no additional adjustment was deemed
necessary. The assumptions used in estimating the fair value of the ABCP are
subject to change, which may result in further adjustments to non-operating
results in the future.

    Contractual Obligations

    There have been no material changes in contractual obligations since
October 31, 2007 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.

    Derivative Instruments

    We use derivative financial instruments to manage our foreign currency
and interest rate exposure. These instruments have 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 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 July 31,
2008 was a liability of $2 million.
    In addition to the above derivatives, isotope supply agreements include
terms that result in the creation of an embedded currency derivatives under
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". The
fair value of the derivatives at July 31, 2008 are recorded as an asset of
$4 million and a liability of $2 million.

    
    Capital Structure

                                           July 31,  October 31,
    ($ millions)                              2008         2007       Change
    -------------------------------------------------------------------------
    Long-term debt                       $     299     $    384         (22%)
    Less: cash and cash equivalents
     and short-term investments               (130)        (324)        (60%)
    -------------------------------------------------------------------------
    Net debt                                   169           60         182%
    Shareholders' equity                     1,797        1,897          (5%)
    -------------------------------------------------------------------------
    Capital employed(1)                  $   1,966     $  1,957          n/m
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Capital employed is a measure of how much of our net assets is
        financed by debt and equity.
    

    Long-term debt decreased $84 million primarily due to $81 million of
repayment of the long-term debt in the first quarter 2008 and the revaluation
of our Canadian dollar dominated long-term debt to reflect the strength of the
U.S. dollar at the end of the third quarter of 2008, compared to our 2007
fiscal year end.

    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 U.S. GAAP and prior periods have been restated to
reflect the discontinuance of the operations discussed above.

    
    ($ millions, except earnings per share)
    -------------------------------------------------------------------------
                       Trailing Four      July     April       Jan       Oct
                            Quarters      2008      2008      2008      2007
    -------------------------------------------------------------------------
    Net revenues            $  1,227  $    298  $    326  $    296  $    307
    Operating income (loss) $    (19) $    (22) $      8  $     (6) $      1

    Income from continuing
     operations             $     33  $    (10) $     11  $     17  $     15
    Net income              $     31  $    (10) $     11  $     17  $     13
    Earnings per share
     from continuing
     operations
      Basic and diluted     $   0.27  $  (0.08) $   0.09  $   0.14  $   0.12
    Earnings per share
      Basic                 $   0.26  $  (0.08) $   0.09  $   0.14  $   0.11
      Diluted               $   0.26  $  (0.08) $   0.09  $   0.14  $   0.11
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    ($ millions, except earnings per share)
    -------------------------------------------------------------------------
                       Trailing Four      July       Apr       Jan       Oct
                            Quarters      2007      2007      2007      2006
    -------------------------------------------------------------------------
    Net revenues            $  1,062  $    308  $    263  $    241  $    250
    Operating income (loss) $   (112) $     (4) $    (96) $     (9) $     (3)

    Income (loss) from
     continuing operations  $    (36) $      7  $    (55) $      -  $     12
    Net income              $    805  $      7  $    737  $     16  $     45
    Earnings (loss) per
     share from continuing
     operations
      Basic and diluted     $  (0.26) $   0.06  $  (0.40) $   0.00  $   0.08
    Earnings per share
      Basic                 $   5.83  $   0.05  $   5.37  $   0.11  $   0.30
      Diluted               $   5.81  $   0.05  $   5.35  $   0.11  $   0.30
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Items on the pre-tax basis that impact the comparability of operating
income include:

    -   Results for the quarter ended July 31, 2008 reflect a $12 million
        restructuring charge and a $11 million asset impairment charge
    -   Results for the quarter ended April 30, 2008 reflect income of
        $10 million from the reduction of the FDA provision
    -   Results for the quarter ended January 31, 2008 reflect a $11 million
        gain from the reduction of future Canadian income tax rates
    -   Results for the quarter ended April 30, 2007 reflect a $792 million
        net gain from the sale of our diagnostics businesses, 41 days of
        operating results of Molecular Devices, $61 million of charges
        related to assisting clients in respect to the FDA review, and
        $25 million of restructuring charges.
    -   Results for the quarter ended January 31, 2007 reflect the impact of
        restructuring charges totalling $13 million.
    

    Outlook

    In the first three quarters of 2008, we have seen strong growth in new
order wins at MDS Pharma Services totalling $511 million. While we expected
these new orders to begin driving increased revenue in the second half of
2008, this increase has not yet materialized due to delays in the start dates
for certain new studies primarily in our late-stage business. We now expect
the primary increase in revenue to occur in fiscal 2009. Our attention
continues to be focused on restoring profitability by streamlining and
strengthening the solid platforms we have throughout our business. We are
continuing to invest in building our global business development capability to
accelerate growth in key global markets. This has included hiring experienced
staff, new sales incentive programs, training and a focus on winning more
profitable business. These initiatives include corresponding growth
investments in facilities such as our Phoenix Phase I facility and our Beijing
central laboratory, as well as investments in customer-facing systems designed
to achieve our On-Time, High-Quality brand promise. At the same time, we
continue to streamline our business through restructuring initiatives
announced in the third quarter of 2008. We believe these actions, combined
with the increased backlog, will drive accelerated growth and increased
profits in 2008 and beyond.
    MDS Nordion maintained traditional levels of revenue and improved
adjusted EBITDA in the third quarter of 2008 after the divestiture of certain
product lines. We remain encouraged by the ongoing global expansion of our
TheraSphere(R) product line and continue to seek new partnerships for growth
in medical isotopes. Our expanded long-term contract for cobalt supply with
Rosenergoatom positions MDS Nordion well to serve continued growth in cobalt
sterilization demand in the long term. We are encouraged by the projected
outlook for expected growth in our global markets and we are focusing on being
well positioned in these markets to capitalize on these opportunities.
    On May 16, 2008, AECL and the Government of Canada publicly announced
their intention to discontinue the development work on the MAPLE reactors. At
the same time, AECL and the Government of Canada also publicly announced that
they will continue to supply medical isotopes from the current NRU, and will
pursue a license extension of the NRU operation past its current expiry date
of October 31, 2011. On July 9, 2008, we served AECL with a notice of
arbitration proceedings seeking an order to compel AECL to fulfill its
contractual obligations. We concurrently filed court claims for $1.6 billion
in damages against AECL and the Government of Canada.
    In the second and third quarter, MDS Analytical Technologies has seen
deferrals of capital expenditures for high-end instruments by pharmaceutical
customers primarily in North America. This has negatively affected our second
and third quarter results as these high-end instruments also command higher
margins. We expect this market softness to continue at least until the end of
2008, and have taken actions to increase profitability including the
restructuring initiatives announced in the third quarter of 2008. We continue
to execute our strategy to shift manufacturing to Asia and to bring innovative
new products to our customers through internal research and development and
through the licensing and acquisition of new technologies.

    MDS Inc. 2008 Guidance

    To execute our strategy and drive increased profitability we have
implemented a number of margin improvement activities in the third quarter of
2008 including the restructuring plans mentioned above. To reflect the impact
of the third quarter of 2008 and the expected $6 million - $8 million fourth
quarter of 2008 restructuring charges, an asset impairment charge associated
with a MDS Pharma Services facility and the delay in increased revenue at MDS
Pharma Services, we have revised our 2008 guidance as follows:

    
    ($ millions, except per share amount)
    -------------------------------------------------------------------------
                                2007      September 2008           June 2008
                      Actual Results            Guidance            Guidance
    -------------------------------------------------------------------------
    Total
     revenues     $            1,210  $    1,330 - 1,350  $    1,350 - 1,400
    Net revenue   $            1,119  $    1,230 - 1,250  $    1,250 - 1,290
    Adjusted
     EBITDA       $              145  $        160 - 170  $        160 - 170
    Adjusted EPS  $             0.34  $      0.27 - 0.33  $      0.27 - 0.33
    Income (loss)
     from
     continuing
     operations   $              (33) $          18 - 28  $          45 - 55
    Basic EPS     $            (0.25) $      0.15 - 0.23  $      0.37 - 0.45
    Capital
     expenditures $               71  $          50 - 60  $          60 - 70
    Effective tax
     rate                        41%           10% - 20%           10% - 20%
    

    Our revised 2008 guidance is based on the following assumptions:
    Net revenues for 2008 are expected to grow in the range of 10% - 12%
based on: the net impact of the Molecular Devices acquisition, foreign
exchange and the divestiture of the MDS Nordion external beam therapy and
self- contained irradiator product lines, with increased revenues across all
three business units. The decrease in the guidance range by $20 million at the
lower end and $40 million at the higher end, from our July 2008 Guidance is
primarily a result of the slower-than-expected ramp up of revenue at MDS
Pharma Services due to the delay in the start of certain customer studies.
Total revenue is a GAAP measure that includes a forecast for reimbursement
revenues, which are then excluded from the calculation of net revenues.
    Adjusted EBITDA is expected to grow at 10% - 17% and to be in the range
of $160 million - $170 million driven by: productivity improvements, revenue
growth across MDS, and the full-year impact of the acquisition of Molecular
Devices. The cost reduction actions implemented by the Company are expected to
offset the impact of lower revenues at MDS Pharma Services and we are
therefore maintaining our adjusted EBITDA guidance consistent with that issued
in June, 2008. For 2008, the adjusting items used in calculating adjusted
EBITDA include; the revision of our best estimate of the remaining FDA
provision, the provision for ABCP, the loss on the sale of MDS Nordion's
divested product lines, restructuring and asset impairment charges and certain
other items.
    Adjusted earnings per share (adjusted EPS) for 2008 are expected to be in
the range of $0.27 - $0.33. In addition to the adjusting items outlined above,
adjusted EPS also excludes a first-quarter 2008 gain on deferred taxes
associated with future Canadian income tax rates.
    Income from continuing operations and basic EPS for 2008 primarily
reflects adjusted EBITDA growth and the income tax gain described above,
offset by the adjusting items used in calculating adjusted EBITDA as described
above. The decrease in the range for income from continuing operations of
$27 million from our June 2008 Guidance is due to expected after-tax impact of
the third and fourth quarter 2008 restructuring charges, the asset impairment
charge recorded in the third quarter of 2008 and certain other charges that
are treated as adjusting items in the calculation of adjusted EBITDA.
    Capital expenditures in 2008 are expected to be lower than 2007 as we are
deferring several projects to 2009 based on lower forecast profitability for
the remainder of the year.
    The effective tax rate in 2008 is expected to remain in the range of
10% - 20% reflecting the first quarter 2008 gain associated with the reduction
of future Canadian income tax rates, the use of foreign tax loss
carry-forwards and research and development investment tax credits. There is
no change in our effective tax rate from previously issued guidance.
    Our income from continuing operations and basic EPS could be materially
reduced, including the possibility of a significant loss in 2008, if we
determine there is an impairment of the intangible asset associated with the
MAPLE reactors. The above item could also affect our effective tax rate.

    Canadian GAAP Reconciliation

    Note 22 to our consolidated financial statements for the third quarter of
2008 contains a reconciliation of results reported in U.S. GAAP to the results
based on Canadian GAAP. The material reconciling items for net income in the
quarter are deferred development costs that are capitalized for Canadian GAAP
purposes and expensed under U.S. GAAP, a difference in the methodologies used
to value certain stock-based compensation programs and certain contracts that
under U.S. GAAP have an embedded derivative associated with them. In the third
quarter of 2007 the differences relate to accounting for joint ventures,
treatment of investment tax credits, deferred development costs, stock-based
compensation plans and hedge contracts.
    Our Canadian Supplement to this MD&A provides descriptions and
reconciliations of the material differences between this MD&A based on U.S.
GAAP and the financial information for the quarter based on Canadian GAAP.

    Accounting Changes

    In July 2006, the U.S. Financial Accounting Standards Board (FASB) issued
FASB interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109". FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing the recognition
threshold a tax position is required to meet before being recognized in the
financial statements. It also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 was adopted by the Company in the first
quarter of fiscal 2008 and we did not have to record any change to liabilities
for uncertain tax positions. For additional information see Note 2 of our
unaudited interim financial statements.

