UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      40-F





[     ]
      REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT
      OF
      1934


OR


[
      X ] ANNUAL REPORT PURSUANT TO SECTION 13(A) OR 15(D) OF THE SECURITIES EXCHANGE
      ACT OF 1934





For
                the fiscal year ended October
                31,
                2007
            Commission
                File Number___001-15016





MDS
                INC.
              (Exact
                name of Registrant as specified in its charter)Canada
                (Federal)
              (Province
                or other jurisdiction of incorporation or organization)8099
              (Primary
                Standard Industrial Classification Code Number (if
                applicable))98-0170107
              (I.R.S.
                Employer Identification Number (if applicable))Suite
                300, West Tower
              2700
                Matheson Blvd. East
              Mississauga,
                Ontario Canada L4W 4V9
              (416)
                213-4082
              (Address
                and telephone number of Registrant's principal executive
                offices)MDS
                Pharma Services (US) Inc.
              621
                Rose Street,  P.O. Box 80837, Lincoln, Nebraska
                68501
              (402)
                476-2811
              (Name,
                address (including zip code) and telephone number (including area
                code)
              of
                agent for service in the United
                States)








Securities
      registered or to be registered pursuant to Section 12(b) of the
      Act.


Title
                of each
                class
            Name
                of each exchange
                on which registeredCommon
                Shares, no par value
            New
                York Stock Exchange


Securities
      registered or to be registered pursuant to Section 12(g) of the
      Act.


none
              (Title
                of Class)


Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act.


none
              (Title
                of Class)


For
      annual reports, indicate by check mark the information filed with this
      Form:


[
                X
                ] Annual information form
            [
                X
                ] Audited annual financial
                statements




Indicate
      the number of outstanding shares of each of the issuer's classes of capital
      or
      common stock as of the close of the period covered by the annual
      report.




The
      Registrant had 122,578,331 Common
      Shares outstanding as at October 31, 2007





Indicate
      by check mark whether the Registrant by filing the information contained in
      this
      Form is also thereby furnishing the information to the Commission pursuant
      to
      Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the "Exchange Act").
      If "Yes" is marked, indicate the file number assigned to the Registrant in
      connection with such Rule.





Yes    [      ]      No  [  X  ]





Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
      (or for such shorter period that the Registrant was required to file such
      reports) and (2) has been subject to such filing requirements for the past
      90
      days.





Yes  [  X  ]        No
      [       ]


DOCUMENTS
      FILED UNDER COVER
      OF THIS FORM








Document
                No.
                1:
            Annual
                Information Form for the year ended October 31, 2007.








Document
                No.
                2:
            Audited
                Consolidated Financial Statements for the year ended October 31,
                2007,
                prepared in accordance with United States generally accepted accounting
                principles.








Document
                No.
                3:
            Management's
                Discussion and Analysis of Financial Condition and Results of Operations
                for the year ended October 31, 2007.





Cautionary
      Statement Regarding Forward-Looking
      Statements





This
      annual report on Form 40-F, including the exhibits attached hereto and any
      amendments, supplements or modifications hereof or thereof, contains statements
      that are 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.   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", and words and expressions of similar import are
      intended to identify forward-looking statements.





By
      their
      very nature, forward-looking statements involve inherent risks and
      uncertainties, both general and specific, which give rise to the possibility
      that predictions, forecasts, projections and other forward-looking statements
      will not be achieved.  We caution readers not to place undue reliance
      on these statements as a number of important factors could cause our actual
      results to differ materially from the beliefs, plans, objectives, expectations,
      anticipations, estimates and intentions expressed in such forward-looking
      statements.  These factors include, but are not limited to, management
      of operational risks; the strength of the Canadian and United States economies
      and the economies of other countries in which we conduct business; our ability
      to secure a sufficient quantity of raw materials, particularly cobalt; a
      reliable source of supply of critical nuclear isotopes; the impact of the
      movement of the Canadian dollar relative to other currencies, particularly
      the
      US dollar and the Euro; changes in interest rate policies of the Bank of Canada
      and the Board of Governors of the Federal Reserve System in the United States;
      the effects of competition in the markets in which we operate; the timing and
      technological advancement of new products introduced by us or by our
      competitors; the impact of changes in the laws and regulations and enforcement
      thereof; judicial judgments and legal proceedings; our ability to obtain
      accurate and complete information from, or on behalf of, our customers and
      counter parties; our ability to successfully realign our organization, resources
      and processes; our ability to complete strategic acquisitions and joint ventures
      and to integrate our acquisitions and joint ventures successfully; changes
      in
      accounting policies and methods we use to report our financial condition,
      including uncertainties associated with critical accounting assumptions and
      estimates; operational and infrastructure risks; other factors that may affect
      future results including changes in trade policies, timely development and
      introduction of new products and services, changes in our estimates relating
      to
      reserves and allowances, changes in tax laws, technological changes, natural
      disasters such as hurricanes, the possible impact on our businesses from public
      health emergencies, international conflicts and other developments including
      those relating to terrorism; and our success in anticipating and managing the
      foregoing risks.





We
      caution that the foregoing list of important factors that may affect future
      results is not exhaustive.  When relying on our forward-looking
      statements to make decisions with respect to the Company, investors and others
      should carefully consider the foregoing factors and other uncertainties and
      potential events.  We do not undertake to update any forward-looking
      statement, whether written or oral, that may be made from time to time by us
      or
      on our behalf.





In
      this
      Form 40-F, unless the context otherwise requires, references to "we", "us",
      "our", or similar terms, as well as references to "MDS", the "Company", or
      the
      "Registrant" refer to MDS Inc.







Document
      No. 1


MDS
        INC.
  ANNUAL
        INFORMATION FORM
  FOR
        THE YEAR ENDED OCTOBER 31, 2007
 
  January
        25, 2008
 Toronto,
        Canada
   TABLE
        OF
        CONTENTS
  INTERPRETATION
 ITEMS
                  AFFECTING THE COMPARABILITY OF FINANCIAL INFORMATION OF PRIOR YEARS
 DOCUMENTS
                  INCORPORATED BY REFERENCE
 CAUTION
                  REGARDING FORWARD-LOOKING
                  INFORMATION
 1.
              CORPORATE
                  STRUCTURE
 1.1
              Jurisdiction
                  of Incorporation
 1.2
              Current
                  Organization
 2.
              GENERAL
                  DEVELOPMENT OF THE BUSINESSES OF MDS
 2.1
              Overview
 2.1.1Life
                  Sciences
 2.1.2Diagnostics
 2.1.3Customers
 2.1.4Employees
 2.2
              Recent
                  Industry Developments
 2.3
              Business
                  Strategy of MDS
 2.4
              Financial
                  and Other Developments
 2.4.1Capital
                  Structure
 2.4.2Acquisitions
 2.4.3Divestitures
                  and Discontinuances
 3.
              NARRATIVE
                  DESCRIPTION OF THE BUSINESSES OF MDS
 3.1
              Reportable
                  Industry Segments
 3.2
              MDS
                  Pharma Services
 3.3
              MDS
                  Nordion
 3.4
              MDS
                  Analytical Technologies
 3.5
              Diagnostics
 3.6
              Significant
                  Investees
 3.6.1Lumira
                  Capital Corp.
 3.7
              Principal
                  Facilities
 3.8
              Research
                  and Development
 3.9
              Environmental
                  Compliance
 3.10
              Other
                  Business Matters
 3.10.1Risk
                  Factors
 3.10.2Legal
                  Proceedings and Regulatory Actions
 3.10.3Interest
                  of Management and Others in Material
                  Transactions
 3.10.4Transfer
                  Agent and Registrar
 3.10.5Material
                  Contracts
 3.10.6Experts
 4.
              SELECTED
                  CONSOLIDATED FINANCIAL INFORMATION
 4.1
              Summary
                  Annual Information (Year to October 31)
 4.2
              Dividends
 4.3
              Capital
                  Structure
 5.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS
 6.
              MARKET
                  FOR SECURITIES
 7.
              DIRECTORS
                  AND OFFICERS
 7.1
              Directors
 7.2
              Executive
                  Officers
 7.3
              Additional
                  Disclosure for Directors and Executive
                  Officers
 8.
              AUDIT
                  COMMITTEE INFORMATION
 8.1
              Composition
                  of the Audit Committee
 8.2
              Auditor
                  Service Fees
 8.3
              Pre-approval
                  Policy for External Audit Services
 9.
              ADDITIONAL
                  INFORMATION
 APPENDIX
                  I – MDS INC. AUDIT COMMITTEE CHARTER
 APPENDIX
                  II – DEFINITIONS6
 
 
 The
        following are registered trademarks of MDS Inc. or its
        subsidiaries:
 
 MDS;
        Nordion; Sciex; ELAN®; API 5000TM; API 4000TM; API 3200TM; API 2000TM; QSTAR® Elite;
        QSTAR® XL Hybrid; 4000 Q TRAP®; 3200 Q TRAP®; 4800 MALDI TOF/TOFTM; GenePix®;
        MetaMorph®; SpectraMax®; FlexStation®; FLIPR®.
 
 The
        following are registered trademarks belonging to the companies
        indicated:
 
 ZEVALIN®                                
        Molecular Insight Pharmaceuticals, Inc.
 BEXXAR®                                
        GlaxoSmithKline
 
   MDS
        INC.
 ANNUAL
        INFORMATION FORM
  INTERPRETATION
  In
        this
        Annual Information Form (“AIF”), “we”, “us”, “our”, “MDS”, and “the Company” are
        used to refer to MDS Inc., its subsidiaries and joint ventures.  In
        this AIF, all references to specific years are references to the fiscal year
        ended October 31.  All references to “$” or “dollars” are references
        to US dollars, unless otherwise specified.
  Certain
        terms and abbreviations used in this AIF are defined in Appendix II -
        Definitions.
  ITEMS
        AFFECTING THE COMPARABILITY OF FINANCIAL INFORMATION OF PRIOR YEARS
  All
        financial references in this document exclude our discontinued generic
        radiopharmaceuticals operations, our U.S. and Canadian laboratory operations,
        certain early-stage pharmaceutical research services operations, and our
        interests in Source Medical Corporation (Source) unless otherwise indicated.
        All
        financial references for the prior years have been restated to reflect this
        treatment.
  MDShistorically
        prepared its consolidated financial
        statements in accordance with Canadian GAAP and provided reconciliation to
        US
        GAAP. The Company has now adopted US GAAP effective with the reporting of
        its
        fiscal 2007 annual results as its primary reporting standard for its
        consolidated financial statements. MDS has adopted US GAAP to improve the
        comparability of its financial information with that of its competitors,
        the
        majority of whom are US-based multinational companies. All figures for prior
        years have been revised to reflect the adoption of US GAAP as our reporting
        standard. All financial statements andManagement’s Discussion and Analysis
        (MD&A)previously
        filed by the Company
        including those filed for interim reporting purposes during 2007, were prepared
        under Canadian GAAP.
  DOCUMENTS
        INCORPORATED BY REFERENCE
  The
        following sections of the MDS 2007 Annual Report Financial Review (2007
        Financial Review) are incorporated by reference into this AIF:
  1.
              The
                  audited consolidated financial statements of MDS Inc. for the years
                  ended
                  October 31, 2007, October 31, 2006 and October 31, 2005, reported
                  on by
                  Ernst & Young LLP, Chartered Accountants (2007 Financial Statements)
                  on pages 30 to 37 of the 2007 Financial Review; and
  2.
              Management’s
                  Discussion and Analysis of financial condition and results of operations
                  of MDS Inc. for the fiscal year ended October 31, 2007 (2007 MD&A)
                  contained on pages 1 to 29 of the 2007 Financial Review.
  3.
              Management’s
                  Proxy Circular dated January 7, 2008 with respect to the March
                  6, 2008
                  Annual Shareholders meeting.
 
 
 CAUTION
        REGARDING FORWARD-LOOKING
        INFORMATION
 From
        time
        to time, we make written or oral forward-looking statements within the meaning
        of certain securities laws, including the Securities Act (Ontario) and the
“safe
        harbour” provisions of 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 changes in laws, trade
        policies and regulations, and enforcement thereof; judicial judgments and
        legal
        proceedings; our ability to successfully realign our organization, resources
        and
        processes; our ability to complete strategic acquisitions and joint ventures
        and
        to integrate our acquisitions and joint ventures successfully; 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.  We do not undertake to update any forward-looking
        statement, whether written or oral, that may be made from time to time by
        us or
        on our behalf.
  1.           
        CORPORATE STRUCTURE
  1.1
              Jurisdiction
                  of Incorporation
  The
        Company was incorporated on April 17, 1969 under the laws of the Province
        of
        Ontario under the name Medical Data Sciences Limited.  The Company
        changed its name to MDS Health Group Limited in April of 1973 and to MDS
        Inc. in
        November 1996.  The Company was continued under the Canada Business Corporations
        Act (CBCA) in October 1978 and remains subject to that
        statute.
  The
        head
        office of MDS, and its principal place of business, is located at 2700 Matheson
        Boulevard East, Suite 300, West Tower, Mississauga, Ontario, Canada, L4W
        4V9.
  1.2
              Current
                  Organization
  Significant
        operating subsidiaries and partnerships are defined as those
        companies/partnerships that contribute 10% or more of the consolidated revenues
        or consolidated operating income of the Company or account for 10% or more
        of
        the consolidated total assets of the Company. The significant operating
        subsidiaries and partnerships of the Company are set forth below.
  Ø
              MDS
                  (Canada) Inc., a Canadian (CBCA) corporation;
  Ø
              MDS
                  Analytical Technologies (US) Inc., a Delaware corporation;
  Ø
              MDS
                  Pharma Services (US) Inc., a Nebraska corporation;
  Ø
              MDS
                  Pharma Services Central Lab S.A.S., a French corporation;
  Ø
              MDS
                  Pharma Services S.A.S., a French corporation;
  Ø
              MDS
                  Pharma Services France S.A.S., a French corporation;
  Ø
              MDS
                  Pharma Services GB Limited, a UK corporation;
  Ø
              MDS
                  Pharma Services Switzerland AG, a Swiss corporation;
  Ø
              Molecular
                  Devices Limited, a UK corporation;
  Ø
              PerkinElmer
                  Sciex Instruments partnership, an Ontario partnership; and
  Ø
              Applied
                  Biosystems/MDS Analytical Technologies partnership, an Ontario
                  partnership.
  With
        the
        exception of the two partnerships in which MDS has a 50% interest, MDS
        beneficially owns, directly or indirectly, 100% of the shares of the above
        named
        subsidiaries.
  The
        entities outlined above are consolidated in the financial statements of MDS
        and
        are referred to hereafter as subsidiaries, with the exception of PerkinElmer
        Sciex Instruments and Applied Biosystems/MDS Analytical Technologies, each
        of
        which is accounted for on an equity basis.
  In
        addition to the active operations described above:
  As
        at
        October 31, 2005, the Company owned a 50% interest in Source, a Canadian
        corporation.  On November 22, 2005 the Company sold its 50% interest
        in Source to its partner, Cardinal Health Inc. (see Section 2.1 - General
        Development of the Businesses of MDS: Overview).
  Until
        February 26, 2007, the Company conducted the majority of its diagnostics
        business through the following partnerships:
  Ø
              MDS
                  Laboratory Services, L.P., a partnership established under the
                  laws of
                  Ontario in which MDS held an indirect 99.6% interest, and
  Ø
              Metro-McNair
                  Clinical Laboratories Limited Partnership (Metro-McNair), a limited
                  partnership established under the laws of British Columbia in which
                  MDS
                  held a 75% interest.
  On
        February 26, 2007, the Company sold its interest in its diagnostics business,
        including its interest in these partnerships, to Borealis Infrastructure
        Management Inc. (see Section 2.1 - General Development of the Businesses
        of MDS:
        Overview)
 
 In
        addition to its subsidiaries, the Company owns a 99.6% non-controlling equity
        interest in LPBP Inc., an Ontario corporation, through which it held its
        former
        indirect interest in the Ontario businesses of MDS Diagnostic Services and
        a 45%
        interest in Lumira Capital Corp. (formerly MDS Capital Corp.).  Lumira
        Capital Corp. is described under the heading
 3.6
        -
        Significant Investees.
 
 
 2.
              GENERAL
                  DEVELOPMENT OF THE BUSINESSES OF MDS
  2.1
              Overview
 MDS
        is a
        global life sciences company that provides market-leading products and services
        that our customers need for the development of drugs and the diagnosis and
        treatment of disease.  We are a leading global provider of
        pharmaceutical research services, medical isotopes for molecular imaging,
        sterilization, radiotherapeutics, and analytical instruments.
  MDS
        operates in three business units within the life sciences industry: MDS Pharma
        Services; MDS Nordion, and MDS Analytical Technologies.
  In
        September 2005, we announced our strategic plan to pursue growth in the global
        life sciences market and dispose of assets that do not contribute to the
        Company’s areas of focus.  The announcement also referred to our
        restructuring plan to reduce overhead and better align resources and
        infrastructure costs.
  During
        fiscal 2005, we discontinued certain early-stage businesses within our
        pharmaceutical research services business, a business unit of the life sciences
        segment, and, consistent with our strategic plan, our interests in Source
        Medical and Calgary Laboratory Services (CLS) were classified as discontinued
        operations. In November 2005, the Company sold its interest in Source to
        Cardinal Health Inc. for C$79 million, and in April 2006, the Calgary Health
        Region exercised its
        option to acquire the Company’s partnership interest in CLS for C$21 million,
        (see Section 2.4.3 - Divestitures and Discontinuances).
  On
        February 26, 2007, the Company completed another significant step in this
        strategic plan by selling its remaining Canadian diagnostics businesses to
        Borealis Infrastructure Management Inc. for gross proceeds of C$1.3 billion,
        (see Section 2.4.3 - Divestitures and Discontinuances)
  In
        line
        with the Company’s strategic plan, on March 20, 2007, MDS finalized the
        acquisition of Sunnyvale, California-based Molecular Devices Corporation
        (MDC),
        a leading provider of high-performance measurement tools for high-content
        screening, cellular analysis, and biochemical testing for $621 million (see
        Section 2.4.2 - Acquisitions).
  In
        the
        first half of fiscal 2007, MDS initiated efforts to further optimize the
        global
        footprint of MDS Pharma Services.  During 2007, the Company finalized
        the sale of its Phase I clinical facility in Hamburg, Germany, transferred
        its
        LCMS bioanalytical, and drug metabolism and pharmacokinetics (DMPK) operations
        from Montreal, Canada to its Lincoln, USA and Bothell, USA sites, respectively.
        The Company also consolidated central laboratory operations from Hamburg,
        Germany into Baillet, France and transferred bioanalytical operations from
        Sittingbourne, UK to its Zurich, Switzerland site.  To further
        accelerate growth, the Company has invested in new customer-facing IT systems,
        expanded central laboratory operations in Beijing, China and initiated a
        300-bed
        expansion at its Phase I facility in Phoenix, USA.  The latter opened
        in January 2008.
  2.1.1
              Life
                  Sciences
  The
        Company has three life sciences business units: MDS Pharma Services, which
        provides pharmaceutical research services; MDS Nordion, which provides molecular
        imaging, sterilization and radiotherapeutics; and MDS Analytical Technologies,
        which designs, manufactures and sells analytical instruments and combines
        newly
        acquired Molecular Devices (MDC) with the Sciex division of MDS.
  In
        1981,
        MDS entered the analytical instruments business with the acquisition of
        SCIEX(acronym
        for SCIentific EXport).  In 2007, MDS expanded its analytical
        instruments business with the 100% acquisition of MDC.
  In
        1992,
        MDS acquired an initial 83% interest in Nordion International Inc. (Nordion)
        from the Canadian Development Investment Corporation pursuant to a privatization
        initiative by Atomic Energy of Canada Limited (AECL), thereby expanding its
        operations into medical isotope manufacturing and
        distribution.  Commencing in 1995, the Company increased its ownership
        interest in Nordion to 100%.
  In
        1995,
        MDS began acquiring pharmaceutical research services organizations and expanded
        the services offered to the pharmaceutical development
        industry.  Several smaller acquisitions led to the fiscal 2000
        acquisition of Phoenix International Life Sciences Inc., a public company
        based
        in Montreal, Canada with additional operations in the United States and
        Europe.  These pharmaceutical research services businesses
        collectively operate globally under the name MDS Pharma
        Services.
  2.1.2                      
        Diagnostics
  Until
        February 2007, the Company also operated in the healthcare industry primarily
        through its Canadian clinical laboratory operations, MDS Laboratory
        Services.  The Canadian laboratory business was the largest operator
        of private sector clinical laboratories in Canada.  Services provided
        by the company included clinical laboratory testing for physicians and
        non-hospital healthcare institutions, management of hospital laboratories
        under
        contract and other support services for clinical diagnostics. The sale of
        the
        Canadian laboratory business to Borealis Infrastructure Management Inc. was
        closed on February 26, 2007 as disclosed in Section 2.4.3 – Divestitures and
        Discontinuances.
  2.1.3                      
        Customers
  Customers
        of the Company’s life sciences businesses include a broad range of manufacturers
        of medical products including pharmaceutical manufacturers, biotechnology
        companies, manufacturers of medical supplies and devices, plus academic and
        government institutions.  These customers are located in virtually all
        major international markets.
  Through
        its former Canadian diagnostics business, the Company provided products and
        services directly to healthcare providers, including physicians and
        hospitals.
  No
        single
        customer accounted for more than 10% of the consolidated revenues of the
        Company
        for the fiscal year ended October 31, 2007.
  The
        Company’s business and customer base are global.  Revenues earned
        outside of Canada, reflecting export sales, along with revenues earned by
        operating units based outside of Canada, made up approximately 90% of net
        revenues for 2007.  Export sales from Canada alone made up 41% of net
        revenues for 2007.
  2.1.4                      
        Employees
  As
        at
        October 31, 2007, MDS had approximately 5,500 employees in 29
        countries.
  2.2
              Recent
                  Industry Developments
  MDS
        has
        benefited from the significant and rapid changes that are affecting the life
        sciences industry.  These changes include:
  (i)
              rising
                  healthcare costs;
  (ii)
              intensifying
                  cost containment pressures;
  (iii)
              rapid
                  growth in demand for services due to aging population bases;
  (iv)
              rapid
                  innovation in technology, increasing the availability of sophisticated
                  treatment options;
  (v)
              greater
                  productivity in drug discovery and development;
  (vi)
              growing
                  consumer awareness of healthcare choices; and
  (vii)
              growing
                  awareness within emerging and developing countries of the benefits
                  of
                  adequate healthcare systems and the improving ability to pay for
                  improved
                  healthcare solutions.
  New
        technologies have profoundly affected the life sciences market.  These
        new technologies, in part, have led to more focused research spending and
        continued corporate mergers of significant size within the pharmaceutical
        industry, as pharmaceutical companies strive to maintain or obtain a competitive
        edge by providing new and improved services or by introducing new products
        to
        market.  Consolidation of this industry is expected to continue, and
        is likely expected to affect product development budgets and may lead to
        more
        focused research spending by the merged entities, including more concentration
        of spending budgets within therapeutics areas.
  These
        mergers are, at least in part, a response to the loss of patent protection
        on a
        significant number of large market drugs expected over the next few
        years.  Off-patent drugs often lose more than half of their market
        share to generic alternatives in less than one year.  To replace these
        lost revenues and sustain the levels of growth enjoyed in the past,
        pharmaceutical companies must either increase research and development spending
        or improve the effectiveness of existing spending.  Major
        pharmaceutical companies are also acting aggressively to protect existing
        patent
        positions and to extend patent coverage to different formulations.
  A
        string
        of recent adverse events affecting a number of large market pharmaceutical
        products has placed added scrutiny on the drug approval process in the
        US.  There are increasing calls for more regulation of the approval
        process as a result.  The impact of this on the rate and cost of drug
        innovation is uncertain.
  There
        is
        growing activity between pharmaceutical companies having large research budgets
        and smaller biotechnology companies that have smaller budgets but rich pipelines
        of possible new discoveries.  Advances in biotechnology, genomics, and
        proteomics have created a better understanding of how diseases function both
        at
        a molecular level and as part of a biological system that biotechnology
        companies are seeking to exploit.  Large pharmaceutical companies are
        increasingly providing funding to these smaller companies in return for rights
        to further develop and market products resulting from these discoveries,
        or
        buying these smaller companies outright.
  The
        surge
        in development activity, coupled with a drive to reduce costs and accelerate
        development time, has driven growth in outsourcing of research activities
        by
        pharmaceutical manufacturers to specialized pharmaceutical research services
        organizations and an increased use of new analytical technologies that seek
        to
        provide improved efficiency and results.  High throughput screening,
        and the technologies that make this possible, increase the number of new
        drug
        leads that can be investigated, enabling drug companies to identify promising
        candidates earlier.  More importantly, researchers can eliminate an
        unpromising candidate before a large investment is made in further
        development.
  It
        is
        anticipated that these technological advances may lead to more targeted,
        personalized and effective medicines.  In addition, these technologies
        are expected to lead to more accurate diagnosis
        at an earlier disease stage, which will in turn lead to treatment that is
        more
        effective.  A number of new developments also promise better disease
        prevention alternatives.
  2.3
              Business
                  Strategy of MDS
  The
        Company’s strategy is to focus on the global life sciences markets to drive
        growth and deliver value to customers and shareholders.  The life
        sciences markets are some of the fastest growing markets in the world, driven
        by
        long term trends in population demographics and the way therapeutics are
        developed and disease is treated.  The Company is focused in the areas
        of pharmaceutical research services through MDS Pharma Services, molecular
        imaging, sterilization and radiotherapeutics through MDS Nordion, and life
        sciences instruments and tools through MDS Analytical
        Technologies.  MDS expects to supplement organic growth in its three
        life sciences businesses with selected technology and business
        acquisitions.
  MDS
        Pharma Services (see Section 3.2) is growing its global pharmaceutical research
        services capability with a focus on building global scale and uniform quality
        and procedures. The segment is the sixth largest contract research organization
        (CRO) globally, and one of the largest CROs in early-stage research (Discovery
        through Phase IIa). The current focus of MDS Pharma Services is on improving
        the
        growth and profitability of this segment across its businesses and
        regions.
  MDS
        Nordion (see Section 3.3) is the largest global provider of nuclear isotopes
        used in molecular imaging and sterilization. Securing reliable sources of
        supply
        for key isotopes and building safe, dependable logistics capability are key
        strategic objectives for this core business. MDS Nordion is also focused
        on
        identifying new uses for medical isotopes and building the necessary
        manufacturing and development capabilities to be the provider of choice for
        companies that are developing new products with isotopic
        applications.
  MDS
        Analytical Technologies (see Section 3.4) is focused on developing and providing
        customers with state-of-the-art life sciences tools. This segment relies
        heavily
        on leading-edge research and engineering as well as extensive expertise in
        molecular and cell biology and chemistry to develop instruments that have
        a
        clear advantage over competitive offerings. MDS Analytical Technologies consist
        of two channel brands, Sciex and Molecular Devices (MDC).  Sciex,
        focused on high-end mass spectrometers, takes its products to market
        predominantly through partnerships with companies who have primary
        responsibility for marketing, sales, and after-sales support.  MDC
        markets its high-performance bioanalytical measurement systems through its
        global sales channel, which added important distribution capability to MDS
        during 2007.
  2.4
              Financial
                  and Other Developments
  Factors
        affecting the comparability of the Company’s financial data for fiscal years
        2005 through 2007 include the following:
  2.4.1                      
        Capital Structure
  Ø
              In
                  December 2002, the Company completed a private placement of $311
                  million
                  of senior unsecured notes (Senior Unsecured Notes). The Senior
                  Unsecured
                  Notes bear interest at
                  rates
                    between 5.15% and 6.19% per annum and have maturities ranging
                    from
                    December 2007 to December 2012.
  Ø
              In
                  2005, the Company negotiated a new C$500 million, five-year committed,
                  revolving credit facility which replaced the Company’s previous C$225
                  million credit facility.  As at October 31, 2007, the facility
                  was undrawn.
  Ø
              On
                  April 9, 2007, MDS completed a substantial issuer bid and repurchased
                  approximately 22.8 million Common shares for $441 million at a
                  price of
                  C$21.90 per share. As a result of this issuer bid, MDS reduced
                  the number
                  of Common shares outstanding from approximately 144 million to
                  122
                  million.
  2.4.2                      
        Acquisitions
  Ø
              During
                  2005, MDS acquired SkeleTech Inc., a therapeutically focused CRO
                  providing
                  pre-clinical discovery and development services in bone and central
                  nervous systems biologies, for consideration of $6 million. The
                  purchase
                  agreement included a provision for contingent consideration of
                  $2 million,
                  payable to the vendors if certain profitability levels were attained
                  in
                  fiscal 2006. During 2006, a payment for $1 million was made to
                  the vendors
                  under this agreement.
  Ø
              On
                  March 20, 2007, MDS finalized the acquisition of Sunnyvale,
                  California-based Molecular Devices Corporation (MDC), a leading
                  provider
                  of high-performance measurement tools for high-content screening,
                  cellular
                  analysis, and biochemical testing. The total cost of the acquisition
                  was
                  $621 million, including the cost of the tender offer, the cost
                  to acquire
                  outstanding in-the-money options held by MDC employees, and transaction
                  costs. Upon completion of this acquisition, MDS established a new
                  business
                  unit, MDS Analytical Technologies, which combines MDS Sciex with
                  MDC. MDS
                  filed a form 51-102F4 with respect of this acquisition on June
                  4, 2007.
  2.4.3                      
        Divestitures and Discontinuances
  Ø
              In
                  2005, the Company’s management announced its commitment to a plan to
                  divest a number of business operations that were no longer core
                  to the
                  Company’s strategy.  During 2005, the Company’s interest in
                  Source was classified as a discontinued operation, and as stated
                  previously, in November, 2005, the Company disposed of its interest
                  in
                  Source.  In addition, during 2006, the Company’s partner in CLS
                  exercised its right to buy out the Company’s partnership interest.
  Ø
              In
                  2005, the Company approved a plan to divest of its Pharmaceutics,
                  Fermentation Biopharmaceutics/Biosafety, and in vitro Pharmacology
                  operations within the MDS Pharma Services business unit.  These
                  businesses have also been classified as discontinued operations.
                  During
                  2006, these businesses were either sold or shut down.
  Ø
              In
                  February 2006, MDS and AECL reached an agreement on disputes related
                  to
                  the MAPLE facilities (Facilities), which resulted in MDS exchanging
                  its
                  interest in the Facilities for a
                  long-term
                    isotope supply contract (See Section 3.3. – MDS Nordion; NRU and MAPLE
                    Facilities)
  Ø
              On
                  October 5, 2006, the Company entered into a series of agreements
                  to sell
                  its remaining Canadian diagnostics businesses, MDS Diagnostic Services,
                  to
                  Borealis Infrastructure Management Inc. for gross proceeds of C$1.3
                  billion. The sale was completed on February 26, 2007.
  Ø
              Subsequent
                  to fiscal 2007 year-end, on November 29, 2007, MDS Nordion signed
                  an
                  agreement with Best Medical International Inc. to divest its external
                  beam
                  therapy and self-contained irradiator product lines.
   3.
              NARRATIVE
                  DESCRIPTION OF THE BUSINESSES OF MDS
  3.1
              Reportable
                  Industry Segments
  The
        Company operates under the following three business units:
 MDS
                  Pharma Services
              This
                  business unit provides research services and is one of the world
                  leaders
                  in pharmaceutical research services, from pre-clinical development
                  to
                  Phase IV clinical trials, for innovative and generic pharmaceutical
                  companies and for biotechnology companies, as well as consumer
                  product and
                  drug delivery companies.MDS
                  Nordion
              This
                  business unit is a leading global provider of medical isotopes
                  for
                  molecular imaging, technologies for the sterilization of medical
                  and other
                  products as well as contract manufacturing for the radiotherapeutics
                  industry.MDS
                  Analytical Technologies
              This
                  business unit focuses on the research, design, manufacture and
                  marketing
                  of state-of-the-art life sciences tools such as high-end mass
                  spectrometers through its Sciex brand and high-performance bioanalytical
                  measurement systems through its Molecular Devices
                  brand.
 
 Prior
        to
        February 26, 2007, as disclosed in Section 2.4.3 – Divestitures and
        Discontinuances, the Company was, through various operating business units,
        the
        leading provider of diagnostic laboratory services in Canada.
 
 Prior
        to
        the sale of Source Medical in November 2005, as disclosed in Section 2.4.3
–
Divestitures and Discontinuances, the Company was a partner in the largest
        provider of distribution services for medical products in Canada, supplying
        hospitals and alternative care sites.
   3.2            MDS Pharma
        Services
  MDS
        operates as a global contract research organization (CRO) through MDS Pharma
        Services. MDS Pharma Services is one of the top global CROs and has been
        highly
        rated for customer service and quality by CenterWatch, a leading industry
        publication. MDS Pharma Services is a full-service provider of drug discovery
        and development services to the pharmaceutical, biotechnology and generic
        industries. MDS Pharma Services operates as a CRO in 28 countries.
  Industry
        Background
  During
        the 1970’s, integrated pharmaceutical companies conducted the majority of
        research leading up to development of pharmaceutical products in-house. At
        that
        time, the only significant function that was contracted out was pre-clinical
        toxicology screening.
  The
        drug
        development process is extremely expensive due to the cost of the infrastructure
        required to support the full range of processes necessary for drug development
        and the long period of time required to achieve full regulatory approval
        of a
        new compound. On average, it takes 10 to 12 years and over $800 million to
        bring
        a new pharmaceutical from discovery through Phases I to III of clinical trials
        and make it available to consumers. Since patent protection for new products
        extends for only 17 to 20 years, the profitability of a new compound can
        be
        greatly enhanced by reducing the total cost of development and by shortening
        the
        elapsed period over which development occurs.
  As
        a
        result, companies began to outsource to meet the occasional surge in internal
        demand that could not be addressed with in-house capabilities.  In an
        effort to reduce both time and costs, major drug companies began outsourcing
        portions of the development work to companies that provide specialized research
        services. These companies have become known as Contract Research Organizations
        or CROs. Individual CROs tend to specialize in particular stages of the drug
        development process and, therefore, develop expertise in those areas. Reliance
        on CRO expertise can enable the pharmaceutical companies to achieve cost
        efficiencies and to shorten the research time for that stage of the development
        process while avoiding capital investments.
  The
        decision by MDS to enter the CRO business in 1995 was influenced by a number
        of
        key trends that were beginning to affect the industry. The Company believes
        that
        these trends remain in place. In particular, corporate mergers and cost
        containment pressures at pharmaceutical companies are expected to continue
        to
        lead to downsizing of in-house research and development capabilities and
        pharmaceutical companies are anticipated to continue to focus increasingly
        on
        marketing and product distribution. Outside suppliers will increasingly be
        relied upon to provide services previously secured from in-house departments.
        Aside from reducing infrastructure costs for the pharmaceutical companies,
        outsourcing is expected to lead to reduced cycle time for development.
        Outsourcing this activity may also lead to development of drug candidates
        which
        have a small market and might have been ignored by larger pharmaceutical
        companies which require large-market drugs to cover the costs of their marketing
        and distribution channels.
  Globalization
        of pharmaceutical markets driven by ongoing mergers of major international
        pharmaceutical companies has influenced the selection of a CRO. Those with
        an
        international presence and the ability to conduct trials in multiple
        jurisdictions have greater chances of becoming preferred suppliers. The growth
        of the biotechnology industry is also significantly influencing
        the growth of CROs, as many smaller biotechnology companies elect not to
        build
        the infrastructure to conduct the various phases of the development of their
        products in-house.
  A
        general
        overview of the drug development process is provided in the diagram
        below:
  
