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MDS Reports First Quarter 2008 Results
Date:3/6/2008

Net Revenues up 23%, Adjusted EBITDA up 33%

TORONTO, March 6 /PRNewswire-FirstCall/ - MDS Inc. (TSX: MDS; NYSE: MDZ), a leading provider of products and services to the global life sciences markets, today reported its first quarter 2008 results. For the quarter, MDS reported net revenues of $296 million, net income of $17 million and earnings per share from continuing operations of $0.14. Adjusted EBITDA rose to $40 million, up from $30 million in the prior year. Adjusted earnings per share were $0.05, down from $0.07 in the prior year. This solid start to 2008 is primarily driven by improvements at MDS Pharma Services and MDS Analytical Technologies, partially offset by challenges at MDS Nordion.

Quarterly Highlights

- Delivered $296 million in net revenues, up 23% from $241 million in

the prior year.

- Increased adjusted EBITDA to $40 million, up 33% from $30 million in

the prior year.

- Reported adjusted earnings per share of $0.05, down from $0.07 in the

prior year impacted by $0.08 of intangible amortization from the

Molecular Devices acquisition.

- MDS Pharma Services delivered $146 million in total revenues and

$6 million in adjusted EBITDA, up from $1 million in the prior year

with new business wins at $177 million up 32% over the prior quarter.

- MDS Nordion delivered $60 million in revenues, down 10% in the

quarter impacted by a medical isotope supply disruption and light

cobalt shipments.

- MDS Analytical Technologies delivered $116 million in revenues and

$27 million in adjusted EBITDA with the highest quarterly revenue in

Molecular Devices history.

- MDS repurchased and cancelled 252,000 Common shares for $5 million

under its Normal Course Issuer Bid.

"We are off to a solid start in the first quarter with double-digit growth in both net revenue 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 at January 31, 2008, we have started to report new orders, which are the confirmed contracts that we have received a customer commitment for within the interim period. We have also started to report period ending backlog which measures our backlog at the period ending date and we continue to reported average backlog which is the average of the three month end backlog balances for the interim period.

Substantially all of the 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 to the joint ventures as profit sharing. Under US 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 Sciex products of MDS Analytical Technologies, 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 US GAAP

Effective with the reporting of our fiscal 2007 annual results, we adopted US GAAP as our primary reporting standard for our consolidated financial statements. We have adopted US 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 US 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.

MDS Inc.

Consolidated operating highlights and reconciliation of

consolidated adjusted EBITDA

First Quarter

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2008 2007

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Total revenues $ 322 $ 264

Reimbursement revenues (26) (23)

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Net revenues $ 296 $ 241

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Income from continuing operations 17 -

Income taxes (recovery) expense (7) 3

Net interest expense - 2

Depreciation and amortization 27 14

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EBITDA 37 19

Restructuring charges, net - 13

Acquisition integration and in-process R&D 3 -

Loss (gain) on sale of assets/investments 2 (2)

Gain on interest rate swap (2) -

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Adjusted EBITDA $ 40 $ 30

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Adjusted EBITDA margin 14% 12%

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Consolidated net revenues, which exclude reimbursement revenues associated with reimbursed expenses in the MDS Pharma Services segment, were up 23% on a reported basis to $296 million for the first quarter of 2008 compared to $241 million last year. The Molecular Devices (MD) business of MDS Analytical Technologies, which was acquired in the second quarter of 2007, added $56 million of net revenue in the quarter, its highest quarter to date, and that led net revenue for MDS Analytical Technologies to more than double compared to that of the first quarter of 2007. MDS Pharma Services net revenues decreased 1% compared to the same period in 2007, with slight growth in late-stage net revenues being offset by a decline in early-stage net revenues. MDS Nordion net revenues were down 10% compared to the same period in 2007, due primarily to a medical isotope supply disruption and lower cobalt shipments. Foreign exchange impacts increased net revenue in the first quarter of 2008 compared to the first quarter of 2007 by approximately $25 million.

Income from continuing operations for the first quarter of 2008 was $17 million compared to nil reported for the same period in 2007. The first quarter of 2008 included $12 million in expenses for integration and amortization related to MD and a $11 million gain on deferred taxes related to a reduction in future income tax rates by the Canadian government.