    
    Recent Accounting Pronouncements

    a.  In September 2006, the FASB issued Statement of Financial Accounting
    Standards (SFAS) No. 157, "Fair Value Measurements". SFAS 157 provides
    guidance for using fair value to measure assets and liabilities. It also
    responds to investors' requests for expanded information about the extent
    to which companies measure assets and liabilities at fair value, the
    information used to measure fair value, and the effect of fair value
    measurements on earnings. SFAS 157 applies whenever other standards
    require (or permit) assets or liabilities to be measured at fair value,
    and does not expand the use of fair value in any new circumstances. SFAS
    157 is effective for financial statements issued for fiscal years
    beginning after November 15, 2007 and is required to be adopted by the
    Company on November 1, 2008. The Company does not expect the adoption of
    SFAS 157 to have a material impact on its consolidated results of
    operations and financial condition.

    b.  In February 2007, the FASB issued SFAS No. 159, "The Fair Value
    Option for Financial Assets and Financial Liabilities Including an
    amendment of FASB Statement No. 115" (SFAS 159). This Statement permits
    entities to choose to measure many financial instruments and certain
    other items at fair value. The objective is to improve financial
    reporting by providing entities with the opportunity to mitigate
    volatility in reported earnings caused by measuring related assets and
    liabilities differently without having to apply complex hedge accounting
    provisions. The Company is required to adopt the provisions of SFAS 159
    on November 1, 2008 and is currently evaluating the effects of the
    adoption of SFAS 159. The adoption, however, is not expected to have a
    material impact on the consolidated results of operations and financial
    condition.

    c.  In December 2007, the FASB issued SFAS No. 141R, "Business
    Combinations", a substantial amendment to SFAS 141. The objective of this
    statement is to improve the relevance, representational faithfulness, and
    comparability of the information that a reporting entity provides in its
    financial reports about a business combination and its effects. To
    accomplish that, this statement establishes principles and requirements
    for how the acquirer: a) recognizes and measures in its financial
    statements the identifiable assets acquired, the liabilities assumed, and
    any non controlling interest in the acquiree; b) recognizes and measures
    the goodwill acquired in the business combination or a gain from a
    bargain purchase; and c) determines what information to disclose to
    enable users of the financial statements to evaluate the nature and
    financial effects of the business combination. The Company is required to
    adopt the provisions of SFAS 141R effective for acquisitions after
    October 31, 2009. The Company is currently evaluating the effects that
    the adoption of SFAS 141R will have on its consolidated results of
    operations and financial condition and is not yet in a position to
    determine such effects.

    d.  In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
    Interests in Consolidated Financial Statements an amendment of ARB No.
    51". SFAS 160 is effective for fiscal years beginning after December 15,
    2008. The objective of this Statement is to improve the relevance,
    comparability, and transparency of the financial information that a
    reporting entity provides in its consolidated financial statements
    related to the noncontrolling interest held by others in entities that
    are consolidated by the reporting entity. The provisions of SFAS 160 are
    not expected to have a material impact on the Company's consolidated
    results of operations and financial condition.

    e.  In March 2008, the FASB issued SFAS no. 161, "Disclosures about
    Derivative Instruments and Hedging Activities an amendment of FASB
    Statement 133". SFAS 161 is effective for fiscal years and interim
    periods beginning after November 15, 2008. MDS plans to adopt the
    provisions of SFAS 161 in the first quarter ending January 31, 2009.

    f.  In April 2008, the FASB issued Financial Statement Position,
    "Determination of the Useful Life of Intangible Assets" (FSP 142-3). FSP
    142-3 provides guidance with respect to estimating the useful lives of
    recognized intangible assets acquired on or after the effective date and
    requires additional disclosure related to the renewal or extension of the
    terms of recognized intangible assets. FSP 142-3 is effective for fiscal
    years and interim periods beginning after December 15, 2008. The adoption
    is not expected to have a material impact on the Company's consolidated
    results of operations and financial condition.

    g.  In May 2008, the FASB issued Financial Accounting Standard (SFAS)
    No. 162, "The Hierarchy of Generally Accepted Accounting Principles"
    (SFAS 162). Under SFAS 162, the U.S. GAAP hierarchy will now reside in
    the accounting literature established by the FASB. SFAS No. 162
    identifies the sources of accounting principles and the framework for
    selecting the principles used in the preparation of financial statements
    in conformity with U.S. GAAP. SFAS No 162 will not impact the Company's
    financial statements.
    

    International Financial Reporting Standards

    MDS has been monitoring the deliberations and progress being made by
accounting standard setting bodies and securities regulators both in Canada
and the United States with respect to their plans regarding convergence to
International Financial Reporting Standards (IFRS). The Accounting Standards
Board in Canada and the Canadian Securities Administrators (CSA) have recently
confirmed that domestic issuers will be required to transition to IFRS for
fiscal years beginning on or after January 1, 2011. The CSA Staff has proposed
retaining the existing option for a domestic issuer that is also an Securities
and Exchange Commission (SEC) registrant to use U.S. GAAP. Separately, the SEC
in late 2007 also eliminated the requirement of reconciling financial
statements to U.S. GAAP for foreign private issuers that file under IFRS
effective November 15, 2007. On August 27, 2008, the SEC issued a proposal
which would require registrants to issue their financial statement under IFRS
beginning in 2014, 2015 or 2016 depending on the size of the issuer. MDS has
not made an assessment of the impact of a conversion to IFRS.
    MDS adopted U.S. GAAP as the primary reporting standard for the Company's
consolidated financial statements in fiscal 2007. MDS commenced reporting
under U.S. GAAP to improve the comparability of the financial information with
that of its competitors, the majority of whom are U.S.-based multinational
companies that report under U.S. GAAP.

    Internal Control over Financial Reporting

    As a result of our internal controls review during the preparation of our
2007 annual financial statements, we concluded that effective internal control
over financial reporting was not maintained with respect to accounting for and
disclosure of the fair value of compensation expense and period-end
liabilities for certain stock-based incentive compensation plans. As this
error resulted in a material audit adjustment to our statements for fiscal
2007 and a restatement of the 2007 interim financial statements to correct the
Canadian to U.S. GAAP reconciliation tables in the notes to the financial
statements, we concluded that this constituted a material weakness in the
Company's internal control over financial reporting and that the Company's
internal control over financial reporting was not effective as at October 31,
2007. Although we believe that the reported material weakness is narrow in
scope and that it does not have a pervasive impact on internal control over
financial reporting at MDS, we will continue to evaluate our internal control
over financial reporting on an ongoing basis and will upgrade and enhance
internal control over financial reporting as needed.
    To address the identified material weakness, management implemented
measures in the first quarter of 2008 to remediate the control deficiency,
including review of certain stock-based incentive compensation plans with
third-party compensation experts, the calculation of fair value for these
plans using a Monte Carlo simulation, and a review of accounting regulations
for stock-based compensation plans with third-party accounting experts. These
measures have strengthened internal control associated with the calculation
and reporting of the fair value of stock-based incentive compensation plan
liability and expense. These measures were implemented prior to the
preparation of the financial statements for the quarter ended January 31, 2008
and will be subject to the Company's assessment of internal controls in fiscal
2008.

    
    CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
    (UNAUDITED)

    As at July 31 with comparatives at October 31
    ($ millions)                                              2008      2007
    -------------------------------------------------------------------------
    ASSETS
    Current assets
    Cash and cash equivalents                              $   130   $   222
    Short-term investments                                       -       102
    Accounts receivable, net                                   268       287
    Notes receivable                                            83         -
    Unbilled revenue                                           103        99
    Inventories, net                                           101       128
    Income taxes recoverable                                    56        54
    Current portion of deferred tax assets                      46        45
    Prepaid expenses and other                                  46        35
    Assets held for sale                                         6         1
    -------------------------------------------------------------------------
    Total current assets                                       839       973

    Property, plant and equipment, net                         347       386
    Deferred tax assets                                         28         4
    Long-term investments and other                            172       290
    Goodwill                                                   805       782
    Intangible assets, net                                     501       583
    -------------------------------------------------------------------------
    Total assets                                           $ 2,692   $ 3,018
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND SHAREHOLDERS' EQUITY
    Current liabilities
    Bank indebtedness                                      $    15   $     -
    Accounts payable and accrued liabilities                   282       384
    Current portion of deferred revenue                         78        71
    Income taxes payable                                        16        57
    Current portion of long-term debt                           20        94
    Current portion of deferred tax liabilities                 22        10
    -------------------------------------------------------------------------
    Total current liabilities                                  433       616

    Long-term debt                                             279       290
    Deferred revenue                                            14        17
    Other long-term obligations                                 33        30
    Deferred tax liabilities                                   136       168
    -------------------------------------------------------------------------
    Total liabilities                                          895     1,121
    -------------------------------------------------------------------------

    Shareholders' equity
    Common shares, at par - Authorized shares:
     unlimited; Issued and outstanding shares:
     121,093,730 and 122,578,331 for July 31, 2008
     and October 31, 2007, respectively.                       491       493
    Additional paid-in capital                                  76        72
    Retained earnings                                          840       842
    Accumulated other comprehensive income                     390       490
    -------------------------------------------------------------------------
    Total shareholders' equity                               1,797     1,897
    -------------------------------------------------------------------------
    Total liabilities and shareholders' equity             $ 2,692   $ 3,018
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Incorporated Under The Canada Business Corporations Act

    See accompanying notes.



    CONSOLIDATED STATEMENTS OF OPERATIONS
    (UNAUDITED)

    -------------------------------------------------------------------------
                                            Three months         Nine months
                                           ended July 31       ended July 31
    -------------------------------------------------------------------------
                                          2008      2007      2008      2007
                                                Restated            Restated
    ($ millions)                                 (Note 2)            (Note 2)
    -------------------------------------------------------------------------
    Revenues
      Products                         $   155   $   170   $   475   $   404
      Services                             143       138       445       408
      Reimbursement revenues                23        25        73        71
    -------------------------------------------------------------------------
    Total revenues                         321       333       993       883
    -------------------------------------------------------------------------

    Costs and expenses
      Direct cost of products              (95)     (109)     (296)     (263)
      Direct cost of services              (98)      (83)     (291)     (255)
      Reimbursed expenses                  (23)      (25)      (73)      (71)
      Selling, general and
       administration                      (63)      (66)     (202)     (181)
      Research and development             (19)      (20)      (61)      (48)
      Depreciation and amortization        (25)      (24)      (75)      (56)
      Asset impairment                     (11)        -       (11)        -
      Restructuring charges - net          (10)       (3)      (11)      (41)
      Other income (expenses) - net          1        (7)        7       (77)
    -------------------------------------------------------------------------
    Total costs and expenses              (343)     (337)   (1,013)     (992)
    -------------------------------------------------------------------------

    Operating loss from continuing
     operations                            (22)       (4)      (20)     (109)

    Interest expense                        (5)       (6)      (17)      (20)
    Interest income                          3         4        13        18
    Mark-to-market on interest rate
     swaps                                   -        (1)        2         -
    Equity earnings                         14        15        38        40
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations before income taxes        (10)        8        16       (71)

    Income tax (expense) recovery
      - current                              1         5       (24)       34
      - deferred                            (1)       (6)       26       (11)
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                            (10)        7        18       (48)

    Income from discontinued
     operations - net of income tax          -         -         -       808
    -------------------------------------------------------------------------
    Net income (loss)                  $   (10)  $     7   $    18   $   760
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic earnings (loss) per share
      - from continuing operations     $ (0.08)  $  0.06   $  0.15   $ (0.36)
      - from discontinued operations         -     (0.01)        -      5.99
    -------------------------------------------------------------------------
    Basic earnings (loss) per share    $ (0.08)  $  0.05   $  0.15   $  5.63
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Diluted earnings (loss) per share
      - from continuing operations     $ (0.08)  $  0.06   $  0.15   $ (0.36)
      - from discontinued operations         -     (0.01)        -      5.99
    -------------------------------------------------------------------------
    Diluted earnings (loss) per share  $ (0.08)  $  0.05   $  0.15   $  5.63
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes



    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
    (UNAUDITED)

    -------------------------------------------------------------------------
                                            Three months         Nine months
                                           ended July 31       ended July 31
    -------------------------------------------------------------------------
                                          2008      2007      2008      2007
                                                Restated            Restated
    ($ millions)                                 (Note 2)            (Note 2)
    -------------------------------------------------------------------------
    Net income (loss)                  $   (10)  $     7   $    18   $   760
    -------------------------------------------------------------------------
    Foreign currency translation           (16)       42       (91)       71
    Unrealized loss on
     available-for-sale assets              (1)        -         -        (3)
    Unrealized gain (loss) on
     derivatives designated as cash
     flow hedges, net of tax                (1)        -        (5)        5
    Reclassification of realized
     losses                                  -         -         -        (2)
    Repurchase and cancellation of
     Common shares                          (2)        -        (4)      (33)
    -------------------------------------------------------------------------
    Other comprehensive income (loss)  $   (20)  $    42   $  (100) $     38
    -------------------------------------------------------------------------
    Comprehensive income (loss)        $   (30)  $    49   $   (82) $    798
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Consolidated Statements of Cash Flows
    (UNAUDITED)
    -------------------------------------------------------------------------
                                            Three months         Nine months
                                           ended July 31       ended July 31
    -------------------------------------------------------------------------
                                          2008      2007      2008      2007
                                                Restated            Restated
    ($ millions)                                 (Note 2)            (Note 2)
    -------------------------------------------------------------------------
    Operating activities
    Net income (loss)                  $   (10)  $     7   $    18   $   760
    Less: Income from discontinued
     operations - net of tax                 -         -         -       808
    -------------------------------------------------------------------------
    Income (loss) from continuing
     operations                            (10)        7        18       (48)
    Adjustments to reconcile net
     income to cash provided (used in)
     operating activities relating
     to continuing operations:
      Items not affecting current cash
       flow                                 35        35        64       195
      Changes in non-cash operating
       assets and liabilities balances
       relating to operations               (2)      (42)     (130)      (41)
    -------------------------------------------------------------------------
    Cash provided by (used in)
     operating activities of
     continuing operations                  23         -       (48)      106
    Cash provided by (used in)
     operating activities of
     discontinued operations                 -         1         -       (52)
    -------------------------------------------------------------------------
                                            23         1       (48)       54
    -------------------------------------------------------------------------
    Investing activities
    Acquisitions                           (16)        2       (18)     (601)
    Purchase of property, plant and
     equipment                             (14)      (27)      (42)      (43)
    Proceeds on sale of property,
     plant and equipment                     -         -         3         -
    Proceeds on sale of short-term
     investments                             -        14       101       165
    Purchases of short-term investments      -       (81)        -      (118)
    Proceeds on sale of long-term
     investment                              1         -         8        13
    Proceeds on sale of product line        15         -        15         -
    Decrease (increase) in restricted
     cash                                    1         -        (2)       (3)
    Other                                    -        (2)        -        (2)
    -------------------------------------------------------------------------
    Cash provided by (used in)
     investing activities of
     continuing operations                 (13)      (94)       65      (589)
    Cash provided by investing
     activities of discontinued
     operations                              -         -         -       929
    -------------------------------------------------------------------------
                                           (13)      (94)       65       340
    -------------------------------------------------------------------------
    Financing activities
    Increase in Bank Indebtedness           15         -        15         -
    Repayment of long-term debt              -        (1)      (81)       (8)
    Decrease in deferred revenue and
     other long-term obligations             -         1         -         1
    Payment of cash dividends                -         -         -        (3)
    Issuance of shares                       1         5         6        15
    Repurchase of shares                   (15)        -       (32)     (441)
    -------------------------------------------------------------------------
    Cash provided by (used in)
     financing activities of
     continuing operations                   1         5       (92)     (436)
    Cash used in financing activities
     of discontinued operations              -         -         -        (2)
    -------------------------------------------------------------------------
                                             1         5       (92)     (438)
    -------------------------------------------------------------------------
    Effect of foreign exchange rate
     changes                                (6)       11       (17)       15
    -------------------------------------------------------------------------
    Net increase (decrease) in cash
     and cash equivalents during
     the period                              5       (77)      (92)      (29)
    Cash and cash equivalents,
     beginning of period                   125       287       222       239
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period                    $    130  $    210   $   130   $   210
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes



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


    1.  Basis of Presentation

    The accompanying unaudited consolidated financial statements have been
    prepared by the Company in United States (US) dollars and in accordance
    with U.S. generally accepted accounting principles (U.S. GAAP) for
    interim financial reporting, which do not conform in all respects to the
    requirements of U.S. GAAP for annual financial statements. Accordingly,
    these condensed notes to the unaudited consolidated financial statements
    should be read in conjunction with the audited consolidated financial
    statements and notes thereto prepared in accordance with U.S. GAAP that
    are contained in the Company's amended Annual Report for the fiscal year
    ended October 31, 2007, filed on January 29, 2008 with the U.S.
    Securities and Exchange Commission, the Ontario Securities Commission,
    and other securities regulatory authorities in Canada. These interim
    consolidated financial statements have been prepared using accounting
    policies that are consistent with the policies used in preparing the
    Company's audited consolidated financial statements for the year ended
    October 31, 2007. There have been no material changes to the Company's
    significant accounting policies since October 31, 2007, except as
    described below under "Recently Adopted Accounting Pronouncements". These
    policies are consistent with accounting principles generally accepted in
    Canada (Canadian GAAP) in all material respects except as described in
    Note 22.

    Comparative Figures

    Certain figures for the previous year have been reclassified to conform
    to the current period financial statement presentation.

    Use of Estimates

    In preparing the Company's consolidated financial statements, management
    is required to make estimates and assumptions that affect the reported
    amounts of assets and liabilities, the disclosure of contingent assets
    and liabilities at the dates of the consolidated financial statements and
    the reported amounts of revenue and expenses during the reporting
    periods. Actual results could differ from these estimates and the
    operating results for the interim periods presented are not necessarily
    indicative of the results expected for the full year.

    On an ongoing basis, management reviews its estimates to ensure that
    these estimates appropriately reflect changes in the Company's business
    and new information as it becomes available. If historical experience and
    other factors used by management to make these estimates do not
    reasonably reflect future activity, the Company's results of operations
    and financial position could be materially impacted.


    2.  Changes Affecting Fiscal 2008 Consolidated Financial Statements

    a.  Restatement of 2007 Interim Financial Statements

    During the preparation of the 2007 annual financial statements, an error
    was identified in the U.S. GAAP reconciliation provided as part of the
    fiscal 2007 interim financial statements with respect to certain stock-
    based incentive compensation plans for which an incorrect valuation
    methodology was utilized. The Company has corrected this error by
    restating selling, general and administration expenses for the three
    months ended July 31, 2007 with a reduction of $2 million in the
    accompanying quarterly consolidated financial statements and reducing the
    value of accrued liabilities by a similar amount. The Canadian GAAP
    financial statements previously reported were not impacted by the change,
    except for the reconciliation to U.S. GAAP (see Note 22).

    b.  Recently Adopted Accounting Pronouncements

    On November 1, 2007, the Company adopted the provisions of the U.S.
    Financial Accounting Standards Board (FASB) interpretation No. 48 (FIN
    48), "Accounting for Uncertainty in Income Taxes, an Interpretation of
    FASB Statement No. 109". FIN 48 clarifies accounting for uncertainty in
    income taxes recognized in an enterprise's financial statements and
    prescribes a recognition threshold of more likely than not to be
    sustained upon audit examination. As a result of the implementation, an
    adjustment to the liability for unrecognized tax benefits was not
    required; accordingly, no adjustment was made to opening retained
    earnings at November 1, 2007.

    At May 1, 2008, the total amount of unrecognized tax benefits, including
    interest and penalties, was $29 million. Of these unrecognized tax
    benefits, $22 million, if recognized, would favourably affect the
    effective income tax rate in the future. The amount of unrecognized tax
    benefits at July 31, 2008, including interest and penalties, is
    $31 million.

    The Company accrues interest and penalties relating to unrecognized tax
    benefits in its provision for income taxes. As of May 1, 2008, the
    balance of accrued interest and penalties was $6 million. During the
    third quarter of 2008 there was an increase to the liability for interest
    and penalties by approximately $1 million.

    MDS is subject to taxation in Canada and the US, its principal
    jurisdictions, and in numerous other countries around the world. With few
    exceptions, MDS is no longer subject to examination by Canadian tax
    authorities for tax years before 2002, while most tax returns for 2002
    and beyond remain open for examination. Tax returns filed in the U.S.
    generally are not subject to examination for years before 2003, while
    2003 and subsequent U.S. tax filings generally remain open for audit by
    tax authorities. In certain circumstances, selective returns in earlier
    years are also open for examination.


    3.  Recent U.S. Accounting Pronouncements

    a. In September 2006, the FASB issued Statement of Financial Accounting
    Standards (SFAS) No. 157, "Fair Value Measurements". SFAS 157 provides
    guidance for using fair value to measure assets and liabilities. It also
    responds to investors' requests for expanded information about the extent
    to which companies measure assets and liabilities at fair value, the
    information used to measure fair value, and the effect of fair value
    measurements on earnings. SFAS 157 applies whenever other standards
    require (or permit) assets or liabilities to be measured at fair value,
    and does not expand the use of fair value in any new circumstances. SFAS
    157 is effective for financial statements issued for fiscal years
    beginning after November 15, 2007 and is required to be adopted by the
    Company on November 1, 2008. The Company does not expect the adoption of
    SFAS 157 to have a material impact on its consolidated results of
    operations and financial condition.

    b. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
    for Financial Assets and Financial Liabilities Including an amendment of
    FASB Statement No. 115" (SFAS 159). This Statement permits entities to
    choose to measure many financial instruments and certain other items at
    fair value. The objective is to improve financial reporting by providing
    entities with the opportunity to mitigate volatility in reported earnings
    caused by measuring related assets and liabilities differently without
    having to apply complex hedge accounting provisions. The Company is
    required to adopt the provisions of SFAS 159 on November 1, 2008 and is
    currently evaluating the effects of the adoption of SFAS 159. The
    adoption, however, is not expected to have a material impact on the
    consolidated results of operations and financial condition.

    c. In December 2007, the FASB issued SFAS No. 141R, "Business
    Combinations", a substantial amendment to SFAS 141. The objective of this
    statement is to improve the relevance, representational faithfulness, and
    comparability of the information that a reporting entity provides in its
    financial reports about a business combination and its effects. To
    accomplish that, this statement establishes principles and requirements
    for how the acquirer: a) recognizes and measures in its financial
    statements the identifiable assets acquired, the liabilities assumed, and
    any non controlling interest in the acquiree; b) recognizes and measures
    the goodwill acquired in the business combination or a gain from a
    bargain purchase; and c) determines what information to disclose to
    enable users of the financial statements to evaluate the nature and
    financial effects of the business combination. The Company is required to
    adopt the provisions of SFAS 141R effective for acquisitions after
    October 31, 2009. The Company is currently evaluating the effects that
    the adoption of SFAS 141R will have on its consolidated results of
    operations and financial condition and is not yet in a position to
    determine such effects.

    d. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
    Interests in Consolidated Financial Statements an amendment of ARB
    No. 51". SFAS 160 is effective for fiscal years beginning after
    December 15, 2008. The objective of this Statement is to improve the
    relevance, comparability, and transparency of the financial information
    that a reporting entity provides in its consolidated financial statements
    related to the noncontrolling interest held by others in entities that
    are consolidated by the reporting entity. The provisions of SFAS 160 are
    not expected to have a material impact on the Company's consolidated
    results of operations and financial condition.

    e. In March 2008, the FASB issued SFAS no. 161, "Disclosures about
    Derivative Instruments and Hedging Activities an amendment of FASB
    Statement 133". SFAS 161 is effective for fiscal years and interim
    periods beginning after November 15, 2008. MDS plans to adopt the
    provisions of SFAS 161 in the first quarter ending January 31, 2009.

    f. In April 2008, the FASB issued Financial Statement Position,
    "Determination of the Useful Life of Intangible Assets" (FSP 142-3).
    FSP 142-3 provides guidance with respect to estimating the useful lives
    of recognized intangible assets acquired on or after the effective date
    and requires additional disclosure related to the renewal or extension of
    the terms of recognized intangible assets. FSP 142-3 is effective for
    fiscal years and interim periods beginning after December 15, 2008. The
    adoption is not expected to have a material impact on the Company's
    consolidated results of operations and financial condition.

    g. In May 2008, the FASB issued Financial Accounting Standard (SFAS)
    No. 162, "The Hierarchy of Generally Accepted Accounting Principles"
    (SFAS 162). Under SFAS 162, the U.S. GAAP hierarchy will now reside in
    the accounting literature established by the FASB. SFAS No. 162
    identifies the sources of accounting principles and the framework for
    selecting the principles used in the preparation of financial statements
    in conformity with U.S. GAAP. SFAS No 162 will not impact the Company's
    financial statements.

    h. MDS has been monitoring the deliberations and progress being made by
    accounting standard setting bodies and securities regulators both in
    Canada and the United States with respect to their plans regarding
    convergence to International Financial Reporting Standards (IFRS). The
    Accounting Standards Board in Canada and the Canadian Securities
    Administrators (CSA) have recently confirmed that domestic issuers will
    be required to transition to IFRS for fiscal years beginning on or after
    January 1, 2011. The CSA Staff proposed retaining the existing option for
    a domestic issuer that is also a Securities and Exchange Commission (SEC)
    registrant to use U.S. GAAP.

    Separately, the SEC in late 2007 also eliminated the requirement of
    reconciling financial statements to U.S. GAAP for foreign private issuers
    that file under IFRS effective November 15, 2007. On August 27, 2008, the
    SEC issued a proposal which would require registrants to issue their
    financial statement under IFRS beginning in 2014, 2015 or 2016 depending
    on the size of the issuer. MDS has not made an assessment of the impact
    of a conversion to IFRS.

    MDS adopted U.S. GAAP as the primary reporting standard for the Company's
    consolidated financial statements in fiscal 2007. MDS commenced reporting
    under U.S. GAAP to improve the comparability of the financial information
    with that of its competitors, the majority of whom are US-based
    multinational companies that report under U.S. GAAP.


    4.  Acquisitions

    a.  Acquisition of Blueshift Biotechnologies Inc.

    In June 2008, MDS acquired 100% of the stock of a small biomedical
    company focused on the development of screening platforms for life
    sciences research. The purchase price totalled $13 million of which
    $1.5 million has been placed in escrow. This escrow amount less claims
    for indemnifications will be released to the vendors on June 26, 2009. An
    additional amount of $0.5 million has been placed in escrow which is
    contingent on the achievement of certain milestones.

    The acquisition has been accounted for as a purchase in accordance with
    SFAS No. 141 and the Company has allocated the purchase price of the
    acquired assets 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 becomes
    available. In connection with determining the fair value of the assets
    acquired and liabilities assumed, management performed assessments of
    assets and liabilities using customary valuation procedures and
    techniques.

    The cost of the acquisition has been allocated as follows:

    ($ millions)
    -------------------------------------------------------------------------
    Intangible assets, primarily acquired technology                     $ 8
    Goodwill                                                               5
    Total purchase price                                                $ 13
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    b.  Other Acquisition

    In December 2007, MDS acquired 100% of the stock of a small company that
    is in the process of developing a complimentary product to our MDS
    Analytical Technologies product portfolio. Consideration for the
    transaction was $2 million net of cash acquired, plus an additional
    $2 million in cash payments expected in 2008 which were placed in escrow
    according to the agreement. The additional $2 million payment was
    included in prepaid expenses in the second quarter of 2008, and was
    contingent on the retention of certain key employees and the completed
    validation of the functionality and technical specification of prototypes
    of the product acquired. The contingency related to the prototypes was
    fulfilled in the third quarter, and the amount of the notional payment
    was added to the purchase price and allocated to goodwill.