  Overview
        of
        Business
  Headquartered
        in King of Prussia, Pennsylvania, MDS Pharma Services is focused on being
        a
        full-service provider of drug discovery and development services to the
        pharmaceutical, biotechnology, and generic industries. MDS has provided services
        to pharmaceutical manufacturers since 1992, beginning as a centralized support
        laboratory providing testing services in connection with Phase III clinical
        trials. MDS is now one of the largest and most integrated CROs in the
        pre-clinical and early clinical segment of the market and a developing
        competitor in late-stage clinical trials.
  The
        pharmaceutical research process can be broken down into three primary
        components: laboratory-based research, clinic-based testing, and out-patient
        based testing. MDS includes most laboratory-based research and clinic-based
        research in early-stage and the Company has been the leading competitor in
        this
        phase of research based on the installed base of mass spectrometers and on
        the
        number of available clinic beds. The Company’s significant capacity in each of
        these areas enables it to take on client work on very short notice and to
        develop the necessary expertise in these fields to participate in the most
        complex studies.
  Key
        service lines for this business include:
  Ø
              Preclinical,
                  in which the Company’s vast library of assays is applied to study the
                  effects of compounds on living organisms and in-vitro targets and
                  in which
                  advanced understanding of drug safety and toxicology is obtained
                  under
                  strict Good Laboratory Practices (GLP) regulated conditions.
  Ø
              Bioanalysis
                  in which advanced technology and analytical science is applied
                  to
                  biological fluids to gain an understanding of the drug’s absorption,
                  distribution, metabolism and elimination.
  Ø
              Early-stage
                  clinical or first-in-man testing (Phase I), in which new investigational
                  drugs are tested for the first time in healthy volunteers to assess
                  drug
                  safety and to determine how the drugs are processed by the body.
  Ø
              Late-stage
                  clinical or traditional clinical trials (Phase II – IV), in which
                  investigational drugs are tested in volunteers exhibiting the condition
                  the drug is intended to determine the relative efficacy of the
                  drug under
                  study.
  Ø
              Central
                  laboratory, a support service for late-stage trials, through which
                  samples
                  taken from study participants are run against standard assays to
                  determine
                  the safety and effectiveness of the drug.
  Significant
        pre-clinical and early clinical operations are in Montreal, Canada; Lincoln,
        USA; Phoenix, USA; Bothell, USA; Belfast, Northern Ireland; Zurich, Switzerland;
        Lyon, France and Taipei, Taiwan.  These facilities include clinic
        locations and laboratories, as well as other development
        facilities.
  Management
        of late-stage clinical trials on behalf of clients is conducted globally.
        Significant clinical offices include King of Prussia, USA; Irvine, USA; Paris,
        France and Winnersh, United Kingdom, along with smaller offices in a number
        of
        other countries.  In addition, the Company has central laboratory
        locations in Toronto, Canada; Neptune, USA; Baillet, France; Beijing, China
        and
        Singapore.
  MDS
        Pharma Services is dependent on staff with highly specialized
        skills.  Individuals with requisite the credentials are recruited on a
        global basis.  Globally, approximately 3,400 employees work in MDS
        Pharma Services.
  Strategy
  MDS
        Pharma Services is currently one of the leading CROs in the
        world.  Management expects to continue to expand its global
        capabilities through organic growth and through acquisition while expanding
        profitability and enhancing the ability to serve customers through LeanSigma
        and
        other operational improvements. The acquisition strategy of the Company is
        to
        focus on targets that extend leadership in key fields and build on existing
        strengths in order to enhance the services we offer our
        customers.  Acquisitions may add capabilities, scale or geographic
        reach in our key lines of business.  Where operations do not meet the
        Company's expected returns, or they do not fit with the strategic markets
        in
        which the Company has chosen to compete, MDS has sought to divest these
        businesses.  During 2006, MDS sold or closed a number of smaller,
        non-strategic lines of business.
  Competition
  The
        growth of the pharmaceutical research services industry has been dependent
        on
        the increase in outsourcing by pharmaceutical and biotechnology companies.
        The
        market has experienced high
        growth rates and has become highly competitive. Competition for individual
        research contracts often includes in-house research departments of
        pharmaceutical and biotechnology companies, as well as universities, teaching
        hospitals, and other CROs. Industry consolidation and globalization have
        affected pharmaceutical companies as well as CROs resulting in the use of
        fewer,
        larger CROs.  The Company believes that outsourcing will continue to
        grow as an economically attractive alternative to in-house
        research.
  Companies
        active in this industry, including MDS, may improve their competitive position
        by building scale, which enhances the ability to service clients with consistent
        global quality in their preferred location or in a more timely fashion, and
        internal operating efficiencies, which translates into sound and predicable
        execution and opportunity to expand profitability.  In addition, we
        believe that our expertise and capabilities result in a unique offering that
        contributes to our competitive position.  MDS Pharma Services’
strength in Pharmacology, Phase I and Bioanalytical Sciences and its broad
        configuration, allows it to integrate its offerings under complete drug
        development programs to help biotech firms move their compounds through the
        development stages more rapidly by having one provider take compounds through
        multiple stages of development.
  The
        majority of competitors have been
        focused primarily on later stages of the drug development process (Phase
        II-IV
        clinicalresearch).
        Late-stage competitors include several multinational companies such as QuintilesTransnational Corp.,
        Parexel International, Corp., PPD, Inc., and PharmaNet Development Group,
        Inc.  Early-stage (preclinical to Phase IIa) competitors include
        Covance, Inc. and Charles River Laboratories Inc. Some of the Company’s CRO
        competitors are significantly larger than MDS and may have greater financial
        and
        technical resources.
  3.3
              MDS
                  Nordion
  Through
        MDS Nordion, MDS is a world leader in medical isotopes for molecular imaging,
        development and manufacturing of radiotherapeutics and
        sterilization.  Exports of these materials to over 60 countries
        account for more than 95% of total sales by this business.
  Industry
        Background
  In
        molecular imaging, isotopes are used because of their ability to assist in
        diagnostic procedures such as single photon emission computed tomography
        (SPECT)
        and positron emission tomography (PET). When formulated with chemical compounds
        that are attracted to or accumulate in particular types of tissue, these
        isotopes can aid physicians in the identification and treatment of certain
        diseases. Certain other isotopes can be used to deliver direct radiation
        therapy
        to cancerous cells using the same principles of targeted therapy.
  Entry
        into both the molecular imaging and sterilization businesses require significant
        capital investment, extensive process development and access to limited supplies
        of raw materials. The manufacture of raw isotopes is dependent upon the
        availability of capacity in acceptable types of nuclear reactors and cyclotrons.
        Processing facilities such as those operated by MDS are centralized, capital
        intensive, and expensive to operate. In addition, due to the nature of the
        materials handled by the facilities, government and environmental regulation
        are
        significant factors in the business.
  Processing
        raw isotopes into a form suitable for the intended use is highly complex.
        Many
        isotopes used for molecular imaging have a limited half-life. This imposes
        constraints on the manufacturing process and the logistics procedures needed
        to
        deliver refined product to an end-user. Security of supply is a key customer
        concern due to the short lifespan of the products; hence, efficient and safe
        transportation systems are vital components of the business. The logistics
        system at MDS can process isotopes, deliver them to manufacturers and then
        on to
        hospitals or treatment centres within only a few days.
  Molecular
        imaging is a growing market. Aging populations worldwide are expected to
        increase demand for the procedures which medical isotopes make possible.
        In
        addition, considerable research is underway to identify new uses for existing
        isotopes.
  Sterilization
        of medical products is a relatively mature industry with 4%-7% market growth.
        Alternate applications for this technology are continuously under investigation.
        The United States Food and Drug Administration (FDA) has approved the use
        of
        irradiation for microbial control of pathogens (e.g.: E.coli) and as a quarantine
        treatment for fruit and vegetables to eliminate agricultural pests. To date,
        the
        commercial use of irradiation has largely been limited to spices, some red
        meat,
        poultry and certain fresh fruits and vegetables.
  Overview
        of
        Business
  MDS
        manufactures, processes and repackages isotopes to produce products that
        include:
  Ø
              medical
                  isotopes that are used alone or coupled to target molecules for
                  use in
                  clinical research, diagnosis of cardiac function and other diseases
                  and
                  treatment of diseases such as cancer;
  Ø
              medical
                  isotopes for the treatment of cancer; and
  Ø
              industrial
                  isotopes for the sterilization of disposable medical products and
                  for
                  treating food.
  In
        addition, the Company manufactures and sells products and equipment, such
        as
        large scale production irradiators, for the sterilization of disposable medical
        products and food.
  MDS
        is
        the world's principal supplier of Cobalt-60 (Co60).
        The
        majority of raw Co60material is produced under long-term supply contracts with nuclear
        power
        suppliers such as Bruce Power, Quebec Hydro, Ontario Power Generation and
        Rosenergoatom (the utility operator responsible for Russia’s nuclear power
        plants). MDS further processes the raw Co60
        into a
        finished form for commercial use at its Ottawa, Canada facilities. The resulting
        processed material, or gamma source, is delivered to customers using approved
        transport containers and procedures. Customers include major sterilization
        contractors, as well as large medical product manufacturers who maintain
        their
        own in-house sterilization facility.
  MDS
        also
        markets related equipment and services such as industrial scale
        irradiators.  Delivery or construction of this equipment is usually
        accompanied by an initial shipment (“loading”) of a gamma source. Resupply or
        replenishment of the gamma source is required from time to time as the
        radioactivity level of the initial loading declines over time at a rate of
        approximately 12% per year.
  Isotopes
        used for molecular imaging are handled and processed in much smaller quantities
        than those used for industrial irradiation. MDS purchases reactor-produced
        isotopes, principally from AECL,
        such as Molybdenum-99 (Mo99),
        Iodine-131 (I131),
        Iodine-125 (I125)
        and
        Xenon-133 (Xe133)
        in an
        unfinished, non-purified form, and transports them to its own facilities
        in
        Ottawa, Canada for further processing. MDS also manufactures cyclotron-produced
        isotopes such as Iodine-123 (I123),
        Thallium-201 (Tl201),
        Palladium-103 (Pd103)
        and
        Yttrium-90 (Y90)
        at its
        facilities in Vancouver, Canada and Fleurus, Belgium, and refines these
        materials in its adjacent processing facilities. In addition, MDS also has
        a
        joint venture with the University of Liege in Belgium to manufacture and
        distribute an isotope used in PET imaging.
  The
        purified forms of these isotopes are incorporated by pharmaceutical companies
        into radiopharmaceuticals used to diagnose and treat numerous serious disease
        states, such as coronary artery disease and cancer. Mo99decays
        into Technetium-99 (Tc99m),
        which is the most widely used diagnostic isotope in the world. Approximately18
        million scans are performed each year and 80% use a Tc99m
        radiopharmaceutical. This number is expected to grow as the population in
        developed countries ages and as the use of molecular imaging in the management
        of coronary artery disease expands. MDS is the world’s leading supplier of
        Mo99.
  NRU
        and MAPLE
        Facilities
  The
        Company’s principal source of Mo99
        is the
        existing NRU reactor located in Chalk River, Canada, which is owned and operated
        by AECL.  To provide greater security for the future supply of Mo99
        and
        other reactor-produced radioisotopes commonly used in nuclear medicine, MDS
        contracted with AECL in 1996 for the construction and operation of two dedicated
        reactors and a processing facility (Facilities) to produce such isotopes.
        Under
        the original agreement, MDS would have owned the reactors and, once completed,
        AECL would have operated them on a fee per service basis for MDS.
  As
        a
        result of construction deficiencies, cost overruns and other technical
        regulatory issues, completion of the Facilities has been delayed significantly.
        The deficiencies, regulatory issues, significant delays, and cost overruns
        led
        to a dispute between the Company and AECL.  Both MDS and AECL agreed
        to a mediation process to resolve the dispute and a mediator was appointed
        in
        February of 2005.
  The
        mediation process between the parties was successful and in early 2006 the
        Company entered into an agreement with AECL related to the MAPLE
        Project.  The agreement reached with AECL provides the basis for a
        productive ongoing relationship and enables AECL to move forward to successfully
        complete the project.  Under the Agreement, ownership of the
        Facilities was transferred to AECL, along with certain associated inventories,
        for C$25 million in cash, a non-interest bearing note due over four years
        beginning in 2008, and a 40-year supply agreement containing terms that are
        similar to those contained in the existing supply agreement with AECL related
        to
        the NRU reactor.
  Since
        AECL has now assumed full ownership of the Facilities, they are responsible
        for
        capital costs associated with completing the project and commissioning the
        reactors for future operating costs.  MDS has retained a commitment to
        assist AECL to defray the costs of any material and unusual regulatory changes,
        should such a change occur during the life of the supply
        agreement.  This commitment extends to cover any changes required by
        international agreements or treaties related to the procurement of highly
        enriched uranium in the reactors.  The Company has also retained
        certain legal rights in the event that the Facilities have not met certain
        performance criteria by October 31, 2008, including regulatory approvals
        and
        operating requirements.
  Final
        completion and commissioning of the Facilities will entail an extended
        regulatory and quality control review process for our customers, including
        steps
        to determine that the products produced in the new facility meet the same
        quality standards as those produced in NRU.
  The
        new
        Facilities, once operational, should enable MDS to provide its customers
        with a
        stable and secure supply of key medical isotopes and strengthen MDS’s
        competitive position in medical isotope supply, as they are the only reactors
        dedicated solely to medical isotope production. All other reactors engaged
        in
        medical isotope production are multipurpose reactors. Our current agreement
        with
        AECL, as well as limited back-up supply arrangements, are intended to provide
        a
        secure supply of isotopes to our customers.
  In
        August
        2006 the Canadian Nuclear Safety Commission (CNSC) granted a new operating
        license for the Chalk River facilities that extends to October 31,
        2011.  Continued sourcing from the NRU reactor is intended to provide
        a stable and secure supply of these key isotopes while the new Facilities
        are
        being completed.
  Facilities
        that are able to handle and process isotopes in the manufacture of
        radiopharmaceuticals are complex and strictly regulated. MDS has added an
        80,000
        square foot manufacturing facility at its Ottawa, Canada site that is utilized
        on a partnership basis in the development, and later, the direct manufacture
        of
        radiotherapeutics. Examples include ZEVALIN® and BEXXAR® Both products are based
        on monoclonal antibodies and are used to treat non-Hodgkin’s Lymphoma (NHL).
        ZEVALIN uses Y90
        as the
        active agent while BEXXAR uses I131.
        Growth of development and manufacturing opportunities is expected, since
        drug
        manufacturers may not wish to incur the capital cost or regulatory delays
        associated with building their own facilities. MDS also manufactures and
        distributes radiation therapy equipment and Co60
        is the
        radiation source for this equipment.
  MDS
        Nordion is dependent on staff with specialized skills and knowledge necessary
        to
        operate a highly regulated processing facility for radioactive
        materials.  Some technical and production employees of MDS belong to
        the Public Service Alliance of Canada, a collective bargaining agent
        representing, among others, certain employees of the Government of Canada.
        Certain other employees belong to the Communications, Energy and Paperworkers
        Union of Canada. Labour relations are judged to be good with both
        unions.  Globally, MDS Nordion employs approximately 760
        people.
  Strategy
  MDS
        has a
        leading position as an international supplier of key isotopes. Revenue growth
        for isotopes generally has historically been in line with the overall increase
        in healthcare spending and population growth, both of which have an impact
        on
        the growth in the utilization of diagnostic tests and the use of disposable
        medical products. Sales of medical isotopes do not follow any notable seasonal
        or other cycles and demand is relatively constant. The short half-life of
        the
        isotopes used for medical purposes limits the ability of any market participant
        to build significant inventories.
  Security
        of supply is a significant objective for the majority of the Company’s
        customers. The Company has developed a strong supply and logistics network
        to
        meet these demands. Current activity
        and investment by AECL in the NRU and the MAPLE Facilities, are intended
        to
        solidify the Company’s position as a reliable source of supply. In addition, the
        Company is developing new and complementary lines of business based on its
        expertise with isotopes. For example, the cancer treatment market is expected
        to
        develop rapidly over the next several years, particularly in emerging economies.
        Many of these countries are now able to afford modern cancer therapies and
        are
        expected to make significant investments in this technology as their healthcare
        systems develop.
  Competition
  There
        are
        significant capital and logistics investments required to successfully compete
        in the molecular imaging market, making the Company’s established position a
        competitive advantage.  Since Mo99
        is the
        most significant isotope on world markets, the majority of competition faced
        by
        the Company is in this product. Major competitors are Institute National
        des
        Radioelements (IRE) of Belgium, the NTP Radioisotopes (Pty) Ltd. (a wholly
        owned
        subsidiary of Nuclear Energy Corporation of South Africa) and the Nuclear
        Research and Consultancy Group of the Netherlands.
  Competition
        in the sterilization market is different from the medical isotopes market
        due to
        the substantially different half-life of the products. Co60
        is
        often bought and sold in large quantities and can be produced by any of several
        nuclear power reactors around the world. While delivery and logistics expertise
        remains an MDS advantage, the most significant competition in the sterilization
        market and Co60
        supply
        comes from Reviss Services Ltd. which acquires cobalt from Russian sources.
        Competition for sterilization spending also comes from alternative technologies,
        the most significant of which are Ethylene Oxide (EtO) and electron-beam.
        The
        Company believes that gamma-based sterilization technologies continue to
        enjoy
        advantages over these competitive technologies in some applications. In
        addition, there is a significant installed base of industrial irradiators
        that
        should ensure that gamma irradiation remains a key technology in this
        market.
  Isotopes
        used for sterilization tend to be somewhat more cyclical, due primarily to
        the
        length of time required to convert Cobalt-59 (Co59)
        into
        Co60
        and the limited number of facilities in which this can be done
        economically.  During 2007, the Company took steps to increase its
        supply of cobalt, signing an extension to its 2005 long-term contract with
        Rosenergoatom.  This 17-year extension should provide for a 30%
        increased supply of Co60
        to MDS
        Nordion by 2016.
  3.4            MDS
        Analytical Technologies
  MDS
        provides life sciences tools through its MDS Analytical Technologies business
        unit.  This business unit consists of two highly recognized brands,
        Sciex and Molecular Devices (MDC).  Sciex designs and manufactures
        high-end mass spectrometers and MDC designs, manufactures and markets
        high-performance bioanalytical measurement systems.
  Industry
        Background
  In
        recent
        years, research in the life sciences industry has accelerated.  This
        expansion of research activity has yielded discoveries that are currently
        fuelling a revolution in our understanding of human health and disease. With
        a
        better understanding of biology at the level of genes, proteins and cells,
        researchers hope to discover the underlying causes of human disease and
        determine ways to treat them.
  Drugs
        typically fight illness by binding to proteins, known as “targets”, and modify
        their behaviour to reduce their disease-causing effects.  Once a
        protein’s link to a disease is understood, the task of finding a drug that acts
        on the protein and treats the disease is undertaken primarily by pharmaceutical
        and biotechnology companies.  Drug manufacturers typically own
        libraries of potential drug candidates comprising hundreds of thousands,
        or even
        millions, of chemical compounds from which they screen against known
        targets.  As life sciences research continues to unveil new targets,
        the task of screening large libraries of compounds against these targets
        represents both a great opportunity and a technological challenge for
        pharmaceutical and biotechnology companies.
  Drug
        compounds that progress and become potential drug candidates for in-man use
        are
        rigorously tested, among other factors, for safety, absorption, distribution,
        metabolism and excretion (ADME), efficacy and pharmacokinetics.  High
        sensitivity as well as high resolution instruments are necessary to quantify
        and
        analyze the physical and biological properties of substances and
        metabolites.
  In
        the
        race to develop new and improved drugs to treat diseases, our customers are
        constantly looking for the latest in instruments, software, consumables and
        services to increase productivity and provide high-quality data that enables
        decision-making in the high-cost drug discovery and development
        process.
  Overview
        of
        Business
  MDS
        first
        entered the analytical instruments industry in 1981 with the acquisition
        of
        Sciex, and in 1988 introduced the first liquid chromatography mass spectrometer
        for use on organic compounds to take advantage of the significant opportunities
        that exist in drug discovery and pharmaceutical research services outsourcing
        for drug development companies.
  To
        strengthen its leadership position as one of the top global providers of
        life
        sciences solutions, MDS acquired MDC in 2007.   MDC brings to MDS
        a portfolio of high-performance measurement tools for high-content screening,
        cellular analysis, and biochemical testing.  MDC’S flagship product
        lines such as SpectraMax® and FLIPR® are considered industry standard
        instruments in liquid handling and high throughput screening
        respectively.
  MDS
        supplies the life sciences industry with high-sensitivity mass spectrometers
        under the Sciex brand name.  Sciex mass spectrometers are marketed
        through partnerships with Applied Biosystems (Canada) Limited (Applied
        Biosystems) and PerkinElmer Canada Inc. (PerkinElmer) to a global customer
        base;
        sales outside of Canada account for more than 95% of revenues from MDS’s Sciex
        products.  Total revenues earned from these partnerships during 2007
        were $205 million.  For both partnerships, MDS Analytical Technologies
        is responsible for manufacturing and has primary responsibility for research
        and
        development. The Company’s partners are responsible for marketing, sales and
        service. The partnerships are structured so that each partner shares equally
        in
        the full profit margin generated once a piece of equipment is sold to an
        end-user.
  MDS
        has
        been a major innovator of technologically sophisticated mass spectrometry
        instrumentation.  In each of its product lines, MDS has been a
        pioneer. Accomplishments include the introduction of the first triple-quad
        mass
        spectrometers, inductively coupled plasma mass spectrometers,
        and techniques for detecting ultra-trace amounts of small or large molecules
        by
        atmospheric pressure ionization (electrospray).  Most of these
        products have evolved through multiple generations and continue to hold
        significant shares of their market segments.
  The
        pharmaceutical and biotechnology markets are the major users of technology
        based
        on the principles of liquid chromatography coupled with mass spectrometry
        (LC/MS) for detecting organic compounds.  Early models of this
        equipment revolutionized many of the processes that were fundamental limitations
        in the search for new drugs or biotechnology products. Productivity and
        sensitivity improvements remain the primary basis for product differentiation
        for MDS equipment.
  MDS
        Analytical Technologies and its partner Applied Biosystems are the market
        leader
        in high-sensitivity LC/MS equipment and have consistently delivered
        technological innovation within this industry. This innovation is a result
        of
        significant research and development spending each year.
  A
        smaller
        portion of the Company’s mass spectrometry market is outside of the
        pharmaceutical industry and relies on similar equipment for the detection
        of
        inorganic compounds. For this group of customers, the Company produces the
        ELAN®
Inductively Coupled Plasma Mass Spectrometer (ICP/MS) that provides high
        sensitivity with extremely high specificity for a wide range of elements
        in the
        analysis of a single sample. The range of market areas that are addressed
        with
        the ELAN® is broad and includes environmental monitoring (drinking and
        wastewater analysis), toxicology (role of trace metals in human disorders),
        semiconductors (trace impurities), and the nuclear industry (impurities in
        uranium). These machines are marketed on a worldwide basis through a partnership
        with PerkinElmer.
  The
        following table summarizes the mass spectrometers offered by the Applied
        Biosystems/MDS Analytical Technologies and PerkinElmer Sciex Instruments
        joint
        ventures
 Instrument
                  Name
              Joint
                  Venture PartnerAPI
                  5000TM LC/MS/MS System
              Applied
                  BiosystemsAPI
                  4000TM LC/MS/MS System
              Applied
                  BiosystemsAPI
                  3200TM LC/MS/MS System
              Applied
                  BiosystemsAPI
                  2000TM LC/MS/MS System
              Applied
                  BiosystemsQSTAR®
                  Elite LC/MS/MS System
              Applied
                  BiosystemsQSTAR®
                  XL Hybrid LC/MS/MS System
              Applied
                  Biosystems4000
                  Q TRAP® LC/MS/MS System
              Applied
                  Biosystems3200
                  Q TRAP® LC/MS/MS System
              Applied
                  Biosystems4800
                  MALDI TOF/TOFTM Analyzer
              Applied
                  BiosystemsELAN®
                  DRC II ICP-MS System
              PerkinElmerELAN®
                  DRC-e ICP-MS System
              PerkinElmerELAN®
                  9000 ICP-MS System
              PerkinElmer
  MDS
        also
        offers a full range of high-performance bioanalytical tools including automated
        systems for pharmaceutical screening and a variety of general-purpose research
        instruments under the MDC brand, which are grouped into two families;
        bioresearch and drug discovery.
  Bioresearch
        products include: microplate detection products, GenePix®, MetaMorph®, Laser
        Capture Microdissection, Cellular Neurosciences, Liquid Handling and Threshold®
product lines.  Our microplate detection products consist of the
        SpectraMax® and FlexStation® lines of advanced microplate readers; they address
        the increasing need for the acquisition and processing of large quantities
        of
        biochemical and biological data.  The GenePix® family of products is a
        complete line of instruments and software for analyzing Microarrays, which
        enable the high-throughput identification of large number of genes. Our laser
        capture microdissection products help researchers to visualize and extract
        individual cells or groups of cells from tissue samples with minimal
        damage.  For cellular neurosciences research, the Company offers a
        range of products for voltage recording, current and voltage clamping and
        patch
        clamping. As well, our liquid handling systems offer a complete line of
        state-of-the–art microplate washers and other related tools, including cell
        harvesters, to the bioresearch product family.  The Threshold® system
        emerged from a need by biopharmaceutical companies for more sensitive and
        reproducible methods to detect contaminants in biopharmaceuticals during
        the
        manufacturing and quality control process.
  Our
        drug
        discovery products are used to screen large numbers of chemical compounds
        to
        assess their effects on disease targets.  Drug discovery products
        include: FLIPR® system and reagent kits, automated electrophysiology systems,
        high-throughput imaging systems and the Analyst system and reagent
        kits.  Since its introduction in 1995, the FLIPR system has become the
        industry standard for the automated testing of compounds in live
        cells.  FLIPR instrumentation is complemented by FLIPR reagent kits,
        which use a proprietary technology to reduce the number of steps involved
        in
        live cell testing.  Automated electrophysiology products are automated
        systems that obtain the same high-quality information from cells as conventional
        patch clamping, but at a much faster rate and requiring far less operator
        skill.  To efficiently visualize cellular events, our high-throughput
        imaging systems provide automation of image capture and analysis to allow
        tens
        of thousands of microscopic cellular assays to be performed in a single
        day.  The Analyst family of products provides industry-leading
        flexibility and throughput for a wide range of biochemical assays.
  MDC
        also
        provides services to its installed base of customers on both a contract and
        time
        and materials basis as well as a variety of post-warranty contract options
        for
        all instrument offerings.
  MDS
        Analytical Technologies’ business is dependent on a staff with highly
        specialized skills and knowledge in various branches of physics, chemistry
        and biology. Individuals with the requisite credentials are recruited on
        a
        global basis and their knowledge is further developed by in-house
        training.  Over 1,200 people work at MDS Analytical Technologies
        globally.
  Strategy
  The
        Company’s strategy is to be the leading global provider of top-of-line life
        sciences research and analysis solutions, with a particular focus on the
        application of this technology within the drug discovery and development
        process.
  MDS
        Analytical Technologies’ products are designed to outperform competitive
        products based on sensitivity and speed.  We invest in research and
        development to continually fuel our pipeline of new innovative products to
        help
        accelerate the complex process of discovering and developing new drug
        compounds.  Expertise in engineering, molecular and cell biology and
        chemistry contributes to the recognition of strong brands.
  MDS
        Analytical Technologies’ products are sold into global markets.  The
        Sciex brand products are also sold globally but through our partnerships
        with
        Applied Biosystems and PerkinElmer. The current key markets are the US, Western
        Europe and Japan, reflecting the sophistication of the drug development industry
        in each of those areas.  The fastest growing global markets include
        China and India.
  Competition
  The
        Company’s principal competitors in the life sciences tools market include Waters
        Corporation, Thermo Fisher Scientific, Inc., Bruker Daltonics, Inc., Agilent
        Technologies, Inc. and Invitrogen Corp., all of which operate in the global
        market.  Competition includes other manufacturers selling similar
        technology and also companies that sell competing but different technologies
        for
        certain applications.
  Since
        technological superiority is a key product differentiator, MDS Analytical
        Technologies, along with our partners, takes all necessary actions to protect
        and defend our intellectual property.  The Company owns numerous
        United States, Canadian and foreign patents and have patent applications
        pending
        in the United States, Canada and abroad.  In addition to our patent
        portfolio, we possess a wide array of unpatented proprietary technology and
        know-how.  We also own numerous United States, Canada and foreign
        trademarks and trade names for a variety of our product names, and have
        applications for the registration of trademarks and trade names pending in
        the
        United States, Canada and abroad.  We believe that patents and other
        proprietary rights are important to develop and maintain the competitive
        position of our business.
  In
        2006,
        MDS leased and built out a 10,000 square foot manufacturing facility in
        Singapore in an effort to improve the cost base of its instrumentation and
        materials and position the Company to take advantage of the increasing
        importance of the Asian market with respect to future sales
        growth.   To date, the manufacturing of three high volume mass
        spectrometer product lines have been transferred to Singapore and the site
        has
        been expanded to 20,000 square feet.
  The
        majority of MDS Analytical Technologies’ infrastructure, manufacturing and
        research and development reside in North America: Concord, Canada and Sunnyvale,
        USA.  However, in addition to the Singapore facility the Company has
        manufacturing operations in Shanghai, China as well as a global network of
        sales
        offices throughout Europe, Asia and Latin America.
  The
        operations of MDS Analytical Technologies to a certain degree have been and
        could be impacted by the cyclical nature of the pharmaceutical industry,
        the
        investment cycle in the biotech industry and the government regulation of
        environmental issues.
  3.5
              Diagnostics
  Until
        2006, the Company also operated in the healthcare industry primarily through
        its
        Canadian clinical laboratory operations, MDS Diagnostic Services.  The
        Canadian laboratory business was the largest operator of private sector clinical
        laboratories in Canada.  Services provided by the company included
        clinical laboratory testing for physicians and non-hospital healthcare
        institutions, management of hospital laboratories under contract and other
        support services for clinical diagnostics.
  The
        Canadian diagnostics business was determined not to be consistent with the
        Company’s strategic focus and was sold to Borealis Investment
        Management.  This transaction was completed on February 26, 2007 as
        disclosed under “2.4.3 – Divestitures and Discontinuances”.
  3.6
              Significant
                  Investees
  3.6.1                      
        Lumira Capital Corp. (formerly MDS Capital Corp.)
  Lumira
        Capital Corp., in which MDS has a 45% interest, is a venture capital and
        fund
        management company focused on the healthcare and life sciences
        industry.  Lumira Capital Corp. earns management fees from the
        management of investment funds, including incentive fees based on the overall
        success of the funds.  In 2006, Lumira Capital Corp. sold its retail
        funds management business.
  3.7
              Principal
                  Facilities
  The
        following were the principal operating facilities of the Company as at October
        31, 2007:
 
 Location
                  of Facility
              Type
                  of Facility
              Owned/
                Leased
              Business
                  Unit
              Approx.
                  Sq. FootageOttawa,
                  Canada
              Manufacturing
                  Plant
              Owned
              MDS
                  Nordion
              483,300Montreal,
                  Canada
              Research
                  Laboratory and Clinical Trials Facility
              Leased
              MDS
                  Pharma Services
              321,500Concord,
                  Canada
              Manufacturing
                  Plant
              Owned
              MDS
                  Analytical Technologies
              147,500Lyon,
                  France
              Research
                  Facility
              Owned
              MDS
                  Pharma Services
              134,200Lincoln,
                  USA
              Clinical
                  Trials Facility
              Owned
              MDS
                  Pharma Services
              130,200Sunnyvale,
                  USA
              Manufacturing/Office
              Leased
              MDS
                  Analytical Technologies
              114,600Tempe,
                  USA
              Clinical
                  Trials Facility
              Owned
              MDS
                  Pharma Services
              104,500Bothell,
                  USA.
              Research
                  Laboratory
              Leased
              MDS
                  Pharma Services
              95,600Mississauga,
                  Canada
              Corporate
                  Offices
              Leased
              MDS
                  Corporate
              84,800Union
                  City, USA
              Manufacturing
                  /Office
              Leased
              MDS
                  Analytical Technologies
              76,200Mississauga,
                  Canada
              Clinical
                  Trials Facility
              Leased
              MDS
                  Pharma Services
              63,000Vancouver,
                  Canada
              Manufacturing
                  Plant
              Leased
              MDS
                  Nordion
              54,800Phoenix,
                  USA
              Clinical
                  Trials Facility
              Owned
              MDS
                  Pharma Services
              51,100King
                  of Prussia, USA
              Corporate
                  Office
              Leased
              MDS
                  Pharma Services
              47,100Zurich,
                  Switzerland
              Clinical
                  Trials Facility
              Leased
              MDS
                  Pharma Services
              40,200Neptune,
                  USA
              Clinical
                  Trials Facility
              Leased
              MDS
                  Pharma Services
              39,700Taipei,
                  Taiwan
              Research
                  Laboratory
              Owned
              MDS
                  Pharma Services
              39,500Irvine,
                  USA
              Corporate
                  Office
              Leased
              MDS
                  Pharma Services
              39,100Paris,
                  France
              Clinical
                  Trials Facility
              Leased
              MDS
                  Pharma Services
              37,600Fleurus,
                  Belgium
              Manufacturing
                  Plant
              Leased
              MDS
                  Nordion
              36,200Hamburg,
                  Germany
              Clinical
                  Trials Facility
              Leased
              MDS
                  Pharma Services
              30,500Belfast,
                  N.  Ireland
              Clinical
                  Trials Facility
              Owned
              MDS
                  Pharma Services
              28,500Downingtown,
                  USA
              R&D
              Leased
              MDS
                  Analytical Technologies
              27,900Baillet,
                  France
              Clinical
                  Trials Facility
              Leased
              MDS
                  Pharma Services
              26,400Beijing,China
              Clinical
                  Trials Facility
              Leased
              MDS
                  Pharma Services
              24,200Baillet,
                  France
              Clinical
                  Trials Facility
              Owned
              MDS
                  Pharma Services
              23,091Singapore
              Manufacturing
                  Plant
              Leased
              MDS
                  Analytical Technologies
              20,000Shanghai,
                  China
              Manufacturing
              Leased
              MDS
                  Analytical Technologies
              18,900Winnersh,
                  UK
              Office
              Leased
              MDS
                  Analytical Technologies
              14,000Blackhorse,
                  USA
              Clinical
                  Trials Facility
              Leased
              MDS
                  Pharma Services
              13,500Mississauga,
                  Canada
              Corporate
                  Head Offices
              Leased
              Corporate
              13,400Winnersh,
                  UK
              Clinical
                  Trials Facility
              Leased
              MDS
                  Pharma Services
              12,500
   3.8
              Research
                  and Development
  The
        Company carries on various research and development (R&D) programs largely
        focused on product development at MDS Analytical Technologies and to a lesser
        extent at MDS Nordion.  Accounting for R&D is described in Note 3
        to the 2007 Financial Statements, which are incorporated by reference into
        this
        AIF.
  3.9
              Environmental
                  Compliance
  The
        Company has established a series of policies to facilitate compliance with
        applicable environmental laws and regulations.  The policies require
        that business units conduct regular environmental assessments of company
        activities, establish remedial and contingency plans to deal with any incidents,
        and establish processes to report to senior corporate management and to the
        Board through the Environment, Health & Safety Committee of the Board on the
        environmental status of the Company and its subsidiaries.  MDS uses an
        independent third party environmental auditing firm to conduct regular
        regulatory audits of MDS operations.  MDS believes its approach to
        environmental compliance meets the regulated requirements and it is not expected
        that this policy will have a significant impact on capital expenditures,
        consolidated earnings, or our competitive position.
  3.10
              Other
                  Business Matters
  3.10.1                      
        Risk Factors
  The
        businesses in which MDS operates are subject to a number of risks and
        uncertainties discussed below and under the heading “Risks and Uncertainties” in
        the 2007 MD&A on pages 21 to 23. Additional risks and uncertainties not
        presently known to the Company or that the Company does not currently anticipate
        will be material, may impair the Company’s business operations. If any such
        risks occur, the Company’s business, financial condition and results of
        operation could be materially adversely affected.
  If
        we do not
        introduce new products in a timely manner, our products could become obsolete
        and our business, financial condition and results of operation would
        suffer.
  We
        sell
        many of our products in industries characterized by rapid technological change,
        frequent new product and service introductions, and evolving industry standards.
        Without the timely introduction of new products and enhancements, our products
        could become technologically obsolete over time, in which case our business,
        financial condition and results of operation would suffer. Our new product
        offerings will not succeed if we are unable to:
  ·
              accurately
                  anticipate customer needs;
  ·
              innovate
                  and develop new technologies and applications;
  ·
              successfully
                  commercialize new technologies in a timely manner;
  ·
              price
                  our products competitively;
  ·
              source,
                  manufacture and deliver high quality products in sufficient volumes
                  and on
                  time; or
  ·
              differentiate
                  our product offerings from our competitors’ product offerings.
  Developing
        new products may require significant investments before we can determine
        the
        commercial viability of the new product. If we fail to accurately anticipate
        our
        customers’ needs and future activities, we may invest heavily in research and
        development of products that do not become commercially viable.
  In
        addition, some of our licensed technology is subject to contractual
        restrictions, limiting our ability to develop or commercialize products for
        some
        applications. For example, some of our license agreements are limited to
        the
        field of life sciences research, and exclude clinical diagnostics
        applications.
  Changes
        in trends in the pharmaceutical and biotechnology industries could adversely
        affect our operating results.
  Industry
        trends and economic and political factors that affect pharmaceutical and
        biotechnology companies and academic and government entities that sponsor
        clinical research, also affect our business. For example, the practice of
        many
        companies in these industries and government organizations has been to hire
        companies to conduct large development projects. Research and development
        budgets fluctuate due to changes in available resources, mergers of
        pharmaceutical and biotechnology companies, spending priorities and
        institutional budgetary policies.  Our business could be adversely
        affected by any significant decrease in life sciences research and development
        expenditures by pharmaceutical and biotechnology companies, as well as by
        academic institutions, government laboratories or private
        foundations.  In addition, numerous governments have undertaken
        efforts to control growing healthcare costs through legislation, regulation
        and
        voluntary agreements with medical care providers and pharmaceutical companies.
        If future regulatory cost-containment efforts limit the profits that can
        be
        derived on new drugs, our clients might reduce their drug discovery and
        development spending, which could reduce our revenue and have a material
        adverse
        effect on our results of operations.
  Our
        business,
        financial condition, and results of operation could be subject to significant
        fluctuation, and we may not be able to adjust our operations to effectively
        address changes we do not anticipate.
  We
        cannot
        reliably predict future sales and profitability. Changes in competitive,
        market
        and economic conditions may require us to adjust our operations, and we may
        not
        be able to make those adjustments or to make them quickly enough to adapt
        to
        changing conditions. A high proportion of our costs are fixed and thus, small
        declines in sales could disproportionately affect our business, financial
        condition, and results of operation in any particular quarter. Factors that
        may
        negatively affect our quarterly sales and operating results
        include:
  ·
              lack
                  of demand for, or market acceptance of, our products;
  ·
              competitive
                  pressures resulting in lower selling prices;
  ·
              adverse
                  changes in the level of economic activity in regions in which we
                  do
                  business;
  ·
              adverse
                  changes in industries on which we are dependent, such as the
                  pharmaceutical and biomedical industries;
  ·
              changes
                  in the portions of our sales represented by our various products
                  and
                  customers;
  ·
              delays
                  or problems in the introduction of new products;
  ·
              our
                  competitors’ announcement or introduction of new products, services or
                  technological innovations;
  ·
              increased
                  costs of raw materials or supplies;
  ·
              delays
                  or problems sourcing product inputs, especially in circumstances
                  where
                  there are limited suppliers; or
  ·
              changes
                  in the volume or timing of product orders.
  We
        may not be
        able to successfully execute acquisitions or license technologies, integrate
        acquired businesses or licensed technologies into our existing business,
        or make
        acquired businesses or licensed technologies profitable.
  We
        may be
        unable to complete the acquisition of promising business acquisitions or
        license
        technologies for many reasons, including:
  ·
              competition
                  among buyers and licensees,
  ·
              the
                  need for regulatory and other approvals,
  ·
              our
                  inability to raise capital to fund these acquisitions,
  ·
              the
                  high valuations of businesses and technologies, or
  ·
              restrictions
                  in the instruments governing our indebtedness, our Senior Unsecured
                  Notes
                  and our credit facility.
  In
        addition, any business we may seek to acquire or technology we may seek to
        license may be unprofitable.  Accordingly, the earnings or losses of
        any such business that is acquired or technology that is licensed may dilute
        our
        earnings.  We may also encounter other difficulties in integrating
        acquired businesses or licensed technologies into our existing operations,
        such
        as incompatible management, difference in information or other systems or
        cultural differences.
  We
        may not be
        able to successfully obtain financing to fund potential
        acquisitions
  Our
        rate
        of growth may be limited by the pricing and availability of any proposed
        acquisition target and other factors not within our control.  To
        finance our acquisitions, we may have to raise additional funds, either through
        public or private financings.  If we are unable to obtain such funding
        or can do so only on terms unacceptable to us, we may miss opportunities
        to
        grow.
  If
        we are unable
        to renew our licenses or otherwise lose our licensed rights, we may have
        to stop
        selling products or we may lose a competitive advantage.
  If
        we
        lose the rights to a patented or other proprietary technology, we may be
        forced
        to stop selling products incorporating that technology and possibly other
        products.  We may need to redesign
        our products, thereby losing a competitive advantage. Competitors could
        in-license technologies that we fail to license and erode our market
        share.
  Our
        licenses typically subject us to various economic and commercialization
        obligations. If we fail to comply with these obligations, we could lose
        important rights under a license, such as the right to exclusivity in a market.
        In some cases, we could lose all rights under the license. In addition, rights
        granted under the license could be lost for reasons out of our control. For
        example, the licensor could lose patent protection for a number of reasons,
        including invalidity of the licensed patent, or a third party could obtain
        a
        patent that curtails our freedom to operate under one or more
        licenses.
  If
        we do not
        compete effectively, our business will be harmed.
  We
        encounter aggressive competition from numerous competitors in many areas
        of our
        businesses.  The basis of this competition includes, but is not
        limited to, the following:
  ·
              reputation
                  for on-time quality performance and regulatory compliance;
  ·
              expertise
                  and experience in specific areas;
  ·
              scope
                  of service offerings;
  ·
              strengths
                  in various geographic markets;
  ·
              price;
  ·
              technological
                  expertise and efficient drug development processes;
  ·
              quality
                  of facilities;
  ·
              ability
                  to acquire, process, analyze and report data in an accurate manner;
  ·
              ability
                  to manage large-scale clinical trials both domestically and
                  internationally;
  ·
              expertise
                  and experience in market access services; or
  ·
              size.
  If
        we do
        not compete effectively our business will be harmed.  In addition, we
        anticipate that we may also have to adjust the prices of many of our products
        to
        stay competitive.
  Changes
        in
        governmental regulations may reduce demand for our products or services or
        increase our expenses.
  We
        compete in markets in which we, or our customers, must comply with federal,
        state, local, and foreign regulations, such as environmental, health and
        safety,
        and food and drug regulations. Because of the high cost to develop, configure,
        and market our products to meet customer needs created by these regulations,
        any
        significant change in these regulations could reduce demand for our products
        or
        services or increase our costs of producing these products.
  Healthcare
        reform
        and changes to government policies related to healthcare spending may reduce
        demand for our products and services or the prices we are able to
        charge.
  If
        government reimbursement policies were changed, it could have a significant
        impact on spending decisions of certain of our customers.  In recent
        years the United States Congress and US state legislatures have considered
        various types of health care reform in order to control growing health care
        costs.  Similar reform movements have occurred in Europe and
        Asia.  Implementation of healthcare reform legislation containing
        costs could limit the profits that can be made from the development of new
        drugs.  This could adversely affect research and development
        expenditures by pharmaceutical and biotechnology companies which could in
        turn
        decrease the business opportunities available to us both in the United States
        and abroad.
  Patent
        protection
        for our proprietary products, processes, and technologies may be difficult
        and
        expensive and may not result in sufficient protection for our
        technology.
  We
        have
        applied or intend to apply for additional patents to cover our newest products.
        We may not obtain issued patents from any pending or future patent applications
        owned by or licensed to us. Of the US and foreign patents we currently hold,
        the
        claims allowed may not be broad enough to protect our technology.  In
        addition, competitors may design around our technology or develop competing
        technologies.  Intellectual property rights may also be unavailable or
        limited in some foreign countries, which could make it easier for some of
        our
        competitors to capture increased market position.
  Third
        parties may
        seek to challenge, invalidate or circumvent issued patents owned by or licensed
        to us or claim that our products and operations infringe their patent or
        other
        intellectual property rights.
  In
        addition to our patents, we possess an array of unpatented proprietary
        technology and know-how and we license intellectual property rights to and
        from
        third parties. The measures that we employ to protect this technology and
        these
        rights may not be adequate. Moreover, in some cases, the licensor can terminate
        a license or convert it to a non-exclusive arrangement if we fail to meet
        specified performance targets.
  We
        may
        incur significant expense in any legal proceedings to protect our proprietary
        rights or to defend infringement claims by third parties. In addition, claims
        of
        third parties against us could result in awards of substantial damages or
        court
        orders that could effectively prevent us from manufacturing, using, importing
        or
        selling our products in the United States or in any other country and could,
        depending on the quantum of damages awarded, have a significant adverse affect
        on our financial results.
  Our
        results of
        operations will be adversely affected if we fail to realize the full value
        of
        our intangible assets.
  As
        of
        October 31, 2007, our total assets included approximately $583 million of
        net
        intangible assets. Net intangible assets consist principally of the value
        of the
        long-term isotope supply agreement, acquired technology, brands and licenses,
        net of accumulated amortization. We test these items on an annual basis for
        potential impairment by comparing the carrying value to the fair market value
        of
        the reporting unit to which they are assigned.
  Adverse
        changes in our business or the failure to grow our life sciences businesses
        may
        result in impairment of our intangible assets, which could adversely affect
        our
        results of operations.
  Restrictions
        in
        our Senior Unsecured Notes and bank credit facilities and other debt instruments
        may limit our activities.
  Our
        Senior Unsecured Notes issued in fiscal 2003 as well as our credit facility
        contain restrictive covenants limiting our ability to engage in certain
        activities.  The note purchase agreement governing our Senior
        Unsecured Notes includes restrictions on our ability and the ability of our
        subsidiaries to:
  ·
              pay
                  dividends on, redeem or repurchase our shares(see Section 4.2 –
                  Dividends);
  ·
              sell
                  assets;
  ·
              incur
                  obligations that restrict the ability of our subsidiaries to pay
                  dividends
                  or other amounts to us;
  ·
              guarantee
                  or secure indebtedness;
  ·
              enter
                  into transactions with affiliates; or
  ·
              consolidate,
                  merge, or transfer all or substantially all of our assets and the
                  assets
                  of our subsidiaries on a consolidated basis.
  We
        are
        also required to meet specified financial ratios under the terms of the note
        purchase agreement relating to our Senior Unsecured Notes. Our failure to
        comply
        with these financial restrictions may result in an event of default under
        the
        note purchase agreement, which could result in acceleration of our indebtedness
        under our Senior Unsecured Notes and require us to prepay our Senior Unsecured
        Notes before their scheduled due date. Future debt instruments to which we
        may
        become subject could also contain similar provisions.
  Our
        business could suffer if we are unsuccessful in negotiating new collective
        bargaining agreements.
  Certain
        Company sites employ personnel subject to collective bargaining
        agreements.  If we are unable to negotiate acceptable agreements with
        the association(s) representing our employees upon expiration of existing
        contracts, we could experience strikes or work stoppages.  Even if we
        are successful in negotiating new agreements, the new agreements could call
        for
        higher wages or benefits paid to members, which would increase our operating
        costs and could adversely affect profitability.
  The
        carrying value of our venture capital investments could be in excess of fair
        value due to market conditions
  We
        have
        certain venture capital investments in biotechnology companies.  We
        monitor our investees’ capacity to raise and spend funds and to develop a
        commercial market for their products and services as well as their regulatory
        approval experience.  We initially record investments on our books at
        cost and adjust these values to fair value, when available, by a change to
        other
        comprehensive income.  There exists a risk that the carrying value of
        such investments
        could be in excess of fair value due to market conditions and this could
        result
        in provisions related to these investments.
  We
        are subject to
        a number of market risks.
  We
        are
        exposed to market risks, relating to both foreign exchange rates and interest
        rates. We briefly describe several of the market risks we face
        below.
  Foreign
        Exchange
        Risk
  As
        a
        global company, we are exposed to changes in foreign exchange rates including,
        but not limited to, the following:
  ·
              Because
                  a significant portion of costs from our Canadian-based operations
                  are
                  denominated in Canadian dollars, volatility in exchange rates can
                  have a
                  material impact on our financial results. Costs incurred in foreign
                  currencies, when translated into United States dollars for financial
                  reporting purposes, can fluctuate due to exchange rate movements.
  ·
              Our
                  foreign subsidiaries, on occasion, invoice third-party customers
                  in
                  foreign currencies other than the functional currency in which
                  they
                  primarily conduct business. Movements in the invoiced currency,
                  as
                  compared to the functional currency can result in either realized
                  or
                  unrealized transaction losses that directly impact our cash flows
                  and our
                  results of operations.
  ·
              Our
                  manufacturing and distribution organization is multinational in
                  nature
                  resulting in a variety of intercompany transactions that are billed
                  and
                  paid in many different currencies. Our cash flows and our results
                  of
                  operations are therefore directly impacted by volatility in these
                  currencies.
  ·
              The
                  cash flow needs of each of our foreign subsidiaries vary over time.
                  Accordingly, there may be times when a subsidiary is on the receiving
                  side
                  or the lending side of a short-term advance from either us or another
                  of
                  our subsidiaries. These advances, being denominated in currencies
                  other
                  than a particular entity’s functional currency, can expose us to
                  volatility in exchange rates that can adversely impact both our
                  cash flows
                  and results of operations.
  ·
              In
                  order to repay debt or take advantage of tax saving opportunities,
                  we may
                  remit cash from our foreign locations to Canada. When this occurs,
                  we are
                  liquidating foreign currency net asset positions and converting
                  them into
                  Canadian or US dollars. Our cash flows and our results of operations
                  may
                  therefore be adversely impacted by these transactions.
  Interest
        Rate
        Risk
  Our
        Senior Unsecured Notes bear interest at fixed rates between 5.15% and 6.19%
        per
        annum and have various terms between five and twelve years.  At
        October 31, 2007, one quarter of our Senior Unsecured Notes is subject to
        floating rates as a result of interest rate swap agreements that we entered
        into.  Interest rate volatility can have a direct impact on both our
        short-term cash flows and earnings.
  Our
        insurance
        coverage may not be adequate in all circumstances and there can be no assurance
        that such coverage will continue to be available at rates and on terms
        acceptable to the Company.
  We
        maintain a global liability insurance policy covering all of our operating
        units.  The policy provides coverage for normal operating risks and
        includes liability coverage of up to C$35 million for MDS Analytical
        Technologies and C$100 million for MDS Pharma Services and MDS
        Nordion.  We also maintain a global policy covering property and
        business interruption risks with a total insured value of C$1.8 billion and
        directors’ and officers’ insurance having a limit of $120
        million.  There is no certainty that the amount of coverage is
        adequate to protect us in all circumstances or that we will be able to acquire
        such insurance on an ongoing basis at rates acceptable to us.
  From
        time to time during the normal course of business, the Company and its
        subsidiaries are subject to litigation.
  Material
        litigation that is not covered by our insurance policies could have a material
        adverse impact on our results and our financial position.
  Our
        operations
        may be subject to review by drug approval authorities and the outcome of
        any
        such review could lead to corrective action by the Company.
  Our
        facilities devoted to pharmaceutical development are subject to regular
        inspection by the FDA, Health Canada and other foreign regulatory
        agencies.  Our customers also are subject to periodic review by drug
        approval authorities, principally the FDA in the United States.  In
        addition, the terms of a typical CRO contract provide that our customers
        can
        request that our facilities be subjected to the same levels of review by
        the
        authorities.  Our clinical laboratories are subject to significant
        government regulation.  In Canada, all laboratories are subject to
        periodic government inspection and proficiency testing by government
        agencies.
  Our
        failure, or any of our customers' failure, to pass an inspection conducted
        by
        the FDA, Health Canada or any other regulatory body could result in disciplinary
        action leading to increased cost and/or reduced customer demand that would
        have
        a material adverse affect on our business, financial condition or results
        of
        operation.
  Our
        operations
        might be affected if there was a disruption to air or ground
        transportation
  Our
        business relies heavily on both air and ground transportation, including
        the
        highly regulated, time sensitive transport of isotopes.  Any material
        disruption to air or ground transportation systems could have a material
        adverse
        effect on our business.  Contingency plans might not be effective or
        sufficient to avert such material adverse effect.
  Our
        business
        depends on the continued and uninterrupted performance of our information
        technology systems and the communication systems that support those systems,
        including the Internet.
  Our
        business depends, in part, on the continued and uninterrupted performance
        of our
        information technology systems.  Sustained system failures or
        interruptions could disrupt our ability to perform many of the functions
        that
        are critical to our business, including transportation of
        our
        medical isotopes, reporting clinical test results, processing laboratory
        requisitions and timely billings.  Our business, results of operations
        and financial condition could be adversely affected by a system
        failure.
  Our
        computer systems are vulnerable to damage from a variety of sources, including
        telecommunications failures, malicious human acts, and natural
        disasters.  Additionally, unanticipated problems affecting our systems
        could cause interruption in our information technology systems.  Our
        insurance policies may not adequately compensate us for any losses that may
        occur due to any failures in our information technology systems.
  We
        are subject to
        a number of risks due to the fact that we carry on business in several
        countries.
  Our
        operations are subject to the risks of carrying on business in several countries
        in North America, Europe, Asia and Latin America.  Accordingly, our
        future results of operations could be adversely affected by a variety of
        factors
        including, but not limited to:
  ·
              changes
                  in a country’s or region’s political or economic conditions, particularly
                  in developing or emerging markets;
  ·
              possible
                  restrictions on the transfer of funds;
  ·
              longer
                  payment cycles of foreign customers and difficulty of collecting
                  receivables in foreign jurisdictions;
  ·
              trade
                  protection measures and import or export licensing requirements;
  ·
              differing
                  tax laws and changes in those laws including investment tax credits,
                  or
                  changes in the countries in which we are subject to tax;
  ·
              differing
                  cultural and business practices associated with foreign operations;
  ·
              difficulty
                  in staffing and managing widespread operations;
  ·
              differing
                  labor laws, including being subject to certain European regulations
                  relating to work counsels and changes in those laws;
  ·
              differing
                  protection of intellectual property and changes in that protection;
                  or
  ·
              differing
                  regulatory requirements and changes in those requirements.
  We
        are dependent
        upon the services of key personnel.
  Our
        success depends, to a significant extent, upon the continued service of our
        executive officers and key management and technical personnel, particularly
        our
        scientific and technical staff, and our ability to continue to attract, retain
        and motivate qualified personnel.  The competition for these employees
        is intense.  The loss of the services of one or more of our key
        personnel could have a material adverse effect on our operating
        results.  The investment required to retain key staff, including
        ensuring that compensation packages are competitive, could have an impact
        on the
        profitability of our business. We do not maintain any key person life insurance
        policy on any of our officers or employees.
  If
        we are unable to attract suitable participants for our clinical trials, our
        business might suffer.
  The
        clinical research studies we run rely upon the ready accessibility and willing
        participation of subjects.  Our Phase I clinical research activities
        could be adversely affected if we are unable to attract suitable and willing
        participants on a consistent basis.
  Our
        cost of
        research could increase in the event certain tax credits were to become
        unavailable.
  Research
        and development we conduct in Canada, both for our own account and for defined
        groups of arm’s length customers, is eligible for tax
        credits.  Elimination or significant reduction of these tax credits
        would have a material impact on the cost of our research and development
        which
        would have a material adverse effect on our business, financial condition,
        or
        results of operation.
  Changes
        in the
        regulatory environment could adversely affect our business.
  Future
        regulatory changes could impair our ability to offer the products and services
        we now provide.  Such regulatory changes could make the provision of
        these services too expensive to be attractive to clients, could hamper the
        delivery of products or services to clients, or could cause clients to reduce
        the amount of outsourcing they are prepared to do resulting in a material
        adverse effect on our business, financial condition, or results of
        operation.
  Certain
        of our
        businesses are exposed to attention from special interest groups and are
        subject
        to related political risks.
  Among
        our
        products and services are those that contain or require as raw materials,
        nuclear materials, and drug safety services.  From time to time, these
        have garnered negative attention from special interest groups and are therefore
        at risk of disruption as a result of such attention.  A significant
        disruption could have a material adverse effect on our business, financial
        condition, or results of operation.
  Failure
        to gain
        FDA acceptance of Study Review could have a continuing material adverse effect
        on the financial results of MDS Pharma Services bioanalytical
        operations.
  During
        2004, 2006 and 2007, MDS Pharma Services received written communication from
        the
        FDA related to certain generic bioequivalence studies carried out at MDS
        Pharma
        Services’ bioanalytical laboratory facilities in Montreal, Canada.
  The
        communication resulted from inspections carried out by the FDA in 2003 and
        2004,
        a subsequent FDA audit in March 2006, and the FDA’s review of our responses to
        the audit and related communications.  The communications from the FDA
        outlined concerns in certain studies about unexpected results in a limited
        number of study samples, the standard procedures in place at that time to
        investigate the root cause of the unexpected results and the policies and
        procedures in place to address such results.
  In
        January 2007, the FDA issued statements that outlined steps that customers
        of
        our Montreal bioanalytical facilities would be required to take to resolve
        any
        outstanding issues.  The FDA directed sponsors of approved and pending
        generic drug submissions (ANDA) containing study data produced in these
        facilities during the period between January 2000 to December 2004 to take
        one
        of three actions to address FDA concerns about the accuracy and validity
        of
        these bioanalytical studies: 1) repeat their bioanalytical studies; 2)
        re-analyze their original study samples at a different bioanalytical facility;
        or 3) independently audit original study results.  In addition, the
        FDA wrote to sponsors of innovator submissions and requested that they advise
        the FDA of any submissions containing data from those facilities from the
        affected period.  If our clients’ studies fail to gain FDA clearance
        it could impact our ability to attract and retain work and have a material
        adverse effect on the financial results of MDS Pharma Services bioanalytical
        operations
  The
        terms of MDS
        Pharma Services’ contracts entitle clients to cancellation rights, which, if
        exercised, could adversely affect our business, financial condition, and
        results
        of operation.
  A
        majority of the revenue earned by MDS Pharma Services’ business are under
        contracts which typically run several months for drug discovery through Phase
        I
        clinical trials and as much as several years for Phase III/IV clinical
        trials.  Terms of most contracts entered into by MDS Pharma Services
        entitle clients to cancellation rights that may be exercised by the client
        in
        the event of regulatory delays or if unexpected results are encountered at
        any
        stage of the development program.  The cancellation of contracts could
        have a material adverse effect on MDS Pharma Services’ business, financial
        condition and results of operation.
  We
        could be
        subject to claims as a result of product failure in clinical trials
        testing.
  During
        clinical trials testing, we will typically administer pharmaceutical products
        owned and developed by others to individuals acting as test
        subjects.  The terms of the contracts we enter into with the sponsor
        of the product vary and do not prevent individuals to whom the products have
        been administered from filing claims against us even though we may be
        indemnified in these circumstances.  Furthermore, the indemnity
        obligations established under these contracts are not secured and it is possible
        that the indemnifying party may not have the financial ability to meet its
        obligations to us in the case of an adverse event.
  We
        could be
        subject to claims as a result of our administration of clinical
        trials.
  In
        conducting the tests and other procedures that form a part of the clinical
        trials process, we may be subject to claims related to alleged negligence
        or
        misconduct pertaining to the services we perform.  These risks may
        also include the medical malpractice of medical personnel operating Phase
        I
        clinical facilities.  In addition, we could potentially be subject to
        claims for negligence or misconduct on the part of third-party investigators
        engaged by us on behalf of clients.
  Certain
        of our
        products depend on the availability of the supply of key
        components.
  A
        number
        of our products include materials for which there is a limited source of
        supply.  There can be no assurance that we will be able to continue to
        acquire the necessary materials at an acceptable price.  If we are
        unable to acquire the necessary materials at an acceptable price, it could
        have
        a material adverse effect on our business, financial condition and results
        of
        operation.
  Labour
        disruptions within the companies that supply our isotopes could have a material
        adverse affect on our financial results.
  We
        are
        dependent upon suppliers for our source of isotopes.  The majority of
        our isotope suppliers employ unionized personnel.  Any labour
        disruptions could have a material adverse effect on our business, financial
        condition, and results of operation.
  We
        are dependent
        upon access to nuclear power reactors to install or remove cobalt and such
        access is dependent upon third parties.
  We
        purchase Co59
        as a
        commodity.  The processed Co59
        is
        inserted into nuclear reactors for approximately 18 to 60 months to convert
        it
        to Co60.  Access
        to these nuclear reactors to either install or remove cobalt is determined
        based
        on the routine maintenance schedule for the reactor facility.  Any
        significant change in a maintenance schedule could have a material impact
        on the
        availability of Co60
        in any
        given year which could have an adverse effect on our business, financial
        condition, and results of operation.
  An
        interruption in the supply of reactor-produced isotopes could have a material
        adverse effect on our financial results.
  As
        noted
        earlier, to provide greater security for the future supply of molybdenum-99
        and
        other reactor-produced radioisotopes commonly used in nuclear medicine, we
        contracted with AECL for the construction and operation of two special purpose
        reactors and a processing facility to produce such isotopes.
  Completion
        of the MAPLE project is currently seven years behind schedule and to date
        AECL
        has been unable to resolve certain technical and regulatory issues to the
        satisfaction of the CNSC.  At this time, we do not have sufficient
        reliable information from AECL to predict with any reasonable degree of accuracy
        if or when commercial production will commence from the MAPLE
        Facilities.
  In
        the
        absence of the MAPLE Facilities, we depend upon the NRU reactor operated
        by AECL
        in Chalk River, Canada for the supply of a majority of our reactor-produced
        radioisotopes.  The NRU reactor is 50 years old.  In
        November and December 2007, the NRU reactor had an extended, unplanned shutdown
        related to a regulatory matter.  There is no assurance that the NRU
        reactor will not experience other planned or unplanned
        shutdowns.  Further prolonged planned or unplanned shutdowns would
        have an adverse effect on our business, financial condition, and results
        of
        operation which could be material.
  Potential
        changes
        to the regulation of the export of medical isotopes could cause supply
        disruptions.
  Certain
        purchased medical isotopes are produced in reactors and are by-products of
        the
        decay of the uranium fuel in the reactor.  AECL obtains the majority
        of its uranium from the United States.  The U.S. Department of Energy
        (DOE) strictly controls exports of highly-enriched uranium
        (HEU).  Delays in obtaining HEU could cause supply disruption for
        certain isotopes.  Currently the DOE must approve each shipment of
        HEU.  There is political pressure by the US Government on medical
        isotope manufacturersto convert to
        low-enriched uranium (LEU).  Any conversion to LEU, should such
        conversion become technologically, commercially and economically
        viable, could require significant additional capital investment to convert
        both
        reactors and related processing facilities and could impact the profitability
        and potential viability of our isotope business.
  Operating
        licenses related to handling and storage of radioactive materials could be
        subject to cancellation by the CNSC under certain
        circumstances.
  All
        of
        our facilities that handle or store radioactive materials are government
        regulated and inspected.  Failure to obtain future operating licenses
        could adversely affect our business, financial condition, or results of
        operation.
  Our
        business, financial condition and results of operation would be harmed if
        our
        isotope processing facility suffered a business interruption or was shut
        down
        for any reason.
  Our
        sole
        site for processing and delivery of reactor based isotopes in North America
        is
        located in Ottawa, Canada.  Any event including, a labor dispute, a
        natural disaster, fire, power outage, security, regulatory, public health
        or
        other issue that resulted in a prolonged business disruption or shutdown
        of this
        facility would have a material adverse affect on our business, financial
        condition or results of operation.
  Our
        operations
        are exposed to risk of material environmental liabilities.
  Certain
        of the materials we handle can have a significant and pernicious impact on
        the
        environment.  As a result, we are exposed to risk of costs associated
        with environmental clean-up, as well as exposure to claims from others who
        have
        suffered a loss as a result of an environmental spill.
  Our
        business,
        financial condition and results of operation could be harmed by cyclical
        downturns affecting certain of the industries into which we sell our analytical
        instruments.
  Some
        of
        the industries and markets into which we sell our products are
        cyclical.  Industry downturns are often characterized by reduced
        product demand, excess manufacturing capacity and erosion of average selling
        prices and profits.  Significant downturns in our customers’ markets
        and in general economic conditions could result, and have resulted in the
        past,
        in a reduced demand for several of our products, adversely affecting our
        business, financial condition and results of operation.
  A
        portion of our
        business is carried on through partnerships with third
        parties.
  Essentially
        all sales of Sciex products are made through partnerships with Applied
        Biosystems and PerkinElmer.  The relationships are governed by
        partnership agreements that define the rights and responsibilities of each
        party.  While each partnership is for a fixed term, both agreements
        extend automatically in the absence of any notice to terminate the agreements.
        Sciex focuses primarily on the development and manufacturing of analytical
        instruments while our partners focus primarily on marketing, sales, and
        service.  Failure by either partner to carry out its respective
        obligations could adversely affect Sciex’s business, financial condition, or
        results of operation.
  3.10.2                      
        Legal Proceedings and Regulatory Actions
  From
        time
        to time during the normal course of business, the Company becomes party to
        legal
        proceedings.  At the present time, the Company is not a party to
        proceedings that alone or in aggregate represent claims that could, in the
        judgment of management, be material to the Company and its subsidiaries on
        a
        consolidated basis. In addition, during the year, the Company was not subject
        to: any penalties or sanctions imposed by a court relating to securities
        legislation or by a securities regulatory authority; an penalties or sanctions
        imposed by a court or regulatory body that would be considered important
        by a
        reasonable investor; or any settlement agreements relating to securities
        legislation or with a securities regulatory authority.
  3.10.3                      
        Interest of Management and Others in Material Transactions
  No
        director or executive officer of MDS nor any associate or affiliate of any
        of
        the foregoing, and, to the knowledge of the directors and executive officers
        of
        MDS, no person or company that is the direct or indirect beneficial owner
        of, or
        who exercises control or direction over, more than 10 percent of our Common
        shares or any of such person or company’s associates or affiliates, has had an
        interest in any material transaction entered into by the Company since November
        1, 2002.
  3.10.4                      
        Transfer Agent and Registrar
  The
        transfer agent of the Company is CIBC Mellon Trust Company, Toronto,
        Canada.
  3.10.5                      
        Material Contracts
  The
        following are the only material contracts, other than contracts entered into
        in
        the ordinary course of business, which have been entered into by the Company
        within the most recently completed financial year, or were entered into before
        the most recently completed financial year and are still in effect, deemed
        to be
        material:
  (a)
              The
                  Note Purchase Agreement governing our Senior Unsecured Notes issued
                  on
                  December 18, 2002. The Senior Unsecured Notes bear interest at
                  rates
                  between 5.15% and 6.19% and have various terms between five and
                  twelve
                  years, (See Section 2.4.1 – Capital Structure).
  (b)
              A
                  C$500 million, five-year committed, revolving credit facility provided
                  on
                  July 14, 2005, (see Section 2.4.1 – Capital Structure).
  (c)
              Interim
                  and Long-term Supply Agreement between Atomic Energy Canada Limited
                  and
                  MDS (Canada) Inc., (see Section 3.3 – MDS Nordion: MAPLE Facilities).
  (d)
              Asset
                  purchase agreement between MDS Inc. and Borealis Infrastructure
                  Management
                  Inc., dated October 4, 2006, (See Section 2.4.3 – Divestitures and
                  Discontinuances).
  (e)
              Agreement
                  and plan of merger by and among: MDS Inc. Monument Acquisition
                  Corp., and
                  Molecular Devices Corporation, dated January 28, 2007, (see Section
                  2.4.2
                  – Acquisitions, and Section 3.4 – MDS Analytical Technologies: Overview of
                  Business).
  The
        terms
        of our Senior Unsecured Notes and credit facility are typical for debt
        instruments of this nature (see 3.10.1 - Risk Factors).
  3.10.6                      
        Experts
  The
        2007
        Financial Statements have been audited by Ernst & Young LLP, Box 251, 222
        Bay Street, Toronto, Ontario, M5K 1J7. During fiscal 2007, MDS’s Audit Committee
        obtained written confirmation from Ernst & Young LLP confirming that they
        are independent with respect to the Company within the meaning of the Rules
        of
        Professional Conduct of the Institute of Chartered Accountants of
        Ontario.
  4.
              SELECTED
                  CONSOLIDATED FINANCIAL INFORMATION
  4.1
              Summary
                  Annual Information (Year to October 31)
 