Adjusted EBITDA for the quarter was $40 million, up 33% compared to $30 million reported for last year. MD contributed $11 million of adjusted EBITDA in the first quarter of 2008. MDS Pharma Services delivered $5 million of improvement in adjusted EBITDA; MDS Analytical Technologies also had a strong quarter on an adjusted EBITDA basis, with and without the impact of the MD acquisition; and, MDS Nordion was adversely impacted by approximately $5 million from the medical isotope supply disruption, lower cobalt shipments and an embedded derivative loss of $4 million in the first quarter of 2008 (nil in 2007). In the first quarter of 2008, a $7 million gain was recorded relating to certain stock-based compensation programs, primarily as a result of a reduction in MDS's stock price, compared to a $1 million gain in 2007. Primarily due to the strengthening of the US dollar relative to the Canadian dollar from our fiscal year end to January 31, 2008, we recorded a $4 million gain from the impact of foreign exchange on certain monetary assets and liabilities up $1 million from the first quarter of 2007. However, in the first quarter of 2008 we also experienced a negative impact of approximately $3 million on adjusted EBITDA from the net impact of foreign exchange, on our operations, due to the decline of the US dollar, from the first quarter of 2007 to the first quarter of 2008.

Adjustments reported for the quarter in 2008 include a $4 million loss associated with the expected sale of MDS Nordion's beam therapy and self-contained irradiator product lines, a $2 million gain resulting from the settlement of a mortgage that in 2000 had been determined to be uncollectible at that time, $2 million of costs related to the acquisition and integration of MDS Analytical Technologies, $1 million of in-process research and development (in-process R&D) related to an acquisition within the quarter, and a $2 million gain resulting from the settlement of interest rate swaps. In 2007, adjustments reported for the quarter included restructuring costs totalling $13 million, of which $8 million related to ongoing profit improvement initiatives in MDS Pharma Services, and $5 million related to transition of our information technology infrastructure and support to a new provider. The other adjusting item in the first quarter of 2007 was a $2 million gain realized on the sale of our debt interest in Hemosol Corp.

Selling, general, and administration (SG&A) expenses for the quarter-totalled $64 million, and represents 22% of net revenues compared to $54 million and 22% respectively, in the same period last year. The increase in SG&A spending is a result of the addition of MD and foreign exchange which was partially offset by lower stock-based compensation expense, and spending on the FDA issue in the first quarter of 2007.

We spent $20 million on R&D activities in the first quarter of 2008 compared to $12 million in the first quarter of 2007. The increase in spending is a result of the additional MD spending and higher investment related to the Sciex brand products of MDS Analytical Technologies.

Consolidated depreciation and amortization expense increased $13 million in the first quarter of 2008 compared to the same period last year. The increase is principally related to the amortization of intangible assets associated with the MD acquisition. Capital expenditures for the quarter were $13 million compared to $9 million in the first quarter of 2007.

Reported earnings per share from continuing operations were $0.14 for the quarter, compared to nil in the first quarter of 2007. Adjusted earnings per share from continuing operations for the quarter were $0.05 compared to $0.07 earned in the same period last year. In addition to the adjusting items affecting adjusted EBITDA that were described earlier, adjusting items include a $0.09 reduction in our deferred tax liabilities due to the enactment of income tax rate reductions in Canada. Earnings per share from discontinued operations were nil compared to $0.11 for 2007. Results from discontinued operations include only the results of the diagnostics business that we sold in 2007. Adjusted net income and adjusted earnings per share for the two periods were as follows:

Earnings

Net income per share

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2008 2007 2008 2007

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From continuing operations -

as reported $ 17 $ - $ 0.14 $ -

Adjusted for - after tax:

Restructuring charges, net - 11 - 0.08

Acquisition integration and

in-process R&D 2 - 0.02 -

Gain on sale of business and

long-term investments - (1) - (0.01)

Gain on interest rate swaps (2) - (0.02) -

Tax rate changes (11) - (0.09) -

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Adjusted $ 6 $ 10 $ 0.05 $ 0.07

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MDS Pharma Services

Financial highlights

First Quarter

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% of net % of net

2008 revenues 2007 revenues

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Early-stage $ 63 53% $ 66 55%

Late-stage 57 47% 55 45%

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Net revenues 120 100% 121 100%

Reimbursement revenues 26 - 23 -

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Total revenues $ 146 - $ 144 -

Cost of revenues (88) (73%) (89) (74%)

Reimbursed expenses (26) - (23) -

Selling, general, and

administration (29) (24%) (33) (26%)

Depreciation and amortization (9) (8%) (8) (7%)

