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MDS Reports Second Quarter 2008 Results
Date:6/5/2008

Net Revenue up 24%, Adjusted EBITDA up 10%

TORONTO, June 5 /PRNewswire-FirstCall/ - MDS Inc. (TSX: MDS; NYSE: MDZ), a leading provider of products and services to the global life sciences markets, today reported its second quarter 2008 results for the period ended April 30, 2008. For the quarter, MDS reported total revenue of $350 million, net income of $11 million and earnings per share from continuing operations of $0.09. Net revenue was $326 million and adjusted EBITDA was $34 million, up from $263 million and $31 million in the prior year, respectively. Adjusted earnings per share were $0.06, down from $0.11 in the prior year.

Quarterly Highlights

- Delivered net revenue of $326 million, up 24% from $263 million in

the prior year. Excluding the impact of foreign exchange and

acquisitions, net revenue increased 5%.

- Increased adjusted EBITDA to $34 million, up 10% from $31 million in

the prior year.

- Reported adjusted earnings per share of $0.06, down from $0.11 in the

prior year, impacted by $0.04 of intangible asset amortization from

the Molecular Devices acquisition.

- MDS Pharma Services had another quarter of strong new business wins,

up 60% from prior year to $165 million. The business delivered

$128 million in net revenue and a loss of $1 million in adjusted

EBITDA compared to breakeven in the prior year.

- MDS Nordion delivered solid performance in Q2 reporting revenue of

$80 million, up 13% from $71 million in the prior year. Adjusted

EBITDA increased 9% to $24 million versus $22 million last year.

- MDS Analytical Technologies delivered $118 million in revenue

compared to $77 million in the prior year. Adjusted EBITDA increased

13% from $15 million to $17 million and was impacted by softening

demand for high-end instruments.

- iance 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 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 at January 31, 2008, we started 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 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 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, 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.

Subsequent Event - MAPLE Reactor

On May 16, 2008, Atomic Energy of Canada Limited (AECL), a Canadian crown corporation, and the Government of Canada, publicly 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 AECL's current National Research Universal reactor (NRU) and provide MDS Nordion with a long-term source of supply of medical isotopes. AECL and the Government of Canada have also publicly announced that they will continue to supply medical isotopes using the NRU and will pursue an extension of the NRU operation beyond its current expiry date of October 31, 2011. MDS has substantial financial interests in the success of the MAPLE reactor project, primarily through a related 40-year supply agreement with AECL, as a result of an exchange of non-monetary assets in February 2006 (see below). The Company was neither consulted nor informed in advance by AECL or the Canadian government about their decision. AECL's announcement and position represents a different perspective on the contract than that held by MDS. The Company intends to evaluate all options and pursue appropriate steps to protect the interests of patients, its customers and its shareholders.

On February 22, 2006, the Company had announced an agreement resulting from a comprehensive mediation process with AECL related to the MAPLE reactor project. Under the agreement, AECL paid the Company $22 million, and 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 # 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.

As a result of the May 16, 2008 announcement by AECL and the Government of Canada, MDS is reviewing the impact on its business from an operational and financial reporting perspective. The Company will evaluate all options and pursue appropriate steps to protect the interests of patients, its customers and its shareholders. The principal US GAAP reporting exposure for MDS related to the announcement is its intangible asset associated with the 40-year supply agreement currently carried at $342 million (revalued at the April 30, 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.

MDS Inc.

Consolidated operating highlights and reconciliation of consolidated

adjusted EBITDA

Second Quarter Year-to-date

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2008 2007 2008 2007

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350 286 Total revenues 672 550

(24) (23) Reimbursement revenues (50) (46)

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$ 326 $ 263 Net revenues $ 622 $ 504

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Income (loss) from continuing

11 (55) operations 28 (55)

5 (27) Income tax expense (recovery) (2) (24)

2 (2) Net interest expense 2 -

- (1) Mark-to-market on interest rate swaps (2) (1)

23 18 Depreciation and amortization 50 32

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41 (67) EBITDA 76 (48)

1 25 Restructuring charges, net 1 38

3 6 Valuation provisions 3 6

- 3 Loss on sale of a business/investment 2 1

(Reversal) provision for FDA-related

(10) 61 costs (10) 61

(1) 3 Acquisition integration 2 3

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$ 34 $ 31 Adjusted EBITDA $ 74 $ 61

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10% 12% Adjusted EBITDA margin 12% 12%