 (amounts
                  in millions except per share amounts)
              2007
              2006
              2005(revised1)
              (revised1)Consolidated
                  Statements of Income(US
                  GAAP)Total
                  revenues
              $1,210
              $1,060
              $982Operating
                  income (loss)
              $(108)
              $(56)
              $(76)Income
                  (loss) from continuing operations
              $(33)
              $22
              $(29)Net
                  income
              $773
              $120
              $(7)Earnings
                  per share – basic
              $5.87
              $0.83
              $(0.05)Earnings
                  per share – diluted
              $5.86
              $0.83
              $(0.05)
 
 Consolidated
                  Statements of Financial Position(US
                  GAAP)Total
                  assets
              $3,018
              $2,343
              $2,238Long-term
                  debt
              $384
              $394
              $394Total
                  shareholders’ equity
              $1,897
              $1,354
              $1,175Weighted
                  average shares outstanding
              $132
              $144
              $142Long-term
                  debt/shareholders’ equity
              15%
              28%
              34%Current
                  ratio (excludes assets for sale)
              1.6
              2.4
              1.70
 Consolidated
                  Statements of Cash Flows(US
                  GAAP)Cash
                  from continuing operating activities
              $178
              $25
              $48Capital
                  assets purchased
              $71
              $51
              $102Cash
                  from discontinued operations, net
              $871
              $165
              $52Net
                  issue (repayment) of long-term debt
              $(18)
              $(7)
              -1Figures
                  for 2006 and 2005 have been revised to conform to the fiscal 2007
                  consolidated financial statement
                  presentation.
  4.2
              Dividends
  The
        declaration of dividends is at the discretion of the Board of
        Directors.  Both the Company’s credit facility and Senior Unsecured
        Notes contain provisions which could restrict the amount of any dividend
        payment.  However, as noted below, the Company has discontinued the
        payment of dividends.
  Prior
        to
        October 2004, dividends were declared payable in April and
        October.  Effective for the October 2004 dividend, the Company adopted
        a policy of paying quarterly dividends.  Pursuant to the policy,
        dividends, when declared, were paid in January, April, July and
        October.  In the past three years, MDS has paid the following cash
        dividends:
  
 
 Fiscal
                  Year
              Aggregate
                  Dividend Amountper
                  Common Share2005
              C$0.13002006
              C$0.13002007
              C$0.0325
  On
        October 5, 2006, the Company announced that it would discontinue paying
        dividends following completion of the sale of the diagnostics
        business.  The final dividend was declared on December 12, 2006 and
        was paid January 8, 2007 to shareholders of record on December 20,
        2006.
  4.3
              Capital
                  Structure
  MDS
        uses
        a combination of equity and long-term debt to finance its
        business.  The Company has one class of Common shares authorized and
        outstanding.  As at October 31, 2007, there were 122,578,331 Common
        shares outstanding.
  The
        Common shares entitle the holder thereof to receive notice of, to attend,
        and to
        vote at all meetings of holders of Common shares.  Each Common share
        entitles the holder thereof to one vote per share and to share rateably in
        the
        assets of the Company on liquidation or dissolution.
  The
        Company’s share capital has been restructured or converted several times from
        Common shares in 1973 to Class A Common and Class B Non-Voting in 1980 and
        back
        to Common shares in March of 2000.  Under the terms of the 2000
        conversion, each Class A share was converted into 1.05 Common shares and
        each
        Class B non-voting share was converted into 1.0
        Common share.
  The
        Company’s shares have been split on a two-for-one basis four times, on the
        following dates: September 26, 1980, July 13, 1983; March 15, 1990; and,
        November 15, 1996.  In addition, on September 14, 2000, the directors
        of the Company declared a one-for-one share dividend paid on October 10,
        2000 to
        shareholders of record on September 26, 2000.  This share dividend had
        the same effect as a two-for-one stock split.
  MDS
        currently has a normal course issuer bid (NCIB) in place to purchase up to
        4,506,236 Common shares that expires on July 2, 2008.  As at October
        31, 2007, no Common Shares had been purchased previous to the
        NCIB.  During fiscal 2005, the Company repurchased 799,000 Common
        shares for cancellation at an average price of C$16.67 under the terms of
        an
        NCIB in place in 2005.  The Company repurchased no Common shares for
        cancellation under an NCIB in 2006 or 2007, but rather in the second quarter
        of
        2007, the Company conducted a substantial issuer bid and repurchased
        approximately 22.8 million Common shares at a price of C$21.90 per share
        on
        April 9, 2007.
  The
        Company has issued Senior Unsecured Notes payable totalling $311 million,
        has
        secured financing for the MAPLE facilities construction project in the form
        of a
        non-interest bearing government loan, and has various other forms of long-term
        credit, mostly associated with the purchase of specific assets.  At
        October 31, 2007, the value of all of the Company’s outstanding debt was $384
        million.  In addition, the Company has available C$500 million of
        undrawn committed term credit facilities.
  5.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS
  Please
        refer to the disclosure contained on pages 1 to 29 of the 2007 Annual Financial
        Review under the heading “Management’s Discussion and Analysis” which is
        incorporated by reference into this AIF.
  6.
              MARKET
                  FOR SECURITIES
  The
        outstanding Common shares are listed for trading on the Toronto Stock Exchange
        (symbol - MDS) and the New York Stock Exchange (symbol – MDZ).  The
        following table sets forth the price ranges and volume of Common shares traded
        on the Toronto Stock Exchange for each month of fiscal 2007.
 
 Month
              Volume
                (Total
                  Month)
              High
                  Price
                (C$)
              Low
                  Price
                ($C)November
                  2006
              10,955,720
              $21.40
              $19.31December
                  2006
              6,740,195
              $21.40
              $19.90January
                  2007
              18,191,492
              $21.40
              $19.86February
                  2007
              28,737,408
              $22.06
              $20.25March
                  2007
              20,971,038
              $22.15
              $21.55April
                  2007
              18,071,304
              $22.09
              $21.
                  01May
                  2007
              17,937,284
              $22.10
              $20.70June
                  2007
              12,329,746
              $21.90
              $20.91July
                  2007
              8,790,345
              $21.90
              $20.14August
                  2007
              10,431,345
              $21.00
              $19.55September
                  2007
              4,920,415
              $21.85
              $20.12October
                  2007
              7,585,690
              $21.64
              $20.32
 
 Other
        than the Common shares, no other class of securities of the Company is traded
        or
        quoted on any exchange or market.
  7.
              DIRECTORS
                  AND OFFICERS
  7.1
              Directors
  Each
        director of the Company is elected to serve until the next Annual Meeting
        of the
        Company or until their successor is elected or appointed.  The
        disclosure under the heading “Election of Directors” in the Company’s Management
        Proxy Circular dated January 7, 2008 contains information about each director
        of
        the Company and is incorporated herein by reference.
  7.2
              Executive
                  Officers
  The
        Company’s Executive Management team currently comprises the following
        individuals:
 
 Executive
                  Officer Name
              Position
                  with MDS
              Province
                  or State and Country of ResidenceAndrew
                  W. Boorn
              President
                MDS
                  Analytical Technologies
              Ontario,
                  CanadaPeter
                  E. Brent
              Senior
                  Vice-President, Legal and Corporate Secretary
              Ontario,
                  CanadaStephen
                  P. DeFalco
              President
                  and Chief Executive Officer (CEO)
              Ontario,
                  CanadaThomas
                  E. Gernon
              Executive
                  Vice-President, Information Technology and Chief Information Officer
                  (CIO)
              Ontario,
                  CanadaKenneth
                  L. Horton
              Executive
                  Vice-President, Corporate Development and General Counsel
              Massachusetts,
                  USASharon
                  M. Mathers
              Senior
                  Vice-President, Investor Relations and External
                  Communications
              Ontario,
                  CanadaDouglas
                  S. Prince
              Executive
                  Vice-President, Finance and Chief Financial Officer (CFO)
              Ontario,
                  CanadaJames
                  M. Reid
              Executive
                  Vice-President, Global Human Resources
              Ontario,
                  CanadaDavid
                  Spaight
              President
                MDS
                  Pharma Services
              Pennsylvania,
                  USASteven
                  M. West
              President
                MDS
                  Nordion
              Ontario,
                  Canada
  Andrew
        W.
        Boorn, Peter E. Brent, Sharon M. Mathers, James M.  Reid and Steven M.
        West have held their present positions or other senior positions with MDS
        Inc.
        or its subsidiaries during the past five years. The executive officers listed
        below have not held their present positions or other senior positions with
        MDS
        or its subsidiaries for the last five years and their previous occupations
        are
        as follows:
  a)
              Stephen
                  DeFalco joined MDS in 2005 and was previously Chairman and CEO
                  of US
                  Genomics and prior to that role served as President of PerkinElmer
                  Instruments and Senior Vice-President of PerkinElmer Inc.
  b)
              Douglas
                  S. Prince joined MDS in 2007 and was previously Vice-President,
                  Enterprise
                  Risk Management at PerkinElmer Inc. He also served as Vice-President
                  and
                  CFO for the Life and Analytical Sciences business unit at PerkinElmer
                  Inc.
  c)
              Thomas
                  E. Gernon joined MDS in 2005, was previously Chief Operating Officer
                  of
                  D2Hawkeye Inc., a healthcare software development company and held
                  CIO
                  positions at both PerkinElmer Inc. and J.P. Morgan Invest.
  d)
              Kenneth
                  L. Horton joined MDS in December 2005 and was previously Vice President,
                  Acquisitions, Ventures and General Counsel for the Life and Analytical
                  Sciences business unit at PerkinElmer, Inc. and previously an attorney
                  at
                  Ropes & Gray LLP.
  e)
              David
                  Spaight joined MDS in April 2006 and was previously Senior Vice-President,
                  Global Sales and Marketing at Fisher Scientific Products (Fisher).
                  Prior
                  to joining Fisher, Mr. Spaight held the role of Vice-President,
                  Global
                  Sales and Marketing for the Life and Analytical Sciences business
                  unit at
                  PerkinElmer Inc.
  To
        the
        knowledge of MDS, the directors and executive officers of MDS, as a group,
        beneficially own, directly or indirectly, or exercise control or direction
        over
        an aggregate of 53,693 MDS Common shares representing 0.04% of MDS’s issued and
        outstanding Common shares.
  7.3           
        Additional Disclosure for Directors and Executive Officers
  To
        the knowledge of MDS, no director or executive officer of MDS (a) is at the
        date
        hereof or has been, in the last ten years before the date hereof, a director,
        chief executive officer (CEO) or chief financial officer (CFO) of any company,
        including MDS that, while that person was acting in that capacity, (i) was
        the
        subject of a cease trade order, similar order or an order that denied the
        company or MDS access to any exemptions under securities legislation, for
        a
        period of more than 30 consecutive days, (ii) was subject to an order that
        was
        issued, after that person ceased to be a director, CEO or CFO and which resulted
        from an event that occurred while that person was acting in that capacity
        as a
        director, CEO or CFO, (b) is at the date hereof or has been in the ten years
        before the date hereof, a director or executive officer of a company, including
        MDS that, while that person was acting in that capacity or within a year
        of that
        person ceasing to act in that capacity became bankrupt, made a proposal under
        any bankruptcy or insolvency legislation or became subject to or instituted
        any
        proceedings, arrangement or compromise with creditors, or had a receiver,
        receiver or manager or trustee appointed to hold assets or (c) has within
        the
        last ten years become bankrupt, made a proposal under any legislation relating
        to bankruptcy or insolvency, or become subject to or instituted any proceedings,
        arrangements or compromise with creditors or had a receiver, receiver manager
        or
        trustee appointed to hold the assets of any director, or executive officer
        except for Mr. Robert Luba, a director of MDS who was an independent director
        of
        Safety-Kleen Corp., a New York Stock Exchange listed company, which filed
        for
        bankruptcy in 2000.
   8.           
        AUDIT COMMITTEE INFORMATION
  8.1
              Composition
                  of the Audit Committee
  The
        Audit
        Committee of MDS is composed of the following five members:
  Robert
        W.
        Luba (Chair), William D. Anderson, James S. A. MacDonald, Kathleen M. O’Neill,
        and Richard H. McCoy.  The responsibilities and duties of the
        Committee are set out in the Committee’s charter, the text of which is set forth
        in Appendix I to this AIF.
  The
        Board
        of Directors believes that the composition of the Audit Committee reflects
        a
        high level of financial literacy and expertise.  Each member of the
        Audit Committee has been determined by the Board to be “independent” and
“financially literate” as such terms are defined under Canadian and United
        States securities laws and the NYSE Corporate Governance Listing
        Standards.  In addition, the Board has determined that each of Robert
        W. Luba, William D. Anderson and Kathleen M. O’Neill is an “Audit Committee
        Financial Expert” as such term is defined under United States securities
        laws.  The Board has made these determinations based on the education
        and breadth and depth of experience of each member of the
        Committee.  The following is a description of the education and
        experience of each member of the Committee that is relevant to the performance
        of his or her responsibilities as a member of the Audit Committee:
  Mr.
        William D. Anderson, a Chartered Accountant, is a Corporate Director, having
        retired in 2005 after serving 14 years with BCE Inc. (a global communications
        company headquartered in Montreal, Canada).  From 2001 to 2004, Mr.
        Anderson was President of BCE Ventures and from 1997 to 2000 was Chief Financial
        Officer of BCE Inc. Mr Anderson currently serves on the public boards of
        TransAlta Corporation and Gildan Activeware Inc. He serves on the audit
        committees of TransAlta Corporation and Gildan Activeware Inc.
  Mr.
        Robert W. Luba, a Chartered Accountant, is President of Luba Financial Inc.
        (an
        investment company in Toronto, Canada).  Prior to 1994, he was
        President and Chief Executive Officer of Royal Bank Investment Management
        Inc.,
        President and Chief Financial Officer (CFO) of Crown Life Insurance Company
        and
        Senior Vice-President and CFO of John Labatt Limited. Mr. Luba currently
        serves
        on the public boards of AIM Trimark Investments and Softchoice Corporation.
        He
        also serves on the audit committee of Softchoice Corporation.
  Mr.
        James
        S. A. MacDonald is Chairman and a Managing Partner of Enterprise Capital
        Management Inc. (an investment management company) and has been for the last
        five years.  Mr. MacDonald currently serves on the public boards of
        Manitoba Telecom Services Inc. and Superior Plus Inc.  He is also
        serves on the audit committee of Manitoba Telecom.
  Mr.
        Richard H. McCoy is a
        Corporate Director.  He was in the investment banking business for
        over 35 years.  Prior to retiring in 2003, he was Vice-Chairman,
        Investment Banking at TD Securities Inc. (one of Canada’s largest investment
        firms in Toronto, Canada).  Prior to joining TD Securities Inc. in May
        of 1997, Mr. McCoy was Deputy Chairman of CIBC Wood Gundy
        Securities.  Mr. McCoy currently serves on the public boards of ACE
        Aviation Holding Inc.; Aberdeen Asia-Pacific Income Investment Company Limited;
        Gerdau Amersteel Corp.; Jazz Air Income Fund; Pizza Pizza Royalty Income
        Fund;
        Rothmans Inc; and Uranium Participation Corporation.
        He also serves on the audit committees of Rothmans Inc., Aberdeen Asia-Pacific
        Income Investment Company Limited and Uranium Participation
        Corporation.
  Ms.
        Kathleen M. O’Neillis a
        Corporate Director and was an Executive Vice-President with BMO Bank of Montreal
        (a major Canadian chartered bank) until January 2005. Prior to joining BMO
        Bank
        of Montreal in 1994, Ms. O’Neill was a partner at
        PricewaterhouseCoopers.  Ms. O’Neill is a Fellow of the Institute of
        Chartered Accountants (FCA) of Ontario.  In 2005, Ms. O’Neill was
        accredited to the ICD/Rotman School of Management Directors Education
        Program.  Ms. O’Neill is also a director of Canadian Tire
        Bank.  Ms. O’Neill is Chair of St. Joseph’s Health Centre Foundation
        and a past-Chair of the Board of St. Joseph’s Health Centre in Toronto and is
        also active on several other non-profit boards.  Ms. O’Neill currently
        serves on the public boards of Finning International Inc. and TSX Group
        Inc.  She also serves on the audit committees of Finning International
        Inc. and TSX Group Inc.
  8.2
              Auditor
                  Service Fees
  The
        fees
        billed by MDS’s external auditors, Ernst & Young LLP, for all services
        performed by the auditors for the years ended October 31, 2007 and October
        31,
        2006 are set out below.
 
 2007
                  (C$‘000s)
              
              2006
                  (C$‘000s)Audit
                  services
              $6,119
              
              $
                  6,726Audit-related
                  services
              634
              
              255Tax
                  services
              333
              
              196Total
              $7,086
              
              $
                  7,177
  Audit
        Services – an audit engagement is one in which Ernst & Young LLP, or a
        foreign affiliate, has been hired to render an audit opinion on a set of
        financial statements or related financial information.  These
        engagements include the opinion issued on the consolidated financial statements
        of MDS, the opinions issued on subsidiaries of MDS as required by statute
        in
        certain jurisdictions, and opinions issued on the financial statements of
        subsidiaries or entities over which MDS exercises management
        discretion.  The latter category includes audit opinions issued on
        Pension Plans established for the benefit of MDS employees.
  Audit-Related
        Services – an audit-related engagement is one in which some sort of assurance is
        provided that is not an audit opinion or one which supports the ability of
        Ernst
& Young LLP to render an audit opinion in an indirect
        manner.  Such engagements include reviews of the interim financial
        statements, the reports of which are provided to the Audit Committee, accounting
        assistance and advice and translation services related solely to our filed
        financial reports.  From time to time, Ernst & Young LLP may also
        be engaged to provide audit-related services in connection with acquisitions,
        including audits of transaction date balance sheets and similar services.
        In
        fiscal 2007, Ernst & Young LLP provided audit-related services in connection
        with the Company’s sale of its diagnostic business, its acquisition of Molecular
        Devices and its conversion to US GAAP.
  Tax
        Fees
– a tax engagement is one in which Ernst & Young LLP has been engaged to
        provide tax services, including assistance with tax compliance and tax advice
        and planning.  Tax compliance assistance is generally provided to the
        foreign subsidiaries of MDS and to certain entities that are controlled by
        MDS
        but in which there are other minority interests.  Tax compliance
        services include assistance with the preparation and filing of tax returns
        and
        assistance in dealing with tax audits.  Tax advice and planning
        services are provided to the Company and many of its subsidiaries and relate
        to
        both income taxes and sales and use taxes.
  8.3
              Pre-Approval
                  Policy for External Audit Services
  The
        Audit
        Committee has adopted processes for the pre-approval of engagements for services
        of its external auditors.
  The
        Audit
        Committee’s policy requires pre-approval of all audit and non-audit services
        provided by the external auditor.  The policy identifies three
        categories of external auditor services and the pre-approval procedures
        applicable to each category, as follows:
  (1)
              Audit
                  and audit-related services – these are identified in the annual audit
                  service plan presented by the external auditor and require annual
                  approval.  Changes to these fees are reported to the Audit
                  Committee at least quarterly.
  (2)
              Pre-approved
                  list of non-audit services – non-audit services which are reasonably
                  likely to occur have been identified and receive general pre-approval
                  of
                  the Audit Committee, and as such, do not require specific
                  pre-approvals.  The term of any general pre-approval is 12
                  months from approval unless otherwise specified.  The Audit
                  Committee annually reviews and pre-approves the services on this
                  list.
  (3)
              Other
                  proposed services – all proposed services not categorized above are
                  brought forward on a case-by-case basis and are subject to pre-approval
                  by
                  the Audit Committee.
  All
        fees
        paid to the independent auditors for 2007 were approved in accordance with
        the
        pre-approval policy.
  9.
              ADDITIONAL
                  INFORMATION
  Additional
        information about MDS is available on the Company’s web site at www.mdsinc.com,
        on SEDAR (System for Electronic Document Analysis and Retrieval) at www.sedar.com, and on
        the US Securities and Exchange web site at www.sec.gov.
  Additional
        information, including directors’ and executive officers’ remuneration and
        indebtedness, principal holders of the Company’s securities and securities
        authorized for issuance under equity compensation plans is contained in the
        Management Proxy Circular dated as of January 7, 2008 prepared in connection
        with the Company’s Annual Meeting of Shareholders to be held on March 6,
        2008.
  Additional
        financial information is provided in the 2007 Financial Statements and the
        2007
        MD&A, each included in the 2007 Annual Report Financial Review of MDS for
        its fiscal year ended October 31, 2007.
  Copies
        of
        this AIF, as well as copies of the 2007 Annual Report Financial Review of
        MDS
        for the year ended October 31, 2007 and the Management Proxy Circular dated
        January 7, 2008 may be obtained from:
 
 Peter
                  Brent
                SVP
                  Legal & Corporate Secretary, MDS Inc.
                Telephone:                                
                  416-213-4082
                Fax:                        
                  416-213-4222
                Email:                                 peter.brent@mdsinc.com
              2700
                  Matheson Blvd., Suite 300, West Tower
                Mississauga,
                  Ontario, L4W 4V9
                Canada
   APPENDIX
        I
  MDS
        INC.
 AUDIT
          COMMITTEE CHARTER
 
 
 The
        primary function of the audit committee (the “Audit Committee”) of the Board of
        Directors (the “Board”) of MDS Inc. (the “Corporation”) is to assist the Board
        in fulfilling its oversight responsibilities for the financial reporting
        process
        including responsibility for overseeing:
 
 ·
              the
                  integrity of the Corporation’s financial statements and financial
                  reporting process, including the system of internal control over
                  financial
                  reporting, the audit process and the processes for identifying,
                  evaluating
                  and managing the Corporation’s principal risks impacting financial
                  reporting;
  ·
              compliance
                  with legal and regulatory requirements, other than those otherwise
                  assigned from time to time by the Board;
  ·
              financial
                  oversight of Pension Plan management;
  ·
              the
                  qualifications and independence of the independent auditor; and
  ·
              the
                  Corporation’s internal audit function.
  Consistent
        with these functions, the Audit Committee should encourage continuous
        improvement of, and should foster adherence to, the Corporation’s policies,
        procedures and practices.
 
 Approval
        of Charter
 
 This
        Charter and any future changes to this Charter require approval by the
        Board.
 
 Structure
        and Composition
 
 The
        Audit
        Committee shall consist of no fewer than three members from among the
        Board.
 
 Each
        member of the Audit Committee shall: (i) be free from any relationship that,
        in
        the opinion of the Board, would reasonably be expected to interfere with
        the
        exercise of his or her independent judgment as a member of the Audit Committee;
        and (ii) meet the independence and financial literacy requirements of all
        applicable corporate, exchange and securities statutes, rules and regulations
        in
        Canada and the United States (the “Regulations”).
 
 Each
        member of the Audit Committee shall be financially literate as determined
        by the
        Board in its business judgment and, at a minimum, have the ability to read
        and
        understand a set of financial statements that present a breadth and level
        of
        complexity of accounting issues that are generally comparable to the breadth
        and
        complexity of the issues that can reasonably be expected to
        be
        raised by the Corporation’s financial statements or shall become financially
        literate within a reasonable period of time following his or her
        appointment.
 
 At
        least
        one member of the Audit Committee shall be an “audit committee financial expert”
as such term is defined by the Regulations. The Board shall make determinations
        as to whether any particular member of the Audit Committee satisfies this
        requirement.
 
 The
        members of the Audit Committee shall be appointed by the Board annually on
        the
        recommendation of the Nominating and Corporate Governance Committee or until
        successors are duly appointed.
 
 The
        Board
        shall normally designate the Chair of the Audit Committee. In the event that
        a
        Board designation is not made, the members of the Audit Committee shall elect
        a
        Chair by majority vote of the full Audit Committee.
 
 In
        the
        event that the Chair of the Audit Committee does not attend a meeting of
        the
        Audit Committee, the members of the Audit Committee shall elect a temporary
        Chair for such meeting by majority vote of the members in attendance at the
        meeting.
 
 Once
        appointed, Audit Committee members shall cease to be a member of the Audit
        Committee only upon:
 
 (a)
              resignation
                  from the Audit Committee or the Board,
 (b)
              death,
 (c)
              disability,
                  as determined by an independent physician retained by the Board;
                  or
 (d)
              not
                  being re-appointed pursuant to the annual appointment process described
                  above.
 
 Members
        of the Audit Committee shall not simultaneously serve on the audit committees
        of
        more than three public companies, including the Corporation, unless the Board
        determines that such simultaneous service would not impair the ability of
        such
        member to effectively serve on the Audit Committee.
 
 Meetings
 
 The
        Audit
        Committee shall meet at least quarterly and more frequently as circumstances
        dictate.
 
 A
        majority of Audit Committee members is required for meeting quorum.
 
 The
        Audit
        Committee shall meet separately on a periodic basis with management, the
        Internal Auditor and the independent auditor in separate committee
        sessions.
 
 The
        Chief
        Executive Officer, Chief Financial Officer, Vice President, Finance, Vice
        President, Internal Audit and Corporate Secretary of the Corporation and
        representatives of the independent auditor shall normally attend meetings
        of the
        Audit Committee. The Audit Committee may request any officer or employee
        of the
        Corporation or the Corporation’s outside counsel or independent
        auditor to attend a meeting of the Audit Committee or to meet or provide
        consultations to the Audit Committee or any member
        thereof.   Others may also attend meetings as the Audit Committee
        may request.
 
 Notice
        of
        all meetings of the Audit Committee shall be sent to those persons referred
        to
        in the preceding paragraph and to the internal auditors (or other persons
        responsible for the internal audit function), as well as to all Audit Committee
        members.
 Chair
 
 The
        Chair
        of the Committee shall have the duties and responsibilities set forth in
        Appendix "A".
 
 Resolutions
 
 Resolutions
        of the Audit Committee shall require approval by a simple majority of members
        voting on such resolution.
 
 Responsibilities
        and Duties
 
 (i)
              Minutes
                  and Reporting to the Board
 
 The
        Audit
        Committee shall prepare written minutes of all of its meetings.  The
        Audit Committee shall make regular reports to the Board, but not less frequently
        than quarterly.  In addition, after each meeting of the Audit
        Committee, the Chair of the Audit Committee or designate shall report to
        the
        Board on the significant matters addressed by the Audit Committee at such
        meeting and a copy of the minutes shall be made available to all members
        of the
        Board.
 