Restructuring charges - net - - (8) (7%)

Other income (expense) 5 4% 2 2%

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Operating loss (1) (1%) (15) (12%)

Adjustments:

Restructuring charges - net - - 8 7%

Gain on settlement (2) (2%) - 0%

Depreciation and amortization 9 8% 8 7%

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Adjusted EBITDA $ 6 5% $ 1 1%

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Margins:

Gross margin 27% - 26% -

Adjusted EBITDA 5% - 1% -

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Capital expenditures $ 6 $ 2

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MDS Pharma Services net revenues declined 1% as reported. The impact on revenue of the change in foreign exchange rates from the first quarter of 2007 to the first quarter of 2008 was an increase of approximately $9 million or 7%. Both our early-stage and late-stage businesses had lower revenues and adjusted EBITDA," said Stephen P. DeFalco, President and Chief Executive Officer of MDS Inc. "I am very pleased with the performance of the Molecular Devices acquisition which continues to perform strongly, setting new records in revenue. I am also encouraged by the accelerating pace of new business wins at MDS Pharma Services which we expect to result in revenue growth in the second half of 2008."

Operating Segment Results

MDS Pharma Services

% Change

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($ millions) Q1 2008 Q1 2007 Reported

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Net Revenue:

Early-stage 63 66 (5%)

Late-stage 57 55 4%

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$ 120 $ 121 (1%)

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Reimbursement revenues 26 23 -

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Total revenues $ 146 $ 144 -

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Adjusted EBITDA:

$ 6 $ 1 500%

% excluding the impact of foreign exchange. The late-stage decline was primarily a result of contract cancellations related to failures of compounds that occurred in the current and prior quarters. While we have seen an increase in early-stage orders, the timing of service delivery relative to our capacity did not allow us to convert these orders into revenue in the quarter and this business continued to show declines versus the prior year.

New orders in the first quarter of 2008 of $177 million were up 32% sequentially and were higher than any quarter in 2007; however, we also experienced a high level of contract cancellations relating to compound failures affecting our late-stage businesses. As order cancellations occurred early in the quarter and order receipts were higher at the end of the quarter, we saw an overall decrease in our average monthly backlog to $360 million, down $25 million from the fourth quarter of 2007 and down 20% compared to the first quarter of 2007. Despite these cancellations and given the strength of new orders, our quarter end backlog increased sequentially by $20 million to $395 million.

Period

New Average Ending

New orders and backlog Orders Backlog Backlog

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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

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MDS Pharma Services had an operating loss of $1 million for the quarter, compared to a loss of $15 million for the same period last year. This reduction in operating loss was driven by lower costs in the first quarter of 2008 resulting from the restructuring actions taken in 2007; a $2 million reduction in stock-based compensation costs in the first quarter of 2008; a $2 million gain related to the settlement of a mortgage that in 2000 had been determined uncollectible and a $3 million foreign currency gain on the revaluation of certain assets and liabilities in the quarter, compared to a $2 million gain the first quarter of 2007. As well, in the first quarter of 2007, our operating loss reflects $8 million of restructuring charges and $4 million of spending on the US Food and Drug Administration (FDA) review of our Montreal bioanalytical operations. In the first quarter of 2008 there was no impact to operating income from these items, although we did spend $2 million on the FDA matter and it was charged to the reserve we established for this purpose in the second quarter of 2007. Partially offsetting these reductions in our operating loss was the lower amount of gross profit associated with the net revenue declines, excluding the impact of foreign exchange, described in our discussion of net revenues, and the negative impact of foreign exchange on our operations resulting from the decline in the US dollar from the first quarter of 2007 to the first quarter of 2008 of approximately $3 million.

Adjusted EBITDA for MDS Pharma Services for the first quarter of 2008 was $6 million, up substantially from $1 million for the first quarter of 2007 driven by restructuring savings and the other items described above, except that the $2 million gain on the mortgage settlement in the first quarter of 2008 and the $8 million restructuring charges in the first quarter of 2007 were adjusting items.

SG&A of $29 million in the first quarter of 2008 was $4 million lower than the first quarter of 2007 due to $2 million of lower stock-based compensation and productivity, partially offset by the negative impact of foreign exchange on spending from the strengthening of the Canadian dollar, British pound and the euro over the same period.

During the first quarter of 2008, we continued to implement our restructuring plan announced in 2007. These plans are now 90% complete with the balance of actions expected to be substantially completed in the second quarter of 2008.