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Consolidated net revenues which exclude reimbursement revenues associated with reimbursed expenses in the MDS Pharma Services segment, were up 24% on a reported basis to $326 million for the second quarter of 2008 compared to $263 million last year. The Molecular Devices (MD) business of MDS Analytical Technologies, which was acquired in the second quarter of 2007, increased net revenues by $26 million in the second quarter of 2008, compared to the 41 day post-acquisition period in the second quarter of 2007. Foreign exchange impacts increased net revenue in the second quarter of 2008 compared to the second quarter of 2007 by approximately $25 million or 10%. Excluding the impact of the MD acquisition and foreign exchange, net revenues increased $12 million or 5% with growth across all businesses.

MDS Pharma Services net revenues increased 11% compared to the same period in 2007, with growth in both early-stage and late-stage net revenues. MDS Nordion revenues were also up 13% compared to the same period in 2007. MDS Analytical Technologies revenues were up $41 million, including the $26 million increase associated with MD.

Income from continuing operations for the second quarter of 2008 was $11 million compared to a loss of $55 million reported for the same period in 2007. The second quarter of 2008 included $7 million of after tax income from the revision of our best estimate of the remaining Food and Drug Administration (FDA) provision related to our Montreal Bioanalytical business. The $55 million loss for the second quarter of 2007 includes the after tax provision set-up for FDA-related costs, a restructuring charge and a long-term investment valuation. These items amounted to $66 million on an after-tax basis.

Adjusted EBITDA for the quarter was $34 million, up 10% compared to $31 million reported for last year. MDS Nordion adjusted EBITDA increased by $2 million. MDS Analytical Technologies adjusted EDITDA grew $2 million to $17 million. MD contributed $9 million of adjusted EBITDA in the second quarter of 2008 compared to $7 million in the 41 days post-acquisition period in the second quarter of 2007. MDS Pharma Services reported a loss of $1 million in the quarter versus breakeven last year. In the second 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 US dollar; however, this was partially offset by a $3 million reduction in the foreign exchange loss on the revaluation of net monetary assets.

Adjustments reported for the second quarter of 2008 include income of $10 million due to a revision of our best estimate of the provision associated with the FDA issue, $3 million expense related to an additional 20% provision against an investment in asset-backed commercial paper (ABCP), $1 million expense related to facilities restructuring charges and $1 million related to final adjustments of MD integration costs. In the second quarter of 2007, adjustments included a $61 million charge related to the FDA provision, $25 million of restructuring costs related mostly to profit improvement initiatives in MDS Pharma Services, a $6 million valuation provision related to a long-term equity investment, a $3 million loss resulting primarily from the sale of our Hamburg Phase 1 facility, and $3 million of integration costs incurred by MDS Analytical Technologies.

Selling, general, and administration (SG&A) expenses for the quarter totalled $75 million and 23% of net revenues compared to $61 million and 23% last year. The increase includes the impact from the acquisition of MD partway through the second quarter in 2007, as well as the impact of foreign exchange.

We spent $22 million on R&D activities in the second quarter this year, compared to spending of $16 million last year. The majority of the increase in R&D spending comes from the impact of a full quarter of MD compared to the 41 day post-acquisition period in the second quarter of 2007.

Consolidated depreciation and amortization expense increased $5 million compared to last year. We also amortized $9 million of intangible assets acquired as part of the purchase of MD in the second quarter of 2008 compared to $2 million in the second quarter of 2007. Capital expenditures for the quarter were $15 million compared to $7 million in the second quarter of 2007.

Other income for the quarter includes the $10 million FDA provision release, $3 million ABCP provision and a $3 million embedded derivative gain. Other income for the second quarter of 2007 includes a $61 million FDA provision charge, $6 million valuation provision, $3 million loss on sale of business and a foreign exchange loss of $4 million related to the revaluation of certain monetary assets and liabilities in the quarter, compared to a $1 million loss in the second quarter of 2008.

Results from discontinued operations for 2007 include the operating results of our Canadian diagnostics businesses for the period prior to sale and the gain resulting from the sale of the business.

In the second quarter of 2008, we repurchased $12 million or 0.6 million shares as part of our Normal Course Issuers Bid (NCIB). MDS repurchased and cancelled 619,700 Common shares for $12 million

under its Normal Course Issuer Bid.