 (ii)
              Selection,
                  Evaluation and Oversight of Independent Auditor
 
 With
        respect to the Corporation’s independent auditor the Audit Committee
        shall:
 
 ·
              have
                  the sole authority to recommend to the Board the appointment, retention
                  or
                  replacement of the independent auditor (subject, if applicable,
                  to
                  shareholder approval)
  ·
              be
                  directly responsible for establishing the compensation of the independent
                  auditor
  ·
              have
                  the independent auditor report directly to the Audit Committee
                  and
                  otherwise be directly responsible for overseeing the work of the
                  independent auditor
  ·
              have
                  the authority to communicate directly with the independent auditor
  ·
              meet
                  with the independent auditor prior to the annual audit to discuss
                  the
                  planning, scope and staffing of the audit and approve the selection
                  of the
                  coordinating partner having primary responsibility for the audit
  ·
              provide
                  for the periodic rotation of the coordinating partner having primary
                  responsibility for the audit and the audit partner responsible
                  for
                  reviewing the audit as required by law
  ·
              at
                  least on an annual basis, evaluate the qualifications, performance
                  and
                  independence of the independent auditor and the senior audit partners
                  having primary responsibility for the audit
  ·
              obtain
                  and review a report from the independent auditor at least annually
                  regarding: (i) the independent auditor’s internal quality-control
                  procedures, (ii) any material issues raised by the most recent
                  internal
                  quality-control review, or peer review, of the firm, or raised
                  by any
                  inquiry or investigation by governmental or professional authorities
                  within the preceding five years respecting one or more independent
                  audits
                  carried out by the firm, (iii) any steps taken to deal with any
                  issues,
                  (iv) all relationships between the independent auditor and the
                  Corporation, and (v) the independence of the independent auditor
                  as
                  required by the Regulations
  ·
              review
                  and approve the Corporation’s hiring policies regarding partners,
                  employees and former partners and employees of the present and
                  former
                  independent auditor
  ·
              obtain
                  confirmation from management that the Corporation has not hired
                  employees
                  or former employees of the independent auditor who have participated
                  in
                  any capacity in the audit of the Corporation for the immediately
                  previous
                  12 month period
  ·
              pre-approve
                  all auditing services and permitted non-audit services (including
                  fees and
                  terms thereof) to be performed for the Corporation or its subsidiaries
                  by
                  the independent auditor
  (iii)
              Internal
                  Audit
  With
        respect to the Corporation’s lead of internal audit (the “Internal Auditor”),
        the Audit Committee shall:
 
 ·
              have
                  the authority to approve the appointment of the Internal Auditor
  ·
              have
                  the Internal Auditor report directly to the Audit Committee (although
                  the
                  Internal Auditor may report administratively to the CEO or the
                  CFO)
  ·
              have
                  the authority to communicate directly with the Internal Auditor
  ·
              meet
                  with the Internal Auditor to discuss the planning, scope and staffing
                  of
                  the internal audit plan
  ·
              approve
                  the internal audit mandate and plan
  ·
              obtain
                  and review periodic reports from the Internal Auditor, at least
                  annually
  ·
              establish
                  and review the responsibilities, budget, compensation and staffing
                  of the
                  Corporation’s internal audit function, through inquiry with the
                  Corporation’s independent auditor, management and the Corporation’s
                  internal auditing department
  (iv)
              Financial
                  Reporting of Quarterly Financial Results
 
 With
        respect to the Corporation’s reporting of unaudited quarterly financial results,
        the Audit Committee shall:
 
 ·
              prior
                  to their public release and filing with securities regulatory agencies,
                  review and discuss with management, the internal auditor and the
                  independent auditor:
  o
              earnings
                  press release
 o
              financial
                  statements and notes thereto
 o
              management’s
                  discussion and analysis
 
 The
        review of the Corporation’s unaudited quarterly financial results shall
        include:
 
 ·
              any
                  significant judgments (e.g. estimates and reserves) made in the
                  preparation of financial statements
  ·
              any
                  significant disagreements among management and the independent
                  auditor in
                  connection with the preparation of financial statements
  ·
              the
                  extent to which changes or improvements in financial or accounting
                  practices, as approved by the Audit Committee, have been implemented
  ·
              significant
                  financial reporting issues and judgments made in connection with
                  the
                  preparation of the Corporation’s financial statements, including any
                  significant changes in the Corporation’s selection or application of
                  accounting principles, any major issues as to the adequacy of the
                  Corporation’s internal controls and any special steps adopted in light of
                  material control deficiencies
  ·
              the
                  Corporation’s use of “pro forma” or “adjusted” non-GAAP information
  ·
              the
                  Corporation’s use of forward-looking financial guidance
  ·
              critical
                  accounting policies and practices
  ·
              results
                  of the independent auditor’s review
  ·
              any
                  written communications between the independent auditor and management
                  (e.g. management letters, schedule of unadjusted differences)
  ·
              the
                  effect of regulatory and accounting initiatives as well as off-balance
                  sheet structures on the Corporation’s financial statements
  ·
              management
                  certifications of reports filed by the Corporation pursuant to
                  the
                  Regulations
  ·
              adequacy
                  of internal controls over financial reporting
  ·
              any
                  correspondence with, or published reports by, regulators or governmental
                  agencies which raise material issues regarding the Corporation’s financial
                  statements or accounting policies
  ·
              approve
                  the unaudited quarterly financial statements of the Corporation
 
 (v)
              Financial
                  Reporting of Year-End Financial Results
 
 With
        respect to the Corporation’s annual audit, the Audit Committee
        shall:
 
 ·
              prior
                  to their public release and filing with securities regulatory agencies,
                  review and discuss with management, the internal auditors and the
                  independent auditor the:
 
 o
              earnings
                  press release
 o
              financial
                  statements and notes thereto
 o
              management’s
                  discussion and analysis
 o
              results
                  of the independent auditor’s audit
 
 The
        review of the Corporation’s audited financial results shall
        include:
 
 o
              all
                  matters described above under “Financial Reporting of Quarterly Financial
                  Results”
  o
              results
                  of the independent auditor’s audit
  o
              discussions
                  with the independent auditor on the matters required to be discussed
                  by
                  Statement on Auditing Standards No. 61, including significant adjustments,
                  management judgments and accounting estimates, significant new
                  accounting
                  policies, any difficulties encountered in the course of the audit
                  work,
                  any restrictions on the scope of activities or access to requested
                  information, and any significant disagreements with management
  o
              a
                  report from the independent auditor describing (i) all critical
                  accounting policies and practices to be used, (ii) all alternative
                  treatmentsof
                  financial information within generally accepted accounting principles
                  that
                  have been discussed with management, ramifications of the use of
                  such
                  alternative disclosures and treatments, and the treatment preferred
                  by the
                  independent auditor and (iii) other material communications between
                  the
                  independent auditor and management, such as the annual management
                  letter
                  or schedule of unadjusted differences
  ·
              recommend
                  to the Board whether the audited consolidated financial statements
                  of the
                  Corporation should be approved by the Board
 
 (vi)
              Financial
                  Oversight of Pension Plan Management
 
 With
        respect to the Corporation’s management of Pension Plans, the Audit Committee
        shall  fulfill duties related to financial oversight of pension plan
        management including funding, asset management, and reporting.
 
 The
        review of the Corporation’s Pension Plan’s shall include:
 
 ·
              External
                  Auditor reports and financial statements of the plans, including
                  compliance with pension reporting regulations
 
 ·
              Actuarial
                  valuations and contribution policies
 
 ·
              Plan
                  solvency and compliance with pension legislation
 
 ·
              Review
                  of the investment fund performance strategy
 
 (vii)
              Annual
                  Proxy Statement and Regulatory Filings
 
 The
        Audit
        Committee shall:
 
 ·
              consider
                  the effectiveness of the procedures that are in place for the review
                  of
                  the Corporation’s public disclosure of financial information extracted or
                  derived from the Corporation’s financial statements, other than
                  management’s discussion and analysis and annual and interim earnings press
                  releases, and shall periodically assess the adequacy of those procedures
  ·
              issue
                  any reports required of the Audit Committee to be included in the
                  Corporation’s annual proxy statement
  ·
              prior
                  to their public release or filing with securities regulatory agencies,
                  review and recommend to the Board the approval of the following
                  documents:
 
 o
              Annual
                  Information Form
 o
              Annual
                  Report on Form 40-F
 o
              prospectuses
 
 ·
              review
                  financial information and earnings guidance provided by the Corporation
                  to
                  analysts and rating agencies or which the Corporation or any of
                  its
                  officers or employees intends to publicly disclose by way of press
                  release
                  (other than press releases referred to under “Financial Reporting of
                  Quarterly Financial Results” and under “Financial Reporting of Year-End
                  Financial Results”) or otherwise (which review may be done generally
                  (i.e., discussion of the types of information to be provided or
                  disclosed
                  and type of presentations to be made);  the Audit Committee need
                  not discuss in advance each instance in which the Corporation may
                  provide
                  or disclose earnings guidance)
 
 (viii)
              Related
                  Party Transactions and Off-Balance Sheet Structure
 
 The
        Audit
        Committee shall:
 
 ·
              review
                  all proposed related-party transactions including those between
                  the
                  Corporation and its officers or directors and, if deemed appropriate,
                  recommend approval of any particular transaction to the Board
  ·
              review
                  all material off-balance sheet structures which the Corporation
                  is a party
                  to
 
 (ix)
              Internal
                  Controls, Risk Management and Legal Matters
 
 The
        Audit
        Committee shall:
 
 ·
              consider
                  the effectiveness of the Corporation’s internal controls over financial
                  reporting and related information technology security and control
                  including the process to communicate such controls and roles and
                  responsibilities
  ·
              discuss
                  with management the Corporation’s major financial risk exposures and the
                  steps management has taken to monitor and control such exposures,
                  including the Corporation’s risk assessment and risk management policies
                  including the use of derivative financial instruments. Areas to
                  be
                  considered in this respect include:
  o
              insurance
                  coverage
 o
              foreign
                  currency exposure
 o
              interest
                  rate exposure
 
 ·
              review
                  with management at
                  least annually reports demonstrating compliance with risk assessment
                  and
                  with risk management policies
 ·
              review
                  with management, and if necessary, the Corporation’s counsel, any legal
                  matter which could reasonably be expected to have a material impact
                  on the
                  Corporation’s financial statements or accounting policies
 ·
              review
                  the yearly report prepared by management, and attested to by the
                  Corporation’s independent auditor, assessing the effectiveness of the
                  Corporation’s internal control over financial reporting and stating
                  management’s responsibility for establishing and maintaining adequate
                  internal control over financial reporting prior to its inclusion
                  in the
                  Corporation’s annual filings under applicable securities laws
  ·
              review
                  with the chief executive officer, chief financial officer, Internal
                  Auditor and independent auditor, periodically, the following:
  o
              all
                  significant deficiencies and material weaknesses in the design
                  or
                  operation of internal control over financial reporting which are
                  reasonably likely to adversely affect the Corporation’s ability to record,
                  process, summarize and report financial information; and
  o
              any
                  fraud, whether or not material, that involves management or other
                  employees who have a significant role in the Corporation’s internal
                  control over financial reporting
  ·
              review
                  and approve the Corporation’s disclosure policy
  (x)
              Capital
                  Structure, Investment and Cash Management Policies,
                  Disclosure
              Policy
 
 The
        Audit
        Committee shall:
 
 ·
              review
                  and approve any changes to the Corporation’s capital structure
  ·
              review
                  and approve the Corporation’s treasury management policies
  (xi)
              “Whistle
                  Blower” and Related Procedures
 
 The
        Audit
        Committee shall establish procedures for the receipt, retention and treatment
        of
        complaints received by the Corporation regarding accounting, internal accounting
        controls or auditing matters and for the confidential and/or anonymous
        submission by employees of the Corporation of concerns regarding questionable
        accounting or auditing matters, which procedures shall include the requirement
        to advise the Audit Committee of all such complaints
        received  involving a questionable accounting or auditing matter or
        fraud.
  (xii)           
        Review of Charter and Self Assessment
 
 The
        Audit
        Committee shall:
 
 ·
              review
                  and reassess annually the adequacy of this Charter
  ·
              review
                  annually the Audit Committee’s own performance
  (xiii)
              Other
                  Activities
 
 The
        Audit
        Committee shall carry out such other activities consistent with this Charter,
        the Corporation’s by-laws and governing law, that the Audit Committee or the
        Board deems necessary or appropriate.
 
 Resources
        and Authority
 
 The
        Audit
        Committee shall have the authority to retain independent legal, accounting
        or
        other advisors, including consulting with the national office of the independent
        auditor, as it determines necessary to carry out its duties. The Corporation
        shall provide for appropriate funding, as determined by the Audit Committee,
        for
        payment of compensation to the independent auditor for the purpose of rendering
        or issuing an audit report or performing other audit, review or attest services
        and to any advisors employed by the Audit Committee and for ordinary
        administrative expenses of the Audit Committee.
 
 The
        Audit
        Committee shall have the authority to conduct any investigation necessary
        and
        appropriate to fulfilling its duties and in connection therewith, to inspect
        all
        books and records of the Corporation and its subsidiaries and to discuss
        such
        books and records and any matters relating to the financial position, risk
        management and internal controls of the Corporation and its subsidiaries
        with
        the officers of the Corporation and with the independent auditor.
 
 Limitations
        on Committee’s Duties
 
 It
        is
        recognized that members of the Audit Committee are not full-time employees
        of
        the Corporation and do not represent themselves to be accountants or auditors
        by
        profession.  Each member of the Audit Committee shall be entitled to
        rely on (i) the integrity of those persons and organizations within and outside
        the Corporation from whom such member receives information, and (ii) the
        accuracy of the financial and other information provided to the Audit Committee
        by such persons or organizations absent actual knowledge to the
        contrary.
 
 While
        the
        Audit Committee has the responsibilities and power set forth in this Charter,
        it
        is not the duty of the Audit Committee to plan or conduct audits or to determine
        that the Corporation’s financial statements and disclosures are complete and
        accurate and are in accordance with generally accepted accounting principles
        and
        applicable rules and regulations. These are the responsibilities of either
        management and/or the independent auditor.
 
 In
        discharging its duties, each member of the Committee shall be obliged only
        to
        exercise the care, diligence and skill that a reasonably prudent person would
        exercise in comparable circumstances.
        Nothing in this Charter, including designating any member of the Committee
        as an
“audit committee financial expert” is intended, or should be determined to
        impose on any member of the Committee a standard of care or diligence that
        is in
        any way more onerous or extensive than the standard to which all members
        of the
        Board are subject.
 
 The
        essence of the Committee’s responsibilities is to monitor and review the
        activities described in this Charter to gain reasonable assurance (but not
        to
        ensure) that such activities are being conducted properly and effectively
        by the
        Corporation.
 
 Appendix
        "A"
 
 Position
          Description
 Chair
          of the Audit Committee
 
 In
        addition to the duties and responsibilities set out in the Board of Directors
        Charter and the Charter of the Audit Committee, the chair (the "Chair") of
        the
        Audit Committee (the "Committee) of MDS Inc. (the "Company") has the duties
        and
        responsibilities described below.  The Committee Chair
        will:
 
 1.
              Provide
                  overall leadership to enhance the effectiveness of the Committee,
                  including:
 
 a.
              Recommend
                  and oversee the appropriate structure, composition, membership
                  and
                  activities delegated to the Committee;
 
 b.
              Chair
                  all meetings of the Committee and manage agenda items so appropriate
                  consideration can be given to agenda items;
 
 c.
              Encourage
                  Committee members to ask questions and express viewpoints during
                  meetings;
 
 d.
              Schedule
                  and set the agenda for Committee meetings with input from other
                  Committee
                  members, the Chair of the Board of Directors and management as
                  appropriate;
 
 e.
              Facilitate
                  the timely, accurate and proper flow of information to and from
                  the
                  Committee;
 
 f.
              Arrange
                  for management, internal personnel, external advisors and others
                  to attend
                  and present at Committee meetings as appropriate;
 
 g.
              Arrange
                  sufficient time during Committee meetings to fully discuss agenda
                  items;
                  and
 
 h.
              Carry
                  out the responsibilities and duties of the Committee, as outlined
                  in its
                  Charter and review the Charter and duties and responsibilities
                  with
                  Committee members on a regular
                  basis.
 2.
              Foster
                  ethical and responsible decision-making by the Committee and its
                  individual members.
 
 3.
              Provide
                  for in-camera sessions at all scheduled meetings of the Committee.
 
 4.
              Following
                  each meeting of the Committee, report to the Board of Directors
                  on the
                  activities, findings and any recommendations of the Committee.
 
 5.
              Carry
                  out such other duties as may reasonably be requested by the Board
                  of
                  Directors.
  
 APPENDIX
        II
  DEFINITIONS
 
 Acronyms:
 AECL
              Atomic
                  Energy of Canada Limited is
                  a nuclear technology and services company providing services to
                  utilitiesworldwide.
                  AELC delivers a range ofnuclear servicesincluding
                  R&D
                  support, construction management, design and engineering to specialized
                  technology, waste management and decommissioning in support of
                  CANDU
                  reactor products.CNSC
              The
                    Canadian Nuclear Safety Commission is an independent federal
                    government
                    agency that regulates the use of nuclear energy and material
                    to protect
                    health, safety, security and the environment and to respect Canada’s
                    international commitments on the peaceful use of nuclear
                    energy.CRC
              A
                  Clinical Research Centre is a unit that manages patient studies
                  from
                  partnered sites within a defined investigator or patient-provider
                  location.  For example, a hospital having access to a group of
                  patients having particular conditions on which trials are being
                  conducted
                  may serve as a CRC.CRO
              A
                  Contract Research Organization is a company that conducts research
                  on
                  behalf of a pharmaceutical or biotechnology company.FDA
              Food
                  and Drug Administration – The US regulatory agency charged with
                  maintaining the safety of food, drugs, and cosmetics.FDG
              Fluorodeoxyglucose
                  (F18),
                  a short-lived isotope of
                  fluorine used predominantly in PET scans.GCP
                  and GLP
              Good
                  Clinical Practices and Good Laboratory Practices are standards
                  for the
                  conduct of clinical trials (including laboratory studies), the
                  data from
                  which are expected to be submitted to a regulatory agency such
                  as the
                  FDA.  In the case of GLP these practices are defined by
                  regulation.  GCP have arisen from general accepted clinical
                  practices within the industry.HEU
              Highly
                  enriched uranium is uranium that contains the isotope uranium 235
                  in a
                  concentration of 20% or more. Naturally occurring uranium has a
                  uranium235
                  content of about 0.7%.LC/MS
              A
                  form of analytical instrument that combines liquid chromatography
                  with
                  mass spectrometry.LEU
              Low
                  enriched uranium is uranium that contains the isotope uranium235
                  in a concentration 20% or less.MALDI
              A
                  form of mass spectrometer that uses matrix-assisted laser
                  desorption/ionization technology to give a more detailed measure
                  of the
                  molecular mass of a sample.NCE
              A
                  New Chemical Entity is a chemical compound being studied for possible
                  use
                  as a drug.  Compounds are generally referred to as NCEs until a
                  NDA is filed.NDA
              A
                  New Drug Application is submitted to the FDA reporting the results
                  of
                  clinical trials and must be approved by the FDA before marketing
                  can
                  begin.PET
              Positron
                  Emission Tomography – a diagnostic imaging technology that uses positron
                  emission to measure in detail the functioning of distinct areas
                  of the
                  human brain while the patient is comfortable, conscious and
                  alert.TOF
              A
                  form of mass spectrometry that uses differences in the transit
                  times of
                  molecules through a known distance to determine their molecular
                  weight.
  Technical
        Terms:
 Assay
              Analysis
                  of biological fluids or structure to determine how much or how
                  little drug
                  has been absorbed into the fluid or structure.Bioanalytical
              Methods
                  for determining the concentration of drugs in biological samples
                  such as
                  blood.Bioequivalence
              The
                  study of different formulations of the same drug to determine if
                  the
                  metabolic effects are equivalent.Biomarker
              A
                  distinctive biochemical or physiological indicator of a biological
                  process
                  or event.Biopharmaceuticals
              Pharmaceutical
                  products (drugs) developed using biotechnology instead of chemical
                  synthesis.Biotechnology
              The
                  scientific manipulation of living organisms, especially at the
                  molecular
                  genetic level, to produce useful products.Clinical
                  Trials
              Broadly,
                  the regulated process by which new drugs proceed after discovery
                  through
                  to acceptance for marketing to patients.  The term most
                  correctly refers to the period during which new compounds are tested
                  in
                  human subjects and encompasses the following broad phases:Phase
                  I
              Segment
                  of clinical trials research allocated to assessing the safety,
                  tolerance,
                  and pharmacokinetics of a NCE generally using otherwise healthy
                  study
                  subjects.Phase
                  II
              Segment
                  of clinical trials research allocated to assessing the safety and
                  efficacy
                  of a NCE in selected disease states using patients having the
                  condition.Phase
                  III
              Segment
                  of clinical trials research allocated to assessing the safety and
                  efficacy
                  of a NCE often in comparison with standard therapies, conducted
                  in an
                  expanded, multi-centre manner using patients having the
                  condition.Phase
                  IV
              Follow-on
                  clinical studies completed after the FDA has approved the NCE for
                  marketing.Cobalt-60
              A
                  radioactive isotope of cobalt containing one additional neutron
                  (electrically neutral particle) compared to cobalt in its natural
                  state.Cyclotron
              A
                  form of particle accelerator that can be used to produce
                  radioisotopes.Decay
              A
                  spontaneous radioactive process by which the number of radioactive
                  atoms
                  in a material decreases over time resulting in the release of a
                  defined
                  amount of radiant energy.E.
                  coli
              A
                  member of the family of microorganisms called coliforms.  Many
                  strains of E. coli live peacefully in the gut; however, one strain
                  (E.
                  coli 0157:H7) has been identified as the cause of a specific form
                  of
                  gastroenteritis characterized by abdominal cramps and bloody diarrhea,
                  leading to kidney failure and sometimes death.Efficacy
              Capacity
                  for producing a desired result or effect.Electron
                  (or E) Beam
              A
                  type of particle accelerator that creates a stream of high-energy
                  electrons.Gamma
                  Radiation
              Very
                  high-energy electromagnetic radiation that is released from the
                  decay of
                  radioactive sources.Genome
              The
                  entire genetic information present in a particular organism.Genomics
              The
                  study of the organization, structure and function of the
                  genomeHalf-life
              The
                  time required for radioisotopes to decay to one-half the level
                  of
                  radioactivity originally present.Ionization
              The
                  process by which neutral atoms become electrically charged by the
                  loss of
                  one or more electrons (electrically negative particles).Investigator
              The
                  individual from a clinic site who is ultimately in charge of a
                  study,
                  typically a physician.Irradiation
              The
                  process of exposing product to gamma radiation, or X-rays, or electrons
                  under controlled conditions.Isotope
              A
                  form of an element having the same number of protons (electrically
                  positive particles) but a different number of neutrons from its
                  ordinary
                  state.  Most elements exist in more than one isotopic form and
                  most isotopes are stable (unchanging).  Isotopes are typically
                  identified by an element name followed by a number.  (e.g.,
                  Molybdenum-99)Liquid
                  Chromatography
              A
                  separation technique in which the sample is injected into a liquid
                  stream
                  pumped at high pressure through a column packed with materials
                  which
                  absorb the components of the sample to varying extents, such that
                  over the
                  length of the column the components of the sample become separated
                  and are
                  detected sequentially by the mass spectrometer.Mass
                  Spectrometry
              The
                  science that measures the masses and relative concentrations of
                  atoms and
                  molecules to determine the make-up of the substance.Molybdenum-99
              The
                  most common isotope used for medical purposes.  It is processed
                  into technetium-99m for these purposes.Particle
                  Accelerator
              A
                  machine that increases the kinetic energy of electrons or protons
                  by
                  accelerating them through electric fields.Pharmacology
              The
                  study of drugs and their origins, nature, properties, and effects
                  on
                  living organisms.Pre-clinical
                  Studies
              Designates
                  those studies generally completed prior to human clinical
                  trials.Proteomics
              The
                  study of protein location, interaction, structure, and function
                  that aims
                  to identify and characterize the proteins present in normal versus
                  diseased states in biological samples.Radioisotopes
              An
                  isotope that is unstable and returns to a stable state through
                  the release
                  of energy in a process called decay.  MDS processes and
                  distributes radioisotopes for use in medical applications and for
                  sterilization processing.Radiopharmaceuticals
              A
                  specially designed pharmaceutical having as part of its ingredients
                  a
                  minute amount of a radioisotope.  After injection or ingestion,
                  the radiopharmaceutical is designed to collect in specific organs
                  or types
                  of cells such as tumour cells.Synthesis
              The
                  process of creating a molecule through chemical reaction.Target
              The
                  cells, tissues, or structures that a drug is intended to interact
                  with as
                  part of its pharmacological effect.Toxicology
                  (also called Safety Pharmacology)
              Toxicology
                  in the biomedical area is primarily concerned with the prediction
                  of
                  adverse effects in humans resulting from exposure to drugs as well
                  as the
                  demonstration of safety or hazard associated with their
                  use.





Document
      No. 2




CONSOLIDATED
      FINANCIAL STATEMENTS





Management’s
      Responsibility for Financial Reporting





The
      accompanying consolidated financial statements and management discussion and
      analysis ofMDS and
      all information in this annual report are the responsibility of management
      and
      have been approved by the Board of Directors.





The
      consolidated financial statements have been prepared by management in conformity
      with generally accepted accounting principles in the United States and Canada
      using the best estimates and judgments of management, where
      appropriate.  The most significant of these accounting principles are
      set out in notes 3 and 27 to the consolidated financial statements.





The
      MD&A has been prepared in accordance with National Instrument 51-102 of the
      Canadian Securities Administrators, taking into consideration other relevant
      guidance, including Regulation S-K of the US Securities and Exchange Commission
      (“SEC”).





MDS
      maintains systems of internal accounting and administrative controls designed
      to
      provide reasonable assurance that the financial information is relevant,
      reliable, accurate, and disclosed in a timely manner, and that the Company’s
      assets are appropriately accounted for and adequately
      safeguarded.  During the past year, management has continued to
      improve and document the design and operating effectiveness of internal control
      over financial reporting.  The results of management’s work have been
      subjected to audit by the shareholders’ auditors.  As at year end, we
      determined that internal control over financial reporting is not effective
      as
      disclosed in Management’s
      Annual Report on Internal Control over Financial Reportingstarting on
      page
      28.  In compliance with Section 302 of SOx, MDS’s Chief Executive
      Officer and Chief Financial Officer provided to the SEC a certification related
      to MDS’s annual disclosure document in the US (Form 40-F).  The same
      certification was provided to the Canadian Securities
      Administrators.





The
      Internal Auditor of the Company reviews and reports on MDS’s internal controls,
      including such testing as is deemed to be required.  The Internal
      Auditor has full and independent access to the Audit Committee of the Board
      of
      Directors.





The
      Board
      of Directors has appointed an Audit Committee consisting of five outside
      directors. The Committee meets regularly to review with management and the
      auditors any significant accounting, internal control and auditing matters,
      and
      to review and finalize the interim and annual financial statements of the
      Company along with the independent auditors’ report prior to the submission of
      the financial statements to the Board of Directors for final
      approval.





These
      consolidated financial statements have been audited by Ernst & Young LLP,
      which have been appointed as the auditors of the Company by the
      shareholders.  As auditors, Ernst & Young LLP obtain an
      understanding of MDS’s internal controls and procedures for financial reporting
      to plan and conduct such audit procedures as they consider necessary to express
      their opinion on the consolidated financial statements.  As auditors,
      Ernst & Young LLP has full and independent access to the Audit Committee to
      discuss their findings.





Stephen
                P. DeFalco
              President
                and Chief Executive Officer
              Toronto,
                Canada
              January
                22, 2008
            Douglas
                S. Prince
              Executive
                Vice-President and Chief Financial Officer
              Toronto,
                Canada
              January
                22, 2008





CONSOLIDATED
        FINANCIAL STATEMENTS
 
 Report
        of Independent Registered Public Accounting Firm on Internal
        Controls
 
 To
        the
        Shareholders and Board of Directors of MDS Inc.
 
 We
        have
        audited MDS Inc.’s internal control over financial reporting as of October 31,
        2007, based on criteria established in Internal Control—Integrated Framework
        issued by the Committee of Sponsoring Organizations of the Treadway Commission
        (the COSO criteria). MDS Inc.’s management is responsible for maintaining
        effective internal control over financial reporting, and for its assessment
        of
        the effectiveness of internal control over financial reporting included in
        the
        accompanying Management’s annual report on internal control over financial
        reporting.  Our responsibility is to express an opinion on the
        company’s internal control over financial reporting based on our
        audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether effective
        internal control over financial reporting was maintained in all material
        respects. Our audit included obtaining an understanding of internal control
        over
        financial reporting, assessing the risk that a material weakness exists,
        testing
        and evaluating the design and operating effectiveness of internal control
        based
        on the assessed risk, and performing such other procedures as we considered
        necessary in the circumstances. We believe that our audit provides a reasonable
        basis for our opinion.
 
 As
        indicated in the accompanying Management’s annual report on internal control
        over financial reporting, Management’s assessment of and conclusion on the
        effectiveness of internal control over financial reporting did not include
        the
        internal controls of Molecular Devices Corp., which is included in the 2007
        consolidated financial statements of MDS Inc. and constituted 4.6% and 4.6%
        of
        total and net assets, respectively, as of October 31, 2007 and 11.6% and
        2.1% of
        revenues and net income, respectively, for the year then ended.  Our
        audit of internal control over financial reporting of MDS Inc. also did not
        include an evaluation of internal control over financial reporting of Molecular
        Devices Corp.
 
 A
        company’s internal control over financial reporting is a process designed to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles. A company’s internal control over
        financial reporting includes those policies and procedures that (1) pertain
        to
        the maintenance of records that, in reasonable detail, accurately and fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company’s
        assets that could have a material effect on the financial
        statements.
 
 Because
        of its inherent limitations, internal control over financial reporting may
        not
        prevent or detect misstatements.  Also, projections of any evaluation
        of effectiveness to future periods are subject to the risk that controls
        may
        become inadequate because of changes in conditions, or that the degree of
        compliance with the policies or procedures may deteriorate.
 
 A
        material weakness is a deficiency, or combination of deficiencies, in internal
        control over financial reporting, such that there is a reasonable possibility
        that a material misstatement of the company’s annual or interim financial
        statements will not be prevented or detected on a timely basis. The following
        material weakness has been identified and included in management’s assessment.
        Management has reported a material weakness over the accounting for and
        disclosure of the fair value of compensation expense and period-end liabilities
        for certain stock-based incentive plans under SFAS 123(R). This material
        weakness was considered in determining the nature, timing, and extent of
        audit
        tests applied in our audit of the 2007 financial statements, and this report
        does not affect our report dated January 22, 2008 on those financial
        statements.
  In
        our
        opinion, because of the effect of the material weakness described above on
        the
        achievement of the objectives of the control criteria, MDS Inc. has not
        maintained effective internal control over financial reporting as
        of
 October
        31, 2007, based on the COSO criteria.
 
 
 
 Toronto,
        Canada
 January
        22, 2008
   
 Report
        of Independent Registered Public Accounting Firm
 
 To
        the
        Shareholders of MDS Inc.
 
 We
        have
        audited the consolidated statements of financial position of MDS Inc. (the
        “Company”) as at October 31, 2007 and 2006 and the consolidated statements of
        operations, shareholders’ equity and cash flows for each of the three years in
        the period ended October 31, 2007.  These financial statements are the
        responsibility of the Company’s Management.  Our responsibility is to
        express an opinion on these financial statements based on our
        audits.
 
 We
        conducted our audits in accordance with Canadian generally accepted auditing
        standards and the standards of the Public Company Accounting Oversight Board
        (United States).  Those standards require that we plan and perform an
        audit to obtain reasonable assurance whether the financial statements are
        free
        of material misstatement.  An audit includes examining, on a test
        basis, evidence supporting the amounts and disclosures in the financial
        statements.  An audit also includes assessing the accounting
        principles used and significant estimates made by Management, as well as
        evaluating the overall financial statement presentation.  We believe
        that our audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, these consolidated financial statements present fairly, in all material
        respects, the financial position of the Company as at October 31, 2007 and
        2006
        and the result of its operations and its cash flows for each of the three
        years
        in the period ended October 31, 2007 in conformity with U.S. generally accepted
        accounting principles.
 
 As
        discussed in Note 2(b), the Company has restated retained earnings and goodwill
        as at November 1, 2004.  In addition, as discussed in Note 2(a), the
        Company has changed its policy for the treatment of investment tax
        credits.  Further and as discussed in Note 3, effective October 31,
        2007, the Company adopted Statement of Financial Accounting Standards No.
        158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
        Plans.  As described in Note 2, the Company has adopted US GAAP in
        these financial statements.
 
 We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of the Company’s internal
        control over financial reporting as of October 31, 2007, based on criteria
        established in Internal Control – Integrated Framework issued by the Committee
        of Sponsoring Organizations of the Treadway Commission and our report dated
        January 22, 2008 expressed our opinion that MDS Inc. has not maintained
        effective internal control over financial reporting as of October 31,
        2007.
 
 
 
 Toronto,
        Canada
 January
        22, 2008
 
  
 CONSOLIDATED
                  STATEMENTS OF FINANCIAL POSITIONAs
                  at October 31
                (millions
                  of US dollars)
              
              2007
              2006
                (restated
                  – see note 2)ASSETSCurrent
                  AssetsCash
                  and cash equivalents
              $
              235
              $
              247Short-term
                  investments, net
              
              102
              
              135Accounts
                  receivable, net
              
              287
              
              224Unbilled
                  revenue
              
              99
              
              122Inventories,
                  net
              
              128
              
              80Income
                  taxes recoverable
              
              54
              
              42Current
                  portion of deferred tax assets
              
              45
              
              -Prepaid
                  expenses and other
              
              22
              
              21Assets
                  of discontinued operations
              
              1
              
              196Total
                  Current Assets
              
              973
              
              1,067Property,
                  plant and equipment, net
              
              386
              
              334Deferred
                  tax assets
              
              4
              
              47Long-term
                  investments and other
              
              290
              
              176Goodwill
              
              782
              
              397Intangible
                  assets, net
              
              583
              
              322Total
                  Assets
              $
              3,018
              $
              2,343LIABILITIES
                  AND SHAREHOLDERS' EQUITYCurrent
                  LiabilitiesAccounts
                  payable and accrued liabilities
              $
              384
              $
              237Deferred
                  revenue
              
              71
              
              92Income
                  taxes payable
              
              57
              
              8Current
                  portion of long-term debt
              
              94
              
              20Current
                  portion of deferred tax liabilities
              
              10
              
              -Liabilities
                  of discontinued operations
              
              -
              
              114Total
                  Current Liabilities
              
              616
              
              471Long-term
                  debt
              
              290
              
              374Deferred
                  revenue
              
              17
              
              17Other
                  long-term obligations
              
              30
              
              24Deferred
                  tax liabilities
              
              168
              
              103Total
                  Liabilities
              
              1,121
              
              989Shareholders’
                  EquityCommon
                  shares, at par  – Authorized shares: unlimited; Issued and
                  outstanding shares: 122,578,331 and 144,319,249 for 2007 and 2006,
                  respectively
              
              493
              
              566Additional
                  paid-in capital
              
              72
              
              69Retained
                  earnings
              
              842
              
              391Accumulated
                  other comprehensive income
              
              490
              
              328Total
                  Shareholders’ Equity
              
              1,897
              
              1,354Total
                  Liabilities and Shareholders’ Equity
              $
              3,018
              $
              2,343
 Incorporated
        under the Canada Business Corporations Act
 See
        accompanying notes
 
 On
        behalf
        of the Board:
 mayberry signature 2008 40fJohn
                  T. Mayberry, Director
              Robert
                  W. Luba, Director
   
 CONSOLIDATED
                  STATEMENTS OF OPERATIONSYears
                  ended October 31
                (millions
                  of US dollars except per share amounts)
              
              2007
              2006
              2005RevenuesProducts
              $
              564
              $
              438
              $
              396Services
              
              555
              
              517
              
              491Reimbursement
                  revenues
              
              91
              
              105
              
              95Total
                  revenues
              
              1,210
              
              1,060
              
              982Costs
                  and expensesDirect
                  cost of products
              
              (360)
              
              (296)
              
              (269)Direct
                  cost of services
              
              (338)
              
              (362)
              
              (321)Reimbursed
                  expenses
              
              (91)
              
              (105)
              
              (95)Selling,
                  general and administration
              
              (265)
              
              (220)
              
              (210)Research
                  and development
              
              (68)
              
              (53)
              
              (51)Depreciation
                  and amortization
              
              (79)
              
              (51)
              
              (47)Restructuring
                  charges - net
              
              (37)
              
              7
              
              (51)Other
                  expense - net
              
              (80)
              
              (36)
              
              (14)Total
                  costs and expenses
              
              (1,318)
              
              (1,116)
              
              (1,058)Operating
                  loss from continuing operations
              
              (108)
              
              (56)
              
              (76)Interest
                  expense
              
              (27)
              
              (21)
              
              (15)Interest
                  income
              
              25
              
              15
              
              9Mark-to-market
                  on interest note swaps
              
              1
              
              -
              
              (2)Equity
                  earnings
              
              53
              
              49
              
              41Loss
                  from continuing operations before income taxes
              
              (56)
              
              (13)
              
              (43)Income
                  taxes (expense) recovery-
                  current
              
              25
              
              65
              
              (1)-
                  deferred
              
              (2)
              
              (30)
              
              15Income
                  (loss) from continuing operations
              
              (33)
              
              22
              
              (29)Income
                  from discontinued operations - net of income tax
              
              806
              
              98
              
              22Net
                  income (loss)
              $
              773
              $
              120
              $
              (7)Basic
                  earnings per share
                -from
                  continuing
                  operations
              $
              (0.25)
              $
              0.15
              $
              (0.21)-
                  from discontinued operations
              
              6.12
              
              0.68
              
              0.16Basic
                  earnings per
                  share
              $
              5.87
              $
              0.83
              $
              (0.05)Diluted
                  earnings per
                  share
                -from
                  continuing
                  operations
              $
              (0.25)
              $
              0.15
              $
              (0.21)-from
                  discontinued
                  operations
              
              6.11
              
              0.68
              
              0.16Diluted
                  earnings per
                  share
              $
              5.86
              $
              0.83
              $
              (0.05)
 See
        accompanying notes
   CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY
 (millions
        of US dollars, except common shares in thousands)
 Accumulated
                  Other
              TotalCommon
              Shares
              AdditionalPaid-in
              Retained
              Comprehensive
              Shareholders’Shares
              Amount
              Capital
              Earnings
              Income
              Equity(#000s)
              $
              $
              $
                (restated
                  see note 2)
              $
              $
                (restated
                  see note 2)Balance
                  at October 31, 2004
              141,826
              $  526
              $  64
              $  316
              $  252
              $  1,158Other
                  comprehensive income:Net
                  loss
              
              
              
              (7)
              
              (7)Foreign
                  currency translation, net of tax
              
              
              
              
              20
              20Unrealized
                  loss on available-for-sale securities
              
              
              
              
              (6)
              (6)Reclassification
                  of realized losses, net of tax
              
              
              
              
              2
              2Dividends
              
              
              
              (15)
              
              (15)Issuance
                  of common shares
              443
              7
              
              
              
              7Repurchase
                  and cancellation of common  shares
              (799)
              (4)
              
              (7)
              
              (11)Stock
                  options exercised
              629
              6
              
              
              
              6Stock-based
                  compensation
              
              
              3
              
              
              3Balance
                  at October 31, 2005
              142,099
              535
              67
              287
              268
              1,157Other
                  comprehensive income:Net
                  income
              
              
              
              120
              
              120Foreign
                  currency translation
              
              
              
              
              61
              61Unrealized
                  loss on available-for-sale securities, net of tax
              
              
              
              
              (10)
              (10)Reclassification
                  of realized losses, net of tax
              
              
              
              
              9
              9Dividends
              
              
              
              (16)
              
              (16)Issuance
                  of common shares
              361
              7
              
              
              
              7Stock
                  options exercised
              1,859
              24
              
              
              
              24Stock-based
                  compensation
              
              
              2
              
              
              2Balance
                  at October 31, 2006
              144,319
              566
              69
              391
              328
              1,354Other
                  comprehensive income:Net
                  income
              
              
              
              773
              
              773Foreign
                  currency translation, net of tax
              
              
              
              
              183
              183Unrealized
                  loss on available-for-sale securities
              
              
              
              
              (3)
              (3)Unrealized
                  gain on derivatives designated as cash flow hedges, net of
                  tax
              
              
              
              
              8
              8Reclassification
                  of realized gains, net of tax
              
              
              
              
              (4)
              (4)Adoption
                  of FAS 158, net of tax
              
              
              
              
              11
              11Dividends
              
              
              
              (4)
              
              (4)Issuance
                  of common shares
              108
              2
              
              
              
              2Repurchase
                  and cancellation of common  shares
              (22,831)
              (90)
              
              (318)
              (33)
              (441)Stock
                  options exercised
              982
              15
              (1)
              
              
              14Stock-based
                  compensation
              
              
              4
              
              
              4Balance
                  at October 31, 2007
              122,578
              $  493
              $  72
              $  842
              $  490
              $  1,897
 See
        accompanying notes
   CONSOLIDATED
                  STATEMENTS OF CASH FLOWSYears
                  ended October 31
                (millions
                  of US dollars)
              
              2007
              2006
              2005Cash
                  flows from operating activitiesNet
                  income (loss)
              $
              773
              $
              120
              $
              (7)Income
                  from discontinued operations - net of tax
              
              806
              
              98
              
              22Income
                  (loss) from continuing operations
              
              (33)
              
              22
              
              (29)Adjustments
                  to reconcile net income to cash provided by operating
                  activities
                relating
                  to continuing operationsItems
                  not affecting current cash flow
              
              128
              
              94
              
              76Net
                  changes in non-cash working capital balances relating to
                  operations
              
              83
              
              (91)
              
              1Cash
                  provided by operating activities of continuing operations
              
              178
              
              25
              
              48Cash
                  provided by (used in) operating activities of discontinued
                  operations
              
              (56)
              
              104
              
              65122
              
              129
              
              113Investing
                  activitiesAcquisitions
              
              (600)
              
              -
              
              (5)Proceeds
                  from MAPLE interest
              
              -
              
              24
              
              -Purchases
                  of property, plant and equipment
              
              (71)
              
              (51)
              
              (102)Proceeds
                  on sale of property, plant and equipment
              
              4
              
              -
              
              -Proceeds
                  from sale of businesses and investments
              
              13
              
              5
              
              -Proceeds
                  on sale of short-term investment
              
              165
              
              -
              
              -Purchases
                  of short-term investments
              
              (118)
              
              (135)
              
              -Other
              
              (15)
              
              (11)
              
              (3)Cash
                  used in investing activities of continuing operations
              
              (622)
              
              (168)
              
              (110)Cash
                  provided by (used in) investing activities of discontinued
                  operations
              
              929
              
              73
              
              (2)Financing
                  activitiesRepayment
                  of long-term debt
              
              (18)
              
              (7)
              
              -Increase
                  (decrease) in deferred revenue and other long-term
                obligations
              
              (2)
              
              (7)
              
              (5)Payment
                  of cash dividends
              
              (3)
              
              (13)
              
              (11)Issuance
                  of shares
              
              15
              
              26
              
              9Repurchase
                  of shares
              
              (441)
              
              -
              
              (11)Cash
                  used in financing activities of continuing operations
              
              (449)
              
              (1)
              
              (18)Cash
                  used in financing activities of discontinued operations
              
              (2)
              
              (12)
              
              (11)Effect
                  of foreign exchange rate changes on cash and cash
                  equivalents
              
              10
              
              11
              
              4Increase
                  (decrease) in cash and cash equivalents during the year
              
              (12)
              
              32
              
              (24)Cash
                  and cash equivalents, beginning of year
              
              247
              
              215
              
              239Cash
                  and cash equivalents, end of year
              $
              235
              $
              247
              $
              215Cash
                  interest paid
              $
              22
              $
              21
              $
              20Cash
                  taxes paid
              $
              15
              $
              9
              $
              18
 See
        accompanying notes
   NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
 [
        All tabular amounts in millions of US dollars, except where noted]
 
 
 1.
              Nature
                  of Operations
 
 MDS
        Inc.
        (MDS or the Company) is a Canadian-based global life sciences company that
        provides market-leading products and services that its customers need for
        the
        development of drugs and the diagnosis and treatment of disease. The Company
        is
        a leading global provider of pharmaceutical contract research, medical isotopes
        for molecular imaging, radiotherapeutics, and analytical instruments. The
        Company has three business segments: MDS Pharma Services (MDSPS), which provides
        pharmaceutical contract research; MDS Nordion, which is focused on molecular
        imaging and radiotherapeutics; and MDS Analytical Technologies (MDS AT),
        which
        involves the development, manufacture, and sale of analytical instruments.
        In
        2007, the Company acquired Molecular Devices Corporation , which was combined
        with MDS Sciex to form MDS Analytical Technologies. (See Note 4)
 
 The
        Company’s customers include a broad range of manufacturers of medical products
        including pharmaceutical manufacturers, biotechnology companies, and
        manufacturers of medical supplies and devices, in addition
        to  academic and government institutions.  These customers
        are located in essentially all major international markets.
 
 2.
              Changes
                  Affecting Fiscal 2007 Consolidated Financial Statements
 
 a)
              Change
                  in reporting currency and generally accepted accounting principles
 As
        a Canadian-based company,MDS historically has
        prepared its consolidated financial statements in Canadian dollars in conformity
        with accounting principles generally acceptedinCanadaand
        has also provided a reconciliation
        to United States (US) generally accepted accounting principles
        (GAAP).
 
 To
        enhance its communication with its
        shareholders, improve comparability of financial information with its
        competitors and peer group, and promote a common financial language within
        MDS,beginningwith
        its fiscal 2007 year-end, the
        Company adopted the US dollar as its reporting currency and US GAAP as its
        primary reporting standard for the presentation of its consolidated financial
        statements.  All comparative financial information contained herein
        has been revised to reflect the Company’s results as if they had been
        historically reported in US dollars and in accordancewith US GAAP(SeeNote
        27–Canadian
        GAAP Supplemental Information).
 
 All
        revenues, expenses and cash flows
        for each year were translated into the reporting currency using average rates
        for the year, or the rates in effect at the date of the transaction for
        significant transactions. Assets and liabilities were translated using the
        exchange rate at the end of each year.  All resulting exchange
        differences are reported as a separate component of accumulated other
        comprehensive income.  The functional currency of each of the
        Company’s operations is unchanged.  Assets and liabilities of the
        Company’s operations having a functional currency other than US dollars are
        consolidated and translated into US dollars using the exchange rate in effect
        at
        the end of the period, and revenues and expenses are translated at the average
        rate during the period.
 