    The purchase price and related allocations have been finalized. In
    connection with the fair valuing of the assets acquired and liabilities
    assumed, MDS performed assessments of intangible assets using customary
    valuation procedures and techniques. A value of $1 million was assigned
    to in-process research and development which has been expensed
    accordingly.


    5.  Discontinued Operations and Assets Held for Sale

    a.  During the quarter ended July 31, 2008, the Company adopted a plan to
    dispose of an office building in Phoenix, Arizona which is part of the
    MDS Pharma Services segment for which assets will no longer be required
    due to the move to another facility. The Company expects that the final
    sale and disposal of the asset will be completed by mid-2009. In
    connection with the plan of disposal, the Company determined that the
    $6 million carrying value of the underlying asset does not exceed its
    fair value and there will be no impairment loss recorded. The asset is
    separately presented on the balance sheet in the caption "Assets held for
    sale" and this asset is no longer depreciated.

    b. In November 2007, the Company signed an agreement to sell its external
    beam therapy and self-contained irradiator product lines. The sale closed
    on May 1, 2008 and the final purchase price adjustments, all immaterial,
    have been made. Under the terms of this agreement, Best Medical
    International Inc., (Best Medical) a provider of radiotherapy and
    oncology products, purchased MDS Nordion's external beam therapy and
    self-contained irradiator product lines for $15 million in cash. Best
    Medical acquired these two product lines, which have combined annualized
    revenues of approximately $32 million and approximately 150 employees.
    Once the Company made the decision to dispose of the product lines, the
    Company followed the guidance of SFAS No. 144, "Accounting for the
    Impairment or Disposal of Long-lived Assets" and recorded a loss on sale
    of this business in the amount of $4 million in the first quarter of
    2008. Related to the disposal, $1 million of the loss was allocated to
    the impairment of goodwill. In accordance with SFAS No. 88, "Employers'
    Accounting for Settlements and Curtailments of Defined Benefit Pension
    Plans and for Termination Benefits", a pension curtailment gain of
    approximately $1 million was recorded in the second quarter of 2008 as a
    result of the transfer of employees to Best Medical.

    c. In October 2006, the Company signed an agreement to sell its Canadian
    laboratory services business, MDS Diagnostic Services, in a
    CAD$1.325 billion transaction. The sale of MDS Diagnostic Services closed
    in February 2007. This strategic sale was designed to shift the Company's
    business focus to the global life sciences market. The results of
    discontinued MDS Diagnostic Services were as follows:

    -------------------------------------------------------------------------
                                                                 Nine months
                                                               ended July 31
    -------------------------------------------------------------------------
    ($ millions, except for earnings per share)                         2007
    -------------------------------------------------------------------------
    Net revenues                                                      $   95
    Cost of revenues                                                     (57)
    Selling, general and administration                                  (15)
    -------------------------------------------------------------------------
    Operating income                                                      23
    Gain on sale of discontinued operations                              904
    Interest income                                                        1
    Income taxes                                                        (117)
    Minority interest                                                     (4)
    Equity earnings                                                        1
    -------------------------------------------------------------------------
    Income from discontinued operations                               $  808
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic earnings per share from discontinued operations             $ 5.99
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    6.  Inventories

                                           As at July 31    As at October 31
    -------------------------------------------------------------------------
    ($ millions)                                    2008                2007
    -------------------------------------------------------------------------
    Raw materials and supplies                     $  71               $  83
    Work-in process                                   17                  34
    Finished goods                                    23                  26
    -------------------------------------------------------------------------
                                                     111                 143
    Allowance for excess and obsolete inventory      (10)                (15)
    -------------------------------------------------------------------------
    Inventories - net                              $ 101               $ 128
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    7.  Long-Term Investments and Other

                                           As at July 31    As at October 31
    -------------------------------------------------------------------------
    ($ millions)                                    2008                2007
    -------------------------------------------------------------------------
    Financial instrument pledged as security
     on long-term debt (note a)                    $  43               $  46
    Long-term notes receivable (note b)               36                 125
    Equity investments (note c)                        5                  10
    Equity investments in joint ventures
     (note c)                                         24                  38
    Available for sale investments (note d)           16                  24
    Deferred pension assets                           41                  39
    Other long-term investments (note e)               7                   4
    Venture capital investments                        -                   4
    -------------------------------------------------------------------------
    Long-term investments and other                $ 172               $ 290
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    a.  Financial Instrument Pledged as Security on Long-term Debt

    The financial instrument pledged as security on long-term debt, which is
    classified as held to maturity, and the long-term notes receivable, have
    fair values that approximate their carrying value. Other long-term
    investments, excluding those classified as available for sale, are
    recorded at cost.

    b.  Long-term Notes Receivable

    In 2006, as a result of a comprehensive mediation process that resulted
    in an exchange of assets between the Company and Atomic Energy of Canada
    Limited related to the MAPLE reactor project, a long-term note receivable
    for $38 million after discounting was received by the Company. This non-
    interest bearing note receivable is repayable over four years commencing
    in 2008. The note receivable is net of an unamortized discount based on
    an imputed interest rate of 4.5%. The value as at July 31, 2008 is
    $47 million, of which $11 million is included in notes receivable. The
    note receivable will be accreted up to its face amount of CAD$53 million
    over a period of four years. Please refer to note 8 for information
    regarding the MAPLE Reactor Project.

    A $73 million Canadian denominated note receivable relating to the sale
    of the diagnostics business referred to in Note 5 was reclassified from
    long-term investments and other to note receivable as it is due on
    March 31, 2009.

    c.  Equity Investments

    -------------------------------------------------------------------------
                                           As at July 31    As at October 31
    ($ millions)                                    2008                2007
    -------------------------------------------------------------------------
    Lumira Capital Corp                             $  5                $ 10
    MDS AT joint ventures                             24                  38
    -------------------------------------------------------------------------
    Equity investments                              $ 29                $ 48
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Company accounts for its investments in significantly influenced
    companies and joint ventures using the equity method of accounting. The
    Company owns 45.7% of the outstanding share capital of Lumira Capital
    Corp ("Lumira" - formerly MDS Capital Corp.) Lumira is an investment fund
    management company that also has long-term investments in development-
    stage enterprises that have not yet earned significant revenues from
    their intended business activities or established their commercial
    viability. The recovery of invested amounts and the realization of
    investment returns is dependent upon the successful resolution of
    scientific, regulatory, competitive, political and other risk factors, as
    well as the eventual commercial success of these enterprises. These
    investments are subject to measurement uncertainty, and adverse
    developments could result in further write-downs of the carrying values.
    In 2007, the Company wrote down this investment to its estimated fair
    value and recorded a provision of $6 million in other expenses. In
    February 2008, the Company received $4 million in cash from Lumira as a
    distribution and reduction in stated capital. The Company reduced its
    investment in Lumira accordingly.

    d.  Available for Sale Investments

    Included with available for sale investments is an investment in non-bank
    sponsored asset backed commercial paper (ABCP) issued by two trusts with
    an original cost of $17 million. These investments matured in September
    2007 but as a result of liquidity issues in the ABCP market, they did not
    settle at maturity. In September 2007, a Pan-Canadian Investors Committee
    for Third Party Asset Backed Commercial Paper (the Committee) was formed
    to propose a solution to the liquidity problem in the ABCP market.

    While no adjustment was recorded in the first quarter of 2008, an
    impairment loss of $2 million was recognized in the fourth quarter of
    fiscal 2007. In March 2008, the Committee filed with the Ontario Superior
    Court of Justice a restructuring arrangement. The holders of ABCP voted
    in favour of the Committee's restructuring plan. The Company has
    estimated the fair value of its investments in ABCP using all currently
    available information and assumptions that market participants would use
    in pricing such investments. The Company reviewed information provided by
    the Committee, JP Morgan, DBRS, current investment ratings, valuation
    estimates of the underlying assets and general economic conditions.
    Accordingly, the Company used a scenario-based probability-weighted
    discounted cash flow approach to value its investment at April 30, 2008
    and recognized an impairment loss of $3 million in the second quarter of
    2008 representing a 20% reduction of the face value of the investments
    and for a total write-down of $5 million representing a 30% reduction in
    the fair value of the investment. A change in the estimate of the
    composition of the underlying assets may affect the face value of the
    investments in the future. During the third quarter of 2008, market
    conditions surrounding liquidity of ABCP continued to experience some
    volatility, however, no additional adjustment was deemed necessary. The
    assumptions used in estimating fair value of ABCP are subject to change,
    which may result in further adjustments.

    e.  Other Long-term Investments

    The Company holds 6,480,282 Common shares in Entelos Inc. (Entelos), a
    U.S. based company listed on the London Stock Exchange. The Entelos
    shares were received by the Company as part of an exchange under a merger
    agreement dated August 29, 2007 between Entelos and Iconix Bioscience
    Inc. (Iconix). As at July 31, 2008, the Entelos shares have a market
    value of $2 million.

    In addition, under the terms of the merger agreement between Entelos and
    Iconix, the Company may earn further common shares of Entelos as defined
    in the agreement and based upon specified earnings over the twelve months
    ended August 31, 2008. As at July 31, 2008, the Company's estimate of the
    fair value of the earn-out is $4 million and is included in "prepaid
    expenses and other" (October 31, 2007 - $4 million). The fair value of
    the earn-out is subject to measurement uncertainty. The recognized amount
    of the earn-out is based on the Company's best information and judgment
    in which the Company is expecting to finalize the value of the earn out
    in the fourth quarter of 2008 noting that actual results could differ
    from the original recorded value of $4 million.


    8.  MAPLE Reactor

    In 1996, MDS entered into an agreement with Atomic Energy of Canada,
    Limited (AECL), a Crown corporation for the design, development and
    construction of two nuclear reactors and a processing facility, known as
    the MAPLE project. The project was intended to replace AECL's current
    National Research Universal reactor (NRU) which produces approximately
    50% of the world's medical isotopes. AECL agreed to provide interim
    supply of medical isotopes from NRU until the MAPLE project was
    operational. The MAPLE project was to be completed by the year 2000 at a
    planned cost to MDS of $145 million.

    By 2005, the project was not yet completed and costs had more than
    doubled, with MDS's investment exceeding $350 million. To address these
    issues, MDS entered mediation with AECL that resulted in a new agreement
    between AECL and MDS on February 22, 2006 providing for both interim and
    long-term supply of medical isotopes. Under the interim and long-term
    supply agreement (ILTSA), AECL paid the Company $22 million, assumed
    ownership of the MAPLE facilities and took responsibility for all costs
    associated with completing the project and the future production of
    medical isotopes from the MAPLE facilities. The parties retained certain
    rights related to existing claims. In addition, AECL acquired $47 million
    of MAPLE-related inventories in exchange for a non-interest bearing note
    having a net present value of $38 million, to be repaid over four years
    commencing in 2008. The agreement requires AECL to supply medical
    isotopes to MDS Nordion over a 40-year period, upon the MAPLE facilities
    meeting certain operational criteria, in exchange for a fixed percentage
    of the selling price. In accordance with SFAS No. 153, "Exchanges of
    Non-monetary Assets", the Company exchanged the MAPLE asset for the
    40-year supply agreement which was recorded as an intangible asset at its
    fair value of $308 million. This amount is to be amortized on a
    straight-line basis over a 40-year period once commercial production of
    MAPLE isotopes begins. The Company recorded a loss on this transaction of
    $36 million in 2006.

    On May 16, 2008, AECL and the Government of Canada, announced their
    intention to discontinue the development work on the MAPLE reactors
    located at Chalk River laboratories, effective immediately. The MAPLE
    reactors were to replace the NRU reactor and provide MDS Nordion with a
    long-term source of supply of medical isotopes under the ILTSA. MDS has
    substantial financial interests in the success of the MAPLE project,
    primarily through the 40-year supply commitment from AECL, as part of the
    exchange of non-monetary assets contained in the ILTSA.

    The Company was neither consulted nor informed in advance by AECL or the
    Canadian government about their decision. Prior to their May 16, 2008
    announcement, AECL had consistently maintained in regular project review
    meetings with the Company that it would complete the MAPLE project.
    AECL's announcement and position represents a different perspective on
    AECL's obligations than that held by MDS. On July 9, 2008, MDS served
    AECL with notice of arbitration proceedings. MDS will be seeking an order
    to compel AECL to fulfill its obligations under the ILTSA and if not
    granted, will seek significant monetary damages. MDS has concurrently
    filed a court claim for $1.6 billion in damages against AECL, for
    negligence and breach of contract, and against the Government of Canada,
    for inducing breach of contract and for interference with economic
    relations.

    AECL and the Government of Canada also announced that its decision will
    not impact the current supply of medical isotopes and that AECL will
    continue to supply medical isotopes, using the NRU reactor and will
    pursue an extension of the NRU operation beyond its current expiry date
    of October 31, 2011. While MDS supports this decision, it does not
    adequately address long-term supply.