"While we were able to achieve year-over-year revenue and EBITDA growth, performance was challenged by softening in high-end instrument sales to pharmaceutical customers in the US market," said Stephen P. DeFalco, President and Chief Executive Officer, MDS Inc. "We are evaluating a number of actions to manage through these market conditions and to translate our revenue progress at MDS Pharma Services into accelerated EBITDA growth."

Operating Segment Results

MDS Pharma Services

% Change

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($ millions) Q2 2008 Q2 2007 Reported

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Net Revenues:

Early-stage 68 60 13%

Late-stage 60 55 9%

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$ 128 $ 115 11%

Reimbursement revenues 24 23

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Total revenues $ 152 $ 138

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Adjusted EBITDA: $ (1) $ - -

% (1) % - -

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----------------------In the second quarter of 2007, we completed a substantial issuer bid and repurchased approximately 22.8 million Common shares for C$500 million (US$ 441 million) at a price of C$21.90 per share. As a result of this substantial issuer bid, we reduced the number of Common shares outstanding in the second quarter of 2007 from approximately 144 million to 122 million, and we have 122 million Common shares outstanding as of the second quarter 2008.

Reported earnings per share from continuing operations were $0.09 for the quarter, compared to a loss of $0.40 in 2007. Adjusted earnings per share from continuing operations for the quarter were $0.06 compared to $0.11 earned in the same period last year. Increased amortization of the intangible assets related to the MD acquisition reduced the second quarter of 2008 adjusted EPS by $0.04 compared to the second quarter of 2007. Earnings per share from discontinued operations were nil compared to $5.77 which included $5.76 related to the gain on sale of the diagnostics business in the second quarter of 2007. Adjusted earnings per share and adjusted income from continuing operations for the two periods were as follows:

Earnings Per Share

Second Quarter Year-to-date

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2008 2007 2008 2007

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Basic earnings (loss) per share

from continuing operations -

as reported $ 0.09 $ (0.40) $ 0.23 $ (0.39)

Adjusted for:

Restructuring charges, net 0.01 0.15 0.01 0.23

FDA-related provision (0.06) 0.29 (0.06) 0.29

Valuation provisions 0.03 0.04 0.03 0.04

Mark-to-market on interest rate

swaps - - (0.02) -

MAPLE investment tax credits - (0.02) - (0.02)

Loss sale of business and

long-term investments - 0.03 - 0.02

Acquisition integration (0.01) 0.02 0.01 0.02

Tax rate changes - - (0.09) -

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Adjusted EPS $ 0.06 $ 0.11 $ 0.11 $ 0.19

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Income from Continuing Operations

Second Quarter Year-to-date

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2008 2007 2008 2007

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Income (loss) from continuing

operations - as reported $ 11 $ (55) $ 28 $ (55)

Adjusted for (after tax):

Restructuring charges, net 1 21 1 33

FDA-related provision (7) 40 (7) 40

Valuation provisions 3 5 3 5

Mark-to-market on interest rate

swaps - - (2) -

MAPLE investment tax credits - (2) - (2)

Loss sale of business and

long-term investments - 4 - 2

Acquisition integration (1) 2 1 2

Tax rate changes - - (11) -

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Adjusted income from continuing

operations $ 7 $ 15 $ 13 $ 25

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MDS Pharma Services

Financial Highlights

Second Quarter

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% of net % of net

2008 revenues 2007 revenues

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Early-stage $ 68 53% $ 60 52%

Late-stage 60 47% 55 48%

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Net revenues 128 100% 115 100%

Reimbursement revenues $ 24 - $ 23 -

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Total revenues 152 - 138 -

Cost of revenues (95) (74%) (80) (70%)

Reimbursed expenses (24) - (23) -

Selling, general, and

administration (33) (26%) (32) (28%)

Depreciation and amortization (8) (6%) (10) (9%)

Restructuring charges (1) (1%) (23) (20%)

Other income (expense) 9 7% (68) (58%)

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Operating income (loss) - - (98) (85%)

Adjustments:

Reversal (provision) for

FDA-related costs (10) (8%) 61 53%

Restructuring charges 1 1% 23 20%

Loss (gain) on sale of a

business - - 4 3%

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(9) (7%) (10) (9%)

Depreciation and amortization 8 6% 10 9%

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Adjusted EBITDA $ (1) (1%) $ - 0%

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Margins:

Gross margin 26% 30%

Adjusted EBITDA - 0%

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Capital expenditures $ 9 $ 5