 The
        cumulative impact of the change in reporting currency was to increase the
        cumulative translation adjustment by $371 million through October 31,
        2006.
 
 In
        addition, in adopting US GAAP, the Company has changed its accounting policy
        for
        non-refundable investment tax credits (ITCs). In these consolidated financial
        statements, the Company has recorded non-refundable ITCs as a reduction in
        income tax expense for the year in which the ITC is recognized. Previously,
        the
        Company recorded non-refundable ITCs as a reduction of the related expenditure.
        Management believes this accounting policy change will make the Company’s
        reporting of ITCs consistent with the majority of other
        companies.
  There
        is
        no impact on net income from continuing operations, earnings per share, or
        retained earnings of any period as a result of this change. This change in
        policy increased (decreased) other lines on the statements of operations
        as
        follows:
 
 2007
              
              2006
              
              2005Direct
                  cost of
                  services
              $
              6
              $
              12
              $
              6Research
                  and
                  development
              
              5
              
              7
              
              4Other
                  expense –
                  net
              
              6
              
              27
              
              -Current
                  income
                  taxes
              
              (17)
              
              (46)
              
              (10)
 
 b)
              Correction
                  of prior period figures
 As
        a
        result of adopting US GAAP as the primary reporting standard for the Company,
        management has determined that investment tax credits (ITCs) having an after-tax
        value of $13 million realized in its fiscal year ended October 31, 2001 and
        resulting from its acquisition of Phoenix International Life Sciences Inc.
        in
        the previous year had not been identified as a net income reconciliation
        item in
        the GAAP reconciliation note for fiscal 2001.
 
 Under
        Canadian GAAP, acquired ITCs that are determined to have nil value for purposes
        of purchase price allocation are, if subsequently realized, recorded as income.
        Under US GAAP, such acquired ITCs are recorded when realized as a reduction
        in
        goodwill arising from that prior period acquisition. This item should therefore
        have been identified as a US GAAP net income reconciliation item in fiscal
        2001.
        In subsequent periods, the reported amount of goodwill and retained earnings
        for
        US GAAP purposes were likewise overstated by this amount. The Company has
        corrected this error by restating opening retained earnings for fiscal 2005
        in
        the accompanying consolidated statement of shareholders’ equity and reducing the
        carrying value of goodwill by $13 million.  The impact of this
        restatement has been similarly reflected for subsequent periods.
 
 c)
              Other
                  adjustments
 MDS
        has
        adopted the provisions of Staff Accounting Bulletin No. 108 – Considering the Effects
        of Prior
        Year Misstatements when Quantifying Misstatements in Current Year Financial
        Statements. In accordance with the provisions of SAB No. 108, the Company
        has recorded a cumulative adjustment to correct the treatment of certain
        deferred charges and related income tax expenses. The adjustments resulted
        in an
        increase in fiscal 2005 opening retained earnings of $2 million and an
        adjustment to the tax expense associated with prior year deferred charges
        that
        reduced fiscal 2005 opening retained earnings by $4 million. The cumulative
        net
        effect of these adjustments on retained earnings as at November 1, 2004 is
        a
        reduction of $2 million. In addition, the Company has recorded a $6 million
        reduction in November 1, 2004 retained earnings and a corresponding increase
        in
        additional paid-in capital to correct an amount that had previously been
        misclassified in the continuity of retained earnings.
 
 The
        impact of each of these adjustments is considered to be immaterial on all
        reported periods. Aside from the impact on opening retained earnings for
        fiscal
        2005, these adjustments had no impact on other figures for the periods contained
        in these consolidated financial statements.
 
 3.
              Summary
                  of Significant Accounting Policies
 
 Basis
        of presentation
 The
        consolidated financial statements have been prepared by the Company in US
        dollars and in accordance with US GAAP applied on a consistent
        basis.  These policies are consistent with accounting policies
        generally accepted in Canada (Canadian GAAP) in all material respects except
        as
        described in Note 27.
 
 Principles
        of consolidation
 The
        consolidated financial statements include the accounts of all entities
        controlled by the Company, which are referred to as subsidiaries.  The
        Company has no interests in variable interest entities of which the Company
        is
        the primary beneficiary. All significant inter-company accounts and transactions
        have been eliminated.
 
 The
        equity method of accounting is used for investments in entities for which
        the
        Company does not have the ability to exercise control, but has significant
        influence, and entities which are jointly owned and controlled (referred
        to as
        joint ventures).
  Use
        of estimates
 The
        preparation of the consolidated financial statements in conformity with US
        GAAP
        requires management to make estimates and assumptions. These estimates and
        assumptions affect the reported amounts of assets and liabilities and disclosure
        of contingent assets and liabilities at the date of the consolidated financial
        statements and the reported amounts of revenue and expenses during the reporting
        period.  Estimates are used in accounting for, among other items,
        revenues from long-term contracts, inventory valuation, residual values of
        leased assets, allowance for credit losses on receivables, the amount and
        timing
        of future cash flows expected to be received on long-term investments, actuarial
        assumptions for the pension and other post-employment benefit plans, future
        cash
        flows associated with goodwill and long-lived asset valuations, and
        environmental and warranty reserves. The Company’s estimates are based on the
        facts and circumstances available at the time estimates are made, historical
        experience, risk of loss, general economic conditions and trends, and the
        Company’s assessments of the probable future outcomes of these matters. Actual
        results could differ from those estimates. Estimates and assumptions are
        reviewed periodically, and the effects of changes, if any, are reflected
        in the
        consolidated statement of operations in the period that they are
        determined.
 
 Cash
        and cash equivalents
 Cash
        and
        cash equivalents include cash on hand, balances with banks, demand deposits,
        and
        investments with maturities of three months or less at the time the investment
        is made.  The fair value of cash and cash equivalents approximates the
        amounts shown in the consolidated financial statements.
 
 Short-term
        investments
 Short-term
        investments are investments with original maturities of greater than three
        months and less than one year at the time the investment is made.
 
 The
        Company accounts for its short-term investments in accordance with SFAS No.
        115,
“Accounting for Certain Investments in Debt and Equity Securities.” Short-term
        investments included securities that are classified as available-for-sale
        and
        are reported at fair value.
 
 Realized
        gains and losses on securities are included in income and are determined
        using
        the specific identification method. Unrealized holding gains and losses on
        securities classified as available-for-sale are excluded from income and
        are
        reported in accumulated other comprehensive income, net of related income
        taxes.
 
 Allowance
        for doubtful accounts
 The
        Company maintains bad debt reserves based on a variety of factors, including
        the
        length of time the receivables are past due, macroeconomic conditions,
        significant one-time events, historical experience and the financial condition
        of customers.  The Company records a specific reserve for individual
        accounts when it becomes aware of a customer’s inability to meet its financial
        obligations, such as in the case of bankruptcy filings or deterioration in
        the
        customer’s operating results or financial position.  If circumstances
        related to a customer change, the Company would further adjust estimates
        of the
        recoverability of receivables.
 
 Inventories
 Inventories
        of raw materials and supplies are recorded at the lower of cost, determined
        on a
        first-in, first-out (FIFO) basis, or market.  Finished goods and work
        in process include the cost of material, labor and manufacturing overhead
        and
        are recorded on a FIFO basis at the lower of cost or market.
 
 Property,
        plant, and equipment
 Property,
        plant and equipment, including assets under capital leases, are carried in
        the
        accounts at cost less accumulated depreciation.  Gains and losses
        arising on the disposal of individual assets are recognized in income in
        the
        period of disposal.
 
 The
        costs
        associated with modifications to facilities owned by others to permit isotope
        production are deferred and recorded as facility modifications and amortized
        over the expected contractual production.
  Costs,
        including financing charges and certain design, construction and installation
        costs, related to assets that are under construction and are in the process
        of
        being readied for their intended use are recorded as construction in progress
        and are not subject to depreciation.
 
 Depreciation,
        which is recorded from the date on which each asset is placed into service,
        is
        generally provided for on a straight-line basis over the estimated useful
        lives
        of the property, plant and equipment as follows:
 
 Buildings
              25
                  – 40 years
 Equipment
              3
–
                  10 years
 Furniture
                  and fixtures
              3
–
                  10 years
 Computer
                  systems
              3
–
                  7 years
 Leaseholds
                  improvements
              Term
                  of the lease plus renewal periods, when renewal is reasonably assured
 
 Capitalized
        software
 The
        Company accounts for internal-use software in accordance with the provisions
        of
        AICPA Statement of Position (SOP) No. 98-1, “Accounting for the Costs of
        Computer Software Developed or Obtained for Internal Use”, which requires
        capitalization of certain internal and external costs incurred to acquire
        or
        create internal use software, principally related to software coding, designing
        system interfaces, and installation and testing of the software. Costs incurred
        in the preliminary project stage and the post-implementation stage are expensed
        as incurred.  The Company amortizes capitalized costs using the
        straight-line method over the estimated useful life of the software, generally
        over a period of three to seven years.
 
 Goodwill
 All
        business combinations are accounted for using the purchase
        method.  Goodwill represents the excess of the purchase price and
        related costs over the fair value assigned to the net tangible and intangible
        assets of the business acquired.  In accordance with SFAS No. 142,
“Goodwill and Other Intangible Assets”, goodwill is not amortized but is tested
        for impairment, at least annually, at the business segment level.
 
 An
        assessment of the recoverability of goodwill is performed by the Company
        each
        fiscal year.  This same impairment test will be performed at other
        times during the course of the year should an event occur which suggests
        that
        the recoverability of goodwill should be reconsidered.
 
 Intangible
        assets
 Intangible
        assets consist of acquired technology, brands, acquired supply agreements
        and
        license rights.  Intangible assets acquired through asset acquisitions
        or business combinations and are initially recognized at fair value based
        on an
        allocation of the purchase price.
 
 Supply
        agreements and license rights are amortized on a straight-line basis over
        their
        useful life, which is the term of the supply agreement or license
        right.  Acquired technology represents the value of proprietary
‘‘know-how’’ that was technologically feasible as of the acquisition
        date.  Acquired technology is amortized on a straight-line basis over
        its estimated useful life, which ranges between two and seven
        years.
 
 Brands
        represent the value placed on a corporate brand as well as the product brands
        used to promote the Company and its products in the marketplace.  The
        acquired brands have definite lives and are amortized on a straight line
        basis
        over their estimated useful life.
 
 The
        Company evaluates the reasonableness of the estimated useful lives of these
        intangible assets on an annual basis.
 
 In
        accordance with SFAS No. 141 “Business Combinations”, MDS immediately expenses
        acquired in-process research and development.
  Impairment
        of long-lived assets
 The
        Company evaluates the carrying value of long-lived assets, including property,
        plant and equipment, for potential impairment when events and circumstances
        warrant a review in accordance with SFAS No. 144, “Accounting for Impairment or
        Disposal of Long-Lived Assets”. Factors that the Company considers important
        that could trigger an impairment review include, but are not limited to,
        significant underperformance relative to historical or projected future
        operating results, significant changes in the manner of use of the acquired
        assets or the strategy for the Company’s overall business, significant negative
        industry or economic trends, a significant decline in the Company's stock
        price
        for a sustained period, and the Company’s market capitalization relative to its
        net book value.
 
 The
        carrying value of a long-lived asset is considered impaired when the anticipated
        net recoverable amount of the asset is less than its carrying
        value.  In that event, a loss is recognized in an amount equal to the
        difference between the carrying value and fair value less costs of disposal
        by a
        charge to income.  The anticipated net recoverable amount for a
        long-lived asset is an amount equal to the anticipated undiscounted cash
        flows
        net of directly attributable general and administration costs, carrying costs,
        and income taxes, plus the expected residual value, if any.
 
 When
        required, the fair values of long-lived assets are estimated using accepted
        valuation methodologies, such as discounted future net cash flows, earnings
        multiples, or prices for similar assets, whichever is most appropriate under
        the
        circumstances.
 
 Long-term
        investments
 The
        Company accounts for long-term investments where it has the ability to exercise
        significant influence using the equity method of accounting in accordance
        with
        Accounting Principles Board Opinion (APB) No.18, “The Equity Method of
        Accounting for Investments in Common Stock.”.  In situations where the
        Company does not exercise significant influence over a long-term investee
        that
        is not publicly listed, the investments are recorded at
        cost.  Investments in public companies are accounted for at fair
        value.  The Company periodically reviews these investments for
        impairment.  In the event the carrying value of an investment exceeds
        its fair value and the decline in fair value is determined to be other than
        temporary, the Company writes down the value of the investment to its fair
        value.
 
 Leases
 Leases
        entered into by the Company in which substantially all of the benefits and
        risks
        of ownership are transferred to the Company are recorded as obligations under
        capital leases, and under the corresponding category of property, plant and
        equipment.  Obligations under capital leases reflect the present value
        of future lease payments, discounted at an appropriate interest rate, and
        are
        reduced by rental payments net of imputed interest.  Property, plant,
        and equipment under capital leases is depreciated based on the useful life
        of
        the asset.  All other leases are classified as operating leases and
        leasing costs, including any rent holidays, leasehold incentives, and rent
        concessions, are amortized on a straight-line basis over the lease
        term.
 
 Revenue
        recognition
 Revenues
        are recorded when title to goods passes or services are provided to customers,
        the price is fixed or determinable, and collection is reasonably
        assured.  For the majority of product revenues, title passes to the
        buyer at the time of shipment and revenue is recorded at that time.
 
 Certain
        services are provided to customers on a per-unit pricing
        basis.  Revenues for such services are recognized when the service has
        been performed and a contractual right to bill exists.
 
 A
        significant portion of the Company’s pharmaceutical research services revenues
        are provided under the terms of long-term contracts that can extend from
        several
        months to several years.  Revenues on these contracts are recognized
        using the percentage-of-completion method based on a proportional performance
        basis using output as a measure of performance.  Losses, if any, on
        these contracts are provided for in full at the time such losses are
        identified.  Services performed in advance of billings are recorded as
        unbilled revenue pursuant to the contractual terms.  In general,
        amounts become billable upon the achievement of certain milestones or in
        accordance with predetermined payment schedules.  Changes in the scope
        of work generally result in a renegotiation of contract
        terms.  Renegotiated amounts are not included in net revenues until
        earned and realization is assured.  Billings in excess of services
        performed to date or in excess of costs plus estimated profits on contracts
        in
        progress are recorded as deferred revenue.  Customer advances on
        contracts in progress are shown as liabilities.
  The
        Company recognizes revenue and related costs for arrangements with multiple
        deliverables, such as equipment and installation, as each element is delivered
        or completed based upon its relative fair value.  If fair value is not
        available for any undelivered element, revenue for all elements is deferred
        until delivery is completed.  When a portion of the customer’s payment
        is not due until installation or acceptance, the Company defers that portion
        of
        the revenue until completion of installation or acceptance has been
        obtained.  Revenues for training are deferred until the service is
        completed.  Revenues for extended service contracts are recognized
        ratably over the contract period.  Provisions for discounts,
        warranties, rebates to customers, returns and other adjustments are provided
        for
        in the period the related sales are recorded.
 
 Reimbursement
        revenues
 In
        connection with the management of clinical trials, the Company pays, on behalf
        of its customers, fees to physicians and medical establishments acting as
        clinical trial investigators, fees to certain volunteers in clinical trials,
        as
        well as other out-of-pocket costs for items such as travel, printing, meetings
        and couriers. The Company is reimbursed at cost, without mark-up or profit,
        for
        these expenditures. In connection with the requirements of the EITF Issue
        No.
        01-14, “Income Statement Characterization of Reimbursements Received for
        "Out-of-Pocket" Expenses Incurred”, amounts paid to volunteers and other
        out-of-pocket costs are reflected in operating expenses as reimbursed expenses,
        while the reimbursements due are reported as reimbursement revenues in the
        consolidated statements of operations.
 
 Revenue
        and expense associated with fees paid to investigators and the associated
        reimbursement are netted in the consolidated statements of operations because
        the Company acts as an agent on behalf of the pharmaceutical company sponsors
        with regard to investigator payments. During the years ended October 31,
        2005,
        2006 and 2007, these fees were approximately $32 million, $38 million and
        $63
        million, respectively.
 
 Warranty
        costs
 A
        provision for warranties is recognized when the underlying products or services
        are recorded as revenues. The provision is based on estimated future costs
        using
        historical labor and material costs to estimate costs that will be incurred
        in
        the warranty period.  As at October 31, 2007, the reserve for warranty
        costs was $2 million (2006 –
 $3
        million).
 
 Stock-based
        compensation
 The
        Company accounts for its stock-based compensation in accordance with the
        provisions of SFAS No. 123R, “Share Based Payment”. The fair value of stock
        options granted on and after November 1, 2003 is recognized as compensation
        expense on a straight-line basis over the applicable stock option vesting
        period.  The expense is included in selling, general, and
        administration expenses in the consolidated statements of operations and
        as
        additional paid-in capital grouped within shareholders’ equity on the
        consolidated statements of financial position.  The consideration
        received on the exercise of stock options is credited to share capital at
        the
        time of exercise along with the associated amount of additional paid-in
        capital.
 
 Certain
        incentive compensation plans of the Company base the determination of
        compensation to be paid in the future on the price of the Company’s publicly
        traded shares at the time of payment.  Expenses related to these plans
        are recorded as a liability and charged to income over the period in which
        the
        amounts are earned, based on an estimate of the current fair value of amounts
        that will be paid in the future.
 
 Pension,
        post-retirement and other post-employment benefit plans
 The
        Company offers a number of benefit plans that provide pension and other
        post-retirement benefits.  The current service cost of benefit plans
        is charged to income.  Cost is computed on an actuarial basis using
        the projected benefits method and based on management’s best estimates of
        investment yields, salary escalation and other factors.
 
 The
        expected costs of post-employment benefits, other than pensions, for active
        employees are accrued in the consolidated financial statements during the
        years
        in which employees provide service to the Company.  Adjustments
        resulting from plan amendments, experience gains and losses, or changes in
        assumptions are amortized over the remaining average service term of active
        employees.  Other post-employment benefits are recognized when the
        event triggering the obligation occurs.
  On
        October 31, 2007, the Company adopted the recognition and disclosure
        requirements of  SFAS No. 158, “Employers’ Accounting for Defined
        Benefit Pension and Other Post-Retirement Plans—an amendment of FASB Statements
        No. 87, 88, 106, and 132(R)”. This statement requires employers that sponsor
        defined benefit plans to recognize the funded status of a benefit plan on
        its
        balance sheet; recognize gains, losses, and prior service costs or credits
        that
        arise during the period that are not recognized as components of net periodic
        benefit cost as a component of accumulated other comprehensive income, net
        of
        tax; measure defined benefit plan assets and obligations as of the date of
        the
        employer’s fiscal year-end balance sheet; and, disclose in the notes to
        financial statements additional information about certain effects on net
        periodic benefit cost for the next fiscal year that arise from delayed
        recognition of the gains or losses, prior service costs or credits, and
        transition assets or obligations.
 
 Research
        and development (R&D)
 The
        Company conducts various R&D programs and incurs costs related to these
        activities, including employee compensation, materials, professional services,
        facilities costs, and equipment depreciation.  R&D costs are
        expensed in the periods in which they are incurred.
 
 Income
        taxes
 The
        Company accounts for income taxes under the liability method according to
        SFAS
        No. 109 “Accounting for Income Taxes”. Deferred tax assets and liabilities are
        recognized for future tax consequences attributable to differences between
        the
        financial statement carrying amounts of existing assets and liabilities and
        their respective tax bases. Deferred tax assets and liabilities are measured
        using enacted tax rates expected to apply to taxable income in the years
        in
        which those temporary differences are expected to be recovered or settled.
        The
        Company provides a valuation allowance against its deferred tax assets when
        it
        believes that it is more likely than not that the asset will not be
        realized.
 
 Investment
        tax credits related to the acquisition of assets are deferred and amortized
        to
        income on the same basis as the related assets, while those related to current
        expenses are included in the determination of income for the
        year.  All non-refundable investment tax credits recognized in income
        are recorded as a  reduction in income tax expense for the
        year.  Refundable tax credits are recorded as a reduction in the
        related expense.
 
 Earnings per
        share
 Basic
        earnings per share is calculated by dividing net income by the
        weighted average number of common shares outstanding during the
        year.
 
 Diluted
        earnings per share has been calculated using the treasury stock method, by
        dividing net income available to common shareholders by the sum of the weighted
        average number of common shares outstanding and all additional common shares
        that would have been outstanding shares arising from the exercise of potentially
        dilutive stock options during the year.  This method computes the
        number of incremental shares by assuming the outstanding stock options are
        exercised, then reduced by the number of common shares assumed to be repurchased
        from the total of issuance proceeds plus future period compensation expense
        on
        options granted on or after November 1, 2003, using the average market price
        of
        the Company’s common shares during the applicable period.
 
 Foreign
        currency translation
 Although
        the company reports its financial results in US dollars, the functional currency
        of the Company’s Canadian operations is Canadian dollars and the functional
        currencies of the Company’s foreign subsidiaries are their local currencies. In
        accordance with SFAS No. 52, “Foreign Currency Translation”, the financial
        statements of these subsidiaries are translated into U.S. dollars as follows:
        assets and liabilities at year-end exchange rates; revenues, expenses and
        cash
        flows at average exchange rates for the period; and the Company’s net investment
        in foreign subsidiaries at historical exchange rates. The resulting translation
        adjustment is recorded as a component of accumulated other comprehensive
        income
        in the accompanying statement of financial position. Exchange gains and losses
        on foreign currency transactions are recorded in income. The Company recorded
        an
        exchange loss in the consolidated statements of operations of $16 million
        in
        2007, $3 million in 2006, and $1 million in 2005.
 
 Exchange
        gains or losses arising on translation of the Company's net equity investments
        in these foreign subsidiaries and those arising on translation of foreign
        currency long-term liabilities designated as hedges of these investments
        are
        recorded as other comprehensive income. Upon reduction of the Company’s
        investment in the foreign subsidiary, due to a sale or complete or substantially
        complete liquidation, the amount included in accumulated other comprehensive
        income is recognized in income.
  Derivative
        financial instruments
 The
        Company operates globally, which gives rise to risks that its income and
        cash
        flows may be adversely impacted by fluctuations in foreign exchange rates
        and
        interest rates.  In order to manage or hedge these risks, the Company
        enters into foreign currency forward contracts, foreign currency option
        contracts, and interest rate swap contracts.  These are considered to
        be derivative financial instruments. The Company does not use derivative
        financial instruments for trading or speculative purposes.
 
 When
        derivatives are designated as hedges, the Company classifies them either
        as: (i)
        hedges of the change in the fair value of recognized assets or liabilities
        or
        firm commitments (fair value hedges); (ii) hedges of the variability in highly
        probable future cash flows attributable to a recognized asset or liability,
        or a
        forecasted transaction (cash flow hedges); or (iii) hedges of net investments
        in
        a foreign operation (net investment hedges).
 
 The
        effective portion of foreign currency gains and losses on contracts used
        to
        hedge anticipated foreign currency denominated sales are recognized as an
        adjustment to revenues when the sale is recorded.
 
 Interest
        rate swap contracts may be used as part of the Company’s program to manage the
        fixed and floating interest rate mix of the Company’s total debt portfolio and
        the overall cost of borrowing.  Interest rate contracts involve the
        periodic exchange of payments without the exchange of the notional principal
        amount upon which the payments are based. The effective portion, if any,
        of the
        change in derivative fair value is included in accumulated other comprehensive
        income until the hedged transactions occur. At that time, the amount is
        reclassified into income. The change in the derivative’s fair value attributable
        to the ineffective portion, together with the time value that is excluded
        from
        the assessment of effectiveness, is included in earnings in the
        period.
 
 The
        Company documents all relationships between hedging instruments and hedged
        items
        contemporaneously, at the inception of the hedge as well as the risk management
        objectives and strategy for undertaking various hedge
        transactions.  This process includes linking all derivatives to
        specific assets and liabilities on the consolidated statements of financial
        position or to specific firm commitments or forecasted
        transactions.  The Company also assesses, both at the inception of the
        hedge and on an ongoing basis, whether the derivatives that are used are
        effective in offsetting changes in the fair values or the cash flows of hedged
        items.
 
 The
        Company records derivatives as assets and liabilities measured at fair
        value.  For a derivative designated as a fair value hedge, changes in
        the fair value of the derivative and of the hedged item attributable to the
        hedged risk are recognized in income in the period in which the changes
        occur.  For a derivative designated as a cash flow hedge, the
        effective portions of changes in the fair value of the derivative are recorded
        in accumulated other comprehensive income and are recognized in income when
        the
        hedged item affects the statements of operations  Ineffective portions
        of changes in the fair value of the derivative in a cash flow hedge are
        recognized in other income (expense) in the period in which the changes
        occur.  If the derivative has not been designated as an accounting
        hedge relationship or if a designated hedging relationship is no longer highly
        effective, changes in the fair value of the derivative are recognized in
        income
        beginning in the period in which the changes occur.
 
 When
        a
        fair value hedging relationship is terminated upon the sale of a derivative,
        or
        the hedging relationship is de-designated, the fair value basis adjustment
        recorded on the hedged item is recognized in the same manner as the other
        components of the hedged item.  For a cash flow hedge that is
        terminated because the derivative is sold, expired or the relationship is
        de-designated, the unrealized gain on loss remains in accumulated other
        comprehensive income until the hedged item affects the statement of
        operations.  If a cash flow or fair value hedging relationship is
        terminated because the underlying hedged item is repaid or is sold, or it
        is no
        longer probable that the hedged forecasted transaction will occur, the
        accumulated balance in the accumulated other comprehensive income or the
        fair
        value basis adjustment recorded on the hedged item is recorded immediately
        in
        income.
 
 Non-monetary
        transactions
 In
        accordance with SFAS 153-“Exchanges of Non-Monetary Assets”, all non-monetary
        transactions are measured at the fair value of the asset surrendered or the
        asset received, whichever is more reliable, unless the transaction lacks
        commercial substance.  The commercial substance requirement is met
        when the future cash flows are expected to change significantly as a result
        of
        the transaction.  (See note 12 (i)).
  Comprehensive
        income
 The
        Company accounts for comprehensive income in accordance with SFAS No. 130,
“Reporting Comprehensive Income.” As it relates to the Company, comprehensive
        income is defined as net income plus the sum of the changes in unrealized
        gains
        (losses) on derivatives designated as cash flow hedges, unrealized gains
        (losses) on translation of debt designated as a hedge of the net investment
        in
        self-sustaining foreign subsidiaries, foreign currency translation gains
        (losses) on self-sustaining foreign subsidiaries and an unrealized gain on
        translation resulting from the application of U.S. dollar reporting and is
        presented in the consolidated statements of  shareholders’ equity, net
        of income tax.
 
 Recent
        pronouncements
 On
        October 31, 2007, the Company adopted the recognition and disclosure
        requirements of SFAS No. 158, “Employers’ accounting for Defined Benefit Plans
        and Other Post-retirement Benefits” - an amendment of FASB Statements No. 87,
        88, 106, and 132(R)”. This statement requires employers that sponsor defined
        benefit plans to recognize the funded status of a benefit plan on its balance
        sheet; recognize gains, losses and prior service costs or credits that arise
        during the period that are not recognized as components of net periodic benefit
        cost as a component of accumulated other comprehensive income, net of tax;
        measure defined benefit plan assets and obligations as of the date of the
        employer’s fiscal year-end balance sheet; and disclose in the notes to financial
        statements additional information about certain effects on net periodic benefit
        cost for the next fiscal year that arise from delayed recognition of the
        gains
        or losses, prior service costs or credits, and transition assets or
        obligations.
 
 In
        September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior
        Year Misstatements when Quantifying Misstatements in Current Year Financial
        Statements”. SAB 108 provides guidance on the consideration of the effects of
        prior year misstatements in quantifying current year misstatements for the
        purpose of a materiality assessment.  SAB 108 establishes an approach
        that requires quantification of financial statement errors based on the effects
        of each of the Company’s statement of financial position and statement of
        operations and the related financial statement disclosures.  The
        Company applied the provisions of SAB 108 effective for its fiscal 2007
        year-end.  The impact of its adoption on the consolidated results of
        operations and financial condition are described in note 2.
 
 In
        July
        2006, the FASB issued FASB interpretation (“FIN”) No. 48 , “Accounting for
        Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”. FIN
        48 clarifies the accounting for uncertainty in income taxes by prescribing
        the
        recognition threshold a tax position is required to meet before being recognized
        in the consolidated financial statements.  It also provides guidance
        on de-recognition, classification, interest and penalties, accounting in
        interim
        periods, disclosure, and transition.  FIN 48 is effective for fiscal
        years beginning after December 15, 2006 and is required to be adopted by
        the
        Company in the first quarter of fiscal 2008.  The cumulative effects,
        if any, of applying FIN 48 will be recorded as an adjustment to retained
        earnings as of the beginning of the period of adoption.  The Company
        is currently evaluating the effects that the adoption of FIN 48 will have
        on its
        consolidated results of operations and financial condition and is not yet
        in a
        position to determine such effects.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value
        Measurements”.  SFAS 157 provides guidance for using fair value to
        measure assets and liabilities.  It also responds to investors’
requests for expanded information about the extent to which companies measure
        assets and liabilities at fair value, the information used to measure fair
        value, and the effect of fair value measurements on earnings.  SFAS
        157 applies whenever other standards require (or permit) assets or liabilities
        to be measured at fair value, and does not expand the use of fair value in
        any
        new circumstances.  SFAS 157 is effective for financial statements
        issued for fiscal years beginning after November 15, 2007 and is required
        to be
        adopted by the Company in the first quarter of fiscal 2009.  The
        Company is currently evaluating the effects that the adoption of SFAS 157
        will
        have on its consolidated results of operations and financial condition and
        is
        not yet in a position to determine such effects.
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities—Including an amendment of FASB
        Statement No. 115”.This Statement permits entities to choose to measure many
        financial instruments and certain other items at fair value. The objective
        is to
        improve financial reporting by providing entities with the opportunity to
        mitigate volatility in reported earnings caused by measuring related assets
        and
        liabilities differently without having to apply complex hedge accounting
        provisions. The Company is required to adopt the provisions of SFAS 159
        effective for its 2009 fiscal year and is currently evaluating the effect
        that
        the adoption of SFAS 159 will have on its results of operations and financial
        condition and is not yet in a position to determine such
        effects.
  In
        December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. The
        objective of this Statement is to improve the relevance, representational
        faithfulness, and comparability of the information that a reporting entity
        provides in its financial reports about a business combination and its effects.
        To accomplish that, this Statement establishes principles and requirements
        for
        how the acquirer: a) recognizes and measures in its financial statements
        the
        identifiable assets acquired, the liabilities assumed, and any non-controlling
        interest in the acquiree including significant limitations on the costs that
        may
        be accrued as part of the purchase accounting; b) recognizes and measures
        the
        goodwill acquired in the business combination or a gain from a bargain purchase;
        c) determines what information to disclose to enable users of the financial
        statements to evaluate the nature and financial effects of the business
        combination. The Company is required to adopt the provisions of SFAS 141(R)
        effective for acquisitions occurring after October 31, 2009.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
        Consolidated Financial Statements—an amendment of ARB No. 51”  The
        objective of this Statement is to improve the relevance, comparability, and
        transparency of the financial information that a reporting entity provides
        in
        its consolidated financial statements related to the non-controlling interest
        held by others in entities that are consolidated by the reporting entity.
        Although the Company is required to adopt the provisions of SFAS No. 160
        in its
        fiscal 2010 year, MDS does not currently consolidate entities with material
        non-controlling interests and the provisions of SFAS 160 are not expected
        to
        have a material impact on its results of operations and financial
        condition.
 
 4.
              Acquisitions
 
 a.
              MolecularDevices
                  Corporation
 On
        March 20, 2007, the Company completed
        a tender offer which resulted in the Company acquiring 100% of the shares
        of
        Molecular Devices Corporation (MDC),
        a California-based company with
        global operations. MDCdesigns,
        develops, manufactures, sells
        and services bioanalytical measurement systems that accelerate and improve
        drug
        discovery and other life sciences research. The Company acquired MDCprimarily
        to add their leading-edge
        products to those of MDS Sciex to strengthen the Company’s position as one of
        the top global providers of analytical instrumentation and related products
        marketed to life sciences customers. The operations for this acquisition
        are
        reported within the results of the Company’s newly formed MDS Analytical
        Technologies segment (which combines MDCwith
        the previousanalytical instrumentssegment)
        in the consolidated financial
        statements from the acquisition date.
 
 The
        aggregate purchase consideration
        (net of cash
        acquired of $21million)
        was approximately
        $600million,paid
        in cash from existing cash on hand.
        Included in the consideration isa$27
        millioncash cost tobuybackoutstanding
        in-the-money options of
        MDCat
        the closing date of the acquisition.
        Direct
        and incremental third party acquisition costs associated with the acquisitionand included in the
        aggregate purchase consideration of $600millionwere
        approximately $7million.
 
 The
        acquisition has been accounted
        foras a purchase in
        accordance withSFAS No. 141,and the Company has
        accordingly
        allocated the purchase price of the acquisitionbased upon the preliminaryestimateofthe fairvalues of the assets acquired and
        liabilitiesassumed,pending
        completion of a
        comprehensive
        valuation.The
        purchase price and related
        allocations have not been finalized and may be revisedas
        a result of adjustments made to the
        purchase price as additional information becomes
        available.In
        connection with determining thepreliminaryfair
        value of the assets acquired and
        liabilities assumed, management performed assessments of assetsand liabilitiesusing customary valuation procedures
        and techniques.
 
 b.
              SkeleTech,
                  Inc.
 Effective
        August 4, 2005, the Company acquired 100% of the outstanding shares of
        SkeleTech, Inc. (SkeleTech), a therapeutically focused contract research
        organization providing preclinical discovery and development services in
        bone
        and central nervous system biologies.  The aggregate purchase
        consideration was approximately $6 million paid in cash and an additional
        $1
        million was paid to the vendors based on profitability levels attained in
        2006.
 
 The
        acquisition has been accounted for as a purchase in accordance with SFAS
        No.
        141, “Business Combinations”, and the purchase price was allocated to the net
        assets acquired based on fair values.
  The
        cost
        of the acquisitions described above has been allocated on a basis on the
        acquisition dates as follows:
 
 Molecular
                Devices
                (2007)
              
              SkeleTech
                (2005)Net
                  tangible assets
              $
              15
              $
              1Developed
                  technologies (five-year weighted average useful life)
              
              161
              
              -Brands
              
              60
              
              -Goodwill
                  (non-tax deductible)
              
              364
              
              5Total
                  purchase price
              $
              600
              $
              6
 
 The
        following table summarizes the components of the net tangible assets acquired
        at
        fair value:
 
 Molecular
                Devices
                (2007)
              
              SkeleTech
                (2005)Inventories
              $
              40
              $
              -Property,
                  plant and equipment
              
              12
              
              1Other
                  assets and liabilities, net
              
              (37)
              
              -Net
                  tangible assets acquired
              $
              15
              $
              1
 
 Other
        assets and liabilities for MDC include $25 million of acquired net deferred
        tax
        liabilities and a charge of
 $8
        million to eliminate redundant positions and consolidate redundant facilities
        over the course of the next year.
 
 c.
              Pro
                  forma information (unaudited)
 The
        following unaudited pro forma information is provided for MDS assuming the
        acquisition of MDC occurred on November 1, 2006 and November 1, 2005,
        respectively.
 
 2007
              
              2006Net
                  revenues
              $
              1,283
              $
              1,244Loss
                  from continuing operations, net of income taxes
              
              (55)
              
              (10)Income
                  from discontinued operations, net of income taxes
              
              806
              
              98Net
                  income
              
              751
              
              88Earnings
                  per shareBasic
              $
              5.70
              $
              0.61Diluted
              $
              5.68
              $
              0.61
 
 The
        information presented above is for illustrative purposes only and is not
        indicative of the results that would have been achieved had the acquisition
        taken place as of the beginning of the end of the earliest period
        presented.
 
 The
        unaudited pro forma information reflects interest on the purchase price
        calculated at the Company’s short-term investments rates for the period prior to
        the acquisition date for the respective periods.  The pro forma net
        income for the years ended October 31, 2007 and 2006 include $11 million
        and $27
        million, respectively of depreciation and amortization of identifiable
        intangible assets.
 
 5.
              Divestitures
                  and Discontinued Operations
 In
        2005,
        the Board of Directors of the Company approved a strategic plan to focus
        the
        Company on its Life Sciences businesses and to close or divest of businesses
        that were not strategic to this plan.  As a result, the Company
        reclassified its distribution business, its diagnostics businesses, and certain
        early-stage pharmaceutical research services businesses as discontinued
        operations.
  During
        2005, the Company ceased operations in the generic radiopharmaceutical business
        and completed the sale of its sole remaining US diagnostics operation and
        achieved final settlement of outstanding issues related to the sale of some
        US
        diagnostics businesses that occurred in 2004.
 
 During
        2006, the Company completed the sale of its 50% interest in Source Medical
        Corporation; its 26% interest in Calgary Laboratory Services; and various
        pharmaceutical services operations.  As a result of these
        transactions, the Company received proceeds from the sale of discontinued
        operations and other businesses totaling $78 million and recorded a net gain
        of
        $24 million in 2006.  Goodwill associated with the sale of the
        discontinued operations in 2006 amounted to $24 million.
 
 On
        February 26, 2007, the Company completed the sale of its Canadian diagnostic
        services business, MDS Diagnostic Services, to Borealis Infrastructure
        Management Inc. for gross proceeds of C$1.325 billion. The sale was structured
        as an asset purchase transaction and after provision for taxes, expenses
        and
        amounts attributable to minority interests, resulted in net proceeds of $
        988
        million, comprising $929 million in cash and $65 million in an unconditional
        non-interest bearing note payable in March 2009 (see note 10
        (b)).  This note was recorded at an effective interest rate of 4.4%
        and had a book value of $59 million. Included in income from discontinued
        operations is a gain of $791 million net of income taxes on the transaction,
        which the Company recorded in the second quarter.  Goodwill associated
        with the sale of the diagnostic services business amounted to $56
        million.
 
 The
        operating results of the businesses noted above have been reported as income
        from discontinued operations on the consolidated statements of
        operations.  Figures for 2005 and 2006 have been revised to reflect
        this presentation.  The results of the discontinued operations for the
        years ended October 31 were as follows:
 
 2007
              
              2006
              
              2005Net
                  revenues
              $
              95
              $
              362
              $
              555Cost
                  of
                  revenues
              
              (57)
              
              (225)
              
              (392)Selling,
                  general and
                  administration
              
              (16)
              
              (53)
              
              (95)Depreciation
                  and
                  amortization
              
              -
              
              (10)
              
              (12)Goodwill
                  write-down
              
              -
              
              -
              
              (13)Restructuring
                  charges1
              
              -
              
              (1)
              
              (9)Other
                  expenses
              
              -
              
              (3)Operating
                  income
              $
              22
              $
              70
              $
              34Gain
                  on sale of discontinued
                  operations
              
              904
              
              24Interest
                  expense
              
              -
              
              -
              
              (1)Dividend
                  and interest
                  income
              
              1
              
              2
              
              3Income
                  taxes
              
              (117)
              
              7
              
              (7)Minority
                  interest
              
              (5)
              
              (8)
              
              (9)Equity
                  earnings
              
              1
              
              3
              
              2Income
                  from discontinued
                  operations
              $
              806
              $
              98
              $
              22
 1
        Included
        in the income from discontinued operations are net restructuring charges
        for
        2005 and 2006 associated with workforce reductions.
 
 In
        accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
        Long-Lived Assets”, long-lived assets classified as held for sale are measured
        at the lower of cost and fair value less costs to sell.  Long-lived
        assets to be disposed of other than by sale are classified as held and used
        until disposed.  The Company classified certain operations as held for
        sale in accordance with this Statement.
 
 The
        following table details the assets and liabilities related to the discontinued
        operations as at October 31, 2006:
 
 2006Assets
                  of discontinued operationsAccounts
                  receivable, net
              $
              31Inventories,
                  net
              
              3Prepaid
                  expenses and other
              
              3Property,
                  plant and equipment, net
              
              28Deferred
                  tax assets
              
              63Long-term
                  investments and other
              
              13Goodwill
              
              54Intangible
                  assets, net
              
              1Assets
                  of discontinued operations
              $
              196Liabilities
                  of discontinued operationsAccounts
                  payable and accrued liabilities
              $
              33Long-term
                  debt
              
              4Other
                  long-term obligations
              
              6Deferred
                  tax liabilities
              
              55Minority
                  interest
              
              16Liabilities
                  of discontinued operations
              $
              114
 
 6.
              Short-Term
                  Investments
 
 As
        at
        October 31, 2007, short-term investments consisted of bankers’ acceptances and
        treasury bills amounting to $102 million (2006 – $135 million) with interest
        rates of approximately 4.5% and maturity dates between November 2007 and
        April
        2008 (2006 – November 2006 and May 2007).
 
 7.
              Accounts
                  Receivable
 2007
              
              2006Trade
                  accounts receivable
              $
              238
              $
              197Other
                  receivables
              
              54
              
              31292
              
              228Allowance
                  for doubtful accounts
              
              (5)
              
              (4)Accounts
                  receivable, net
              $
              287
              $
              224
 
 8.
              Inventories
 2007
              
              2006Raw
                  materials and supplies
              $
              83
              $
              55Work-in
                  process
              
              34
              
              17Finished
                  goods
              
              26
              
              16143
              
              88Allowance
                  for excess and obsolete inventory
              
              (15)
              
              (8)Inventory,
                  net
              $
              128
              $
              80
 
 During
        2006, the Company sold inventory having a net book value of $47 million to
        Atomic Energy of Canada Limited (AECL) as part of a legal settlement (see
        Note
        12(i)).
  9.
              Property,
                  Plant and Equipment
 
 2007
              
              
              
              2006Cost
              
              Accumulated
                Depreciation
              
              Cost
              
              Accumulated
                DepreciationLand
              $
              25
              $
              -
              $
              24
              $
              -Buildings
              
              176
              
              60
              
              154
              
              47Equipment
              
              266
              
              182
              
              216
              
              135Furniture
                  and fixtures
              
              29
              
              22
              
              22
              
              16Computer
                  systems
              
              145
              
              77
              
              111
              
              46Leaseholds
              
              60
              
              33
              
              45
              
              18Facility
                  modifications
              
              30
              
              15
              
              25
              
              10Construction
                  in progress
              
              44
              
              -
              
              9
              
              -775
              
              389
              
              606
              
              272Accumulated
                  depreciation
              
              (389)
              
              
              
              (272)Property,
                  plant and equipment, net
              $
              386
              
              
              $
              334
 
 Included
        in property, plant and equipment are assets under capital leases as
        follows:
 
 2007
              
              
              
              2006Cost
              
              Accumulated
                Depreciation
              
              Cost
              
              Accumulated
                DepreciationBuildings
              $
              15
              $
              6
              $
              15
              $
              4Computer
                  systems
              
              3
              
              2
              
              4
              
              -18
              $
              8
              
              19
              
              4Accumulated
                  depreciation
              
              (8)
              
              
              
              (4)$
              10
              
              
              $
              15
 
 During
        the year, depreciation expense of $4 million (2006 –  $1 million; 2005
–  $1 million) was recorded on assets under capital
        leases.
 
 Computer
        systems include capitalized software having a net book value of $35 million
        (2006 – $43 million).  Amortization charges associated with
        capitalized software were $8 million for 2007 (2006 – $8 million; 2005
–
 $2
        million).
 
 In
        2006,
        the Company transferred assets recorded in construction in progress and having
        a
        net book value at
 October
        31, 2006 of $350 million to AECL as part of a legal settlement (see Note
        12(i)).
 