    MDS is reviewing the impact on its business from an operational and
    financial reporting perspective. The principal U.S. GAAP reporting
    exposure for MDS related to the announcement is its intangible asset
    associated with the 40-year supply agreement currently carried at
    $336 million (valued at the July 31, 2008 exchange rate). MDS will
    continue to evaluate the intangible asset for possible impairment and the
    relevant financial reporting implications based upon the progress of any
    dialogue, negotiations or legal proceedings between AECL, the Government
    of Canada and the Company. It is the Company's position that AECL has
    breached its contract with MDS, and the Company will continue to monitor
    the proceedings and potential outcome which, at this time, we deem to be
    uncertain.


    9.  Bank Indebtedness

    The Company has a CAD$500 million operating line facility. As at July 31,
    2008, the Company had drawn CAD$15 million on this facility. The amount
    was subsequently repaid in August 2008.


    10. Restructuring Charges

    An analysis of the activity in the provision through July 31, 2008 is as
    follows:
                                                     Cumulative    Provision
                                                      drawdowns   Balance at
                                 Restructuring                       July 31,
    ($ millions)                        Charge      Cash  Non-cash      2008
    -------------------------------------------------------------------------
    2007:
      Workforce reductions            $     17  $    (14) $     (2) $      1
      Equipment and other asset
       write-downs                           2        (1)        2         3
      Contract cancellation charges          5        (6)        1         -
      Other                                 14       (11)       (3)        -
    -------------------------------------------------------------------------
                                      $     38  $    (32) $     (2) $      4
    -------------------------------------------------------------------------
    2008:
      Workforce reductions                   9        (2)        -         7
      Contract cancellation charges          1         -         -         1
    -------------------------------------------------------------------------
                                      $     10  $     (2) $      -  $      8
    -------------------------------------------------------------------------

    A restructuring charge of $10 million was recorded in the third quarter
    of 2008 related primarily to the MDS Pharma Services ($8 million) and
    MDS Analytical Technologies ($2 million) segments. Cash utilization of
    $2 million was recorded with respect to this restructuring in the third
    quarter. The majority of the 2008 restructuring activities are expected
    to be completed by the end of 2008.

    Cash utilization of $1 million was recorded with respect to the 2007
    restructuring activities in the third quarter of 2008. The remaining
    balance primarily relates to the MDS Pharma Services segment. The 2007
    restructuring activities are expected to be completed by the end of 2009.


    11. Asset Impairment

    In accordance with SFAS No. 144 "Accounting for the Impairment or
    Disposal of Long Lived Assets" (SFAS 144), during the third quarter of
    2008, the Company recorded an asset impairment charge of $11 million to
    reduce the net book value of certain long-lived assets to their estimated
    fair value. The impairment charge relates to a building at its
    bio-analytical laboratory facilities in Montreal which will no longer be
    utilized.


    12. Other Income (Expenses)

                                            Three months        Nine months
                                           ended July 31       ended July 31
    -------------------------------------------------------------------------
    ($ millions)                          2008      2007      2008      2007
    -------------------------------------------------------------------------
    Write-down of
     investments/valuation provisions        -         -        (3)       (6)
    (Loss) gain on sale of investment       (1)        -         1         2
    Gain (loss) on sale of business          -         -        (4)        1
    Curtailment gain on pension              -         -         1        (2)
    Acquisition integration costs            -        (1)       (1)        -
    FDA reversal (provision)                 -         -        10       (61)
    Foreign exchange gain (loss)             2        (4)        5        (5)
    Loss on embedded derivatives             -         -        (1)        -
    Other                                    -        (2)       (1)       (6)
    -------------------------------------------------------------------------
    Other income (expense) - net      $      1  $     (7) $      7  $    (77)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the second quarter of 2008, a write-down of $3 million was taken
    for ABCP. The Company did not record additional impairment of its
    investment in asset-backed commercial paper ABCP in the third quarter of
    fiscal 2008 (see note 7d).

    During fiscal 2007, the Company recorded a provision of $61 million to
    reimburse clients who have incurred or will incur third-party audit costs
    or study re-run costs to complete the work required by the FDA or other
    regulators. The Company has utilized approximately $19 million of this
    reserve to date, an amount partially offset by the impact of foreign
    currency fluctuations on the liability. While the Company believes it has
    substantially completed the majority of all required site audits, we
    still await final reimbursement requests for many of these audits. Based
    on information currently available, the Company believes that a reserve
    of approximately $32 million is required to cover study audits, re-runs
    and other related costs. Approximately $10 million was reversed in the
    second quarter of fiscal 2008 with no further adjustment made in the
    third quarter of 2008. Management will continue to closely monitor the
    FDA matter and related provision.


    13. Earnings Per Share

    a.  Dilution

                                            Three months        Nine months
                                           ended July 31       ended July 31
    -------------------------------------------------------------------------
    (number of shares in millions)        2008      2007      2008      2007
    -------------------------------------------------------------------------
    Weighted average number of Common
     shares outstanding - basic            122       123       122       135
    Impact of stock options assumed
     exercised                               -         -         -         -
    -------------------------------------------------------------------------
    Weighted average number of Common
     shares outstanding - diluted          122       123       122       135
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    b. Pro-Forma Impact of Stock-Based Compensation

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

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

                                            Three months        Nine months
                                           ended July 31       ended July 31
    -------------------------------------------------------------------------
    ($ millions, except earnings
     per share)                           2008      2007      2008      2007
    -------------------------------------------------------------------------
    Net income                        $    (10) $      7  $     18  $    760
    Compensation expense for options
     granted prior to November 1, 2003       -         -         -        (1)
    -------------------------------------------------------------------------
    Net income - pro-forma            $    (10) $      7  $     18  $    759
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Pro-forma basic earnings per
     share                            $  (0.08) $   0.06  $   0.15  $   5.63
    Pro-forma diluted earnings per
     share                            $  (0.08) $   0.06  $   0.15  $   5.62
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    14. Share Capital

    At July 31, 2008, the authorized share capital of the Company consists of
    unlimited Common shares. The Common shares are voting and are entitled to
    dividends if, as and when declared by the Board of Directors.

    The following table summarizes information on share capital and stock
    options and related matters as at July 31, 2008:

    (number of shares in thousands)               Number              Amount
    -------------------------------------------------------------------------
    Common shares
    Balance as at October 31, 2007               122,578            $    493
    Issued during the period                         401                   6
    Repurchased during the period                 (1,885)                 (8)
    -------------------------------------------------------------------------
    Balance as at July 31, 2008                  121,094            $    491
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the third quarter of 2008, the Company repurchased
    1,013,200 Common shares under a normal course issuer bid for a cost of
    $15 million. Of the total cost, $4 million was charged to share capital,
    $2 million was charged to other comprehensive income and $9 million was
    charged to retained earnings. For the nine months ended July 31, 2008
    1,885,300 Common shares were purchased under a normal course issuer bid
    for a cost of $32 million, with $8 million charged to share capital,
    $4 million charged to comprehensive income and $20 million charged to
    retained earnings. Under the terms of its existing normal course issuer
    bid, the Company is entitled to purchase up to 4,136,766 Common shares
    between July 3, 2008 and July 2, 2009, of which 400,000 Common shares
    have been purchased to date.


    15. Stock-based Compensation

    CAD$ options                                                     Average
    (number of stock options in thousands)        Number      Exercise Price
    -------------------------------------------------------------------------
    Stock options
    Balance as at October 31, 2007                 5,555            $  19.66
    Activity during the period:
      Granted                                         39               20.29
      Exercised                                     (401)              16.17
      Cancelled or forfeited                        (569)              20.75
    -------------------------------------------------------------------------
    Balance as at July 31, 2008                    4,624            $  19.84
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    US$ options                                                      Average
    (number of stock options in thousands)        Number      Exercise Price
    -------------------------------------------------------------------------
    Stock options
    Balance as at October 31, 2007                     -            $      -
    Activity during the period:
      Granted                                      1,149               15.92
      Exercised                                        -                   -
      Cancelled or forfeited                           -                   -
    -------------------------------------------------------------------------
    Balance as at July 31, 2008                    1,149            $  15.92
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the third quarter of 2008, the Company granted nil CAD$ options
    and 1,137,000 US$ options (2007 - 883,600 and nil) at an average exercise
    price of CAD$ nil and US$15.90, respectively (2007 - CAD$21.77 and
    US$ nil). Options outstanding have a fair value determined using the
    Black-Scholes model of CAD$4.51 and US$4.14 per share respectively
    (2007 - CAD $4.44 and US$ nil) based on the following:

    CAD$ options                                    2008                2007
    -------------------------------------------------------------------------
    Risk-free interest rate                         3.3%                3.9%
    Expected dividend yield                         0.0%                0.0%
    Expected volatility                              21%                 21%
    Expected time to exercise (years)               4.40                3.17
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    US$ options                                     2008                2007
    -------------------------------------------------------------------------
    Risk-free interest rate                         3.6%                   -
    Expected dividend yield                         0.0%                   -
    Expected volatility                              23%                   -
    Expected time to exercise (years)               4.40                   -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The stock compensation expense for the nine months ended July 31, 2008
    was $4 million (nine months ended July 31, 2007 - $2 million), which has
    been recorded in selling, general and administration expenses and as
    additional paid in-capital within share capital.

    Incentive Plans

    The Company has been utilizing mid-term incentive plans (MTIP) since
    2005. The 2006 MTIP will vest in two equal tranches, based on achieving
    specified share price hurdles of CAD$22.00 and CAD$26.00 respectively.
    The term of the Performance Share Units (PSUs) is three years and payout
    will occur at the later of 24 months from the date of grant and
    achievement of each share price hurdle. Payout on certain PSUs will be in
    the form of Deferred Share Units (DSUs) and the balance will be paid in
    cash. During 2006, the price hurdle was met and 50% of the issued units
    vested. A payment of $3 million was made related to these vested units in
    the first quarter of 2008. A further payment of $1 million was made in
    the third quarter of 2008 related to these vested units.

    The 2007 MTIP will vest in two equal tranches, based on achieving
    specified share price hurdles of CAD$25.30 and CAD$27.50, respectively.
    The term of the PSUs is three years and payout will occur at the later of
    24 months from the date of grant and achievement of each share price
    hurdle.

    The 2008 MTIP will vest on December 15, 2010 and the number of PSUs
    granted will be determined based on achieving a target rate for 2010 cash
    earnings per share of between US$1.17 and US$1.31. The final number of
    vested units can range from 0% to 200% of the number of PSUs granted.
    Payout will occur not later than 60 days following the vesting date.

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

                                           As at July 31,   As at October 31,
    Liability                                       2008                2007
    -------------------------------------------------------------------------
    2006 Plan                                   $      2             $    11
    2007 Plan                                          -                   3
    2008 Plan                                          2                   -
    -------------------------------------------------------------------------
    Total                                       $      4             $    14
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                            Three months         Nine months
    Expense (Income)                       ended July 31       ended July 31
    -------------------------------------------------------------------------
                                          2008      2007       2008     2007
    -------------------------------------------------------------------------
    2006 Plan                         $     (1) $      1   $     (6) $     2
    2007 Plan                               (2)        -         (3)       -
    2008 Plan                                -         -          2        -
    -------------------------------------------------------------------------
    Total                             $     (3) $      1   $     (7) $     2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    16. Accumulated Other Comprehensive Income

                                           As at July 31,   As at October 31,
    ($ millions)                                    2008                2007
    -------------------------------------------------------------------------
    Accumulated other comprehensive income,
     net of income taxes, beginning of
     period                                     $    490             $   328
    Foreign currency translation                     (91)                183
    Unrealized gain on available-for-sale
     assets, net of tax                                -                  (3)
    Unrealized gain (loss) on derivatives
     designated as cash flow hedges,
     net of tax                                       (5)                  8
    Reclassification of realized gains,
     net of tax                                        -                  (4)
    Adoption of FAS 158                                -                  11
    Repurchase and cancellation of Common
     shares                                           (4)                (33)
    -------------------------------------------------------------------------
    Accumulated other comprehensive income,
     net of income taxes, end of period         $    390             $   490
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The foreign currency translation gain in 2007 was mainly a result of the
    effect of the strengthening Canadian dollar (approximately 19% for 2007)
    and the strengthening euro on assets and earnings. The foreign currency
    translation loss in 2008 is mainly a result of the effect of the
    weakening Canadian dollar (approximately 8% for the first three quarters
    of 2008) on Canadian denominated assets.


    17. Employee Benefit Plans

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

    Defined Benefit Pension Plans:

                                            Three months        Nine months
                                           ended July 31      ended July 31
    -------------------------------------------------------------------------
    ($ millions)                          2008      2007      2008      2007
    -------------------------------------------------------------------------
    Service cost                      $      1  $      1  $      3  $      3
    Interest cost                            3         3         9         7
    Expected return on plan assets          (4)       (4)      (12)      (10)
    Recognition of actuarial gains           -        (1)        -        (2)
    Curtailment gain                         -         -        (1)        -
    -------------------------------------------------------------------------
                                      $      -  $     (1) $     (1) $     (2)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Other Benefit Plans:
                                            Three months        Nine months
                                           ended July 31      ended July 31
    -------------------------------------------------------------------------
    ($ millions)                          2008      2007      2008      2007
    -------------------------------------------------------------------------
    Service cost                      $      -  $      -  $      -  $      -
    Interest cost                            -         -         1         1
    Expected return on plan assets           -         -         -         -
    -------------------------------------------------------------------------
                                      $      -  $      -  $      1  $      1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    MDS recorded a curtailment gain of approximately $1 million in the second
    quarter of 2008 related to the transfer of staff from MDS to Best Medical
    International Inc. as a result of the sale of the external beam therapy
    and self-contained irradiator product lines, as per Note 5.