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Year-to-date

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% of net % of net

2008 revenues 2007 revenues

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Early-stage $ 131 53% $ 126 53%

Late-stage 117 47% 110 47%

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Net revenues 248 100% 236 100%

Reimbursement revenues $ 50 - $ 46 -

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Total revenues 298 - 282 -

Cost of revenues (183) (74%) (169) (72%)

Reimbursed expenses (50) - (46) -

Selling, general, and

administration (62) (25%) (65) (28%)

Depreciation and amortization (17) (7%) (18) (8%)

Restructuring charges (1) - (31) (13%)

Other income (expense) 14 6% (66) (27%)

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Operating income (loss) (1) - (113) (48%)

Adjustments:

Reversal (provision) for

FDA-related costs (10) (4%) 61 25%

Restructuring charges 1 - 31 13%

Loss (gain) on sale of a

business (2) (1%) 4 2%

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(12) (5%) (17) (8%)

Depreciation and amortization 17 7% 18 8%

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Adjusted EBITDA $ 5 2% $ 1 0%

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Margins:

Gross margin 26% 28%

Adjusted EBITDA 2% -%

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Capital expenditures $ 15 $ 7

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In the second quarter of 2008, MDS Pharma Services net revenues increased by 11% as reported versus the prior year quarter. The impact on revenue of the change in foreign exchange rates from the second quarter of 2007 to the second quarter of 2008 was an increase of approximately $11 million or 10%. Both our early-stage and late-stage businesses had slightly higher revenue excluding the impact of foreign exchange. The late-stage increase was primarily a result of increases in our central lab business which was partially offset by the impact of contract cancellations in Phase II-IV related to failures of compounds that occurred in prior quarters. Early-stage increased revenue was primarily a result of increased activity in Phase I including the impacts of our new Phoenix facility and increased demand in bioanalytical services.

New orders in the second quarter of 2008 of $165 million were up 60% compared to the same period last year. We saw a $36 million or 9% increase in period end backlog and a 13% increase in average backlog from the first quarter of 2008. Period-end backlog was up 1% compared to the same period in 2007; however average backlog was down 10%. In the second quarter of 2007 we experienced a high level of contract cancellations at the end of the quarter.

Average monthly backlog

Period

New Average End

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

Quarter 2 165 405 431

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MDS Pharma Services had an operating income of nil for the quarter, compared to a loss of $98 million for the same period last year. In the second quarter of 2007, we recorded a $61 million provision for customer reimbursements related to the FDA review of our Montreal bioanalytical operations and a $23 million restructuring charge to improve profitability at MDS Pharma Services. Based on costs incurred to date and our best estimated future liability, we reversed $10 million of the FDA provision to income in the second quarter of 2008. As well, during the same period, a $1 million restructuring charge was incurred related to facility closures. In both 2007 and 2008, the FDA charge, revision of our best estimate and the restructuring charges were treated as adjusting items. In the second quarter of 2007, the $4 million loss on the sale of our Hamburg facility was also an adjusting item.

MDS Pharma Services adjusted EBITDA for the second quarter of 2008 decreased by $1 million to a loss of $1 million compared to the same period in 2007. This decrease was primarily the result of higher margin services reported in our late-stage business in the second quarter of 2007, increased investments for growth in certain areas of our business in 2008, and the impact of the previously announced contract cancellations, all of which offset the impact of savings achieved from our restructuring activities that were initiated in the second quarter of 2007. The negative impact of foreign exchange on our operations resulting from the decline of the US dollar from the second quarter of 2007 to the second quarter of 2008 of approximately $3 million offset the unfavourable impact of the $3 million on the revaluation of certain assets and liabilities in the second quarter of 2007. In addition, we reported a $2 million provision release associated with a customer settlement in the second quarter of 2008 and $2 million of income related to refundable tax credits in the second quarter of 2007.

SG&A of $33 million in the second quarter of 2008 was $1 million higher than the second 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.

During the second quarter of 2008, we continued to work toward completion of our restructuring plan announced in 2007 and these plans are now over 95% complete.

Capital expenditures in the pharmaceutical services segment were $9 million compared to $5 million in the second 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. We believe the European regulators 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. 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 a reserve of $33 million is required to cover any agreements reached with clients for study audits, study re-runs, and other related costs. Accordingly, approximately $10 million has been reversed this quarter and is included in other income.