 10.
              Long-Term
                  Investments and Other
 2007
              
              2006Financial
                  instrument pledged as security on long-term debt (note
                  14)
              $
              46
              $
              39Long-term
                  notes receivable
              
              125
              
              50Equity
                  investments
              
              10
              
              31Investments
                  in joint ventures
              
              38
              
              32Available
                  for sale investments
              
              24
              
              3Deferred
                  pension assets
              
              39
              
              18Other
                  long-term investments
              
              4
              
              -Venture
                  capital investments
              
              4
              
              3Long-term
                  investments
              $
              290
              $
              176
  a.
              Fair
                  value
 The
        financial instrument pledged as security on long-term debt, which is classified
        as held to maturity, and the long-term notes receivable, have fair values
        that
        approximate their carrying value. Other long-term investments, excluding
        those
        classified as available for sale, are recorded at cost.
 
 b.
              Long-term
                  notes receivable
 In
        2006,
        as a result of a comprehensive mediation process that resulted in an exchange
        of
        assets between the Company and AECL related to the MAPLE reactor project,
        a
        long-term note receivable for $38 million was received by the Company (see
        Note
        12(i)).  This non-interest bearing note receivable is repayable over
        four years commencing in 2008.  The note receivable is net of an
        unamortized discount based on an imputed interest rate of 4.5%.  The
        note receivable will be accreted up to its face amount of C$53 million over
        a
        period of four years.  Long-term notes receivable also include amounts
        due related to the sale of MDS Diagnostics Services (see Note 5).
 
 c.
              Equity
                  investments and joint ventures
 2007
              
              2006Hemosol  Corp.
              $
              -
              $
              11Lumira
                  Capital Corp
              
              10
              
              15Iconix
                  Biosciences, Inc
              
              -
              
              3Other
                  long-term investments
              
              -
              
              2Equity
                  investments
              
              10
              
              31MDS
                  Sciex joint ventures
              
              38
              
              32Equity
                  investments and joint ventures
              $
              48
              $
              63
 
 The
        Company accounts for its investments in significantly influenced companies
        and
        joint ventures using the equity method of accounting.
 
 (i)
              The
                  Company previously owned 25.4% of the outstanding share capital
                  of Hemosol
                  Corp. In 2005, the Company’s share of the investee’s losses exceeded the
                  carrying amount of the investment, and a $6 million equity loss
                  adjustment
                  was recorded.  In 2005, Hemosol Corp. filed for receivership
                  and, as a result, the Company's guarantee of the bank debt of Hemosol
                  Corp. was called by the bank and paid by the Company (see also
                  Note 23).
                  During 2007, the Company sold its debt interest in Hemosol and
                  recorded a
                  gain of
 $2
                  million that was recorded in other expense, net.
 
 (ii)
              The
                  Company owns 45.7% of the outstanding share capital of Lumira Capital
                  Corp
                  (Lumira - formerly MDS Capital Corp.). Lumira is an investment
                  fund
                  management company that also has long-term investments in
                  development-stage enterprises that have not yet earned significant
                  revenues from their intended business activities or established
                  their
                  commercial viability. The recovery of invested amounts and the
                  realization
                  of investment returns is dependent upon the successful resolution
                  of
                  scientific, regulatory, competitive, political and other risk factors,
                  as
                  well as the eventual commercial success of these enterprises. These
                  investments are subject to measurement uncertainty, and adverse
                  developments could result in further write-downs of the carrying
                  values.
                  In 2007, the Company wrote down this investment to its estimated
                  fair
                  value and recorded a provision of $6 million in other expense.
  (iii)
              As
                  at October 31, 2006, Company owned convertible debt and 17% of
                  the
                  outstanding share capital of Iconix Bioscience Inc. (Iconix). In
                  addition,
                  as at October 31, 2006, the Company had a secured 6% convertible
                  promissory note receivable amounting to $7 million. This note related
                  to
                  funding requirements of the investee for operations and matured
                  on
                  December 31, 2007. During 2007, MDS converted a portion of its
                  debt
                  interest in Iconix into preferred shares and immediately thereafter
                  exchanged its equity interest in Iconix for common shares of Entelos
                  Inc.,
                  a US-based public company (“Entelos”), under the terms of a merger
                  agreement between Iconix and Entelos.  MDS received 6.5 million
                  common shares in Entelos on closing of the transaction having a
                  market
                  value of $4 million.  In addition, the Company may earn further
                  common shares of Entelos under the terms of a twelve-month earn-out
                  agreement. Entelos also assumed the remaining $1.5 million dollars
                  of
                  long-term debt owed by Iconix to MDS.  This long term debt was
                  repaid on December 31, 2007 and bears interest at 7% per
                  annum.  This transaction was recorded as a non-monetary
                  transaction at estimated fair value.  The investment in Entelos
                  is included in long-term investments as available for sale.
  
 MDS
                  portion of the net income
                (loss)
                  of equity investments
              Total
                  income (loss)
                of
                  equity investments2007
              2006
              2005
              2007
              2006
              2005Hemosol
                  Inc.
              $
              -
              $
              -
              $
              (5)
              $
              -
              $
              -
              $
              (54)Lumira
                  Capital Corp.
              
              -
              
              (4)
              
              -
              
              -
              
              (5)
              
              -Iconix
              
              -
              
              (1)
              
              -
              
              -
              
              (5)
              
              (3)MDS
                  Sciex joint ventures
              
              53
              
              54
              
              46
              
              104
              
              106
              
              96Totals
              $
              53
              $
              49
              $
              41
              $
              104
              $
              96
              $
              39
 
 MDS
                  portion of the retained earnings
                (deficit)
                  of equity investments
              Total
                  retained
                earnings
                  (deficit) of
                equity
                  investments2007
              2006
              2005
              2007
              2006
              2005Hemosol
                  Inc.
              $
              -
              $
              -
              $
              -
              $
              -
              $
              -
              $
              (54)Lumira
                  Capital Corp.
              
              10
              
              12
              
              14
              
              22
              
              26
              
              30Iconix
              
              -
              
              (14)
              
              (13)
              
              -
              
              (82)
              
              (72)MDS
                  Sciex joint ventures
              
              63
              
              45
              
              44
              
              126
              
              90
              
              88Totals
              $
              73
              $
              43
              $
              45
              $
              148
              $
              34
              $
              (8)
 
 MDS
        reported revenues resulting from transactions with the MDS Sciex joint ventures
        amounting to $205 million in 2007 (2006 –  $186 million; 2005
–  $179 million).  Amounts receivable from these joint
        ventures at October 31, 2007 totalled $30 million (2006 – $30
        million)
   Condensed
        combined financial information for equity investees is summarized below in
        aggregate:
  2007
              
              2006
              
              2005Net
                  revenues
              $
              351
              $
              336
              $
              310Gross
                  Profit
              
              214
              
              199
              
              186Net
                  income
              
              104
              
              96
              
              39
 
 2007
              
              2006Current
                  assets
              $
              98
              $
              99Long-term
                  assets
              
              110
              
              90$
              208
              $
              189Current
                  liabilities
              $
              28
              $
              61Long-term  liabilities
              
              -
              
              1128
              
              72Equity
              
              180
              
              117$
              208
              $
              189
 
  11.
              Goodwill
 
 2007
              2006Opening
                  balance
              $
              397
              $
              387Acquired
                  (i)
              
              364
              
              1Foreign
                  exchange and other
              
              21
              
              9Closing
                  balance
              $
              782
              $
              397
 
 (i)
              In
                  2007, the Company recorded goodwill of $364 million in association
                  with
                  the acquisition of Molecular Devices (see note 4).
 
 12.
              Intangibles
                  Assets
 
 2007
              
              
              
              2006Cost
              
              Accumulated
                Amortization
              
              Cost
              
              Accumulated
                AmortizationSupply
                  agreement (40 years useful life)
              $
              363
              $
              -
              $
              308
              $
              -Acquired
                  technology (five-years weighted average
                useful
                  life)
              
              161
              
              16
              
              -
              
              -Licenses
                  (five-years weighted average useful life)
              
              32
              
              17
              
              26
              
              12Brands
              
              60
              
              -
              
              -
              
              -$
              616
              $
              33
              $
              334
              $
              12Accumulated
                  amortization
              
              (33)
              
              
              
              (12)$
              583
              
              
              $
              322
  The
        change in intangible assets comprised:
 2007
              2006Opening
                  balance
              $
              322
              $
              16Acquired
              
              221
              
              309Amortized
              
              (21)
              
              (3)Currency
                  translation
              
              61
              
              -Closing
                  balance
              $
              583
              $
              322
 
 Intangible
        assets acquired during the year consist of the following:
 
 2007
              
              2006Supply
                  agreements(i)
              $
              -
              $
              308Acquired
                  technology
              
              161
              
              -Licenses
              
              -
              
              1Brands
              
              60
              
              -$
              221
              $
              309
 
 (i)
              On
                  February 22, 2006, the Company announced the conclusion of a comprehensive
                  mediation process with AECL related to the MAPLE reactor project.
                  Under
                  the agreement, AECL paid the Company $22 million, net of applicable
                  taxes,
                  and AECL assumed complete ownership of the MAPLE facilities and
                  took
                  responsibility for all costs associated with completing the project
                  and
                  the production of medical isotopes. 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 and which will be repaid
                  over
                  four years commencing in 2008. The Company and AECL have entered
                  into a
                  40-year supply agreement for the provision of medical isotopes
                  in exchange
                  for a fixed percentage of the selling price. In accordance with
                  SFAS No.
                  153. “Exchanges of Nonmonetary Assets” the Company exchanged the MAPLE
                  asset for a 40-year supply agreement which has been recorded as
                  an
                  intangible asset at its fair value of $308 million.  This amount
                  will 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.
 
 Estimated
        future amortization expense related to intangible assets at October 31, 2007
        was
        as follows:
 2008
              $
              372009
              
              462010
              
              402011
              
              322012
              
              30Thereafter
              
              398$
              583
 
  13.
              Accounts
                  Payable and Accrued Liabilities
 
 Accounts
        payable and accrued liabilities comprise the following:
 2007
              
              2006Accounts
                  payable
              $
              123
              $
              83Employee-related
                  accruals
              
              50
              
              49Incentive
                  compensation
              
              43
              
              21Other
                  payables
              
              168
              
              84$
              384
              $
              237
 
 Other
        payables for 2007 include $55 million related to a provision for client
        reimbursements associated with ongoing regulatory activities at MDS Pharma
        Services and $14 million of remaining restructuring reserves.
 
 14.
              Long-term
                  Debt and Capital Lease Obligations
 
 Maturity
              
              2007
              
              2006Senior
                  unsecured notes
              2008
                  to 2014
              $
              307
              $
              312Other
                  debt
              2008
                  to 2015
              
              77
              
              82Total
                  long-term debt
              
              
              384
              
              394Current
                  portion
              
              
              (94)
              
              (20)$
              290
              $
              374
 
 The
        Company has outstanding $307 million (2006 –  $312 million) of senior
        unsecured notes that bear interest at fixed rates between 5.15% and 6.19%
        per
        annum.  Other debt includes a non-interest-bearing government loan
        with a carrying value of $50 million (2006 –  $43 million) discounted
        at an effective interest rate of 7% and repayable at $4 million per year
        with
        the remaining balance due April 1, 2015.  A long-term investment has
        been pledged as security for the repayment of this debt (see Note
        10).  Other debt also includes a $16 million note payable (2006
–  $24 million) to Applera Corporation relating to assets purchased
        for the MALDI-TOF mass spectrometry operations.  The note bears
        interest at 4% and is payable evenly over the two remaining years of its
        term.  The fair value of long-term debt approximates its book
        value.
 
 The
        Company has a C$500 million,  committed, revolving credit facility
        having three years remaining.  As at
 October
        31, 2007, this facility was undrawn.
 
 The
        remaining debt comprises obligations under capital leases amounting to $11
        million (2006 –  $12 million) and bears interest at various fixed
        rates.  The Company has numerous capital leases for both buildings and
        equipment. These leases are capitalized using interest rates considered
        appropriate at the inception of each lease.  Assets acquired under
        capital finance leases are included in the consolidated statements of financial
        position at the present value of the future minimum lease payments and are
        depreciated over the shorter of the lease term and their remaining useful
        lives.
        The corresponding liabilities are recorded in the balance sheet and the interest
        element of the capital lease rental is charged to interest expense.
 
 Principal
        repayments of long-term debt are as follows:
 2008
              $
              942009
              
              202010
              
              292011
              
              172012
              
              18Thereafter
              
              206$
              384
 
 Included
        within the future principal repayments of long-term debt are obligations
        under
        capital leases.  Future minimum lease payments for obligations under
        capital leases in effect as at October 31, 2007 are as follows:
 
 2008
              $
              32009
              
              32010
              
              32011
              
              22012
              
              314Less:
                  portion representing interest
              
              (3)$
              11
 
 15.
              Deferred
                  Revenue
 
 Deferred
        revenue comprises the following:
 2007
              
              2006Payment
                  in advance of services rendered
              $
              64
              $
              84Deferred
                  credit related to government loan
              
              15
              
              16Other
              
              9
              
              988
              
              109Less
                  current portion
              
              (71)
              
              (92)Long-term
                  portion of deferred revenue
              $
              17
              $
              17
 
 Deferred
        revenue includes a $15 million deferred credit (2006 –  $16 million)
        related to the government loan associated with the MAPLE reactor project,
        which
        is being amortized over the remaining seven-year term of the debt using the
        sum
        of the years’ digits method.
 
 16.
              Share
                  Equity
 
 At
        October 31, 2007, the authorized share capital of the Company consists of
        unlimited common shares.  The common shares are voting and are
        entitled to dividends if, as and when declared by the Board of
        Directors.
 
 a)      
        Summary of share capital
 Common
                  Shares(number
                  of shares in thousands)
              Number
              
              AmountBalance
                  - October 31, 2004
              141,826
              $
              526Issued
              1,072
              
              13Repurchased
                  and cancelled
              (799)
              
              (
                  4)Balance
                  - October 31, 2005
              142,099
              
              535Issued
              2,220
              
              31Balance
                  - October 31, 2006
              144,319
              
              566Issued
              1,090
              
              17Repurchased  and
                  cancelled
              (22,831)
              
              (90)Balance
                  - October 31, 2007
              122,578
              $
              493
 
 During
        2007, the Company declared and paid cash dividends of $3 million on common
        shares prior to discontinuing its dividend in January 2007 (2006 – $13 million,
        2005 – $11 million).
  During
        2007, the Company repurchased and cancelled 22,831,050 Common shares under
        the
        terms of a substantial issuer bid for a cost of $441 million.  Of the
        total cost, $90 million was charged to share capital and the excess of the
        cost
        over the amount charged to share capital, totaling $351 million, was charged
        to
        retained earnings and other comprehensive income.
 
 In
        2006,
        the Company did not repurchase or cancel common shares.  In 2005, the
        Company repurchased 799,000 common shares for $11 million under the terms
        of a
        normal course issuer bid (NCIB).  The excess of cost over the share
        capital of the acquired shares was charged to retained
        earnings.  Under the terms of its existing NCIB, the Company is
        entitled to repurchase up to 4,506,236 common shares between July 3, 2007
        and
        July 2, 2008.  No shares have been purchased under the
        NCIB.
 
 During
        the year, the Company issued 982,000 (2006 – 1,859,000; 2005 – 629,000) common
        shares under the stock option plan for proceeds of $14 million (2006 – $24
        million; 2005 – $6 million).
 
 b)
              Stock
                  dividend and share purchase plan and employee share ownership plan
 Until
        2007, the Company sponsored a stock dividend and share purchase plan, under
        which shareholders were able to elect to receive stock dividends in lieu
        of cash
        dividends.  Stock dividends were issued at not less than 95% of the
        five-day average market price (the Average Market Price) of the shares traded
        on
        the Toronto Stock Exchange immediately prior to the dividend payment
        date.  Plan participants were also able to make optional cash payments
        of up to C$3,000 semi-annually to purchase additional common shares at the
        Average Market Price.  Participation in this plan for the year ended
        October 31, 2007 resulted in the issuance of 41,000 (2006 – 220,000) common
        shares as stock dividends and the issuance of 1,000 common shares (2006 – 7,000)
        for cash.  The Company discontinued this plan during
        2007.
 
 The
        Company sponsors a non-compensatory Employee Share Ownership
        Plan.  Until June 2007, eligible employees were able to purchase
        common shares at 90% of the Average Market Price for the five days preceding
        the
        purchase.  Effective June 30, 2007, the Company changed the terms of
        this plan and replaced the 10% market price discount with a 10% matching
        cash
        contribution. During the year, the Company issued 66,000 common shares (2006
        -
        134,000) under this plan for proceeds of $1 million (2006 - $3
        million).
 
 The
        following table illustrates the reconciliation of the denominator in the
        computations of the basic and diluted earnings per share:
 
 2007
              
              2006
              
              2005Weighted
                  average shares outstanding—Basic (millions)
              
              132
              
              143
              
              142Effect
                  of dilutive securities:Stock
                  options
              
              -
              
              1
              
              -Weighted
                  average shares outstanding - Diluted
              
              132
              
              144
              
              142Basic
                  earnings per share from continuing operations
              $
              (0.25)
              $
              0.15
              $
              (0.21)Basic
                  earnings per share from discontinued operations
              $
              6.12
              $
              0.68
              $
              0.16Diluted
                  earnings per share from continuing operations
              $
              (0.25)
              $
              0.15
              $
              (0.21)Diluted
                  earnings per share from discontinued operations
              $
              6.10
              $
              0.68
              $
              0.16
  c)
              Components
                  of accumulated other comprehensive income
 Foreign
                  Currency Translation Adjustment
              
              Pension
                  Gains and Prior Service Credits
              
              Net
                  Unrealized Gains/Losses on Available for Sale Securities
              
              Net
                  Unrealized Gain on Cash Flow Hedges
              
              Accumulated
                  Other Comprehensive IncomeBalance
                  at October 31, 2004
              $
              244
              $
              -
              $
              8
              $
              -
              $
              252Current
                  year change
              
              22
              
              -
              
              (7)
              
              -
              
              15Income
                  tax
              
              (2)
              
              -
              
              3
              
              
              
              1Balance
                  at October 31, 2005
              
              264
              
              -
              
              4
              
              -
              
              268Current
                  year change
              
              63
              
              -
              
              (2)
              
              -
              
              61Income
                  tax
              
              (2)
              
              -
              
              1
              
              
              
              (1)Balance
                  at October 31, 2006
              
              325
              
              -
              
              3
              
              -
              
              328Current
                  year change
              
              160
              
              16
              
              (5)
              
              6
              
              177Income
                  tax
              
              (10)
              
              (5)
              
              2
              
              (2)
              
              (15)Balance
                  at October 31, 2007
              $
              475
              $
              11
              $
              -
              $
              4
              $
              490
 
 
 17.
              Restructuring
                  Charges
 
 Over
        the
        last three years, MDS has undertaken a number of initiatives designed to
        refocus
        the Company as a globally competitive life sciences company, and has recorded
        restructuring charges totaling $81 million, including $37 million in
        2007.  In 2007 the Company recorded $18 million for severance, $1
        million to reduce the carrying value of certain assets, and $18 million for
        other costs related to specific initiatives focused on improving the
        profitability of MDSPS.
 
 In
        2005,
        the Company’s management approved a restructuring plan and recorded
        restructuring charges in the amount of $51 million, related to a reduction
        in
        its management, administrative, and operations workforce, a realignment of
        its
        information technology infrastructure, and the reorganization of certain
        pharmaceutical research services operations.   In 2006, the
        Company completed the majority of its activities associated with the 2005
        restructuring announcement and, accordingly, utilized the majority of the
        2005
        reserves. Also in 2006, the Company successfully renegotiated provisions
        for
        expected contract cancellation costs associated with an early termination
        of
        certain information technology outsourcing agreements and eliminated the
        balance
        of the reserve.
 
 The
        restructuring liability of $14 million as at October 31, 2007 and $6 million
        as
        at October 31, 2006 is reported in the consolidated statements of financial
        position as a component of accounts payable and accrued
        liabilities.
  During
        the years ended October 31, 2005, 2006 and 2007 the restructuring charges
        per
        segment were as follows:
 
 Restructuring
                  Charge
                (Recovery)
              Cumulative
                  Activity
              Provision
                  Balance at October 31, 2007Cash
              Non-cash2005:Workforce
                  reductions-MDSPS
              $
              21
              $
              (19)
              $
              (1)
              $
              1-MDS
                  Nordion
              
              3
              
              (3)
              -
              
              --MDS
                  AT
              
              2
              
              (2)
              -
              
              --Corporate
                  and other
              
              8
              
              (8)
              -
              
              -34
              
              (32)
              (1)
              
              1Equipment
                  and other asset write-downs adjustments-MDSPS
              
              1
              
              -
              (1)
              
              --MDS
                  Nordion
              
              -
              
              -
              -
              
              --MDS
                  AT
              
              -
              
              -
              -
              
              --Corporate
                  and other
              
              6
              
              -
              (6)
              
              -7
              
              -
              (7)
              
              -Contract
                  cancellation charges-MDSPS
              
              -
              
              -
              -
              
              --MDS
                  Nordion
              
              -
              
              -
              -
              
              --MDS
                  AT
              
              -
              
              -
              -
              
              --Corporate
                  and other
              
              10
              
              (2)
              (8)
              
              -10
              
              (2)
              (8)
              
              -Total
                  for 2005 Plan
              $
              51
              $
              (34)
              (16)
              $
              12006:Workforce
                  reductions-MDSPS
              
              -
              
              -
              -
              
              --MDS
                  Nordion
              
              -
              
              -
              -
              
              --MDS
                  AT
              
              -
              
              -
              -
              
              --Corporate
                  and other
              
              1
              
              (1)
              -
              
              -1
              
              (1)
              -
              
              -Contract
                  cancellation charges-MDSPS
              
              -
              
              -
              -
              
              --MDS
                  Nordion
              
              -
              
              -
              -
              
              --MDS
                  AT
              
              -
              
              -
              -
              
              --Corporate
                  and other
              
              (8)
              
              (1)
              9
              
              -(8)
              
              (1)
              9
              
              -Total
                  for 2006 Plan
              $
              (7)
              $
              (2)
              9
              $
              -
  Restructuring
                  Charge
                (Recovery)
              Cumulative
                  Activity
              
              Provision
                  Balance at October 31, 2007Cash
              Non-Cash2007:Workforce
                  reductions-MDSPS
              $
              16
              $
              (9)
              $
              -
              $
              7-MDS
                  Nordion
              
              -
              
              -
              
              -
              
              --MDS
                  AT
              
              1
              
              -
              
              -
              
              1-Corporate
                  and other
              
              1
              
              -
              
              -
              
              118
              
              (9)
              
              -
              
              9Equipment
                  and other asset write-downs adjustments-MDSPS
              
              1
              
              -
              
              1
              
              2-MDS
                  Nordion
              
              -
              
              -
              
              -
              
              --MDS
                  AT
              
              -
              
              -
              
              -
              
              --
                  Corporate and other
              
              -
              
              -
              
              -
              
              -1
              
              -
              
              1
              
              2Contract
                  cancellation charges-MDSPS
              
              5
              
              (5)
              
              -
              
              --MDS
                  Nordion
              
              -
              
              -
              
              -
              
              --MDS
                  AT
              
              -
              
              -
              
              -
              
              -Corporate
                  and other
              
              -
              
              -
              
              -
              
              -5
              
              (5)
              
              -
              
              -Other:MDSPS
              
              5
              
              (2)
              
              (3)
              
              -MDS
                  Nordion
              
              -
              
              -
              
              -
              
              -MDS
                  AT
              
              -
              
              -
              
              -
              
              -Corporate
                  and other
              
              8
              
              (7)
              
              1
              
              213
              
              (9)
              
              (2)
              
              2Total
                  for 2007 Plan
              $
              37
              $
              (23)
              $
              (1)
              $
              13Remaining
                  reserve balance, total
              
              
              
              
              
              
              $
              14
 
  18.
              Other
                  Items
 
 a)    
                  Other income (expense) net
 
 2007
              
              2006
              
              2005Write-down
                  of other long-term assets
              $
              -
              $
              (1)
              $
              (7)Write-down
                  of investments
              
              (6)
              
              -
              
              (6)Gain
                  on sale of long-term assets
              
              3
              
              2
              
              -Loss
                  on sale of Hamburg clinic
              
              (4)
              
              -
              
              -Gain
                  on sale of business
              
              1
              
              -
              
              -Acquisition
                  integration costs
              
              (4)
              
              -
              
              -FDA
                  provision
              
              (61)
              
              -
              
              -Valuation
                  provision
              
              (2)
              
              -
              
              -Protana
                  settlement
              
              5
              
              -
              
              -MAPLE
                  settlement
              
              -
              
              (36)
              
              -Insurance
                  settlement
              
              -
              
              2
              
              -Foreign
                  exchange loss
              
              (16)
              
              (3)
              
              (1)Gain
                  on embedded derivative
              
              4
              
              -
              
              -Other
                  expense - net
              $
              (80)
              $
              (36)
              $
              (14)
 
 b)
              Non-cash
                  items affecting net income
 2007
              
              2006
              
              2005Depreciation
                  and amortization
              $
              79
              $
              54
              $
              46Stock
                  option compensation
              
              4
              
              4
              
              3Deferred
                  revenue
              
              (5)
              
              (7)
              
              (12)Future
                  income taxes
              
              31
              
              17
              
              (34)Equity
                  earnings – net of distribution
              
              (1)
              
              16
              
              15Write-down
                  of MAPLE assets
              
              -
              
              9
              
              -Write-down
                  of investments
              
              8
              
              -
              
              5Write-down
                  of intangibles
              
              1
              
              -
              
              7Loss
                  (gain) on sale of business
              
              4
              
              (2)
              
              -(Gain)
                  loss on disposal of equipment and other assets
              
              -
              
              1
              
              6Gain
                  on sale of investment
              
              (2)
              
              -
              
              -Mark
                  to market of derivatives
              
              (5)
              
              5
              
              39Amortization
                  of purchase price adjustments
              
              14
              
              -
              
              -Other
              
              -
              
              (3)
              
              1$
              128
              $
              94
              $
              76
 
 c)
              Changes
                  in non-cash working capital balances relating to operations
 2007
              
              2006
              
              2005Accounts
                  receivable
              $
              (32)
              $
              (18)
              $
              (25)Unbilled
                  revenue
              
              23
              
              (25)
              
              (29)Inventories
              
              (19)
              
              49
              
              (6)Prepaid
                  expenses and other
              
              33
              
              (3)
              
              (7)Accounts
                  payable and deferred revenue
              
              78
              
              (39)
              
              84Income
                  taxes
              
              -
              
              (55)
              
              (16)$
              83
              $
              (91)
              $
              1
 
  19.
              Income
                  Taxes
 
 a)
              Income
                  tax provision
 The
        components of the Company’s loss before income taxes, minority interests and the
        related provision for income taxes are presented below:
 
 2007
              
              2006
              
              2005Canadian
              $
              (33)
              $
              (6)
              $
              (38)Foreign
              
              (23)
              
              (7)
              
              (5)Loss
                  from continuing operations before income taxes
              $
              (56)
              
              (13)
              
              (43)
 
 The
        components of the income tax recovery are as follows:
 
 2007
              
              2006
              
              2005Canadian
                  income tax (provision) recoveryCurrent
              $
              25
              $
              70
              $
              3Deferred
              
              7
              
              (30)
              
              14Foreign
                  income tax (provision) recoveryCurrent
              
              -
              
              (5)
              
              (4)Deferred
              
              (9)
              
              -
              
              1Income
                  tax recovery
              $
              23
              $
              35
              $
              14
 
 The
        reconciliation of the Canadian Federal and provincial tax rate to the reported
        effective income tax rate is set out below.
 
 2007
              2006
              2005%
              %
              %Combined
                  federal and provincial tax rate
              35.0
              35.0
              35.0Increase
                  (decrease) in tax rate as a result of:Tax
                  credits for research and development
              20.6
              245.4
              17.5Foreign
                  losses that have not been recognized, net
              (13.4)
              (31.5)
              (12.8)Impact
                  of differential foreign tax rates
              3.6
              10.0
              2.3Amortization
                  not deductible for tax
              (0.8)
              (3.8)
              (0.5)Investments
                  and write-downs
              (1.7)
              (13.8)
              (10.0)Impact
                  of tax rate changes on deferred tax balances
              3.7
              29.2
              -Stock
                  compensation
              (2.1)
              (12.3)
              (2.3)Other
              (3.8)
              11.0
              3.4Effective
                  income tax rate
              41.1
              269.2
              32.6
  b)
              Deferred
                  tax assets and liabilities
 Components
        of the current deferred tax
        assets and liabilities consist of the following temporary
        differences:
 
 2007
              
              2006Deferred
                  tax assetsTax
                  benefit of losses carried forward
              $
              39
              $
              100Book
                  value in excess of tax basis
              
              3
              
              (2)Investment
                  tax credits
              
              1
              
              -Provisions
                  and reserves
              
              27
              
              2Deferred
                  tax assets before valuation allowance
              
              70
              
              100Valuation
                  allowance
              
              (21)
              
              (53)49
              
              47Deferred
                  tax liabilitiesBook
                  value in excess of tax basis
              
              (167)
              
              (77)Tax
                  benefit of losses carried forward
              
              35
              
              -Other
                  comprehensive income
              
              (31)
              
              (20)Tax
                  on investment tax credits recognized for accounting
                  purposes
              
              (19)
              
              (9)Provisions
                  and reserves not deductible for tax
              
              4
              
              3(178)
              
              (103)Net
                  deferred tax liabilities
              $
              (129)
              $
              (56)
  The
        Company has not provided for
        deferred income taxes on the undistributed earnings of foreign subsidiaries,
        as
        the Company considers those earnings to be reinvested indefinitely outside
        ofCanada.  The
        Company cannot
        reasonably estimate the amount of additional deferred income tax liabilities
        or
        foreign withholding taxes that may be payable should these earnings be
        distributed in the future.
 
 c)
              Taxlosses
                  carried
                  forward
 As
        at
        October 31, 2007, the Company has deferred tax assets relating to net operating
        loss carryforwards of $74 million (2006 –  $100 million; 2005 – $135
        million) before valuation allowances, including $35 million that have been
        classified as a reduction in deferred tax liabilities.  These assets
        relate to $202 million (2006 – $370 million; 2005 $369 million) of tax loss
        carryforwards.  Of the total losses, $9 million (2006 – $36 million;
        2005 – $41 million) expire by 2011, $122 million (2006 – $159 million; 2005 –
$112 million) expire between 2014 and 2026, and the remaining $71 million
        (2006
– $175 million; 2005 – $217 million) may be carried forward
        indefinitely.
 
 During
        2007, the Company reduced valuation allowances related to $43 million of
        tax
        losses and other temporary differences for which tax benefits had previously
        not
        been recognized in the accounts.  Upon the acquisition of MDC, the
        Company met the deferred tax asset recognition criteria for these tax balances,
        and as a result, reduced the valuation allowances to nil. The impact of this
        adjustment was to also reduce goodwill recorded related to the acquisition
        of
        MDC by $43 million compared to what would otherwise have been reported. These
        losses and related temporary differences arose from MDS operations prior
        to
        the acquisition date of MDC.
 
 d)
              Investment
                  tax credits
 During
        the year, the Company recognized $17 million (2006 – $26 million; 2005 – $10
        million) of investment tax credits relating to research performed in Canada
        on
        its own behalf and for certain customers.
 
 Investment
        tax credits amounting to $20 million and recognized in prior years were realized
        in 2006 and recorded as a reduction in income tax expense.  In years
        prior to 2006, these investment tax credits, which related to the MAPLE project,
        had been recognized as a reduction of the carrying value of the Company’s
        interest in the project.
  20.
              Stock-based
                  Compensation
 
 a)
              Stock
                  option plan
 At
        the
        Company’s annual and Special Meeting of Shareholders held on March 8, 2007,
        shareholders voted to approve the Company’s 2007 Stock Option Plan (the Plan),
        which conforms to all current regulations of the New York and Toronto stock
        exchanges.  Under the 2007 Stock Option Plan, which replaces the
        Company’s 2006 Stock Option Plan, the Company may issue shares on the exercise
        of stock options granted to eligible employees, officers, directors and persons
        providing on-going management or consulting services to the
        Company.  The exercise price of stock options issued under the Plan
        equals the market price of the underlying shares on the date of the
        grant.  All options issued under the Plan are granted and priced on
        the date on which approval by the Board of Directors of the Company is obtained
        or a later date set by the Board in its approval.  Except as noted
        below, stock options granted up to October 31, 2005 vest evenly over five
        years
        and have a term of ten years.  Certain options granted on April 22,
        2005 and all options granted after October 31, 2005 vest evenly over three
        years
        and have a term of seven years.  As of October 31, 2007, 11.4 million
        Common shares had been reserved for issuance under the stock option
        plan.
 
 Number
                  (000s)
              Weighted
                  Average Exercise
                Price
                (C$)
              Weighted-Average
                Remaining
                  Contractual Life (Years)
              Aggregate
                  Intrinsic Value (C$ millions)Outstanding
                  October 31, 2005
              7,672
              $
              17.76
              5.9
              $
              16Granted
              1,019
              $
              20.10Exercised
              (1,859)
              $
              14.76Cancelled
              (982)
              $
              19.94Outstanding
                  at October 31, 2006
              5,850
              $
              18.76
              5.3
              $
              9Granted
              1,241
              $
              21.72Exercised
              (982)
              $
              16.47Cancelled
              (554)
              $
              20.35Outstanding
                  at October 31, 2007
              5,555
              $
              19.66
              5.3
              $
              10Vested
                  and expected to vest at October 31, 2006*
              5,584
              $
              18.60
              5.5
              $
              9Vested
                  and expected to vest at October 31, 2007*
              5,279
              $
              19.66
              5.2
              $
              10Exercisable
                  at October 31, 2006
              3,612
              $
              18.42
              4.6
              $
              7Exercisable
                  at October 31, 2007
              3,223
              $
              19.01
              4.3
              $
              8
 *The
        expected to vest amount represents the unvested options as at October 31,
        2007
        and 2006 less estimated forfeitures
  Options
        outstanding at October 31, 2007 comprised the following:
 
 Options
                  Outstanding
              Options
                  ExercisableRange
                  of Exercise Prices
                (C$)
              Weighted
                  Average
                Remaining
                  Contractual Life (Years)
              
              Number
                (000s)
              
              Weighted
                  Average Exercise Price
                (C$)
              Number
                (000s)
              
              Weighted
                  Average Exercise Price
                (C$)$13.95
              -
              $15.70
              1.6
              
              508
              
              $14.32
              508
              
              $14.32$15.75
              -
              $17.20
              4.5
              
              414
              
              $16.74
              276
              
              $16.74$17.50
              -
              $19.00
              5.4
              
              1,063
              
              $18.41
              836
              
              $18.58$19.05
              -
              $20.50
              5.6
              
              1,182
              
              $19.85
              565
              
              $19.79$20.75
              -
              $22.50
              5.5
              
              2,388
              
              $21.77
              1,038
              
              $21.835.3
              
              5,555
              
              $19.66
              3,223
              
              $19.01
 
 Stock
        option compensation expense for 2007 was $4 million (2006 – $2 million; 2005 –
$3 million), which has been recorded in selling, general and administration
        expenses in the consolidated statements of operations and as additional paid-in
        capital within share capital on the consolidated statements of financial
        position.
 
 The
        Company utilizes the Black-Scholes option valuation model to estimate the
        fair
        value of options granted based on the following assumptions:
 
 2007
              2006
              2005Risk-free
                  interest rate
              4.5%
              3.9%
              3.8%Expected
                  dividend yield
              0.0%
              0.7%
              0.7%Expected
                  volatility
              .209
              .230
              .334Expected
                  time until exercise (years)
              4.35
              3.25
              5.19
 
 The
        weighted average fair value of options granted was estimated to be C$5.66
        per
        Common share in 2007, C$4.14 per Common share in 2006, and C$5.98 per Common
        share in 2005.
 
 The
        Black-Scholes option valuation model used by the Company to determine fair
        values was developed for use in estimating the fair value of freely traded
        options that are fully transferable and have no vesting restrictions. This
        model
        requires the use of assumptions, including future stock price volatility
        and
        expected time until exercise. The Company uses historical volatility to estimate
        its future stock price volatility.  The expected time until exercise
        is based upon the contractual term, taking into account expected employee
        exercise and expected post-vesting employment termination behavior.
 
 The
        following table summarizes the intrinsic value of options exercised and the
        fair
        values of shares vested:
 
 2007
              
              2006
              
              2005Aggregate
                  intrinsic value of options exercised
              C$
              5
              C$
              12
              C$
              4Aggregate
                  grant-date fair value of shares vested
              C$
              5
              C$
              7
              C$
              10
 
 As
        at
        October 31, 2007, the total remaining unrecognized compensation expense related
        to non-vested stock options amounted to approximately $9 million which will
        be
        amortized over the weighted average remaining requisite service period of
        approximately 27 months.
  b)
              Pro
                  forma impact of stock-based compensation
 Companies
        are required to calculate and disclose, in the notes to the consolidated
        financial statements, compensation expense related to the grant-date fair
        value
        of stock options for all grants of options for which no expense has been
        recorded in the consolidated statements of operations  For the
        Company, this includes those stock options issued prior to November 1,
        2003.
 
 For
        purposes of these pro forma disclosures, the Company’s net income and basic and
        diluted earnings per share would have been:
 
 2007
              
              2006
              
              2005Net
                  income
              $
              773
              $
              120
              $
              (7)Compensation
                  expense for options granted prior to November 1, 2003
              
              (1)
              
              (2)
              
              (4)Net
                  income (loss) - pro forma
              $
              772
              $
              118
              $
              (11)Basic
                  earnings per share
              
              5.87
              
              0.82
              
              (0.08)Diluted
                  earnings per share
              $
              5.85
              $
              0.82
              $
              (0.08)
 
 c)
              Incentive
                  plans
 Beginning
        in fiscal year 2004, a mid-term incentive plan was introduced based on specific
        operating margin improvement targets and achievement of defined change outcomes
        across the Company over a two-year performance cycle ending October 31,
        2005.  The plan replaced a portion of the annual stock option grants
        with Performance Share Units (PSUs).  Fiscal 2005 expenses include $2
        million related to this plan and the plan liability of $4 million was paid
        in
        2006.
 
 During
        2005, the Company approved a PSU mid-term incentive plan for senior management
        (the 2006 MTIP).  All PSUs under the 2006 MTIP vest in two equal
        tranches, based on achieving specified share price hurdles of C$22.00 and
        C$26.00, respectively.  The term of the PSUs is three years and payout
        will occur at the later of 24 months from the date of grant and achievement
        of
        each share price hurdle.  Payout on certain PSUs will be in the form
        of Deferred Share Units (DSUs) and the balance will be paid in
        cash.  During 2006, the C$22.00 price hurdle was met and 50% of the
        issued units vested.  These vested units were paid out in November,
        2007.
 
 During
        2006, the Company approved a PSU mid-term incentive plan for senior management
        (the 2007 MTIP).  All PSUs under the 2007 MTIP will vest in two equal
        tranches, based on achieving specified share price hurdles of C$25.30 and
        C$27.50, respectively.  The term of the PSUs is three years and payout
        will occur at the later of 24 months from the date of grant and achievement
        of
        each share price hurdle.
 
 The
        Company records the cost of its mid-term incentive compensation plans at
        fair
        value based on assumptions that are consistent with those used to determine
        the
        fair value of stock option compensation. As at October 31, 2007, the liability
        for future compensation under the mid-term incentive compensation plans was
        $14
        million (2006 - $8 million).  In fiscal 2007, the Company expensed $5
        million related to the mid-term incentive compensation plans (2006 – $8
        million).
 
 21.
              Employee
                  Benefits
 
 The
        Company sponsors various pension and other post-retirement benefit plans,
        including defined benefit and defined contribution pension plans, retirement
        compensation arrangements, and plans that provide extended health care coverage
        to employees. Certain benefit plans were curtailed effective January 1, 2008,
        resulting in a net curtailment gain in fiscal 2006 of $1 million.
  Defined
        benefit pension plans
 
 The
        Company sponsors one defined benefit pension plan for the benefit of certain
        of
        its employees in Canada, one for the benefit of its employees at a Taiwanese
        subsidiary, and one available to certain US employees. The Canadian plan
        is
        based on the highest three or six average consecutive years wages and requires
        employee contributions, while the Taiwanese plan is based upon years of service
        and compensation during the last month prior to retirement. The US plan is
        based
        on the participants’ 60 highest consecutive months of compensation and their
        years of service.
 
 All
        plans
        are funded and the Company uses an October 31 measurement date for its
        plans.  The most recent actuarial valuations of the majority of the
        pension plans for funding purposes were as of January 1, 2007.
 
 The
        components of net periodic pension cost for these plans for 2007, 2006 and
        2005
        are as follows:
 
 Domestic
                  Plans
              International
                  Plans2007
              
              2006
              
              2005
              
              2007
              
              2006
              
              2005Components
                  of Net Periodic Pension CostService
                  cost
              $
              4
              $
              3
              $
              3
              $
              -
              $
              1
              $
              1Interest
                  cost
              
              9
              
              8
              
              8
              
              1
              
              1
              
              1Expected
                  return on plan assets
              
              (12)
              
              (11)
              
              (10)
              
              (1)
              
              (1)
              
              (1)Recognized
                  actuarial gain
              
              -
              
              1
              
              -
              
              -
              
              -
              
              -Amortization
                  of net transition asset
              
              (2)
              
              (2)
              
              (2)
              
              -
              
              -
              
              -Curtailment
                  gain
              
              -
              
              -
              
              -
              
              -
              
              (1)
              
              -Net
                  Periodic Pension Cost
              $
              (1)
              $
              (1)
              $
              (1)
              $
              -
              $
              -
              $
              1
 
 The
        following weighted average assumptions were used in the determination of
        the net
        periodic benefit cost and obligation:
 
 Domestic
                  Plans
              International
                  Plans2007
              
              2006
              
              2005
              
              2007
              
              2006
              
              2005Benefit
                  ObligationDiscount
                  rate
              
              5.60%
              
              5.25%
              
              5.25%
              
              4.94%
              
              4.65%
              
              4.65%Expected
                  return on plan assets
              
              6.75%
              
              6.50%
              
              6.75%
              
              5.94%
              
              5.65%
              
              5.39%Rate
                  of compensation increase
              
              3.75%
              
              3.75%
              
              3.75%
              
              3.94%
              
              3.86%
              
              3.63%Benefit
                  CostDiscount
                  rate
              
              5.25%
              
              5.25%
              
              6.25%
              
              4.85%
              
              5.07%
              
              4.65%Expected
                  return on plan assets
              
              6.50%
              
              6.75%
              
              7.00%
              
              5.94%
              
              6.08%
              
              5.39%Rate
                  of compensation increase
              
              3.75%
              
              3.75%
              
              4.25%
              
              3.94%
              
              3.86%
              
              3.63%
 
 Discount
        rate assumptions have been, and continue to be, based on the prevailing market
        long-term interest rates at the measurement date.
  The
        change in the benefit obligation, plan assets, and the funded status of the
        plans for the two most recently completed years were as follows:
 
 Domestic
                  Plans
              International
                  Plans2007
              
              2006
              
              2007
              
              2006Change
                  in benefit obligationBenefit
                  obligations – beginning of year
              $
              163
              $
              148
              $
              20
              $
              25Service
                  cost – pension
              
              5
              
              5
              
              -
              
              (6)Interest
                  cost
              
              9
              
              8
              
              1
              
              1Benefits
                  paid
              
              (6)
              
              (6)
              
              (2)
              
              -Actuarial
                  loss
              
              4
              
              -
              
              -
              
              -Foreign
                  currency exchange rate changes
              
              33
              
              8
              
              3
              
              -Total
                  benefit obligations – end of year
              
              208
              
              163
              
              22
              
              20Change
                  in Fair Value of Assets:Fair
                  value of plan assets, beginning of year
              
              196
              
              171
              
              20
              
              19MDS
                  contributions
              
              3
              
              2
              
              1
              
              1Employee
                  contributions
              
              2
              
              2
              
              -
              
              -Actual
                  return on plan assets
              
              15
              
              19
              
              1
              
              1Benefits
                  paid
              
              (7)
              
              (6)
              
              (1)
              
              (2)Foreign
                  currency exchange rate changes
              
              37
              
              8
              
              2
              
              1Fair
                  value of plan assets – end of year
              
              246
              
              196
              
              23
              
              20Funded
                  status at end of year – over/(under) funded
              $
              38
              $
              33
              $
              1
              $
              -
 
 A
        reconciliation of the funded status to the net pension asset recognized in
        the
        consolidated statement of financial position is as follows:
 
 2006Domestic
                  Plans
              
              International
                  PlansBenefit
                  obligation
              $
              163
              $
              20Fair
                  value of plan assets
              
              196
              
              20Plan
                  assets in excess of benefit obligations
              
              33
              
              -Unrecognized
                  net actuarial gains
              
              7
              
              2Unrecognized
                  transition assets
              
              (22)
              
              -$
              18
              $
              2
 
 A
        summary
        of the amounts recognized in the consolidated statements of financial position
        as of October 31, 2007 and 2006 prior to the application of SFAS 158 is as
        follows:
 
 Domestic
                  Plans
              International
                  Plans2007
              
              2006
              
              2007
              
              2006Long
                  term pension plan assets
              $
              22
              $
              18
              $
              4
              $
              4Current
                  liabilities
              
              -
              
              -
              
              -
              
              -Non-current
                  liabilities
              
              -
              
              -
              
              2
              
              2Net
                  amount recognized at year end
              $
              22
              $
              18
              $
              2
              $
              2
 
 The
        pension plan assets are included within long-term investments on the
        consolidated statements of financial position.
 