    18. Income Taxes

    The Company's effective tax rate for the third quarter of 2008 was nil.
    The tax recovery was increased by $1 million of tax credits relating to
    research and development that were recognized during the third quarter.
    The impact of the sale of the Company's external beam therapy and self-
    contained irradiator product lines business resulted in a $1 million
    increase to expected taxes during the third quarter. The impact of
    foreign losses that the Company could not recognize during the third
    quarter resulted in a $4 million increase to expected taxes.

                                            Three months        Nine months
                                           ended July 31      ended July 31
    -------------------------------------------------------------------------
    ($ millions)                          2008      2007      2008      2007
    -------------------------------------------------------------------------
    Expected income tax expense
     (recovery) at MDS's 33%
     (2007 - 35%) statutory rate      $     (3) $      3  $      5  $    (25)
    Increase (decrease) to taxes as
     a result of:
      Tax credits for research and
       development                          (1)       (1)       (4)       (7)
      Sale of business                       1         -         -         -
      Foreign losses not recognized          4         1         5         9
      Valuation provisions                   -         -         1         2
      Impact of rate changes on
       deferred tax balances                 -         -       (11)        -
      Other                                 (1)       (2)        2        (2)
    -------------------------------------------------------------------------
    Reported income tax expense
     (recovery)                       $      -  $      1  $     (2) $    (23)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    19. Supplementary Cash Flow Information

                                            Three months        Nine months
                                           ended July 31      ended July 31
    -------------------------------------------------------------------------
    ($ millions)                          2008      2007      2008      2007
    -------------------------------------------------------------------------
    Depreciation and amortization     $     25  $     24  $     75  $     56
    Stock option compensation                1         1         4         2
    Deferred revenue                         -        (1)        -        (3)
    Deferred income taxes                    1        (1)      (26)       46
    Equity earnings - net of
     distribution                            -        (1)       10         8
    Impairment of long-lived assets         11         -        11         -
    Write-down of investments                -         -         3         6
    Loss on disposal of equipment and
     other assets                            1         1         5         5
    Mark-to-market of derivatives            -         1         1        12
    FDA (reversal) provision                 -        10       (10)       61
    Gain on sale of investment               -         -         -         2
    Other                                   (4)        1        (9)        -
    -------------------------------------------------------------------------
                                      $     35  $     35  $     64  $    195
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Changes in non-cash operating assets and liabilities balances relating to
    operations include:

                                            Three months        Nine months
                                           ended July 31      ended July 31
    ($ millions)                          2008      2007      2008      2007
    -------------------------------------------------------------------------
    Accounts receivable               $      -  $    (23) $     20  $    (15)
    Unbilled revenue                         8         1        (5)       12
    Inventories                             17        (3)       15       (10)
    Prepaid expenses and others             (4)       (2)       (5)        9
    Accounts payable and accrued
     liabilities                           (17)      (20)     (109)      (33)
    Income taxes                           (12)        5       (58)       (4)
    Deferred income                          1         -         5         -
    Other operating asset and
     liabilities                             5         -         7         -
    -------------------------------------------------------------------------
                                      $     (2) $    (42) $   (130) $    (41)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    20. Financial Instruments

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


                                           As at July 31,  As at October 31,
    ($ millions)                                    2008               2007
    -------------------------------------------------------------------------
                                      Carrying      Fair  Carrying      Fair
                                        Amount     Value    Amount     Value
    -------------------------------------------------------------------------
    Asset (liability) position:
      Currency forward and option
       - assets                       $      -  $      -  $      7  $      7
      Currency forward and option
       - liabilities                  $     (2) $     (2) $    (12) $    (12)
    Interest rate swap and option
     contracts                        $      -  $      -  $     (1) $     (1)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As of July 31, 2008, the Company had outstanding foreign exchange
    contracts in place to sell $65 million at a weighted average exchange
    rate of CAD$1.105 maturing over the next 12 months.

    In addition to the above derivatives, isotope supply agreements totalling
    $121 million include terms that result in the creation of an embedded
    currency derivative under SFAS 133, "Accounting for Derivative
    Instruments and Hedging Activities". Under the rules contained in SFAS
    133, we have determined the value of this derivative and marked it to
    market as at July 31, 2008. The supply contract is denominated in U.S.
    dollars and due to currency movements between the U.S. and Canadian
    dollar we have recorded an unrealized, mark-to-market loss of $2 million
    on the contract year to date. There was no significant mark-to-market
    adjustment required for the third quarter of 2007.

    The Company has other supply agreements containing embedded derivatives
    with a notional amount of $36 million. Under SFAS 133, the unrealized
    mark-to-market gain for the nine months ended July 31, 2008 was
    $1 million.


    21. Segment Information

    In accordance with SFAS No 131, "Disclosures About Segments of an
    Enterprise and Related Information", the Company operates within three
    business segments - pharmaceutical services, isotopes and analytical
    technologies. These segments are organized predominantly around the
    products and services provided to customers identified for the
    businesses.

    ($ millions)                            Three months ended July 31, 2008
    -------------------------------------------------------------------------
                                                     MDS
                       MDS Pharma      MDS    Analytical  Corporate
                         Services  Nordion  Technologies  and Other    Total
    -------------------------------------------------------------------------
    Product revenues      $     -  $    72  $         83  $       -  $   155
    Service revenues          122        -            21          -      143
    Reimbursement
     revenues                  23        -             -          -       23
    -------------------------------------------------------------------------
    Total revenues            145       72           104          -      321
    Direct product cost         -      (35)          (60)         -      (95)
    Direct service cost       (94)      (1)           (3)         -      (98)
    Reimbursed expenses       (23)       -             -          -      (23)
    Selling, general and
     administration           (31)     (12)          (18)        (2)     (63)
    Research and
     development                -        -           (19)         -      (19)
    Depreciation and
     amortization              (9)      (3)          (12)        (1)     (25)
    Asset impairment          (11)       -             -          -      (11)
    Restructuring charges
     - net                     (8)       -            (2)         -      (10)
    Other income (expenses)
     - net                      -       (1)            1          1        1
    -------------------------------------------------------------------------
    Operating income (loss)   (31)      20            (9)        (2)     (22)
    Equity earnings             -        -            14          -       14
    -------------------------------------------------------------------------
    Segment earnings
     (loss)               $   (31)  $   20  $          5  $      (2) $    (8)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total assets          $   767   $  690  $        876  $     353  $ 2,686
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital expenditures  $     7   $    3  $          2  $       2  $    14
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Total assets exclude assets held for sale of $6 million. A portion of the
    costs related to service revenue in MDS Analytical Technologies is
    included in selling, general and administration and research and
    development expenses.

    ($ millions)                            Three months ended July 31, 2007
    -------------------------------------------------------------------------
                                                     MDS
                       MDS Pharma      MDS    Analytical  Corporate
                         Services  Nordion  Technologies  and Other    Total
    -------------------------------------------------------------------------

    Product revenues      $     -  $    76  $         94  $       -  $   170
    Service revenues          118        -            20          -      138
    Reimbursement
     revenues                  25        -             -          -       25
    -------------------------------------------------------------------------
    Total revenues            143       76           114          -      333
    Direct product cost         -      (39)          (70)         -     (109)
    Direct service cost       (82)       -            (1)         -      (83)
    Reimbursed expenses       (25)       -             -          -      (25)
    Selling, general and
     administration           (30)     (13)          (20)        (3)     (66)
    Research and
     development                -       (1)          (19)         -      (20)
    Depreciation and
     amortization              (8)      (4)          (12)         -      (24)
    Restructuring charges
     - net                     (1)       -             -         (2)      (3)
    Other expenses - net       (2)      (1)           (3)        (1)      (7)
    -------------------------------------------------------------------------
    Operating income (loss)    (5)      18           (11)        (6)      (4)
    Equity earnings             -        -            15          -       15
    -------------------------------------------------------------------------
    Segment earnings
     (loss)               $    (5) $    18  $          4  $      (6) $    11
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total assets          $   820  $   699  $        840  $     419  $ 2,778
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital expenditures  $    21  $     3  $          2  $       1  $    27
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    ($ millions)                             Nine months ended July 31, 2008
    -------------------------------------------------------------------------
                                                     MDS
                       MDS Pharma      MDS    Analytical  Corporate
                         Services  Nordion  Technologies  and Other    Total
    -------------------------------------------------------------------------
    Product revenues      $     -  $   207  $        268  $       -  $   475
    Service revenues          370        5            70          -      445
    Reimbursement
     revenues                  73        -             -          -       73
    -------------------------------------------------------------------------
    Total revenues            443      212           338          -      993
    Direct product cost         -     (111)         (185)         -     (296)
    Direct service cost      (277)      (3)          (11)         -     (291)
    Reimbursed expenses       (73)       -             -          -      (73)
    Selling, general and
     administration           (93)     (36)          (59)       (14)    (202)
    Research and
     development                -       (2)          (59)         -      (61)
    Depreciation and
     amortization             (26)      (9)          (39)        (1)     (75)
    Asset impairment          (11)       -             -          -      (11)
    Restructuring charges
     - net                     (9)       -            (2)         -      (11)
    Other income (expenses)
     - net                     14       (6)           (1)         -        7
    -------------------------------------------------------------------------
    Operating income (loss)   (32)      45           (18)       (15)     (20)
    Equity earnings             -        -            38          -       38
    -------------------------------------------------------------------------
    Segment earnings
     (loss)               $   (32)  $   45  $         20  $     (15) $    18
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total assets          $   767   $  690  $        876  $     353  $ 2,686
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital expenditures  $    22   $    9  $          5  $       6  $    42
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Total assets exclude assets held for sale of $6 million. A portion of the
    costs related to service revenue in MDS Analytical Technologies is
    included in selling, general and administration and research and
    development expenses.


    ($ millions)                             Nine months ended July 31, 2007
    -------------------------------------------------------------------------
                                                     MDS
                       MDS Pharma      MDS    Analytical  Corporate
                         Services  Nordion  Technologies  and Other    Total
    -------------------------------------------------------------------------
    Product revenues      $     -  $   210  $        194  $       -  $   404
    Service revenues          354        4            50          -      408
    Reimbursement
     revenues                  71        -             -          -       71
    -------------------------------------------------------------------------
    Total revenues            425      214           244          -      883
    Direct product cost         -     (108)         (155)         -     (263)
    Direct service cost      (251)      (2)           (2)         -     (255)
    Reimbursed expenses       (71)       -             -          -      (71)
    Selling, general and
     administration           (95)     (36)          (37)       (13)    (181)
    Research and
     development                -       (3)          (45)         -      (48)
    Depreciation and
     amortization             (26)     (10)          (19)        (1)     (56)
    Restructuring charges
     - net                    (32)       -             -         (9)     (41)
    Other expenses
     - net                    (68)       -            (5)        (4)     (77)
    -------------------------------------------------------------------------
    Operating income (loss)  (118)      55           (19)       (27)    (109)
    Equity earnings             -        -            40          -       40
    -------------------------------------------------------------------------
    Segment earnings
     (loss)               $  (118)  $   55  $         21  $     (27) $   (69)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Total assets          $   820   $  699  $        840  $     419  $ 2,778
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital expenditures  $    28  $     5  $          6  $       4  $    43
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    22. Differences Between Canadian and U.S. Generally Accepted Accounting
        Principles

    U.S. GAAP accounting principles used in the preparation of these
    consolidated financial statements conform in all material respects to
    Canadian GAAP, except as set out below.

    a.  Accounting for equity interests in joint ventures - The Company owns
    50% interests in two partnerships that are subject to joint control.
    Under U.S. GAAP, the Company records its share of earnings of these
    partnerships as equity earnings. Under Canadian GAAP, the Company
    proportionately consolidates these businesses. Under the proportionate
    consolidation method of accounting, MDS recognizes its share of the
    results of operations, cash flows, and financial position of the
    partnerships on a line-by-line basis in its consolidated financial
    statements and eliminates its share of all material intercompany
    transactions with the partnerships. While there is no impact on net
    income from continuing operations or earnings per share from continuing
    operations as a result of this difference, there are numerous
    presentation differences affecting the disclosures in these consolidated
    financial statements and in certain of the supporting notes.

    b.  Research and development - The Company expenses research and
    development costs as incurred. Under Canadian GAAP, the Company is
    required to capitalize development costs provided certain conditions are
    met. Such capitalized costs are referred to as deferred development costs
    and they are amortized over the estimated useful life of the related
    products, generally periods ranging from three to five years.

    c.  Investment tax credits - The Company records non-refundable
    investment tax credits as a reduction in current income tax expense in
    the year in which the tax credits are earned. The majority of non-
    refundable investment tax credits earned by MDS are related to research
    and development expenditures. Under Canadian GAAP, non-refundable
    investment tax credits are recorded as a reduction in the expense or the
    capital expenditure to which they relate.