During the first quarter of 2008, we opened a new 300 bed facility in Phoenix, Arizona to expand our capacity to deliver early-stage services to both pharmaceutical and biotech clients. Our late-stage business also launched a new proprietary software application to allow our clients real-time access to their study data. This new application will benefit our customers both in terms of efficiency and standardization in study management.

Capital expenditures in the pharmaceutical services segment were $6 million compared to $2 million in the first quarter of 2007.

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. Although we are not yet able to fully assess the potential impact of possible, if any, foreign regulatory actions, we are satisfied with the progress of our discussions with these 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 $13 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. 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 that the remaining reserve of $52 million will be sufficient to cover any agreements reached with clients for study audits, study re-runs, and other related costs.

MDS Nordion

Financial highlights

First Quarter

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% of net % of net

2008 revenues 2007 revenues

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Product revenues $ 59 98% $ 67 100%

Service revenues 1 2% - -

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Net revenues 60 100% 67 100%

Cost of product revenues (34) (57%) (34) (51%)

Cost of service revenues - - (1) (2%)

Selling, general, and

administration (11) (18%) (11) (16%)

Research and development - - (1) (2%)

Depreciation and amortization (3) (5%) (3) (4%)

Other expense (8) (13%) - -

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Operating income 4 7% 17 26%

Adjustments:

Loss on sale of business 4 7% - -

Depreciation and amortization 3 5% 3 4%

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Adjusted EBITDA $ 11 18% $ 20 30%

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Margins:

Gross margin 43% - 47% -

Adjusted EBITDA 18% - 30% -

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Capital expenditures $ 3 $ 1

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MDS Nordion revenues were down $7 million or 10% from the first quarter of 2007 on a reported basis. The decline of the US dollar in the first quarter of 2008, compared to the first quarter of 2007, increased reported revenue by approximately $9 million. The $16 million decline, net of foreign exchange impacts was due to a disruption in supply of medical isotopes at our supplier's reactor; lower shipments of Cobalt, largely as a result of shipping delays in Asia, which we expect to recover in the middle of the fiscal year; and the revenues for 2007 included $2 million related to deferred revenue associated with the 2004 cancellation of a supply agreement.

Operating income was $4 million compared to $17 million last year and adjusted EBITDA was $11 million in the first quarter of 2008, down $9 million compared to the first quarter of 2007. The reduction in operating income and adjusted EBITDA was primarily a result of a $5 million decrease from the medical isotope supply disruption, lower Cobalt shipments, and 2004 cancellation of the supply agreement noted above. In addition, there was $4 million related to a non-cash loss on embedded derivatives in the first quarter of 2008 which is included in other expense. These reductions were partially offset by foreign exchange and lower R&D expense versus the first quarter of 2007. In the first quarter of 2008, the adjusting item in the amount of $4 million relates to the loss we recorded on the previously announced sale of the MDS Nordion external beam therapy and self-contained irradiator product lines, which is described below in more detail.

SG&A of $11 million in the first quarter of 2008 was level with the first quarter of 2007.

Capital expenditures in the MDS Nordion segment for the quarter were $3 million primarily related to increased capacity for our Glucotrace(R) product in Europe, compared to $1 million last year.

In the quarter, we announced the signing of an agreement to sell our external beam therapy and self-contained irradiator product lines. The sale is a key part of MDS Nordion's strategy to strengthen its position as a leading innovator in molecular medicine. Under the terms of this agreement, Best Medical International Inc., a provider of radiotherapy and oncology products, will purchase MDS Nordion's external beam therapy and self-contained irradiator product lines. Best Medical International Inc. will acquire these two product lines with combined annualized revenues of approximately US$32 million and approximately 150 employees. The transaction, which is subject to the usual closing conditions, is expected to close in the second quarter of 2008. In the first quarter of 2008, we are reporting a loss on disposal of this business in the amount of $4 million, including all costs to sell the product lines. The operating results of these product lines will be reported in the MDS Nordion segment up to the transaction closing date.