MDS Nordion

Financial Highlights

Second Quarter

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% of net % of net

2008 revenues 2007 revenues

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Product revenues $ 76 95% $ 67 94%

Service revenues 4 5% 4 6%

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Net revenues 80 100% 71 100%

Cost of product revenues (42) (53%) (35) (49%)

Cost of service revenues (2) (3%) (1) (1%)

Selling, general, and

administration (13) (16%) (12) (18%)

Research and development (2) (3%) (1) (1%)

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

Other income (expense) 3 4% 1 1%

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Operating income 21 25% 20 28%

Adjustments:

Loss (Gain) on a sale of a

business - - (1) (1%)

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21 25% 19 27%

Depreciation and amortization 3 4% 3 4%

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Adjusted EBITDA $ 24 30% $ 22 31%

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Margins:

Gross margin 45% 50%

Adjusted EBITDA 30% 31%

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Capital expenditures $ 3 $ 1

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Year-to-date

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% of net % of net

2008 revenues 2007 revenues

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For the second quarter, MDS Pharma Services net revenue increased 11% over the prior year. Excluding the impact of foreign exchange, revenue increased approximately 1% as late-stage revenue continues to be impacted by previously announced contract cancellations. Adjusted EBITDA was a loss of $1 million compared to nil last year as unfavourable revenue mix, foreign exchange and investments in growth offset productivity savings. New business wins of $165 million were up 60% from prior year and increased backlog sequentially by $36 million to $431 million. Both early-stage and late-stage contributed to backlog growth, with early-stage backlog supported by increasing demand at MDS Pharma Services' new Phase I facility in Phoenix, Arizona.

Additional progress has been made resolving client FDA audits leading to a $10 million benefit from the revised estimate for future costs. This benefit is not included in adjusted EBITDA.

MDS Nordion

% Change

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($ millions) Q2 2008 Q2 2007 Reported

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Revenues $ 80 $ 71 13%

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Adjusted EBITDA: $ 24 $ 22 9%

% 30 % 31 -

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MDS Nordion's revenue for the second quarter was $80 million, up 13% from the prior year, prim--

Product revenues $ 135 96% $ 134 97%

Service revenues 5 4% 4 3%

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Net revenues 140 100% 138 100%

Cost of product revenues (76) (54%) (69) (50%)

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

Selling, general, and

administration (24) (17%) (23) (17%)

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

Depreciation and amortization (6) (4%) (6) (4%)

Other income (expense) (5) (4%) 1 1%

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Operating income 25 19% 37 27%

Adjustments:

Loss (Gain) on a sale of a

business 4 3% (1) (1%)

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29 21% 36 26%

Depreciation and amortization 6 4% 6 4%

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Adjusted EBITDA $ 35 25% $ 42 30%

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Margins:

Gross margin 44% 49%

Adjusted EBITDA 25% 30%

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Capital expenditures $ 6 $ 2

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MDS Nordion revenues were up 13% from the second quarter of 2007 on a reported basis, inclusive of a foreign exchange impact of $6 million related to the decline of the US dollar in the second quarter of 2008 compared to the second quarter of 2007. The remaining $3 million increase was due to the shipment of a cobalt sterilization system and higher sales across most product lines, which were partially offset by higher sales of medical isotopes in the second quarter of 2007 which occurred as a result of a supply disruption at a competitor.

Operating income in the second quarter of 2008 was $21 million compared to $20 million last year and adjusted EBITDA was $24 million this year compared to $22 million in 2007. The second quarter of 2008 includes a $3 million gain on embedded derivatives, while the second quarter 2007 included $4 million related to higher medical isotope revenues during a period of competitor disruption. Excluding these items, improvements in profitability were driven by growth and productivity.

SG&A in the second quarter of 2008 increased by $1 million to $13 million compared to the same period last year primarily related to the decline of the US dollar compared to the Canadian dollar over the same period. R&D investment increased by $l million in the second quarter of 2008.

Other income for the second quarter of 2007 included the release of a $1 million provision related to a business sold in 2003. This item has been treated as an adjusting item.

Capital expenditures for MDS Nordion were $3 million, compared to $1 million last year driven by investments to expand capacity in Europe for our Glucotrace(R) product.

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 expected $4 million loss was previously recorded in the first quarter of 2008. The operating results for these product lines were reported in the MDS Nordion segment in the second quarter of 2008.