 The
        following table illustrates the amounts in accumulated other comprehensive
        income that have not yet been recognized as components of pension
        expense:
 
 2007Net
                  actuarial loss
              $
              16Deferred
                  income taxes
              
              (5)Accumulated
                  other comprehensive income
              $
              11
 
 The
        weighted-average asset allocation of the Company’s pension plan is as
        follows:
 
 Target
              Domestic
                  Plans
              International
                  PlansAsset
                  Category
              
              2007
              2006
              2007
              2006Cash
              -
              0.1%
              -
              45.7%
              7.2%Fixed
                  income
              35.0%
              32.1%
              33.5%
              19.1%
              60.9%Equities
              65.0%
              67.8%
              66.5%
              35.2%
              31.9%Total
              100.0%
              100.0%
              100.0%
              100.0%
              100.0%
 
 The
        Company maintains target allocation percentages among various asset classes
        based on investment policies established for the pension plans which are
        designed to maximize the total rate of return (income and appreciation) after
        inflation within the limits of prudent risk taking, while providing for adequate
        near-term liquidity for benefit payments. The Company’s expected return on asset
        assumptions are derived from studies conducted by actuaries and investment
        advisors. The studies include a review of anticipated future long-term
        performance of individual asset classes and consideration of the appropriate
        asset allocation strategy given the anticipated requirements of the plans
        to
        determine the average rate of earnings expected on the funds invested to
        provide
        for the pension plans benefits. While the study gives appropriate consideration
        to recent fund performance and historical returns, the assumption is primarily
        a
        long-term, prospective rate.
 
 Expected
        future benefit payments are as follows:
 
 Years
                  ending October 31Domestic
                  Plans
              
              International
                  Plans2008
              $
              7
              $
              -2009
              
              7
              
              -2010
              
              8
              
              -2011
              
              8
              
              -2012
              
              9
              
              -2013-2017
              
              55
              
              3$
              94
              $
              3
 
 In
        September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
        Benefit Pension and Other Postretirement Plans—an Amendment of FASB Statements
        No. 87, 88, 106, and 132(R)” (“SFAS 158”). SFAS 158 requires an employer to
        recognize the overfunded or underfunded status of a defined benefit pension
        and
        post-retirement plan (other than a multiemployer plan) as an asset or liability
        in its statement of financial position and to recognize changes in that funded
        status in the year in which the changes occur through the other comprehensive
        income of a business entity.  SFAS 158 also requires an employer to
        measure the funded status of a plan as of the date of its year-end statement
        of
        financial position. The Company is required to initially recognize the funded
        status of its defined benefit pension and post-retirement plans and to provide
        the required disclosures as of October 31, 2007.
 
 The
        effect of the initial adoption of SFAS 158 on the Company’s accounting for
        pension plans is as follows.  There was no impact on the Company’s
        accounting for other post-retirement benefits plans.
 
 Before
                Application
                of
                  SFAS 158
              
              Adjustment
              
              After
                  Application of SFAS 158Long-term
                  investments
              $
              274
              $
              16
              $
              290Deferred
                  tax liabilities
              
              163
              
              5
              
              168Accumulated
                  other comprehensive income
              
              479
              
              11
              
              490
 
 Other
        benefit plans
 
 These
        include a supplemental retirement arrangement, a retirement/termination
        allowance and post retirement benefit plans, which include contributory health
        and dental care benefits and contributory life insurance coverage. All
        non-pension post-employment benefit plans are unfunded.
 
 The
        components of net periodic cost for these plans for 2007, 2006 and 2005 are
        as
        follows:
 
 2007
              
              2006
              
              2005Components
                  of Net Periodic Pension CostService
                  cost
              $
              -
              $
              1
              $
              1Interest
                  cost
              
              1
              
              1
              
              1Curtailment
                  (gain) loss recognized
              
              -
              
              (1)
              
              (1)Net
                  Periodic Pension Cost
              $
              1
              $
              1
              $
              1
 
 The
        assumptions used to determine the net periodic cost for these plans were
        as
        follows:
 
 2007
              
              2006
              
              2005Weighted
                  Average Assumptions Used to Determine Net Periodic Cost:Discount
                  rate
              
              5.56%
              
              5.16%
              
              5.18%Rate
                  of compensation increase
              
              4.16%
              
              4.21%
              
              4.24%Initial
                  health care cost trend rate
              
              9.10%
              
              10.00%
              
              10.00%Ultimate
                  health care cost trend rate
              
              4.86%
              
              5.00%
              
              5.00%Years
                  until ultimate trend rate is reached
              
              5.0
              
              5.0
              
              5.0Assumptions
                  used to determine net benefit cost:Discount
                  rate
              
              5.18%
              
              5.31%
              
              6.18%Rate
                  of compensation increase
              
              4.16%
              
              4.21%
              
              4.41%
 
 Assumed
        health care cost trend rates have a significant effect on the amounts reported
        for the health care plans. A one-percentage point change in assumed health
        care
        cost trend rates would have had the following impact in 2007:
 
 1%
                  Increase
              1%
                  DecreaseChange
                  in net benefit cost
              $
              -
              $
              -Change
                  in benefit obligation
              $
              5
              $
              (4)
 
 The
        change in the projected benefit obligation and the funded status of the plan
        is
        as follows:
 
 2007
              
              2006Change
                  in Projected Benefit ObligationBenefit
                  obligations – beginning of year
              $
              17
              $
              18Service
                  cost – pension
              
              -
              
              1Interest
                  cost
              
              1
              
              1Benefits
                  paid
              
              (1)
              
              (1)Actuarial
                  gain
              
              -
              
              (1)Curtailments
              
              -
              
              (2)Foreign
                  currency exchange rate changes
              
              4
              
              1Total
                  benefit obligations – end of year
              $
              21
              $
              17Funded
                  status at end of year – over/(under) funded
              $
              (21)
              $
              (17)
 
 A
        reconciliation of the funded status is as follows:
 
 2007
              
              2006Projected
                  benefit obligation
              $
              21
              $
              17Fair
                  value of plan assets
              
              -
              
              -Plan
                  assets in excess (less than) projected obligations
              $
              (21)
              $
              (17)Unrecognized
                  actuarial gains
              
              -
              
              1Unrecognized
                  past service costs
              
              -
              
              -Unrecognized
                  net transition assets
              
              -
              
              -$
              (21)
              
              (16)
  The
        other
        benefit plan liabilities are included within other long-term obligations
        on the
        consolidated statements of financial position.
 
 Based
        on
        the actuarial assumptions used to develop the Company’s benefit obligations as
        at October 31, 2007, the following benefit payments are expected to be made
        to
        plan participants:
 
 Years
                  ending October 31,2008
              $
              12009
              
              12010
              
              12011
              
              12012
              
              12013-2017
              
              6Total
              $
              11
 
 During
        fiscal 2008, the Company expects to contribute approximately $5 million and
        $1
        million to the Company’s pension plans and other benefit plans,
        respectively.
 
 During
        2007, the Company contributed $13 million to defined contribution pension
        plans
        on behalf of its employees (2006 – $17 million; 2005 – $18
        million).
 
 22.
              Segmented
                  Information
 
 In
        accordance with SFAS No.131, “Disclosures About Segments of an Enterprise and
        Related Information,” the Company discloses financial and descriptive
        information about its reportable operating segments. Operating segments are
        components of an enterprise about which separate financial information is
        available and is regularly evaluated by the chief operating decision maker
        in
        deciding how to allocate resources and in assessing performance.
 
 The
        Company operates within three business segments – pharmaceutical services,
        isotopes, and analytical technologies.  These segments are organized
        predominantly around the products and services provided to customers identified
        for the businesses.
 
 The
        pharmaceutical services business provides pharmaceutical research services;
        the
        isotopes business manufactures medical isotopes; and the analytical technologies
        business manufactures advanced analytical equipment.
 
 The
        accounting policies of the segments are the same as those described in the
        summary of significant accounting policies.  There are no significant
        inter-segment transactions. The corporate segment results include the
        incremental cost of corporate overhead in excess of the amount allocated
        to the
        other operating segments, as well as certain other costs and income items
        that
        do not pertain to a business segment.
  The
        information presented below is for continuing operations.
 
 Operating
        results
 
 Year
                  ended October 31, 2007MDS
                  Pharma Services
              MDS
                  Nordion
              MDS
                Analytical
                  Technologies
              Corporate
                and
                  Other
              TotalProduct
                  revenues
              $
              -
              $
              284
              $
              280
              $
              -
              $
              564Service
                  revenues
              
              477
              
              6
              
              72
              
              -
              
              555Reimbursement
                  revenues
              
              91
              
              -
              
              -
              
              -
              
              91Total
                  revenues
              
              568
              
              290
              
              352
              
              -
              
              1,210Direct
                  product cost
              
              -
              
              (147)
              
              (213)
              
              -
              
              (360)Direct
                  service costs
              
              (332)
              
              (3)
              
              (3)
              
              -
              
              (338)Reimbursed
                  expenses
              
              (91)
              
              -
              
              -
              
              -
              
              (91)Selling,
                  general and administration
              
              (130)
              
              (54)
              
              (57)
              
              (24)
              
              (265)Research
                  and development
              
              -
              
              (4)
              
              (64)
              
              -
              
              (68)Depreciation
                  and amortization
              
              (35)
              
              (13)
              
              (29)
              
              (2)
              
              (79)Restructuring
                  charges – net
              
              (28)
              
              -
              
              -
              
              (9)
              
              (37)Other
                  income (expense) – net
              
              (74)
              
              3
              
              (6)
              
              (3)
              
              (80)Equity
                  earnings
              
              -
              
              -
              
              53
              
              -
              
              53Segment
                  earnings (loss)
              $
              (122)
              $
              72
              $
              33
              $
              (38)
              $
              (55)Capital
                  expenditures
              $
              48
              $
              8
              $
              8
              $
              7
              $
              71
 
 
 Year
                  ended October 31, 2006MDS
                  Pharma Services
              MDS
                  Nordion
              MDS
                Analytical
                  Technologies
              Corporate
                and
                  Other
              TotalProduct
                  revenues
              $
              
              $
              290
              $
              148
              $
              -
              $
              438Service
                  Revenues
              
              458
              
              5
              
              54
              
              -
              
              517Reimbursement
                  revenues
              
              105
              
              -
              
              -
              
              -
              
              105Total
                  Revenues
              
              563
              
              295
              
              202
              
              -
              
              1,060Direct
                  product cost
              
              -
              
              (147)
              
              (149)
              
              -
              
              (296)Direct
                  service cost
              
              (359)
              
              (3)
              
              -
              
              -
              
              (362)Reimbursed
                  expenses
              
              (105)
              
              -
              
              -
              
              -
              
              (105)Selling,
                  general and administration
              
              (125)
              
              (51)
              
              (20)
              
              (24)
              
              (220)Research
                  and development
              
              -
              
              (5)
              
              (48)
              
              -
              
              (53)Depreciation
                  and amortization
              
              (30)
              
              (15)
              
              (6)
              
              -
              
              (51)Restructuring
                  charges – net
              
              -
              
              2
              
              -
              
              5
              
              7Other
                  income (expense) – net
              
              2
              
              (36)
              
              5
              
              (7)
              
              (36)Equity
                  earnings
              
              (1)
              
              -
              
              54
              
              (4)
              
              49Segment
                  earnings (loss)
              $
              (55)
              $
              40
              $
              38
              $
              (30)
              $
              (7)Capital
                  expenditures
              $
              37
              $
              -
              $
              4
              $
              10
              $
              51
 
 Year
                  ended October 31, 2005MDS
                  Pharma Services
              MDS
                  Nordion
              MDS
                Analytical
                  Technologies
              Corporate
                and
                  Other
              TotalProduct
                  revenues
              $
              -
              $
              243
              $
              153
              $
              -
              $
              396Service
                  Revenues
              
              434
              
              4
              
              53
              
              -
              
              491Reimbursement
                  revenues
              
              95
              
              -
              
              
              
              -
              
              95Total
                  Revenues
              
              529
              
              247
              
              206
              
              -
              
              982Direct
                  product cost
              
              -
              
              (132)
              
              (137)
              
              -
              
              (269)Direct
                  service cost
              
              (319)
              
              (2)
              
              -
              
              -
              
              (321)Reimbursed
                  expenses
              
              (95)
              
              -
              
              -
              
              -
              
              (95)Selling,
                  general and administration
              
              (116)
              
              (48)
              
              (27)
              
              (19)
              
              (210)Research
                  and development
              
              (2)
              
              (6)
              
              (44)
              
              1
              
              (51)Depreciation
                  and amortization
              
              (26)
              
              (13)
              
              (7)
              
              (1)
              
              (47)Restructuring
                  charges – net
              
              (20)
              
              (3)
              
              (3)
              
              (25)
              
              (51)Other
                  income (expense) – net
              
              (15)
              
              1
              
              1
              
              (1)
              
              (14)Equity
                  earnings
              
              -
              
              -
              
              46
              
              (5)
              
              41Segment
                  earnings (loss)
              $
              (64)
              $
              44
              $
              35
              $
              (50)
              $
              (35)Capital
                  expenditures
              $
              24
              $
              50
              $
              5
              $
              23
              $
              102
  Financial
        position
 As
        at
        October 31
 Additions
              Equity
                  investmentsTotal
                  Assets1
              Property,
                  Plant and Equipment
              GoodwillMDS
                  Pharma Services
              2007
              $
              835
              $
              48
              $
              -
              $
              32006
              
              858
              
              37
              
              1
              
              4MDS
                  Nordion
              2007
              $
              789
              $
              8
              $
              -
              $
              -2006
              
              621
              
              -
              
              -
              
              -MDS
                  Analytical Technologies
              2007
              $
              857
              $
              8
              $
              364
              $
              382006
              
              132
              
              4
              
              -
              
              32Corporate
                  and Other
              2007
              $
              537
              $
              7
              $
              -
              $
              112006
              
              536
              
              10
              
              -
              
              26Total
              2007
              $
              3,018
              $
              71
              $
              364
              $
              522006
              
              2,147
              
              51
              
              1
              
              62
 1Total
        assets for 2006 exclude assets
        held for sale relating to discontinued operations.
 
 Revenues
        by end-customer location
 Years
        ended October 31
 Canada
              
              US
              
              Europe
              
              Asia
              
              Other
              
              TotalMDS
                  Pharma Services
              2007
              $
              62
              $
              247
              $
              214
              $
              16
              $
              29
              $
              5682006
              
              28
              
              288
              
              217
              
              9
              
              21
              
              5632005
              
              28
              
              292
              
              179
              
              4
              
              26
              
              529MDS
                  Nordion
              2007
              $
              10
              $
              162
              $
              45
              $
              47
              $
              26
              $
              2902006
              
              11
              
              164
              
              45
              
              57
              
              18
              
              2952005
              
              10
              
              130
              
              47
              
              44
              
              16
              
              247MDS
                  Analytical Technologies
              2007
              $
              71
              $
              154
              $
              80
              $
              42
              $
              5
              $
              3522006
              
              12
              
              83
              
              63
              
              40
              
              4
              
              2022005
              
              21
              
              81
              
              62
              
              39
              
              3
              
              206Total
              2007
              $
              143
              $
              563
              $
              339
              $
              105
              $
              60
              $
              1,2102006
              
              51
              
              535
              
              325
              
              106
              
              43
              
              1,0602005
              
              59
              
              503
              
              288
              
              87
              
              45
              
              982
 
 Revenues
        earned outside of Canada, reflecting export sales, along with revenues earned
        by
        operating units based outside of Canada, made up approximately 90% of net
        revenues for 2007. MDS Pharma, MDS Nordion and MDS AT contributed 47%, 24%
        and
        29% of total revenues, respectively, in 2007.
 
 Property,
        plant and equipment by segment and geographical location
 As
        at
        October 31
 Canada
              
              US
              
              Europe
              
              Asia
              
              Other
              
              TotalMDS
                  Pharma Services
              2007
              $
              41
              $
              81
              $
              54
              $
              2
              $
              -
              $
              1782006
              
              45
              
              60
              
              48
              
              2
              
              -
              
              155MDS
                  Nordion
              2007
              $
              118
              $
              -
              $
              6
              $
              -
              $
              -
              $
              1242006
              
              106
              
              -
              
              4
              
              -
              
              -
              
              110MDS
                  Analytical Technologies
              2007
              $
              15
              $
              12
              $
              2
              $
              2
              $
              -
              $
              312006
              
              14
              
              3
              
              1
              
              1
              
              -
              
              19Corporate
                  and Other
              2007
              $
              53
              $
              -
              $
              -
              $
              -
              $
              -
              $
              532006
              
              50
              
              -
              
              -
              
              -
              
              -
              
              50Total
              2007
              $
              227
              $
              93
              $
              62
              $
              4
              $
              -
              $
              3862006
              
              215
              
              63
              
              53
              
              3
              
              -
              
              334
 
 Goodwill
        by segment and geographical location
 As
        at
        October 31
 Canada
              
              US
              
              Europe
              
              TotalMDS
                  Pharma Services
              2007
              $
              142
              $
              246
              $
              16
              $
              4042006
              
              123
              
              246
              
              14
              
              383MDS
                  Nordion
              2007
              $
              2
              $
              -
              $
              -
              $
              22006
              
              3
              
              -
              
              -
              
              3MDS
                  Analytical Technologies
              2007
              $
              12
              $
              364
              $
              -
              $
              3762006
              
              11
              
              -
              
              -
              
              11Total
              2007
              $
              156
              $
              610
              $
              16
              $
              7822006
              
              137
              
              246
              
              14
              
              397
 
 The
        geographic allocation of goodwill for MDS Analytical Technologies is preliminary
        pending completion of the purchase valuation and purchase price
        allocation.
  23.
              Commitments,
                  Contingencies, and Guarantees
 
 a)
              Lease
                  and other commitments
 
 The
        Company is obligated under non-cancelable operating leases, primarily for
        its
        offices and laboratory facilities. These leases generally contain customary
        scheduled rent increases or escalation clauses and renewal options.
 
 The
        Company is also obligated under outsourcing agreements related to certain
        aspects of its information technology and human resources support functions.
        Actual amounts paid under these outsourcing agreements could be higher or
        lower
        than the amounts shown below as a result of changes in volume and other
        variables. In addition, early termination of these outsourcing agreements
        by the
        Company could result in the payment of termination fees which are not reflected
        in the table below.
  As
        at
        October 31, 2007, the Company is obligated under non-cancelable operating
        leases, primarily for its premises and equipment leases and other long-term
        contractual commitments to make minimum annual payments of
        approximately:
 
 Operating
                Leases
              
              Sublease
                  Income
              Total
              Other
                Contractual
                Commitments2008
              $
              22
              $
              (1)
              $
              21
              1042009
              
              22
              
              (1)
              
              21
              472010
              
              21
              
              (1)
              
              20
              412011
              
              17
              
              -
              
              17
              232012
              
              15
              
              -
              
              15
              27Thereafter
              
              47
              
              -
              
              47
              206$
              144
              $
              (3)
              $
              141
              448
 
 Net
        rental expense for premises and equipment leases of continuing operations
        for
        the year ended October 31, 2007 was $28 million (2006 - $19 million; 2005
        - $24
        million).
 
 b)
              Contractual
                  commitments
 Included
        in other contractual commitments above is $336 million associated with long-term
        supply arrangements and other long-term commitments with major electricity
        producers comprising the majority of the Company’s expected cobalt
        purchases.
  Other
        contractual commitments included a remaining four-year commitment totaling
        $67
        million (2006 - $61 million) relating to the outsourcing of the information
        technology infrastructure.
  Net
        sales
        of certain products of the Company are subject to royalties payable to third
        parties.   Royalty expense recorded in cost of revenues amounted
        to $7million , $9 million, and $5 million in October 31, 2005, 2006 and 2007,
        respectively.
  c)
              Liability
                  insurance
 The
        Company is self-insured for up to the first $5 million of costs incurred
        relating to a single liability claim in a year and to $10 million in aggregate
        claims arising during an annual policy period.  The Company provides
        for unsettled reported losses and losses incurred but not reported based
        on an
        independent review of all claims made against the Company.  Accruals
        for estimated losses related to self-insurance were not material at October
        31,
        2007.
  d)
              Indemnification
                  provisions
 The
        Company enters into indemnification agreements with certain officers and
        directors.  In addition, the Company enters into license agreements
        with third parties that include indemnification provisions in the ordinary
        course of business that are customary in the industry.  Those
        indemnifications generally require the Company to compensate the other party
        for
        certain damages and costs incurred as a result of third party claims or damages
        arising from these transactions.  In some cases, the maximum potential
        amount of future payments that could be required under these indemnification
        provisions is unlimited.  These indemnification provisions may survive
        termination of the underlying agreement.  Historically, the Company
        has not made any indemnification payments under such agreements and no amount
        has been accrued in the accompanying consolidated financial statements with
        respect to these indemnification obligations; however, the Company maintains
        liability insurance totaling $100 million that limits the exposure and enables
        the Company to recover certain future amounts paid, less any deductible amounts
        pursuant to the terms of the respective policies.
  e)
              Guarantees
 Guarantees
        for which the Company is contractually obligated to make payments in the
        event
        of a default by a third party or due to its inability to meet certain
        performance-based obligations total approximately $21 million (2006 - $20
        million).  No liabilities have been recorded by the Company related to
        these guarantees.
 
 2007
              2006Maximum
                  Potential Exposure
              Range
                  of terms of guarantees
              Maximum
                  Potential Exposure
              Range
                  of terms of guaranteesContracts
                  contingent upon changes of an asset, liability or equity of the
                  guaranteed
                  party
              3
              Nov
                  2007 – Feb 2010
              4
              Oct
                  2006 – Feb 2010Performance
                  guarantees
              18
              Jan
                  2007 – Oct 2008
              15
              Oct
                  2006 – Oct 2008Indirect
                  guarantees of the indebtedness of other parties
              -
              
              1
              Oct
                  2006 – Jan 2007Total
              21
              
              20
 
 24.
              Litigation
 
 Various
        lawsuits, claims and proceedings of a nature considered normal to its business
        are pending against the Company. In the opinion of management, the outcome
        of
        such proceedings and litigation currently pending will not materially affect
        the
        Company’s consolidated financial statements.
  25.
              Asset
                  Retirement Obligation
 
 In
        accordance with the FIN No. 47, “Accounting for Conditional Asset Retirement
        Obligations, an interpretation of FASB Statement No. 143”, companies must
        recognize a liability for the fair value of a legal obligation to perform
        asset
        retirement activities that are conditional on a future event if the amount
        can
        be reasonably estimated.
  The
        Company has identified an asset retirement obligation relating to future
        site
        remediation costs of a facility located in Kanata, Ontario. The Company intends
        to use the facility for an indeterminate period of time and a liability will
        be
        recognized in the period in which sufficient information exists to estimate
        the
        range of potential settlement dates that is required to use a present value
        technique to estimate fair value.
  The
        Company has pledged a $17 million letter of credit in support of future site
        remediation costs for the Kanata facility, which is included in the performance
        guarantees amount described in Note 23.
  26.
              Financial
                  Instruments and Financial Risk
 
 a)
              Foreign
                  currency and interest rate contracts
 The
        Company uses foreign currency
        forward and option contracts to manage its foreign exchange
        risk.  Certain Canadian operations of the Company are expected to have
        net cash inflows in 2008and
        subsequent years denominated
        in US
        dollars.  The Company enters into foreign exchange contracts to hedge
        a portion of these cash flows.  The Company uses interest rate swap
        contracts to manage its exposure to interest rate risk on certain of its
        debt
        obligations.
 
 The
        Company will hedgeanticipatedcash
        inflows that are expected to occur
        over its planning cycle, typically no more than24months
        into the future.Prior to fiscal 2007,
        the
        majority of forward contracts entered into by the Company did not qualifyashedgesfor
        accounting
        purposes.
  Included
        in revenues are gains from
        realized foreign exchange contracts for the year of $4million
        (2006-
        $14million;
        2005-
        $39million).  During
        the year,
        the Company realized other net foreign exchange lossesof
        $16million
 (2006-
        $3million
        loss; 2005-
        $1 million loss),which it reported in
        the consolidated
        statements ofoperations.
 
 As
        at October 31, 2007,
        the Company had outstanding foreign
        exchange contracts in place to sell up to $34million,
        at a weighted average rate of
        C$1.1280,
        maturing over the next five
        months.  The Company also had interest rate swap contracts that
        economically convert a notional amount of $80 million
        of debt from a
        fixed to a floating interest rate.  In 2007,
        a $1milliongainwas
        recorded inotherexpense(2006,
        - nil; 2005 - $2million
        loss).In
        December, 2007 the Company exited the
        swapcontractand
        will record a gain of $2million in itsfiscal2008
        first quarter.
 
 b)
              Credit
                  risk
 Certain
        of the Company’s financial assets, including cash and cash equivalents, are
        exposed to credit risk.  The Company may, from time to time, invest in
        debt obligations and commercial paper of governments and
        corporations.  Such investments are limited to those issuers carrying
        an investment-grade credit rating.  In addition, the Company limits
        the amount that is invested in issues of any one government or
        corporation.
 
 The
        Company is also exposed, in its normal course of business, to credit risk
        from
        its customers.  No single party accounts for a significant balance of
        accounts receivable.   As at October 31, 2007, accounts
        receivable is net of an allowance for uncollectible accounts of $5 million
        (2006
        - $4 million).
 
 Credit
        risk on financial instruments arises from the potential for counterparties
        to
        default on their contractual obligations to the Company.  The Company is
        exposed to credit risk in the event of non-performance, but does not anticipate
        non-performance by any of the counterparties to its financial instruments.
         The Company limits its credit risk by dealing with counterparties that are
        considered to be of high credit quality.  In the event of non-performance
        by a counterparty, the carrying value of the company’s financial instruments
        represents the maximum amount of loss that would be incurred.
 
 c.
              Fair
                  value
 Cash
        and
        cash equivalents, accounts receivable, unbilled revenue, accounts payable
        and
        accrued liabilities, and income taxes assets and liabilities – these assets and
        liabilities have short periods to maturity and the carrying values contained
        in
        the consolidated statements of financial position approximate their estimated
        fair value.
 
 As
        at
        October 31, 2007 and 2006, the financial instruments classified as long-term
        investments were carried at amounts that approximate their estimated fair
        values.
 
 For
        derivative financial instruments,
        (foreign exchange and interest rate swap contracts), the carrying amounts,
        and
        fair values at October 31, 2006 and 2007, are as follows:
 
 2007
                Carrying
                  Amount
              2007
                Fair
                  Value
              2006
                  Carrying Amount
              2006
                Fair
                  ValueNet
                  asset (liability) position:Currency
                  forward and option
              -
                  assets
              $
              7
              $
              7
              $
              1
              $
              1Currency
                  forward and option
              -
                  liabilities
              $
              (12)
              $
              (12)
              $
              -
              $
              -Interest
                  rate swap and option contracts
              $
              (1)
              $
              (1)
              $
              (2)
              $
              (2)
 
 All
        currency forward contracts were eligible for hedge accounting as at October
        31,
        2007.  The Company recorded a
 $4
        million gain in 2006 as a result of marking expired, ineligible options to
        market.
 
 As
        of
        October 31, 2007, $7 million of deferred gains on derivative instruments
        accumulated in other comprehensive income are expected to be reclassified
        to
        income during the next 12 months.  In addition, the Company has $12 million
        of derivative liabilities on derivative instruments associated with long-term
        debt that have not been designated as hedges.
  27.
              Canadian
                  GAAP Supplemental Information
 
 The
        US
        GAAP accounting principles used in the preparation of these consolidated
        financial statements conform in all material respects to Canadian GAAP, except
        as set out below.
 
 i)
              Accounting
                  for equity interests in joint ventures – The Company owns 50% interests in
                  two partnerships that are subject to joint control. Under US GAAP,
                  the
                  Company records its share of earnings of these partnerships as
                  equity
                  earnings. Under Canadian GAAP, the Company proportionately consolidates
                  these businesses. Under the proportionate consolidation method
                  of
                  accounting, MDS recognizes its share of the results of operations,
                  cash
                  flows, and financial position of the partnerships on a line-by-line
                  basis
                  in its financial statements and eliminates its share of all material
                  intercompany transactions with the partnerships. While there is
                  no impact
                  on net income from continuing operations or earnings per share
                  from
                  continuing operations as a result of this difference, there are
                  numerous
                  presentation differences affecting the disclosures in these financial
                  statements and in certain of the supporting notes.
 
 ii)
              Research
                  and development – The Company expenses research and development costs as
                  incurred. Under Canadian GAAP, the Company is required to capitalize
                  development costs provided certain conditions are met. Such capitalized
                  costs are referred to as deferred development costs and they are
                  amortized
                  over the estimated useful life of the related products, generally
                  periods
                  ranging from three to five years.
 
 iii)
              Investment
                  tax credits – The Company records non-refundable investment tax credits as
                  a reduction in current income tax expense in the year in which
                  the tax
                  credits are earned. The majority of non-refundable investment tax
                  credits
                  earned by MDS related to research and development expenditures.
                  Under
                  Canadian GAAP, non-refundable investment tax credits are recorded
                  as a
                  reduction in the expense or the capital expenditure to which they
                  relate.
 
 iv)
              Embedded
                  derivatives – Under SFAS 133 – “Accounting for derivative instruments and
                  hedging activities”, certain contractual terms are considered to behave in
                  a similar fashion to a derivative contract and parties to the contracts
                  are therefore required to separate the accounting for these embedded
                  derivatives from the accounting for the host contract. Once separated,
                  these embedded derivatives are subject to the general derivative
                  accounting guidelines outlined in SFAS 133, particularly the requirement
                  to mark these derivatives to market. For MDS, these terms typically
                  relate
                  to the currency in which the contract is denominated. Canadian
                  GAAP is
                  largely aligned with SFAS 133 for most embedded derivatives; however,
                  Canadian GAAP provides exemptions for contracts that are written
                  in a
                  currency that is not the functional currency of one of the substantial
                  parties to the contract but which is a currency in common usage
                  in the
                  economic environment of one of the contracting parties. The Company
                  has
                  elected to use this exemption available under Canadian GAAP in
                  accounting
                  for certain cobalt supply contracts entered into with a supplier
                  located
                  in Russia. The affected contracts are denominated in US dollars.
  v)
              Currency
                  forward and option contracts – The Company currently designates the
                  majority of the forward foreign exchange contracts it enters into
                  as
                  hedges of future anticipated cash inflows. In prior years, these
                  contracts
                  did not qualify for treatment as hedges and, accordingly, such
                  contracts
                  were carried at fair value and changes in fair value were reflected
                  in
                  earnings. Under Canadian GAAP, all such contracts were eligible
                  for hedge
                  accounting, and as a result, gains and losses on these contracts
                  were
                  deferred and recognized in the period in which the cash flows to
                  which
                  they relate were incurred.
 
 vi)
              Comprehensive
                  income – US GAAP requires that a statement of other comprehensive income
                  and accumulated other comprehensive income be displayed with the
                  same
                  prominence as other financial statements. Under Canadian GAAP,
                  statements
                  of other comprehensive income and accumulated other comprehensive
                  income
                  were not required for years prior to the Company’s 2007 fiscal year.
 
 vii)
              Pensions
                  - Under US GAAP, the net funded status of pension plans sponsored
                  by a
                  Company are fully reflected in the consolidated assets or liabilities
                  of
                  the Company. The amount by which plan assets exceed benefit obligations
                  or
                  benefit obligations exceed plan assets, on a plan-by-plan basis,
                  is
                  reflected as an increase in assets or liabilities, with a corresponding
                  adjustment to accumulated other comprehensive income. Under Canadian
                  GAAP,
                  only the net actuarial asset or liability is reflected in the consolidated
                  financial statements.
 
 viii)
              Stock-based
                  compensation – Under US GAAP, certain equity-based incentive compensation
                  plans are accounted for under the liability method using a fair
                  value
                  model to determine the amount of the liability at each period end.
                  Under
                  Canadian GAAP, these plans are accounted for under the liability
                  method
                  using intrinsic value to measure the liability at each period end.
 
 Recent
        Canadian accounting pronouncements
 
 a)
              Capital
                  disclosures – The CICA issued Section 1535, “Capital Disclosures”, which
                  requires the disclosure of both the qualitative and quantitative
                  information that enables users of financial statements to evaluate
                  the
                  entity’s objectives, policies, and processes for managing capital.
 b)
              Inventories
                  – The CICA issued Section 3031, “Inventories”, which replaces existing
                  Section 3030 and harmonizes the Canadian standards related to inventories
                  with International Financial Reporting Standards. The new Section
                  includes
                  changes to the measurement of inventories, including guidance on
                  costing,
                  impairment testing, and disclosure requirements.
 c)
              Financial
                  instruments – The CICA issued section 3862, “Financial Instruments –
                  Disclosure” and Section 3863, “Financial Instruments – Presentation” to
                  replace Section 3861,  “Financial Instruments – Disclosure and
                  Presentation”.
 
 The
        Company is required to adopt Sections 1535, 3862, and 3863 effective for
        its
        fiscal year end beginning November 1, 2007 and these sections affect disclosures
        only. The Company is required to adopt Section 3031 effective February 1,
        2008.
        The Company is currently evaluating the effects that the adoption of Section
        3031 will have on its consolidated results of operations and financial condition
        and is not yet in a position to determine such effects.
 
 The
        increase (decrease) in income from continuing operations resulting from the
        material GAAP differences is summarized in the tables below:
 
 Income
                  Statement - 2007
              
              US
                  GAAP
              
              Joint
                Ventures
                  (i)
              
              Other
              Ref.
              
              Cdn
                  GAAPTotal
                  revenues
              $
              1,210
              $
              45
              $
              (2)
              v
              $
              1,253Total
                  cost of revenues
              
              (789)
              
              (3)
              
              7
              ii,
                  iii
              
              (785)SG&A
              
              (265)
              
              (3)
              
              (2)
              vii,
                  viii
              
              (270)R&D
              
              (68)
              
              30
              
              9
              ii,
                  iii
              
              (29)Depreciation
                  and amortization
              
              (79)
              
              (9)
              
              (3)
              ii
              
              (91)Other,
                  net
              
              (117)
              
              
              
              -
              ii,
                  iv
              
              (117)Operating
                  income (loss)
              
              (108)
              
              60
              
              9
              
              
              (39)Interest
                  expense, net
              
              (1)
              
              
              
              (1)
              A
              
              (2)Income
                  taxes
              
              23
              
              
              
              (16)
              iii
              
              7Equity
                  earnings
              
              53
              
              (60)
              
              7
              A
              
              -Income
                  (loss) from continuing operations
              $
              (
                  33)
              $
              -
              $
              (1)
              
              $
              (34)Basic
                  EPS from continuing operations
              $
              (0.25)
              $
              -
              $
              (0.01)
              
              $
              (0.26)
 Legend:
        A – classification of interest derivative mark to market adjustment and equity
        earnings; ii – Research and development ; iii – investment tax credits; iv –
embedded derivatives; v - Hedge accounting; vii – Pensions (SFAS 158); viii –
stock-based compensation;
 
 Income
                  Statement - 2006
              
              US
                  GAAP
              
              Joint
                Ventures
                  (i)
              
              Other
              Ref.
              
              Cdn
                  GAAPTotal
                  revenues
              $
              1,060
              $
              42
              $
              5
              v
              $
              1,107Total
                  cost of revenues
              
              (763)
              
              (2)
              
              15
              iii,
                  ii
              
              (750)SG&A
              
              (220)
              
              (1)
              
              (3)
              
              
              (224)R&D
              
              (53)
              
              28
              
              7
              ii
              
              (18)Depreciation
                  and amortization
              
              (51)
              
              (9)
              
              (3)
              ii
              
              (63)Other,
                  net
              
              (29)
              
              
              
              25
              iii
              
              (4)Operating
                  income (loss)
              
              (56)
              
              58
              
              46
              
              
              48Interest
                  expense, net
              
              (6)
              
              
              
              -
              
              
              (6)Income
                  taxes
              
              35
              
              
              
              (48)
              iii
              
              (13)Equity
                  earnings
              
              49
              
              (58)
              
              9
              A
              
              -Income
                  (loss) from continuing operations
              $
              22
              $
              -
              $
              7
              
              $
              29Basic
                  EPS from continuing operations
              $
              0.15
              $
              -
              $
              0.06
              
              $
              0.21
 
 Income
                  Statement – 2005
              
              US
                  GAAP
              
              Joint
                Ventures(i)
              
              Other
              Ref.
              
              Cdn
                  GAAPTotal
                  revenues
              $
              982
              $
              33
              $
              30
              v
              $
              1,045Total
                  cost of revenues
              
              (685)
              
              -
              
              6
              iii
              
              (679)SG&A
              
              (210)
              
              9
              
              
              
              
              (201)R&D
              
              (51)
              
              11
              
              13
              ii
              
              (27)Depreciation
                  and amortization
              
              (47)
              
              (4)
              
              -
              
              
              (51)Other,
                  net
              
              (65)
              
              
              
              (6)
              A
              
              (71)Operating
                  income (loss)
              
              (76)
              
              49
              
              43
              
              
              16Interest
                  expense, net
              
              (8)
              
              
              
              2
              A
              
              (6)Income
                  taxes
              
              14
              
              
              
              (23)
              iii
              
              (9)Equity
                  earnings
              
              41
              
              (49)
              
              8
              A
              
              -Income
                  (loss) from continuing operations
              $
              (29)
              $
              -
              $
              30
              
              $
              1Basic
                  EPS from continuing operations
              $
              (0.21)
              $
              -
              $
              0.21
              
              $
              -
 
 There
        is
        no impact on income or earnings per share from discontinued operations as
        a
        result of GAAP differences.
  The
        increase (decrease) in balances on the consolidated statements of financial
        position resulting from the material GAAP differences is summarized in the
        tables below:
 
 Statement
                  of Financial Position - 2007
              
              US
                  GAAP
              
              Joint
                  Ventures(i)
              
              Other
              
              Cdn
                  GAAPCash
                  and short-term investments
              $
              337
              $
              14
              $
              (1)
              $
              350Other
                  current assets
              
              636
              
              7
              
              (5)
              
              638Current
                  assets
              
              973
              
              21
              
              (6)
              
              988Property,
                  plant, and equipment
              
              386
              
              4
              
              -
              
              390Long-term
                  investments and other
              
              290
              
              (39)
              
              33
              
              284Other
                  long-term assets
              
              1,369
              
              18
              
              15
              
              1,402Total
                  assets
              $
              3,018
              $
              4
              $
              42
              $
              3,064Current
                  liabilities
              $
              616
              $
              -
              $
              7
              $
              623Deferred
                  income tax liabilities
              
              168
              
              -
              
              14
              
              182Other
                  long-term liabilities
              
              337
              
              -
              
              (1)
              
              336Total
                  liabilities
              
              1,121
              
              -
              
              20
              
              1,141Share
                  capital
              
              492
              
              -
              
              -
              
              492Additional
                  paid-in capital
              
              73
              
              -
              
              (63)
              
              10Retained
                  earnings
              
              842
              
              -
              
              103
              
              945Accumulated
                  comprehensive income
              
              490
              
              (4)
              
              (10)
              
              476Total
                  shareholders’ equity
              
              1,897
              
              (4)
              
              30
              
              1,923Total
                  liabilities and shareholders’ equity
              $
              3,018
              $
              (4)
              $
              50
              $
              3,064
 
 
 Statement
                  of Financial Position - 2006
              
              US
                  GAAP
              
              Joint
                  Ventures
              
              Other
              
              Cdn
                  GAAPCash
                  and short-term investments
              $
              382
              $
              6
              $
              -
              $
              388Other
                  current assets
              
              685
              
              9
              
              1
              
              695Current
                  assets
              
              1,067
              
              15
              
              1
              
              1,083Property,
                  plant, and equipment
              
              334
              
              4
              
              1
              
              339Long-term
                  investments and other
              
              176
              
              (34)
              
              28
              
              170Other
                  long-term assets
              
              766
              
              16
              
              10
              
              792Total
                  assets
              $
              2,343
              $
              1
              $
              40
              $
              2,384Current
                  liabilities
              $
              471
              $
              1
              $
              2
              $
              $
                  474Deferred
                  income tax liabilities
              
              103
              
              -
              
              (21)
              
              82Other
                  long-term liabilities
              
              415
              
              -
              
              (1)
              
              414Total
                  liabilities
              
              989
              
              1
              
              (20)
              
              970Share
                  capital
              
              566
              
              -
              
              -
              
              566Additional
                  paid-in capital
              
              69
              
              -
              
              (63)
              
              6Retained
                  earnings
              
              391
              
              -
              
              104
              
              495Accumulated
                  comprehensive income
              
              328
              
              -
              
              19
              
              347Total
                  shareholders’ equity
              
              1,354
              
              -
              
              60
              
              1,414Total
                  liabilities and shareholders’ equity
              $
              2,343
              $
              1
              $
              40
              $
              2,384
 
 28.
              Subsequent
                  Events
 
 Subsequent
        to the year-end, the Company signed an agreement to sell its external beam
        therapy and self-contained irradiator product lines. 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 for $15 million cash. 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.
  The
        net
        assets to be sold associated with these product lines amounted to $19 million
        as
        at October 31, 2007, including property plant, and equipment of $5 million
        and
        net working capital of $14 million. There is no goodwill recorded in the
        accounts of the Company related to these product lines. The Company expects
        to
        report a loss as a result of this transaction, including all costs associated
        with the disposal, in the range of $4 million to $6 million in the second
        quarter of 2008.
 
 On
        November 30 and December 5, 2007. MDS announced that MDS Nordion was
        experiencing an interruption in supply of medical isotopes from a primary
        supplier, Atomic Energy of Canada Limited while the supplier completed a
        scheduled shutdown and an upgrade to the electrical system of the National
        Research Universal reactor. The supplier worked closely with industry regulators
        on this matter, and they were able to resume production in late
        December.
 
 29.
              Comparative
                  Figures
 
 Certain
        figures for the previous years have been reclassified to conform with the
        current year’s consolidated financial statement presentation.





Document
      No. 3




MANAGEMENT’S
        DISCUSSION AND ANALYSIS
 
 January22,
        2008
 
 Following
        is management’s discussion and
        analysis (MD&A) of the results of operations for MDS Inc. (MDS or the
        Company) for the year ended October 31, 2007 and its financial position as
        at
        October 31, 2007.  This MD&A should be read in conjunction with
        the audited consolidated financial statements and notes that
        follow.  For additional information and details, readers are also
        referred to the unaudited quarterly financial statements and quarterly MD&A
        for 2007, the Company’s Annual Information Form for 2007 (AIF), and the
        Company’s Form 40-F, each of which is published separately and is available atwww.mdsinc.com,at
        www.sedar.com,and atwww.sec.gov.
 
 Our
        MD&A is intended to enable
        readers to gain an understanding of MDS’s current results and financial
        position. To do so, we provide information and analysis comparing the results
        of
        operations and financial position for the current year to those of the preceding
        two fiscal years. 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 changes in laws, trade
        policies and regulations, and enforcement thereof; judicial judgments and
        legal
        proceedings; our ability to successfully realign our organization, resources
        and
        processes; our ability to complete strategic acquisitions and joint ventures
        and
        to integrate our acquisitions and joint ventures successfully; 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.  We do not undertake to update any forward-looking
        statement, whether written or oral, that may be made from time to time by
        us or
        on our behalf.
 
 Use
        of non-GAAP
        measures
 In
        addition to measures based on generally accepted accounting principles (GAAP)
        in
        this MD&A, we use terms such as adjusted operating income; adjusted earnings
        before interest, taxes, depreciation and amortization (EBITDA); adjusted
        EBITDA
        margin; adjusted EPS; operating working capital; net revenue; 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.
 
 Substantially
        all of the products of the Sciex division 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 only our direct revenues from sales to the joint
        ventures.  We also 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.
 