MDS Analytical Technologies

Financial highlights

First Quarter

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% of net % of net

2008 revenues 2007 revenues

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Product revenues $ 92 79% $ 38 72%

Service revenues 24 21% 15 28%

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Net revenues 116 100% 53 100%

Cost of product revenues (61) (53%) (37) (70%)

Cost of service revenues (4) (3%) - -

Selling, general, and

administration (19) (16%) (6) (11%)

Research and development (20) (17%) (11) (21%)

Depreciation and amortization (15) (13%) (3) (5%)

Other expense (2) (2%) (1) (2%)

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Operating loss (5) (4%) (5) (9%)

Adjustments:

Acquisition integration and

in-process R&D 3 3% - -

Equity earnings 14 12% 14 26%

Depreciation and amortization 15 13% 3 6%

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Adjusted EBITDA $ 27 23% $ 12 23%

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Margins:

Gross margin 44% - 30% -

Adjusted EBITDA 23% - 23% -

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Capital expenditures $ 2 $ 3

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The Sciex brand channel of MDS Analytical Technologies carries out the majority of its business through joint ventures. Currently, MDS generates the 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 use the equity method of accounting for the joint ventures and therefore the majority of the income related to the Sciex division is reflected in equity earnings, which represent our share of the net income from the joint ventures. We include equity earnings in our calculation of adjusted EBITDA, however, these earnings are not included in operating income.

MDS Analytical Technologies reported revenues of $116 million for the first quarter of 2008, compared to $53 million for the same period last year. First quarter revenues for the current year include $56 million of revenues from the MD brand channel. This is the highest quarterly revenue for MD yet reported, and with $194 million in revenue since the acquisition, MD has already exceeded our first year target of $190 million in revenue after only ten months. MD revenues were up $4 million or 8% compared to the same three-month period in 2007, which was prior to the date when MDS acquired the business.

Sciex revenues were up $7 million or 13%. Sciex revenues are primarily from the sale of products, and SG&A and R&D services to its joint ventures, and $6 million of the revenue increase was related to foreign exchange. End-user revenues for Sciex products grew 5% in the first quarter compared to the same period last year and the small molecule markets continued to be an area of strength for the business. Our high-end triple-quad and ion-trap mass spectrometer instruments have maintained strong sales momentum, across most markets. Good strength in mass spectrometer sales from our core LC/MS products was augmented by continued strength from our ICP/MS product line.

The operating loss for MDS Analytical Technologies for the first quarter of 2008 was $5 million, level with the first quarter of 2007. On an operating income basis, MD lost $2 million in the first quarter because of the acquisition-related items which partially offset the $2 million improvement in Sciex performance. Equity earnings, which are not included in operating income and represent our share of earnings from the Sciex joint ventures were $14 million for the first quarter of 2008, and level with the first quarter of 2007.

Adjusted EBITDA for the quarter was $27 million compared to $12 million last year. Excluding the $11 million of growth attributable to the acquisition of MD, adjusted EBITDA grew by 33% largely as a result of improved gross margins. In the first ten months of ownership by MDS, MD has delivered $44 million in adjusted EBITDA on target to meet or exceed our expectations of $45 - $50 million in adjusted EBITDA for the first full year of MDS ownership. The two adjustments in the first quarter of 2008 are $2 million of MD acquisition and integration costs and $1 million of in-process R&D expense associated with a small technology acquisition described below. There were no adjustments in the prior year.

Increased SG&A and R&D expenses in MDS Analytical Technologies for the first quarter of 2008 primarily reflects the addition of the MD business and the increased R&D investment related to the Sciex brands. Depreciation and amortization expense was also up, reflecting $10 million for amortization of intangible assets acquired as part of the MD acquisition, plus the inclusion of depreciation on MD property, plant, and equipment. Capital expenditures were $2 million in the first quarter of 2008, compared to $3 million in the first quarter of 2007.

During the first quarter of 2008, MDS Analytical Technologies acquired a small company that was in the process of developing a complimentary product for our MD portfolio.

Corporate and Other

Financial highlights

First Quarter

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2008 2007

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Selling, general, and administration $ (5) $ (4)

Restructuring charges - (5)

Other income 1 3

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Operating loss (4) (6)

Adjustments:

Gain on sale of business and investments - (2)

Restructuring charges - 5

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Adjusted EBITDA $ (4) $ (3)

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Corporat 5 % 1 -

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For the first quarter, MDS Pharma Services net revenues declined 1% over the prior year. Adjusted EBITDA was $6 million compared to $1 million last year, an improvement of $5 million year-over-year, driven primarily by savings from 2007 restructuring activities.