MDS Analytical Technologies

Financial Highlights

Second Quarter

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

% of net % of net

2008 revenues 2007 revenues

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

Product revenues $ 93 79% $ 62 81%

Service revenues 25 21% 15 19%

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Net revenues 118 100% 77 100%

Cost of product revenues (64) (54%) (48) (63%)

Cost of service revenues (4) (3%) (1) (1%)

Selling, general, and

administration (22) (19%) (11) (14%)

Research and development (20) (17%) (15) (20%)

Depreciation and amortization (12) (10%) (4) (5%)

Restructuring charges - - - -

Other income (expense) net - - (1) (1%)

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Operating income (loss) (4) (3%) (3) (4%)

Adjustments:

Equity earnings 10 8% 11 14%

Acquisition integration (1) (1%) 3 4%

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5 4% 11 14%

Depreciation and amortization 12 10% 4 5%

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Adjusted EBITDA $ 17 14% $ 15 19%

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Margins:

Gross margin 42% 36%

Adjusted EBITDA 14% 19%

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Capital expenditures $ 1 $ 1

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Year-to-date

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

% of net % of net

2008 revenues 2007 revenues

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Product revenues $ 185 79% $ 100 arily driven by foreign exchange and strength in cobalt sterilization technologies, which contributed 9% and 4% in revenue growth, respectively. Adjusted EBITDA was $24 million compared to $22 million in the second quarter of 2007.

Subsequent to the quarter, MDS Nordion completed the previously announced divestiture of two non-strategic product lines.

After quarter end, Atomic Energy of Canada Limited (AECL) announced its intention to discontinue the MAPLE project at Chalk River, Ontario. AECL has indicated its commitment to providing ongoing supply of medical isotopes and the Canadian government has asked AECL to pursue the extension of the NRU operation beyond its current license. MDS is reviewing the potential impact of this announcement. The Company intends to evaluate all options and pursue appropriate steps to protect the interests of patients, its customers and its shareholders.

MDS Analytical Technologies

% Change

----------

($ millions) Q2 2008 Q2 2007 Reported

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

Revenues $ 118 $ 77 53%

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Adjusted EBITDA $ 17 $ 15 13%

% 14 % 19 -

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MDS Analytical Technologies delivered $118 million in revenue, a 53% increase over prior year and $17 million in adjusted EBITDA, a 13% year-over-year increase. Adjusted for acquisitions and foreign exchange, revenue increased by 15%. Profitability was impacted by softening demand for high-end instruments, particularly in the pharmaceutical market.

Sciex product lines contributed $8 million in adjusted EBITDA in the second quarter, flat to prior year. Mass spectrometry end user revenue, including the impact of foreign exchange, grew 6% compared to the same period last year. Molecular Devices (MD) contributed $55 million in revenue and $9 million in adjusted EBITDA.

During the quarter, MDS Analytical Technologies continued to drive innovation and growth with the launch of the next-generation Arcturus XT(TM) instrument for laser capture microdissection. The new Arcturus XT(TM) offers researchers improved speed, precision and flexibility for their microdissection experiments.

Guidance

Primarily as a result of softening demand for high-end instruments in the pharmaceutical markets and a delay in achieving targeted profitability at MDS Pharma Services, MDS has revised its guidance for its 2008 financial performance. For the full year 2008, the Company now expects to achieve the following results:

(millions of US dollars, except earnings per share)

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

2007 Actual Revised 2008 Initial

Results Guidance (February 21, 2008)

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Total Revenues $ 1,210 $ 1,350 - 1,400 $ 1,350 - 1,410

Net Revenues $ 1,119 $ 1,250 - 1,290 $ 1,250 - 1,300

Adjusted EBITDA $ 145 $ 160 - 170 $ 175 - 185

Adjusted EPS $ 0.34 $ 0.27 - 0.33 $ 0.37 - 0.43

Income (loss) from

continuing operations $ (33) $ 45 - 55 $ 55 - 65

Basic EPS $ (0.25) $ 0.37 - 0.45 $ 0.45 - 0.53

Capital Expenditures $ 71 $ 60 - 70 $ 65 - 75

Effective tax rate 41% 10 - 20% 0 - 10%

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

Conference Call

MDS will be holding a conference call today at 9:30 am EST to discuss second 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.

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 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 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 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 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 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

June 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 April 30, 2008 and its financial position as at April 30, 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 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 April 30, 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 rel
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SOURCE MDS Inc.
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