    d.  Embedded derivatives - Under SFAS 133, "Accounting for Derivative
    Instruments and Hedging Activities", certain contractual terms are
    considered to behave in a similar fashion to a derivative contract and
    parties to the contracts are therefore required to separate the
    accounting for these embedded derivatives from the accounting for the
    host contract. Once separated, these embedded derivatives are
    subject to the general derivative accounting guidelines outlined in SFAS
    133, particularly the requirement to mark these derivatives to market.
    For MDS, these terms typically relate to the currency in which the
    contract is denominated. Canadian GAAP is largely aligned with SFAS 133
    for most embedded derivatives; however, Canadian GAAP provides exemptions
    for contracts that are written in a currency that is not the functional
    currency of one of the substantial parties to the contract but which is a
    currency in common usage in the economic environment of one of the
    contracting parties. The Company has elected to use this exemption
    available under Canadian GAAP in accounting for certain cobalt supply
    contracts entered into with a supplier located in Russia. The affected
    contracts are denominated in U.S. dollars.

    e.  Currency forward and option contracts - The Company currently
    designates the majority of the forward foreign exchange contracts it
    enters into as hedges of future anticipated cash inflows. In prior years,
    these contracts did not qualify for treatment as hedges and,
    accordingly, such contracts were carried at fair value and changes in
    fair value were reflected in earnings. Under Canadian GAAP, all such
    contracts were eligible for hedge accounting, and as a result, gains and
    losses on these contracts were deferred and recognized in the period in
    which the cash flows to which they relate were incurred.

    f.  Comprehensive income - U.S. GAAP requires that a statement of other
    comprehensive income and accumulated other comprehensive income be
    displayed with the same prominence as other financial statements. Under
    Canadian GAAP, statements of other comprehensive income and accumulated
    other comprehensive income were not required for years prior to the
    Company's 2007 fiscal year.

    g.  Pensions - Under U.S. GAAP, the net funded status of pension plans
    sponsored by a company are fully reflected in the consolidated assets or
    liabilities of the Company. The amount by which plan assets exceed
    benefit obligations or benefit obligations exceed plan assets, on a plan-
    by-plan basis, is reflected as an increase in assets or liabilities, with
    a corresponding adjustment to accumulated other comprehensive income.
    Under Canadian GAAP, only the net actuarial asset or liability is
    reflected in the consolidated financials statements.

    h.  Stock-based compensation - Under U.S. GAAP, certain equity-based
    incentive compensation plans are accounted for under the liability method
    using a fair value model to determine the amount of the liability at each
    period end. Under Canadian GAAP, these plans are accounted for under the
    liability method using intrinsic value to measure the liability at each
    period end.

    i.  As per Note 3 (h): The Accounting Standards Board announced that
    Canadian Generally Accepted Accounting Principles for publicly
    accountable enterprises will be replaced with International Financial
    Reporting Standards (IFRS) for fiscal years beginning on or after
    January 1, 2011. While domestic issuers will be required to make the
    transition by 2011, the CSA in a Concept Paper provided a tentative
    conclusion allowing domestic issuers who are also SEC registrants, like
    MDS, to continue to report under U.S. GAAP for two years from the
    transaction date of 2011. Early conversion to IFRS for fiscal years
    beginning on or after January 1, 2009 may also be permitted.

    j.  As mentioned in Note 2, in the fourth quarter of 2007 during the
    preparation of the 2007 annual financial statements under U.S. GAAP, an
    error was identified in the prior interim financial statements with
    respect to certain stock-based incentive compensation plans. The Company
    has corrected this error of $2 million in these consolidated financial
    statements. The previous Canadian GAAP to U.S. GAAP reconciliation is
    therefore amended by the below restated reconciliation.


    CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
    -------------------------------------------------------------------------
                                     2008
    As at July 31, 2008          Canadian  Reconciling                  2008
    ($ millions)                     GAAP  Adjustments  Reference  U.S. GAAP
    -------------------------------------------------------------------------
    ASSETS
    Current assets
    Cash and cash equivalents     $   138  $        (8)         a  $     130
    Short-term investments              -            -                     -
    Accounts receivable, net          269           (1)         a        268
    Notes receivable                   83            -                    83
    Unbilled revenue                  103            -                   103
    Inventories, net                  104           (3)         a        101
    Income taxes recoverable           56            -                    56
    Current portion of deferred
     tax assets                        46            -                    46
    Prepaid expenses and other         42            4          d         46
    Assets held for sale                6            -                     6
    -------------------------------------------------------------------------
    Total current assets          $   847  $        (8)            $     839

    Property, plant and
     equipment, net                   350           (3)         a        347
    Deferred tax assets                28            -                    28
    Long-term investments and
     other                            184          (12)     a,b,g        172
    Goodwill                          827          (22)         a        805
    Intangible assets, net            516          (15)         a        501
    -------------------------------------------------------------------------
    Total assets                  $ 2,752  $       (60)              $ 2,692
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND SHAREHOLDERS'
     EQUITY
    Current liabilities
    Bank indebtedness             $    15  $         -               $    15
    Accounts payable and accrued
     liabilities                      290           (8)     a,e,h        282
    Current portion of deferred
     revenue                           78            -                    78
    Income taxes payable               17           (1)         a         16
    Current portion of long-term
     debt                              20            -                    20
    Current portion of deferred
     tax liabilities                   22            -                    22
    -------------------------------------------------------------------------
    Total current liabilities     $   442  $        (9)              $   433

    Long-term debt                    279            -                   279
    Deferred revenue                   14            -                    14
    Other long-term obligations        33            -                    33
    Deferred tax liabilities          149          (13)       f,h        136
    -------------------------------------------------------------------------
    Total liabilities             $   917  $       (22)              $   895
    -------------------------------------------------------------------------

    Shareholders' equity
    Share capital                     504          (13)         h        491
    Additional paid in capital          -           76          h         76
    Retained earnings                 953         (113)   b,d,g,h        840
    Accumulated other
     comprehensive income             378           12      a,f,g        390
    -------------------------------------------------------------------------
    Total shareholders' equity    $ 1,835  $       (38)              $ 1,797
    -------------------------------------------------------------------------
    Total liabilities and
     shareholders' equity         $ 2,752  $       (60)              $ 2,692
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
    -------------------------------------------------------------------------
                                     2007
    As at October 31             Canadian  Reconciling                  2007
    ($ millions)                     GAAP  Adjustments  Reference  U.S. GAAP
    -------------------------------------------------------------------------
    ASSETS
    Current assets
    Cash and cash equivalents     $   259  $       (37)         a    $   222
    Short-term investments             91           11                   102
    Accounts receivable               284            3        a,d        287
    Unbilled revenue                   99            -                    99
    Inventories, net                  134           (6)         a        128
    Income taxes recoverable           54            -                    54
    Current portion of income
     taxes                             45            -                    45
    Prepaid expenses and other         21           14                    35
    Assets held for sale                1            -                     1
    -------------------------------------------------------------------------
    Total current  assets             988          (15)                  973

    Property, plant and equipment,
     net                              390           (4)         a        386
    Deferred tax assets                 4            -                     4
    Long-term investments and
     other                            284            6      a,b,g        290
    Goodwill                          797          (15)                  782
    Intangible assets, net            601          (18)         a        583
    -------------------------------------------------------------------------
    Total assets                  $ 3,064  $       (46)              $ 3,018
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND SHAREHOLDERS'
     EQUITY
    Current liabilities
    Accounts payable and accrued
     liabilities                  $   391  $        (7)       a,h    $   384
    Current portion of deferred
     revenue                           71            -                    71
    Income taxes payable               57            -                    57
    Current portion of long-term
     debt                              94            -                    94
    Current portion of deferred
     tax liabilities                   10            -                    10
    -------------------------------------------------------------------------
    Total current liabilities         623           (7)                  616

    Long-term debt                    290            -                   290
    Deferred revenue                   16            1                    17
    Other long-term obligations        29            1                    30
    Deferred tax liabilities          182          (14)       f,h        168
    Minority interest                   1           (1)                    -
    -------------------------------------------------------------------------
    Total liabilities               1,141          (20)                1,121
    -------------------------------------------------------------------------

    Shareholders' equity
    Share capital                     502           (9)         h        493
    Additional paid-in capital        n/a           72          h         72
    Retained earnings                 945         (103)   b,d,g,h        842
    Accumulated other
     comprehensive income             476           14      a,f,g        490
    -------------------------------------------------------------------------
    Total shareholders' equity      1,923          (26)                1,897
    -------------------------------------------------------------------------
    Total liabilities and
     shareholders' equity         $ 3,064  $       (46)              $ 3,018
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    CONSOLIDATED STATEMENTS OF OPERATIONS
    -------------------------------------------------------------------------
                              Three months ended           Nine months ended
                                   July 31, 2008               July 31, 2008
    -------------------------------------------------------------------------
    ($millions, except      CDN   Recon.     U.S.      CDN   Recon.     U.S.
     per share amounts)    GAAP  Items(1)    GAAP     GAAP  Items(1)    GAAP
    -------------------------------------------------------------------------
    Revenues
      Products and
       services         $   308  $   (10) $   298  $   941      (21) $   920
      Reimbursement
       revenues              23        -       23       73        -       73
    -------------------------------------------------------------------------
    Total revenues          331      (10)     321    1,014      (21)     993
    -------------------------------------------------------------------------

    Costs and expenses
      Cost of revenues     (190)      (3)    (193)    (584)      (3)    (587)
      Reimbursed
       expenses             (23)       -      (23)     (73)       -      (73)
      Selling,
       general and
       administration       (60)      (3)     (63)    (191)     (11)    (202)
      Research and
       development          (11)      (8)     (19)     (31)     (30)     (61)
      Depreciation and
       amortization         (28)       3      (25)     (84)       9      (75)
      Asset Impairment      (11)       -      (11)     (11)       -      (11)
      Restructuring
       charges - net        (10)       -      (10)     (11)       -      (11)
      Other expense
       - net                  -        1        1        3        4        7
    -------------------------------------------------------------------------
    Total costs and
     expenses              (333)     (10)    (343)    (982)     (31)  (1,013)
    -------------------------------------------------------------------------

    Operating income
     (loss)                  (2)     (20)     (22)      32      (52)     (20)

    Interest expense         (6)       1       (5)     (17)       -      (17)
    Interest income           3        -        3       13        -       13
    Mark-to-market on
     interest rate swaps      -        -        -        -        2        2
    Equity earnings           -       14       14        -       38       38
    -------------------------------------------------------------------------
    Income (loss)            (5)      (5)     (10)      28      (12)      16

    Income tax (expense)
     recovery
    - current                 -        1        1      (31)       7      (24)
    - deferred                1       (2)      (1)      27       (1)      26

    -------------------------------------------------------------------------
    Net income          $    (4) $    (6) $   (10) $    24 $     (6) $    18
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic earnings
     (loss) per share
     - from continuing
     operations         $ (0.03) $ (0.05) $ (0.08) $  0.20  $ (0.05) $  0.15
    -------------------------------------------------------------------------
    Basic earnings
     (loss) per share   $ (0.03) $ (0.05) $ (0.08) $  0.20  $ (0.05) $  0.15
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Diluted earnings
     (loss) per share
     - from continuing
     operations         $ (0.03) $ (0.05) $ (0.08) $  0.20  $ (0.05) $  0.15
    -------------------------------------------------------------------------
    Diluted earnings
     (loss) per share   $ (0.03) $ (0.05) $ (0.08) $  0.20  $ (0.05) $  0.15
    -------------------------------------------------------------------------


    ($millions, except
     per share amounts)  Reference
    -------------------------------
    Revenues
      Products and
       services               a
      Reimbursement
       revenues
    -------------------------------
    Total revenues
    -------------------------------

    Costs and expenses
      Cost of revenues
      Reimbursed
       expenses
      Selling,
       general and
       administration     a,e,h
      Research and
       development        a,b,c
      Depreciation and
       amortization           a
      Asset Impairment
      Restructuring
       charges - net
      Other expense
       - net                b,d
    -------------------------------
    Total costs and
     expenses
    -------------------------------

    Operating income
     (loss)

    Interest expense
    Interest income
    Mark-to-market on
     interest rate swaps
    Equity earnings           a
    -------------------------------
    Income (loss)

    Income tax (expense)
     recovery
    - current
    - deferred

    -------------------------------
    Net income
    -------------------------------
    -------------------------------

    Basic earnings
     (loss) per share
     - from continuing
     operations
    -------------------------------
    Basic earnings
     (loss) per share
    -------------------------------
    -------------------------------

    Diluted earnings
     (loss) per share
     - from continuing
     operations
    -------------------------------
    Diluted earnings
     (loss) per share
    -------------------------------
    (1) Reconciling items between Canadian GAAP and U.S. GAAP