MDS Pharma Services initiated the reporting of certain non-GAAP measures for new business wins and period ending backlog, to track confirmed contracts to which customers have committed within the period. New orders increased to $177 million representing three quarters of sequential improvements and are up 32% from last quarter. Contract cancellations were $37 million in the quarter leaving a quarter-ending backlog of $395 million, down 16% year-over-year and up 5% sequentially.

As of the end of the first quarter, MDS Pharma Services has implemented 90% of its restructuring initiatives announced in the second quarter of last year and is well positioned to accelerate profitable growth with higher second half revenues coupled with a lower cost base.

In January, MDS Pharma Services opened its 300-bed expansion of a Phase I facility in Phoenix, Arizona and is now conducting trials. As well, MDS Pharma Services launched Apollo, a new study management system for central lab customers which is designed to improve efficiency and enable MDS to deliver its brand promise of on-time, high-quality service.

MDS Nordion

% Change

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($ millions) Q1 2008 Q1 2007 Reported

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Revenue $ 60 $ 6e SG&A expenses were $1 million higher this year compared to 2007 due to the impact of foreign exchange on our Canadian dollar spending and increased costs within our finance function including our costs to convert to US GAAP, which was partially offset by $2 million of lower stock based compensation expense.

The 2007 adjustments include restructuring charges related to the transition of IT support and infrastructure to a new provider and a gain of $2 million as a result of selling a debt interest in Hemosol Corporation. There were no adjusting items in 2008.

Net interest expense was nil in the first quarter of 2008, compared to $2 million in the first quarter of 2007 due to higher interest income in 2008. In addition, in the first quarter of 2008, we recorded a $2 million gain on the settlement of interest rate swaps. Net interest expense and the swap gain are not included in our operating income or adjusted EBITDA.

Income Taxes

In the quarter we recorded a net $11 million reduction in our deferred tax liabilities due to the enactment of income tax rate reductions in Canada. In addition, the favourable impact of tax credits relating to eligible research and development reduced the taxes we reported in the quarter by approximately $1 million. Our expected taxes for the quarter were $4 million based on the $10 million of income before income taxes we reported from continuing operations. However, due largely to the above adjustments we reported a tax recovery of $7 million for the quarter.

Discontinued Operations

Income from discontinued operations for fiscal 2007 reflects only the results of our remaining diagnostics businesses. We sold the diagnostics business in the second quarter of 2007 and there is no income from discontinued operations in 2008.

Three months ended January 31

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2007

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Net revenues $ 75

Cost of revenues (46)

Selling, general and administration (8)

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Operating income 21

Income taxes (3)

Minority interest (3)

Equity earnings 1

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Income from discontinued operations 16

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Basic EPS from discontinued operations $ 0.11

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Liquidity and Capital Resources

January 31, October 31,

2008 2007 Change

-------------------------------------------------------------------------

Cash, cash equivalents and

short-term investments $ 144 $ 337 (57%)

Operating working capital(1) $ 113 $ 59 93%

Current ratio (excludes net assets

held for sale) 1.7 1.6 6%

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(1) Our measure of operating working capital equals accounts receivable

plus unbilled revenue and inventory less accounts payable, accrued

liabilities, and current deferred revenue.

During the first quarter, $193 million of cash was utilized for $89 million of scheduled long-term debt principal and interest repayments that were due in the quarter, $57 million of income taxes related to the 2007 gain on the sale of the diagnostics business and an increase in operating working capital as a result of year end compensation payouts and decreases in our accounts payable balances principally related to lower capital expenditures in the first quarter. In addition, there was a $43 million reduction in cash from the effect of foreign exchange rate changes in the quarter. 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.

We expect to have net operating cash inflows for the remainder of fiscal 2008. Expected cash outflows include FDA-related reimbursements to our customers and the payment of severance obligations associated with our remaining restructuring activities. In addition to cash generated by operations and cash on hand, we have available a C$500 million, five-year, committed, revolving credit facility, that expires in July, 2010, to fund our liquidity requirements. There were no borrowings under this facility as at January 31, 2008.

Cash provided by investing activities for continuing operations totalled $92 million for the first quarter of 2008, compared to inflows of $107 million for the first quarter of 2007, principally from the sale of short-term investment of $101 million in the first quarter of 2008, compared to $126 million in the same period in 2007. Capital expenditures for the quarter totalled $13 million, compared to $9 million of expenditures in the first quarter of 2007, and $28 million of expenditures in the fourth quarter of 2007.