    CONSOLIDATED STATEMENTS OF OPERATIONS

                               Three months ended          Nine months ended
                                    July 31, 2007              July 31, 2007
    -------------------------------------------------------------------------
    ($millions, except      CDN   Recon.     U.S.      CDN   Recon.     U.S.
     per share amounts)    GAAP  Items(1)    GAAP     GAAP  Items(1)    GAAP
    -------------------------------------------------------------------------
    Revenues
      Products and
       services         $     -  $     -  $   308  $     -  $     -  $   812
      Reimbursement
       revenues               -        -       25        -        -       71
    -------------------------------------------------------------------------
      Total revenues        321       12      333      844       39      883
    -------------------------------------------------------------------------
    Costs and expenses
      Cost of revenues        -        -     (192)       -       (2)    (518)
      Reimbursed
       expenses               -      (25)     (25)       -      (71)     (71)
      Selling, general
       and administration   (74)       8      (66)    (194)      13     (181)
      Research and
       development           (9)     (11)     (20)     (21)     (27)     (48)
      Depreciation and
       amortization         (28)       4      (24)     (65)       9      (56)
      Restructuring
       charges - net         (3)       -       (3)     (44)       3      (41)
      Other expense
       - net                 (2)      (5)      (7)     (68)      (9)     (77)
    -------------------------------------------------------------------------
      Total costs and
       expenses            (308)     (29)    (337)    (908)     (84)    (992)
    -------------------------------------------------------------------------
    Operating income
     (loss) from
     continuing
     operations              13      (17)      (4)     (64)     (45)    (109)
    Interest expense         (6)       -       (6)     (20)       -      (20)
    Interest income           4        -        4       18        -       18
    Mark-to-market on
     interest note
     swaps                    -       (1)      (1)       -        -        -
    Equity earnings           -       15       15        -       40       40
    -------------------------------------------------------------------------
    Income (loss) from
     continuing
     operations before
     income taxes            11       (3)       8      (66)      (5)     (71)
    Income taxes
     (expense)
     recovery:
      - current              (3)       8        5       15       19       34
      - deferred              -       (6)      (6)       -      (11)     (11)
    -------------------------------------------------------------------------
    Income (loss) from
     continuing
     operations               8       (1)       7      (51)       3      (48)
    Income from
     discontinued
     operations - net
     of income tax           (1)       1        -      808        -      808
    -------------------------------------------------------------------------
    Net income          $     7  $     -  $     7  $   757  $     3  $   760
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic earnings
     (loss) per share:
      - from continuing
       operations       $  0.07  $ (0.01) $  0.06  $ (0.37) $  0.01  $ (0.36)
      - from
       discontinued
       operations         (0.01)       -    (0.01)    5.99        -     5.99
    -------------------------------------------------------------------------
    Basic earnings
     per share          $  0.06  $ (0.01) $  0.05  $  5.62  $  0.01  $  5.63
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Diluted earnings
     (loss) per share:
      - from continuing
       operations       $  0.07  $ (0.01)    0.06  $ (0.38) $  0.02  $ (0.36)
      - from
       discontinued
       operations         (0.01)       -    (0.01)    5.98     0.01     5.99
    -------------------------------------------------------------------------
    Diluted earnings
     per share          $  0.06  $ (0.01) $  0.05  $  5.60  $  0.03  $  5.63
    -------------------------------------------------------------------------
    (1) Reconciling items between Canadian GAAP and U.S. GAAP


    CONSOLIDATED STATEMENTS OF CASH FLOWS

                               Three months ended          Nine months ended
                                    July 31, 2008              July 31, 2008
    -------------------------------------------------------------------------
                            CDN   Recon.     U.S.      CDN   Recon.     U.S.
    ($millions)            GAAP  Items(1)    GAAP     GAAP  Items(1)    GAAP
    -------------------------------------------------------------------------
    Operating
     activities
    Net income          $    (4) $    (6) $   (10) $    24  $    (6) $    18
    Adjustments to
     reconcile net
     income to cash
     provided (used in)
     operating activities
     relating to cont-
     inuing operations
      Items not affecting
       current cash flow     32        3       35       41       23       64
      Changes in non-cash
       working capital
       balances relating
       to operations         (4)       2       (2)    (136)       6     (130)
    -------------------------------------------------------------------------
    Cash provided by
     (used in)
     operating
     activities              24       (1)      23      (71)      23      (48)
    -------------------------------------------------------------------------

    Investing activities
    Acquisitions            (16)       -      (16)     (18)       -      (18)
    Increase in deferred
     development charges     (1)       1        -       (6)       6        -
    Purchase of property,
     plant and equipment    (14)       -      (14)     (42)       -      (42)
    Proceeds from sale
     of property, plant
     and equipment            -        -        -        3        -        3
    Proceeds on sale
     of short-term
     investments              -        -        -      101        -      101
    Proceeds on sale
     of long-term
     investment               1        -        1        8        -        8
    Proceeds on sales
     of product line         15        -       15       15        -       15
    Increase of the
     restricted cash          1        -        1       (2)       -       (2)
    Other                     -        -        -        -        -        -
    -------------------------------------------------------------------------
    Cash provided by
     (used in) investing
     activities of cont-
     inuing operations      (14)       1      (13)      59        6       65
    -------------------------------------------------------------------------
    Financing
     activities
    Repayment of long-
     term debt                -        -        -      (81)       -      (81)
    Increase in bank
     indebtedness            15        -       15       15        -       15
    Issuance of shares        1        -        1        6        -        6
    Repurchase of
     shares                 (15)       -      (15)     (32)       -      (32)
    -------------------------------------------------------------------------
    Cash used in
     financing
     activities               1        -        1      (92)       -      (92)
    -------------------------------------------------------------------------
    Effect of foreign
     exchange rate
     changes on cash
     and cash
     equivalents             (1)      (5)      (6)      (2)     (15)     (17)
    -------------------------------------------------------------------------
    Increase (decrease)
     in cash and cash
     equivalents during
     the period              10       (5)       5     (106)      14      (92)
    Cash and cash
     equivalents,
     beginning
     of period              128       (3)     125      244      (22)     222
    -------------------------------------------------------------------------
    Cash and cash
     equivalents,
     end of period      $   138  $    (8) $   130  $   138  $    (8) $   130
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Reconciling items between Canadian GAAP and U.S. GAAP


    CONSOLIDATED STATEMENTS OF CASH FLOWS

                               Three months ended          Nine months ended
                                    July 31, 2007              July 31, 2007
    -------------------------------------------------------------------------
                                         Restated                   Restated
                                             U.S.                       U.S.
                            CDN   Recon.     GAAP      CDN   Recon.     GAAP
    ($millions)            GAAP  Items(1) (Note 2)    GAAP  Items(1) (Note 2)
    -------------------------------------------------------------------------
    Cash flows from
     operating
     activities
    Net income          $     7  $     -  $     7  $   757  $     3  $   760
    Less: Income from
     discontinued
     operations - net
     of tax                  (1)       1        -      808        -      808
    -------------------------------------------------------------------------
    Income (loss) from
     continuing
     operations               8       (1)       7      (51)       3      (48)
    Adjustments to
     reconcile net
     income to cash
     provided by operating
     activities relating
     to continuing
     operations

      Items not
       affecting
       current
       cash flow             41       (6)      35      197       (2)     195
      Changes in
       non-cash working
       capital balances
       relating to
       operations           (41)      (1)     (42)     (32)      (9)     (41)
    -------------------------------------------------------------------------
    Cash provided by
     (used in)
     operating
     activities of
     continuing
     operations               8       (8)       -      114       (8)     106
    Cash used in
     operating
     activities of
     discontinued
     operations               1        -        1      (52)       -      (52)
    -------------------------------------------------------------------------
                              9       (8)       1       62       (8)      54
    -------------------------------------------------------------------------
    Investing activities
    Acquisitions              2        -        2     (601)       -     (601)
    Purchase of
     Intangibles             (1)       1        -       (1)       1        -
    Increase in deferred
     development charges     (5)       5        -       (7)       7        -
    Purchase of property,
     plant and equipment    (28)       1      (27)     (45)       2      (43)
    Proceeds from sale
     of property, plant
     and equipment            -        -        -        -        -        -
    Proceeds on sale
     of short-term
     investments             14        -       14      165        -      165
    Purchase of
     short-term
     investments            (81)       -      (81)    (118)       -     (118)
    Proceeds on sale
     of long-term
     investments              -        -        -       13        -       13
    Increase of
     restricted cash          -        -        -       (3)       -       (3)
    Other                    (2)       -       (2)      (2)       -       (2)
    -------------------------------------------------------------------------
    Cash provided by
     investing
     activities
     of continuing
     operations            (101)       7      (94)    (599)      10     (589)
    -------------------------------------------------------------------------
    Cash provided by
     (used in)
     investing
     activities of
     discontinued
     operations               -        -        -      929        -      929
    -------------------------------------------------------------------------
    Financing activities
    Repayment of
     long-term debt          (1)       -       (1)      (8)       -       (8)
    Increase (decrease)
     in deferred
     revenue and other
     long-term
     obligations              1        -        1        1        -        1
    Payment of cash
     dividends                -        -        -       (3)       -       (3)
    Issuance of shares        5        -        5       15        -       15
    Repurchase
     of shares                -        -        -     (441)       -     (441)
    -------------------------------------------------------------------------
    Cash used in
     financing
     activities
     of continuing
     operations               5        -        5     (436)       -     (436)
    -------------------------------------------------------------------------
    Cash used in
     financing activities
     of discontinued
     operations               -        -        -       (2)       -       (2)
    -------------------------------------------------------------------------
    Effect of foreign
     exchange rate
     changes on cash
     and cash
     equivalents             10        1       11       14        1       15
    -------------------------------------------------------------------------
    Net increase in
     cash and cash
     equivalents
     during the period      (77)       -      (77)     (32)       3      (29)
    Cash and cash
     equivalents,
     beginning
     of period              290       (3)     287      245       (6)     239
    -------------------------------------------------------------------------
    Cash and cash
     equivalents,
     end of period          213       (3)     210      213       (3)     210
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Reconciling items between Canadian GAAP and U.S. GAAP



                                              Three months       Nine months
                                             ended July 31     ended July 31
    -------------------------------------------------------------------------
                                            2008  Restated    2008  Restated
    ($millions, except)                             Note 2            Note 2
     per share amounts)                               2007              2007
    -------------------------------------------------------------------------
    Net income (loss) from continuing
     operations in accordance with
     U.S. GAAP                            $   (10) $     7  $    18  $   (48)
    U.S. GAAP adjustments:
      Deferred development costs - net          1        3        7        4
      Deferred development costs
       written off                              -        -        -       (3)
      Mid term incentive plan reversal          3       (2)      (3)      (5)
      Mark-to-market on
       embedded derivatives                     1                 2        -
      Defined benefit pension plans             -                 1        -
      Unrealized gains on foreign
       exchange contracts and
       interest rate swaps                      -        -        -        -
      Reduction in income tax expense
       arising from GAAP adjustments            1        -       (1)       1
    -------------------------------------------------------------------------
    Net income (loss) from continuing
     operations in accordance
     with Canadian GAAP                        (4)       8       24      (51)
    Income from discontinued operations
     in accordance with Canadian and
     U.S. GAAP - net of tax                     -       (1)       -      808
    -------------------------------------------------------------------------
    Net (loss) income in accordance
     with Canadian GAAP                   $    (4) $     7  $    24  $   757
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic earnings (loss) per share
     in accordance with Canadian GAAP
      - from continuing operations        $ (0.03) $  0.07  $  0.20  $ (0.37)
      - from discontinued operations            -    (0.01)       -     5.99
    -------------------------------------------------------------------------
    Basic earnings per share              $ (0.03) $  0.06  $  0.20  $  5.62
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Diluted earnings (loss) per share
     in accordance with Canadian GAAP
      - from continuing operations        $ (0.03) $  0.07  $  0.20  $ (0.38)
      - from discontinued operations            -    (0.01)       -     5.98
    -------------------------------------------------------------------------
    Diluted earnings per share            $ (0.03) $  0.06  $  0.20  $  5.60
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Recent Canadian Accounting Pronouncements

    a.  Capital disclosures - The CICA issued Section 1535, "Capital
        Disclosures", which requires the disclosure of both the qualitative
        and quantitative information that enables users of financial
        statements to evaluate the entity's objectives, policies, and
        processes for managing capital.

    b.  Inventories - The CICA issued Section 3031, "Inventories", which
        replaces existing Section 3030 and harmonizes the Canadian standards
        related to inventories with International Financial Reporting
        Standards. The new Section includes changes to the measurement of
        inventories, including guidance on costing, impairment testing, and
        disclosure requirements.

    c.  Financial instruments - The CICA issued Section 3862 "Financial
        Instruments - Disclosure" and Section 3863, "Financial Instruments -
        Presentation" to replace Section 3861, "Financial Instruments -
        Disclosure and Presentation".

    The Company has adopted Sections 1535, 3862 and 3863 effective for its
fiscal year beginning November 1, 2007 and these sections affect disclosures
only. The Company is required to adopt Section 3031 effective November 1,
2008. The Company is currently evaluating the effects that the adoption of
Section 3031 will have on its consolidated results of operations and financial
condition and is not yet in a position to determine such effects.
    





For further information:

For further information: Investor Inquiries: Kim Lee, (416) 213-4721,
kim.lee@mdsinc.com; Media Inquiries: Janet Ko, (416) 213-4167,
janet.ko@mdsinc.com

Organization Profile

Nordion Inc.

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