Financing activities (excluding discontinued operations) used $83 million of cash in the quarter, primarily for scheduled debt repayments, compared to $4 million in the prior year. We made purchases of $5 million under our existing Normal Course Issuers Bid during the quarter which retired 0.3 million shares representing less than 1% of our outstanding Common shares. Cash used in financing activities for the prior year included a $3 million dividend payment.

We continue to hold $15 million, net of a $2 million provision, of asset-backed commercial paper (ABCP) in long-term investments.

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, restructuring costs and potential acquisitions in 2008. At this time, we do not reasonably expect any presently known trend or uncertainty to affect our ability to access our current sources of cash. We remain in compliance with all covenants for our senior unsecured notes and our bank credit facility.

Contractual Obligations

There have been no material changes in contractual obligations since October 31, 2007, and other than the repayment of long-term debt that came due in the quarter, there has been no substantive change in any of our long-term debt or other long-term obligations since t7 (10%)

-------------------------------------------------------------------------

-------------------------------------------------------------------------

Adjusted EBITDA:

$ 11 $ 20 (45%)

% 18 % 30 -

-------------------------------------------------------------------------

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MDS Nordion's revenues for the first quarter were $60 million, down 10% from the prior year driven by a disruption in medical isotope supply and light cobalt shipments. Adjusted EBITDA was $11 million compared to $20 million in the first quarter of 2007. This decrease includes $5 million in unfavourable impact from the medical isotope disruption and a $4 million non-cash charge to account for foreign exchange impact on supply agreements.

During the quarter, MDS Nordion announced the sale of two non-strategic product lines. This sale is expected to close in the second quarter of 2008.

MDS Analytical Technologies

% Change

----------

($ millions) Q1 2008 Q1 2007 Reported

-------------------------------------------------------------------------

Revenue $ 116 $ 53 119%

-------------------------------------------------------------------------

-------------------------------------------------------------------------

Adjusted EBITDA:

$ 27 $ 12 125%

% 23 % 23 -

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MDS Analytical Technologies delivered $116 million in revenues, a 119% increase over prior year and $27 million in adjusted EBITDA, a 125% year-over-year increase.

Sciex contributed $60 million in revenues and $16 million in adjusted EBITDA in the first quarter, up 13% and 33% from the prior year respectively. Mass spectrometry end user revenue grew 5% compared to the same period last year.

Molecular Devices (MD) contributed $56 million in revenues and $11 million in adjusted EBITDA. This is the highest quarterly revenue for MD in its history. We remain on track to exceed our first year commitments for the MD acquisition.

Conference Call

MDS will be holding a conference call today at 9:30 am EST to discuss first quarter 2008 results. This call will be webcast live at http://www.mdsinc.com and will also be available in archived format at http://www.mdsinc.com/news_events/webcasts_presentations.asp after the call.

MDS Annual Shareholders Meeting

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

About MDS

MDS Inc. (TSX: MDS; NYSE: MDZ) is a global life sciences company that provides market-leading products and services that our customers need for the development of drugs and diagnosis and treatment of disease. We are a leading global provider of pharmaceutical contract research, medical isotopes for molecular imaging, radiotherapeutics, and analytical instruments. MDS has more than 5,500 highly skilled people in 29 countries. Find out more at http://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, the degree of market penetration of its products, 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 US economies, the impact of the movement of the US 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 US securities regulatory authorities from time to time, including MDS's quarterly and annual MD&A, annual information form, and annual report on Form40-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 US GAAP basis. MDS converted to US 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 revenues, 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

March 5, 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 January 31, 2008 and its financial position as at January 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 (US GAAP) for financial reporting. As a result of this change, the Company restated to US GAAP its previously filed financial statements for the four quarters of 2007. With US GAAP as our primary basis of accounting, we will reconcile our US 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 US GAAP. To supplement the US 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 for 2007 and the Company's 2007 Annual Information Form (AIF), all of which are published separately and are available at http://www.mdsinc.com and at http://www.sedar.com. In addition, the Company's 40-F filing is available at http://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 January 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 US dollar relative to other currencies, particularly the Canadian dollar and the euro; changes in interest rate policies of the Bank of Canada and the Board of Governors of the Federal Reserve System in the United States; the effects of competition in the markets in which we operate; the timing and technological advancement of new products introduced by us or by our competitors; the impact of our clients' exercising rights to cancel certain contracts; the impact of changes in laws, trade policies and regulations, and enforcement
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SOURCE MDS Inc.
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