 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 has 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 documented 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.
 
 Amounts
        are in millions of United States (US) dollars, except per share amounts and
        where otherwise noted.
 
 Adoption
        ofUSGAAP
 Historically
        MDS prepared its
        consolidated financial statements in accordance with Canadian GAAP and provided
        a reconciliation to US GAAP. We have now adopted US GAAP effective with the
        reporting of our fiscal 2007 annual results 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. The consolidated
        financial statements, including the related notes, and this MD&A have
        therefore been prepared based on US GAAP. All figures for prior years contained
        in these documents have been revised to reflect the adoption of US GAAP as
        our
        reporting standard. All financial statements and MD&A previously filed by
        the Company,including
        those filed for interim
        reporting purposes during 2007, were prepared under Canadian
        GAAP.
 
 The
        adoption of US GAAP has the
        following significant impacts on the financial reports of MDS, the impact
        of
        which vary,year
        to year:
 
 §
              Under
                  Canadian GAAP, investments
                  in joint ventures are accounted for using the proportionate consolidation
                  method. The Company’s proportionate share of the joint ventures in which
                  it has an interest are added to the statements of financial position,operations,shareholders’equity,
                  and cash flows on a
                  line-by-line basis,and
                  the Company’s share of
                  revenues, cost of sales, research and development(R&D)expensesand
                  selling, general, and
                  administration(SG&A)expenses
                  associated with
                  transactions with the joint venture are
                  eliminated.
 
 US
        GAAP does not permit proportionate
        consolidation, and entities that are subject to joint ownership and control
        are
        considered to be significantly influenced and are accounted for by the equity
        method. Under US GAAP, the Company records its share of the net income of
        the
        joint venture on a single line of itsconsolidated statement
        of
        operationslabeled “equity
        earnings” thatis
        shownbelow income from
        operations.
  This
        change does not have an impact on
        net income;however,as
        a result of adopting US GAAP, the
        segment income statement for MDS Analytical Technologies reports lower revenues,
        lower expenses, limited income from operations, and substantial equity
        earnings.
 
 §
              Under
                  Canadian GAAP, the Company
                  is required to defer and amortize R&D expenditures, provided certain
                  criteria are met. MDS Analytical Technologies conducts a significant
                  portion of the Company’s R&D activities that qualify for
                  capitalization under Canadian
                  GAAP.
 
 Under
        US GAAP, all annual R&D
        expenditures are expensed as incurred. The impact of adopting US GAAP has
        been
        to reduce operating income and net income by an amount equal to the difference
        between the amount of R&D spending capitalized in a year and the amount of
        amortization recorded in a year related to R&D capitalized in prior
        years.
 
 §
              Under
                  Canadian GAAP, the Company
                  records all R&D investment tax credits (ITCs) as a reduction in the
                  expenditure to which the ITCs relate. MDS conducts a significant
                  amount of
                  R&D on its own behalf and on behalf of others that qualifies for
                  ITCs.
                  The ITCs related to R&D conducted on behalf of others were reported as
                  a reduction in the costs of revenues in our previously filed financial
                  reports and the ITCs associated with R&D conducted on our own behalf
                  were reported as a reduction in R&D
                  expenses.
 
 Under
        US GAAP, the Company will record
        non-refundable ITCs as a reduction in the current income tax expense in the
        year
        in which the credits areearned.
        Although this change does not impact
        net income, R&D and direct cost of services expenses have increased and
        income tax expense has decreased compared to the amounts that would be reported
        under Canadian GAAP.  Refundable ITCs continue to be reported as a
        reduction in the related expenditures.
 
 §
              In
                  addition to ITCs related to
                  R&D, the Company earned ITCs on the MAPLE project in prior years.
                  These ITCs were recorded as a reduction in the carrying value of
                  the MAPLE
                  project in those prior years, and, accordingly, reduced the amount
                  of the
                  loss reported on the disposal of our interest in the facility in
                  2006.
                  Under US GAAP, these ITCs were alsoreportedas
                  a reduction in income tax
                  expense and therefore the amount of the loss reported for the disposal
                  of
                  MAPLE has been increased, with a corresponding decrease in the
                  income tax
                  expense for the year.
 
 §
              Under
                  Statement of Financial Accounting Standard (SFAS) 133 – “Accounting for
                  derivative instruments and hedging activities”, certain contractual terms
                  are considered to behave in a similar fashion to a derivative contract
                  and
                  parties to the contracts are therefore required to separate the
                  accounting
                  for these embedded derivatives from the accounting for the host
                  contract.
                  Once separated, these embedded derivatives are subject to the general
                  derivative accounting guidelines outlined in SFAS 133, particularly
                  the
                  requirement to mark these derivatives to market. For MDS, these
                  terms
                  typically relate to the currency in which the contract is denominated.
                  Canadian GAAP is largely aligned with SFAS 133 for most embedded
                  derivatives; however, Canadian GAAP provides exemptions for contracts
                  that
                  are written in a currency that is not a functional currency of
                  one of the
                  contract parties but which is a currency in common usage in the
                  economic
                  environment of one of the contracting parties. The Company elected
                  to use
                  this exemption available under Canadian GAAP in accounting for
                  certain
                  cobalt
 supply
                  contracts entered into with a supplier located in Russia. The affected
                  contracts are denominated in US dollars.
 
 §
              We
                  have changed the presentation of our revenues and cost of revenues
                  to
                  present product revenues and costs separately from those for services.
                  The
                  majority of revenues earned by MDS Nordion and MDS Analytical Technologies
                  are product revenues. Service revenues reported for these segments
                  relate
                  primarily to service, installation, and consulting services that
                  are sold
                  to customers on a stand-alone basis. All revenues reported for
                  the MDS
                  Pharma Services segment are from the sale of contract research
                  and related
                  services.
 
 §
              We
                  have adopted SFAS 158 – “Employers’ accounting for defined benefit plans
                  and other post-retirement benefits”. This new standard requires that
                  companies reflect the funded status of post-retirement obligations
                  as an
                  asset or liability and record the portion of this asset or liability
                  that
                  has not yet been recognized in income as a component of accumulated
                  other
                  comprehensive income. MDS sponsors one significant defined benefit
                  pension
                  plan and a number of other, smaller, pension and post-retirement
                  benefit
                  plans. As a result of adopting SFAS 158, we recorded a $16 million
                  increase in net pension assets associated with these plans (see
                  note 21 –
                  Employee Benefits).
 
 §
              Under
                  US GAAP, we are required to account for certain equity-based incentive
                  compensation plans under the liability method using a fair value
                  model to
                  determine the amount of the liability at each period end. Under
                  Canadian
                  GAAP, these plans are accounted for under the liability method
                  using
                  intrinsic value to measure the liability at each period end.
 
 The
        impacts of the differences between US and Canadian GAAP are described ina reconciliation to Canadian
        GAAP that
        has been provided in note 27 to the consolidated financial statements. A
        summary
        of these impacts appears below:
 
 2007
              
              2006
              
              2005Total
                  revenues – US
                  GAAP
              $
              1,210
              $
              1,060
              $
              982Total
                  revenues – Canadian GAAP
              $
              1,253
              $
              1,107
              $
              1,045Operating
                  income (loss) – US
                  GAAP
              $
              (108)
              $
              (56)
              $
              (76)Operating
                  income (loss) – Canadian
                  GAAP
              $
              (39)
              $
              48
              $
              16Income
                  (loss)from continuing
                  operations– US
                  GAAP
              $
              (33)
              $
              22
              $
              (29)Income
                  (loss)from continuing
                  operations– Canadian
                  GAAP
              $
              (34)
              $
              29
              $
              1Basic
                  EPS - continuing operations
                  – US GAAP
              $
              (0.25)
              $
              0.15
              $
              (0.21)Basic
                  EPS - continuing operations
                  – Canadian GAAP
              $
              (0.26)
              $
              0.21
              $
              -
 
 In
        addition to changes that relate to
        the adoption of US GAAP, the Company changed its presentation of certain
        revenues that arise from the reimbursement of the Company by our customers
        (reimbursement revenues) for certain reimbursable out-of-pocket expenses
        that we
        incur on behalf of these customers during the conduct of clinical trials
        (reimbursed expenses). The Company has the right to bill customers for
        reimbursement of the amounts, but is generally not entitled to a mark-up
        or
        other form of profit margin related to these activities. In the financial
        reports for prior years, the reimbursement revenues were offset against the
        related out-of-pocket costs, and because these amounts offset, neither a
        revenue
        nor an expense item associated with this activity was
        reported.
 
 In
        the current presentation, the Company
        is reporting reimbursement revenues and reimbursed expenses on a gross basis
        as
        separate lines on the consolidated statementsof
        operations.As a result of this
        change, although
        both total revenues and total expenses have increased, there is no impact
        on
        operating income reported. This change in presentation reflects a
        reconsideration of the Company’s reporting of revenues under both Canadian and
        US GAAP. We now believe that the presentation used in prior Canadian GAAP
        financial statements is not permitted under Canadian GAAP. While this change
        does not reflect a Canadian-US
        GAAP difference, it does reflect a
        change in the presentation compared to the previously filed Canadian GAAP
        financial statements and therefore, comparative amounts reflected in these
        annual consolidated financial statements have been revised to reflect this
        change on both a Canadian andaUS
        GAAP basis.
 
 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.
 
 Change
        in reporting currency to US
        dollars
 MDS
        has
        historically measured and presented its consolidated financial statements
        in
        Canadian dollars. Effective November 1, 2006, we adopted the US dollar as
        our
        reporting currency as a significant portion of revenues, expenses, assets
        and
        liabilities are denominated in US dollars, the global character of the Company’s
        operations has increased dramatically following the divestiture of the
        diagnostics business, and the majority of the companies with which we compete
        report their financial results in US dollars; consequently, we believe that
        investors will gain a better understanding of our operating results when
        they
        are presented in US dollars.
  The
        functional currency of MDS Inc., the parent company and reporting entity,
        remains the Canadian dollar. When there is a change in reporting currency,
        US
        GAAP requires that financial statements for previous years be presented using
        a
        translation method that retains the company’s functional currency (in this case,
        the Canadian dollar) as the currency of measurement.  For comparative
        purposes, we have prepared US-dollar historical financial statements by
        translating the previously reported Canadian dollar amounts using the following
        methods and exchange rates:
  Revenues,
        expenses, and cash
        flows– translated into US dollars using the weighted-average exchange
        rate for the applicable periods.
  Assets
        and liabilities–
translated into US dollars using the exchange rate in effect at the
        end of the
        applicable period.
  Share
        capital–Share
        capital transactions were
        translated into USdollars
        using the exchange rate in effect
        when the transaction occurred.
  Retained
        earnings–Net
        income transactionswere translated into
        US dollars as
        described above. Other transactions affecting retained earnings, principally
        as
        a result of dividend payments and share repurchases, weretranslated into US
        dollars using the
        exchange rate in effect when the transaction occurred.
  Introduction
 MDS
        is a
        global life sciences company that provides market-leading products and services
        that our customers need for the development of drugs and the diagnosis and
        treatment of disease.  Through our three business
        segments, we
        are a leading global provider of pharmaceutical contract research services
        (MDS
        Pharma Services), medical isotopes for molecular imaging and radiotherapeutics
        (MDS Nordion), and analytical instruments (MDS Analytical Technologies).
        Each of
        these business segments sells a variety of products and/or services to customers
        in markets around the world.
 
 Strategic
        initiatives and discontinued operations
 On
        September 1, 2005, we announced our strategic plan to pursue growth in the
        global life sciences market and dispose of assets that do not contribute
        to the
        Company’s areas of focus.  During fiscal 2006, we completed
        a
        number of transactions in pursuit of this renewed focus, culminating in the
        announcement on October 5, 2006 of the sale ofour remaining Canadian
        diagnostics
        businesses for gross proceeds of C$1.3 billion, which included amounts
        ultimately paid to holders of minority interests in these
        businesses.
 
 On
        February 26, 2007, we announced the
        closing of this transaction. Under the terms of the final agreements, MDS
        received net cash proceeds (after expenses and taxes) of $929 million cash
        and a
        $65 million non-interest bearing promissory note due in 2009. After paying
        costs
        of the transaction, taxes and distributions to our minority partners in these
        businesses, we reported a gain of approximately $0.8 billion in our second
        quarter.
 
 On
        February 26, 2007, coinciding with the completion of the sale of the diagnostics
        businesses, we announced the launch of a substantial issuer bid to repurchase
        MDS Common shares.  Under the bid, which closed on April 9, 2007, we
        repurchased 22.8 million Common shares for$441 million at
        an
        average price of C$21.90.
  As
        a result of these transactions,
        we now treat our former diagnostics segment as a discontinued operation.
        All financial references in this document exclude those businesses that we
        consider to be discontinued, unless otherwise noted.  Our discontinued
        businesses include our diagnostics businesses, our interest in Source Medical
        Corporation, which was sold in November 2006, and certain non-strategic
        pharmaceutical research services businesses.
 
 Acquisition
        of Molecular Devices Corporation
 Our
        September 2005 announcement
        reconfirmed our commitment to focus on building our life sciences businesses.
        On
        January 29, 2007, we announced our agreement to acquire Molecular DevicesCorporation (MDC),a leading provider
        of
        high-performance measurement tools for high-content screening, cellular
        analysis, and biochemical testing. Under this agreement, which closed on
        March
        20, 2007, MDS acquired all Common shares of MDC for $35.50 per
        share.
 
 This
        strategic acquisition marked a
        significant expansion for MDS. By acquiring Sunnyvale, California-based MDC,
        with its global sales and service network and leading-edge products, MDS
        strengthened its leadership position as one of the top global providers of
        life
        sciences solutions. We offer systems that provide high-content screening,
        and
        cellular and biochemical testing for leading drug discovery and life sciences
        laboratories in pharmaceutical, biotechnology, academic, and government
        institutions.  Upon completion of this acquisition, MDC was combined
        with our existing Sciex instruments business to form MDS Analytical
        Technologies.
 
 The
        acquisition has been accounted for using the purchase method based on certain
        preliminary estimates relating to the fair value of the assets and liabilities
        of the acquired company. The total cost of the acquisition was $621 million,
        including the cash cost of the tender offer, the cash cost to acquire
        outstanding in-the-money options held by MDC employees, and cash transaction
        costs. The components of the purchase cost and the preliminary allocation
        of the
        costs are as follows:
 
 Cash
                  paid for tendered shares
              $
              587Cash
                  paid to acquire vested options
              
              27Cash
                  transaction costs
              
              7Total
                  cost of acquisition
              $
              621Preliminary
                  allocation of cost of acquisition:Cash
                  acquired
              $
              21Net
                  tangible assets acquired
              
              15Intangible
                  assets acquired
              
              221Goodwill
              
              364Total
              $
              621
 
 Additional
        details are provided in note 4 to the consolidated financial
        statements
  Consolidated
        operating highlights and reconciliation of consolidated adjusted
        EBITDA
 2007
              
              2006
              
              2005Total
                  revenues
              $
              1,210
              
              $
                  1,060
              
              $
                  982Reimbursement
                  revenues
              
              (91)
              
              (105)
              
              (95)Net
                  revenues
              $
              1,119
              $
              955
              $
              887Income
                  (loss) from continuing
                  operations
              $
              (33)
              $
              22
              $
              (29)Income
                  taxes
              
              (23)
              
              (35)
              
              (14)Net
                  interest
                  expense
              
              2
              
              6
              
              6Loss
                  (gain) on
                  derivatives
              
              (1)
              
              -
              
              2Depreciation
                  and
                  amortization
              
              79
              
              51
              
              47EBITDA
              
              24
              
              44
              
              12Restructuring
                  charges,
                  net
              
              37
              
              (7)
              
              51Valuation
                  provisions
              
              8
              
              6
              
              17MAPLE
                  settlement
              
              -
              
              36
              
              -Gain
                  on sale of a
                  business/investment
              
              (4)
              
              (2)
              
              -Provision
                  for FDA-related
                  settlements
              
              61
              
              -
              
              -Acquisition
                  integration
              
              19
              
              -
              
              -Adjusted
                  EBITDA
              $
              145
              $
              77
              $
              80Adjusted
                  EBITDA
                  margin
              
              13%
              
              8%
              
              9%
 
 Net
        revenues for 2007 were $1,119 million, up 17% from $955 million in net revenues
        in 2006.  Net revenues for 2006 were up 8% from the $887 million
        reported in fiscal 2005. Net revenues for 2007 included $138 million from
        the
        Molecular Devices division (MD) of MDS Analytical Technologies for the period
        March 20 to October 31, 2007. Excluding revenues resulting from this
        acquisition, net revenues were up 3% to $981 million.
 
 Revenue
        growth was strongest in the Sciex product lines of MDS Analytical Technologies
        and the Phase II to IV services offered by MDS Pharma Services. Revenue declined
        in early-stage MDS Pharma Services, as demand for Phase I and bioanalytical
        services continued to be affected by concerns related to the US Food and
        Drug
        Administration (FDA) audit of our Montreal facilities. Revenues from these
        services were lower in 2007 compared to 2006, offsetting good performance
        from
        other early-stage services. MDS Nordion revenues were also lower in 2007
        compared to a very strong 2006, as revenues in 2006 were positively impacted
        by
        production difficulties experienced by a competitor.
 
 MDS
        reported a loss from continuing operations of $33 million, compared to income
        of
        $22 million in 2006, largely due to the provision for FDA-related customer
        settlements and provisions for restructuring, which together
        totaled
 $98
        million. Excluding the impact of adjusting items, as identified in the table
        above, adjusted EBITDA was
 $145
        million compared to $77 million for 2006. Newly acquired MD contributed $33
        million of adjusted EBITDA during the period since acquisition. Excluding
        the
        impact of MD, adjusted EBITDA was up 45% this year to
 $112
        million, driven primarily by improved operating results for MDS Pharma Services
        and strong results from the Sciex product lines.
 
 Fiscal
        2006 adjusted EBITDA was down 4% compared to 2005, as strong results from
        MDS
        Nordion did not offset weakness in the other businesses. As noted previously,
        operating results for MDS Nordion in 2006 were driven higher by production
        difficulties encountered by a competitor.
 
 The
        declining US dollar remained a significant factor faced by all of our businesses
        again this year. While the decline in the US dollar has a positive impact
        on
        reported revenues earned by the Company in currencies other than the US dollar,
        costs incurred in those currencies are also higher on a reported basis,
        resulting in lower operating income. In addition, the revaluation and
        translation of US-dollar denominated monetary assets owned outside of the
        US
        generated a significant foreign exchange loss in 2007. The foreign exchange
        loss
        included in operating income for 2007 was
 $16
        million, compared to $3 million in 2006 and $1 million in 2005.
 
 The
        on-going efforts to resolve issues raised by the FDA during a review of our
        Montreal (Canada) area facilities have had a significant impact on the
        comparability of results for MDS and for MDS Pharma Services year-over-year.
        In
        January of 2007, the FDA issued letters to sponsors of generic drug approval
        applications (ANDA) requiring them to take certain steps to demonstrate to
        the
        Agency that the applications contain valid study data. In response to this
        action by the FDA, we suspended our self-review and redirected these resources
        to helping our customers to take steps that would address the Agency’s
        requirements. In our second quarter, we reserved $61 million to provide this
        assistance and we
        have
        reported this provision as an adjusting item. We have charged the cost incurred
        on these activities since the end of January 2007 to this reserve. As a result,
        adjusted EBITDA for fiscal 2007 reflects only $5 million of costs related
        to the
        FDA matter, while adjusted EBITDA for fiscal 2006 reflects charges of $28
        million, including $8 million recorded in cost of service revenue.  We
        view the costs that we have incurred in the self-review as a quality assurance
        cost and therefore we have not treated costs incurred prior to January 2007
        as
        an adjusting item.
 
 In
        addition to our work to resolve the FDA matter, we launched a significant
        profit
        improvement initiative directed at raising the profitability of MDS Pharma
        Services to a level comparable to that of our peers. This initiative was
        the
        primary driver behind $37 million of restructuring charges we recorded this
        year. In fiscal 2006, we reported a recovery of $7 million of restructuring
        charges that were originally recorded in 2005. This recovery arose as we
        were
        able to negotiate the termination of a global information technology services
        contract without penalty. Restructuring charges in 2005 amounted to $51 million,
        the majority of which related to MDS Pharma Services and to initiatives
        affecting our corporate head office and global support services.
 
 Other
        adjustments recorded to calculate adjusted EBITDA for 2007 included $8 million
        of valuation provisions,
 $4
        million of gains from the sale of businesses and investments, and $19 million
        of
        integration costs stemming from our acquisition of MDC. Other adjustments
        for
        2006 included $6 million of valuation provisions and a $2 million gain resulting
        from the sale of a business. In 2005, we recorded valuation provisions and
        investment write-downs totaling
 $17
        million. Each of these adjustments is described in more detail later in this
        document.
 
 In
        2006,
        we reached an agreement that resulted in a comprehensive change in our
        relationship with Atomic Energy of Canada Limited (AECL) pertaining to the
        MAPLE
        reactor project. The details of the settlement are described in the MDS Nordion
        section, below. As a result of this settlement, we recorded a $36 million
        non-cash loss that has been reflected as an adjusting item. Previously, we
        reported this settlement under Canadian GAAP as a loss of $9 million. The
        amount
        of the loss reported for Canadian GAAP purposes was net of accumulated ITCs
        of
        $27 million. For US GAAP purposes, these ITCs are reflected as a reduction
        in
        income tax expense for the year and the loss on the transaction has therefore
        increased by the same amount.
 
 Consolidated
        operating income
 2007
              
              %
                  of net
                  revenues
              
              2006
              %
                  of net
                  revenues
              
              2005
              %
                  of net
                  revenuesProduct
                  revenues
              $
              564
              $
              50%
              $
              438
              46%
              $
              396
              45%Service
                  revenues
              
              555
              
              50%
              
              517
              54%
              
              491
              55%Net
                  revenues
              
              1,119
              
              100%
              
              955
              100%
              
              887
              100%Reimbursement
                  revenues
              
              91
              
              
              
              105
              
              
              95Total
                  revenues
              
              1,210
              
              
              
              1,060
              
              
              982Direct
                  cost of products
              
              (360)
              
              (32%)
              
              (296)
              (31%)
              
              (269)
              (30%)Direct
                  cost of services
              
              (338)
              
              (30%)
              
              (362)
              (38%)
              
              (321)
              (36%)Reimbursed
                  expenses
              
              (91)
              
              
              
              (105)
              
              
              (95)Selling,
                  general and administration
              
              (265)
              
              (24%)
              
              (220)
              (23%)
              
              (210)
              (24%)Research
                  and
                  development
              
              (68)
              
              (6%)
              
              (53)
              (6%)
              
              (51)
              (6%)Depreciation
                  and
                  amortization
              
              (79)
              
              (7%)
              
              (51)
              (5%)
              
              (47)
              (5%)Restructuring
                  charges
              
              (37)
              
              (4%)
              
              7
              1%
              
              (51)
              (6%)Other
                  expenses
              
              (80)
              
              (7%)
              
              (36)
              (4%)
              
              (14)
              (2%)Operating
                  loss
              $
              (108)
              $
              (10%)
              $
              (56)
              (6%)
              $
              (76)
              (9%)Margins:Gross
                  margin on
                  products
              
              
              
              36%
              
              
              32%
              
              
              32%Gross
                  margin on
                  services
              
              
              
              39%
              
              
              30%
              
              
              35%Capital
                  expenditures
              $
              71
              
              
              $
              51
              
              $
              102
 
 Selling,
        general, and administration (SG&A) expenses for the year was 24% of net
        revenues or $265 million, up from $220 million in 2006, 23% of net revenues.
        The
        increase is primarily attributable to the addition of MD, which incurred
        $41
        million of SG&A since the acquisition date earlier this year, and to the
        impact of foreign exchange for reporting purposes.  Fiscal
        2006 SG&A expenses included $20 million associated with the self-review of
        our Montreal bioanalytical operations compared to $4 million this year, and
        $13
        million related to our first year Sarbanes/Oxley (SOx) compliance program
        compared to $2 million this year. SG&A expenses in 2005 totaled $210 million
        or 24% of net revenues. In late 2005, we took steps to reduce spending on
        SG&A, including a significant headcount reduction in corporate and central
        support services.  Combined SOx and FDA audit spending in 2005
        amounted to $10 million.
 
 MDS
        Analytical Technologies is responsible for the majority of R&D costs we
        incur. R&D increased from $53 million in 2006 to $68 million in 2007 due
        primarily to the acquisition of MD during the year.
 
 Depreciation
        and amortization expense amounted to $79 million, a $28 million increase
        from
        2006. The increase includes $20 million resulting from the acquisition of
        Molecular Devices. Also, equity earnings reported for the joint ventures
        are net
        of $6 million of depreciation and amortization expense recorded by those
        entities (2006 – $5 million; 2005 – $3million).
 
 The
        primary item included in other expenses of $80 million for 2007 is the provision
        of $61 million for FDA-related customer settlements. Fiscal 2006 other expenses
        included the $36 million loss resulting from the MAPLE settlement, while
        the $14
        million of other expenses in 2005 reflects valuation provisions against
        long-term investments and intangible assets.
 
 Earnings
        per share
 Adjusted
        earnings per share(EPS)for
        the year were as
        follows:
 
 2007
              
              2006
              
              2005Basic
                  earnings per share from continuing operations – as
                  reported
              $
              (0.25)
              $
              0.15
              $
              (0.21)Adjusted
                  for:Restructuring
                  charges, net
              
              0.19
              
              (0.04)
              
              0.25FDA-related
                  customer settlements
              
              0.31
              
              -
              
              -Valuation
                  provisions
              
              0.06
              
              0.05
              
              0.11Mark-to-market
                  on interest rate swaps
              
              (0.01)
              
              -
              
              0.01MAPLE
                  settlement
              
              (0.03)
              
              0.04
              
              -Gain
                  on sale of business and long-term investments
              
              (0.02)
              
              -
              
              -Acquisition
                  integration
              
              0.09
              
              -
              
              -Tax
                  rate changes
              
              -
              
              (0.03)
              
              -Adjusted
                  EPS
              $
              0.34
              $
              0.17
              $
              0.16
 
 Adjustments
        made to determine adjusted EPS include all items used to derive adjusted
        EBITDA.
        The adjustments also reflect the after-tax impact of the MAPLE arbitration
        settlement, including $6 million of incremental ITCs realized in fiscal
        2007.  In 2006, we revalued certain deferred tax balances based on an
        enacted Canadian federal rate reduction and a Quebec tax rate increase. The
        impact of this revaluation was a $4 million reduction in net deferred tax
        liabilities, and the EPS impact of this was recorded as an
        adjustment.  In addition, the EPS impact of amortization expense
        associated with MD acquired intangible assets amounted to $0.07 which has
        not
        been treated as an adjusting item.
  MDS
        Pharma Services
 Financial
        Highlights
 2007
              %
                  of net
                  revenues
              2006
              %
                  of net
                  revenues
              2005
              %
                  of net
                  revenuesEarly-stage
              $
                  254
              53%
              $
                  267
              58%
              $
                  276
              64%Late-stage
              223
              47%
              191
              42%
              158
              36%Net
                  revenues
              477
              100%
              458
              100%
              434
              100%Reimbursement
                  revenues
              91
              
              105
              
              95Total
                  revenues
              568
              
              563
              
              529Cost
                  of revenues
              (332)
              (70%)
              (359)
              (79%)
              (319)
              (74%)Reimbursed
                  expenses
              (91)
              
              (105)
              
              (95)Selling,
                  general and administration
              (130)
              (27%)
              (125)
              (27%)
              (116)
              (27%)Research
                  and
                  development
              -
              -
              -
              -
              (2)
              -Depreciation
                  and
                  amortization
              (35)
              (7%)
              (30)
              (6%)
              (26)
              (6%)Restructuring
                  charges
              (28)
              (6%)
              -
              -
              (20)
              (5%)Other
                  income
                  (expense)
              (74)
              (16%)
              2
              -
              (15)
              (3%)Operating
                  income
                  (loss)
              (122)
              (26%)
              (54)
              (12%)
              (64)
              (15%)Adjustments:Provision
                  for FDA-related
                  settlements
              61
              13%
              -
              -
              -
              -Restructuring
                  charges
              28
              6%
              -
              -
              20
              5%Loss
                  (gain) on sale of a
                  business
              4
              1%
              (2)
              
              -
              -Valuation
                  provision
              -
              -
              -
              -
              12
              3%(29)
              (6%)
              (56)
              (12%)
              (32)
              (7%)Depreciation
                  and
                  amortization
              35
              7%
              30
              6%
              26
              6%Adjusted
                  EBITDA
              $
                  6
              1%
              ($
                  26)
              (6%)
              ($
                  6)
              (1%)Margins:Gross
                  margin
              30%
              
              22%
              
              26%Adjusted
                  EBITDA
              1%
              
              (6%)
              
              (1%)Capital
                  expenditures
              $
                  48
              
              $
                  37
              
              $
                  24
 
 Net
        revenues for MDS Pharma Services grew by 4% in 2007, although 17% growth
        in
        late-stage services was partially offset by continuing weakness from early-stage
        services. The growth in late-stage services, which includes Phase II to IV
        clinical trials services and global central laboratory services, reflects
        continuing global trends in this marketplace, improved operating discipline
        and
        the conversion of some of the backlog growth of recent years into revenues.
        All
        of these factors have continued to drive our late-stage revenues since 2005,
        and
        the strong growth in 2007 is a continuation of the 21% growth experienced
        in
        2006.
 
 Revenues
        from early-stage services continue to be affected by the bioanalytical review
        involving our Montreal-area facilities. The 5% revenue decrease this year
        follows a 3% decrease for 2006 compared to 2005. Both bioanalytical testing
        services and Montreal-area Phase I clinic revenues have dropped for reasons
        that
        we attribute to this review.
 
 Monthly
        average backlog was $385 million for the fourth quarter of fiscal 2007, down
        $45
        million or 10% from the end of last year and $65 million from a peak of $450
        million in the second quarter of 2007. The decrease in backlog is largely
        attributable to a higher than normal level of contract cancellations relating
        to
        compound failures and customer mergers affecting our Phase II to IV
        business.  A majority of the revenues earned by the MDS Pharma
        Services’ business result from  contracts which typically run several
        months for early-stage clinical trials and as much as several years for Phase
        III/IV clinical trials.  Terms of most contracts entered into by MDS
        Pharma Services entitle clients to cancellation rights that
        may
        be exercised by the client in the event of regulatory delay, if unexpected
        results are encountered at any stage of the development program or if a client
        makes decisions affecting the on-going development of a compound. Combined
        with
        the improved conversion of contract backlog, these cancellations contributed
        to
        the overall decrease in average monthly pharmaceutical research
        backlog.
 
 Average
                  monthly backlogFiscal
                  2005 – Quarter 1
              $
              315Quarter
                  2
              
              305Quarter
                  3
              
              315Quarter
                  4
              
              340Fiscal
                  2006 – Quarter 1
              
              370Quarter
                  2
              
              400Quarter
                  3
              
              400Quarter
                  4
              
              430Fiscal
                  2007 – Quarter 1
              
              450Quarter
                  2
              
              450Quarter
                  3
              
              420Quarter
                  4
              
              385
 
 MDS
        Pharma Services reported an operating loss for the third year in 2007, due
        in
        large part to provisions recorded in the second quarter to cover the expected
        cost of settlements with customers and profit improvement initiatives for
        the
        business. These activities resulted in provisions totaling $89 million and
        we
        treated them as adjusting items in the determination of adjusted EBITDA for
        the
        segment this year.
 
 Adjusted
        EBITDA for the business improved to income of $6 million compared to losses
        of
        $26 million last year and
 $6
        million for 2005. Fiscal 2006 adjusted EBITDA is net of $24 million of costs
        incurred by the division related to a self-review of bioanalytical laboratory
        study methods instituted late in 2005 in response to an FDA site audit. Fiscal
        2007 adjusted EBITDA is net of $4 million of such costs, and all FDA-related
        costs since January 2007 have been charged to a reserve established in the
        second quarter of 2007 for this purpose.
 
 SG&A
        expenses for the segment were $130 million compared to $125 million in 2006
        and
        $116 million in 2005. The SG&A figure for 2006 also includes $16 million of
        FDA review costs compared to $4 million for 2007.  Foreign currency
        losses associated with asset revaluation amounted to $9 million in 2007 compared
        to $2 million in 2006 and
 $3
        million in 2005.  The majority of these losses arise due to the drop
        in the US dollar.  Depreciation and amortization, which has been
        rising as we have expanded facilities in Lyon, Lincoln, and New Jersey, was
        $35
        million compared to
 $30
        million in 2006 and $26 million in 2005.
 
 Other
        expense for 2007 includes a provision of $61 million primarily for customer
        reimbursements related to costs that they are expected to incur to comply
        with
        FDA requirements for the re-validation of certain study data originating
        from
        studies conducted at our two Montreal-area facilities. We also recorded a
        loss
        of $4 million during the year as a result of the sale of our Hamburg, Germany
        Phase I clinic and foreign exchange losses of $9 million. Other income in
        2006
        included a $2 million gain from the sale of an agronomics business and a
        $2
        million insurance settlement for costs related to Hurricane Katrina, which
        severely damaged our New Orleans Phase I facility in September 2005. This
        facility was closed during 2007.  Other expense in 2005 reflects the
        write-off of a long-term loan receivable and the write-off of a five-year
        licensing fee for technology that we later abandoned. With the exception
        of the
        insurance proceeds, these items have been treated as adjusting items in the
        respective years.
 
 During
        2007, we took a number of steps that we expect will help return MDS Pharma
        Services to a level of profitability that is comparable to our peers in this
        industry. These actions resulted in restructuring charges totaling $28 million,
        the majority of which were recorded in the first half of the year. During
        the
        second half, we accelerated the implementation
 of
        the
        restructuring plan; however, the impact of these initiatives on fiscal 2007
        adjusted operating results was limited due to the implementation
        timing.  Actions announced or taken during the year
        included:
 
 §
              The
                  closure of the New Orleans site in the first quarter when both
                  customers
                  and participant populations failed to return to the region.
 §
              The
                  sale of an unprofitable Phase I clinic location in Hamburg, Germany,
                  and
                  of a regionally based Phase II to IV business in Spain.
 §
              A
                  global workforce reduction of approximately 500 that was 80% implemented
                  by year-end.
 §
              Consolidation
                  of certain bioanalytical services in Zurich, Switzerland, and Lincoln,
                  Nebraska, resulting in the closure of a laboratory in Sittingbourne,
                  UK,
                  and a facility reduction in Montreal, Canada.
 §
              Consolidation
                  of certain other discovery/preclinical services in Bothell, Washington.
 §
              Consolidation
                  of European central laboratory operations in Baillet, France, and
                  a
                  reduction in the
 size
                  of our Hamburg central laboratory operations.
 
 These
        2007 actions continue initiatives begun in 2005, when we recorded a provision
        of
        $20 million. We treated these restructuring charges as adjusting items in
        the
        respective years.
 
 Final
        steps in the 2007 restructuring plan for MDS Pharma Services are expected
        to be
        completed in the first half of 2008, including the remaining 20% of the
        workforce reduction.
 
 Capital
        expenditures for the segment totaled $48 million in 2007 and were focused
        on our
        300-bed expansion in Phoenix, Arizona; expanding our central laboratory facility
        in Beijing, China; and customer-facing information technology initiatives.
        Spending of $37 million in 2006 was focused on increasing capacity in Lincoln
        and Lyon and establishing our new central laboratory in the US. Capital
        expenditures were $24 million in 2005.
 
 Regulatory
        review of Montreal bioanalytical operations
 During
        2007 we continued our efforts to address FDA issues related to our bioanalytical
        operations in our Montreal, Canada, facilities.
 
 In
        January 2007, the FDA issued statements that outlined steps that customers
        of
        our Montreal bioanalytical facility would be required to take to resolve
        any
        outstanding issues.  The FDA directed the sponsors of approved and
        pending generic drug submissions containing study data produced in these
        facilities during the period between January 2000 and December 2004 to take
        one
        of three actions to address FDA concerns about the accuracy and validity
        of
        these bioanalytical studies:  1) repeat their bioanalytical studies;
        2) re-analyze their original study samples at a different bioanalytical facility
        or 3) independently audit the original study results.  In addition,
        the FDA wrote to sponsors of innovator submissions and requested that they
        advise the FDA of any submissions containing data from those facilities during
        the affected period.
 
 In
        their
        letter to generic sponsors, the FDA imposed a six-month time limit to complete
        the generic work. This time has since passed, and we believe we have
        substantially completed all related generic site audits.  We continue
        to receive a limited number of study audit requests from innovator customers,
        and expect that we may continue to receive these requests in low numbers
        in the
        coming months.
 
 During
        2007, we also responded to questions from European regulators about the nature
        of the work that was done for the FDA.  Although we are not able to
        assess the potential impact of possible foreign regulatory actions, if any,
        at
        this time, we are satisfied with the progression of these
        discussions.
 
 During
        the second quarter, we approved and recorded a $61 million provision for
        a
        reimbursement policy for 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 since utilized $11 million of this reserve for
        such
        costs, an amount that was partially offset by a $5 million foreign currency
        translation adjustment on the US-dollar denominated components of the cost
        estimate.
 
 At
        October 31, 2007, we were awaiting reimbursement requests for the majority
        of
        the generic and innovator study audits that were completed in our
        facility.  Based on information currently available, we believe that
        the remaining reserve of $55 million will be sufficient to cover any agreements
        reached with clients for study audits, study re-runs, and other related
        costs.
 
 Full
        and
        complete resolution of the bioanalytical regulatory issues has been a key
        area
        of focus for MDS Pharma Services and MDS.  We remain committed to
        working cooperatively with the FDA, other regulators, and our customers to
        address any regulatory concerns and to support our customers with further
        follow-up.  The remaining reserve reflects our current best estimate
        of the costs we expect to incur with respect to this work and for obligations
        we
        have to clients. There can be no assurance at this time that the full balance
        of
        this reserve will be required, or that costs will not exceed the amounts
        we have
        currently estimated.
  MDS
        Nordion
 Financial
        Highlights
 2007
              %
                  of net
                  revenues
              2006
              %
                  of net
                  revenues
              2005
              %
                  of net
                  revenuesProduct
                  revenues
              $
                  284
              98%
              $
                  290
              98%
              $
                  243
              98%Service
                  revenues
              6
              2%
              5
              2%
              4
              2%Net
                  revenues
              290
              100%
              295
              100%
              247
              100%Cost
                  of product revenues
              (147)
              (51%)
              (147)
              (50%)
              (132)
              (54%)Cost
                  of service revenues
              (3)
              (1%)
              (3)
              (1%)
              (2)
              (1%)Selling,
                  general and administration
              (54)
              (19%)
              (51)
              (17%)
              (48)
              (19%)Research
                  and
                  development
              (4)
              (1%)
              (5)
              (2%)
              (6)
              (2%)Depreciation
                  and
                  amortization
              (13)
              (4%)
              (15)
              (5%)
              (13)
              (5%)Restructuring
                  charges
              -
              -
              2
              1%
              (3)
              (1%)Other
                  income
                  (expense)
              3
              1%
              (36)
              (12%)
              1
              -Operating
                  income
              72
              25%
              40
              14%
              44
              18%Adjustments:MAPLE
                  settlement
              -
              -
              36
              12%
              -
              -Gain
                  on sale of a
                  business
              (1)
              -
              -
              -
              -
              -Restructuring
                  charges,
                  net
              -
              -
              (2)
              (1%)
              3
              1%71
              25%
              74
              25%
              47
              19%Depreciation
                  and
                  amortization
              13
              4%
              15
              5%
              13
              5%Adjusted
                  EBITDA
              $
                  84
              29%
              $
                  89
              30%
              $60
              24%Margins:Gross
                  margin
              49%
              
              50%
              
              46%Adjusted
                  EBITDA
                  margin
              29%
              
              30%
              
              24%Capital
                  expenditures
              $
                  8
              
              $
                  -
              
              $
                  50
 
 Net
        revenues from our isotopes business were down marginally in 2007, dropping
        2%
        compared to the prior year.  Net revenues for 2006 were exceptionally
        strong as a major competitor announced a voluntary recall of technetium
        generators, used primarily for cardiac imaging, while they addressed sterility
        issues at their primary manufacturing facility.  This facility was out
        of production for most of the first six months of fiscal 2006 and sales volumes
        for our isotopes business increased during this time.  We estimate
        that up to $14 million of high-margin revenues were realized in the first
        two
        quarters related to this.  Industry supply returned to normal by the
        end of May 2006.  Over the past two years, the division has been able
        to effectively mitigate the decline in the value of the US dollar versus
        the
        Canadian dollar by implementing changes to its pricing structure.
 
 In
        2004,
        we concluded a $25 million agreement with Biogen Idec Inc. to buy out certain
        minimum purchase commitments related to the supply of yttrium-90.  The
        proceeds of this agreement were recorded as deferred revenue and were recognized
        in income over the original five-year contract term, which ended in February
        2007. Revenues for both prior years include approximately $8 million of deferred
        revenue related to this contract cancellation penalty. As the deferral period
        ended in February 2007, revenues for the current year reflect only the remaining
        $3 million of the contract.
 
 Revenues
        remained strong in all product lines this year, excluding the impact of market
        conditions last year. Of particular note, sales of TheraSphere®
        were up
        significantly as we launched new centres of excellence in Europe for this
        cancer
        treatment option, and we were successful in listing the product on European
        treatment formularies.
 
 Our
        supply of cobalt remained strong this year; however, we had fewer production
        irradiator sales late in 2007 compared to the prior year. Sterilization revenues
        for both 2006 and 2007 were much higher than was the case in 2005 due to
        improved cobalt supplies. We continue to see healthy demand for cobalt, and
        we
        took steps again this year to increase our supply of cobalt, signing an
        extension to the 2005 long-term contract with Rosenergoatom (the utility
        operator responsible for Russia’s nuclear power plants). This 17-year extension
        represents a commitment of $83 million, and a 30% increase in MDS Nordion’s
        cobalt-60 capacity by 2016.
 
 Early
        in
        fiscal 2006, we were pleased to report the settlement of mediation with AECL
        related to the MAPLE reactor project. Under this settlement agreement, we
        exchanged our beneficial interest in the project, along with associated
        inventories, for $22 million in cash, a non-interest bearing note due over
        four
        years beginning November 1, 2008, and a 40-year
        supply agreement containing terms that are similar to those contained in
        the
        previous supply agreement with AECL. We recorded a charge of $36 million
        in 2006
        related to this settlement and we reflected this loss as an adjusting item
        for
        the year. In 2007, we recognized $6 million of ITCs related to components
        of the
        project that qualify as R&D for tax purposes, compared to $27 million in
        2006. We recorded these credits as a reduction in income tax expense for
        the
        current year.
 
 AECL
        also
        assumed responsibility for capital costs associated with completing construction
        and commissioning the reactors and processing facility and for future operating
        costs. MDS has retained certain obligations to assist AECL to defray the
        costs
        of any material and unusual regulatory changes, should such a change occur
        during the life of the current or future supply agreement.  This
        commitment extends to cover any changes required by international agreements
        or
        treaties related to the procurement of highly enriched uranium in the
        reactors.  We have also retained certain legal rights in the event
        that the facilities have not met certain milestones, including regulatory
        approvals and operating rrequirements, by October 31, 2008.
 
 The
        National Research Universal reactor (NRU) will remain our primary source
        of
        reactor isotopes, including molybdenum, while AECL completes the MAPLE facility.
        In July 2006, AECL announced that the operating licence for this facility
        was
        extended to October 31, 2011. Subsequent to October 31, 2007, the NRU was
        shut
        down for routine maintenance and then ordered to remain in shutdown mode
        while
        certain safety equipment was installed. The reactor was shut down for a period
        of 4 weeks, resulting in a significant reduction in the available supply
        of
        medical isotopes during that period. We have estimated that adjusted EBITDA
        for
        the first quarter of 2008 will be reduced by approximately $5 million as
        a
        result.
 
 Adjusted
        EBITDA was $84 million for 2007 compared to $89 million for 2006. The benefit
        realized in 2006 from the supply problem suffered by a competitor and the
        extra
        eight months of contract cancellation revenue recorded in 2006 account for
        the
        bulk of the difference between the two years. The balance is attributable
        to the
        impact of foreign currency. Fiscal 2005 adjusted EBITDA was substantially
        lower
        at $60 million, due primarily to currency and cobalt supply issues.
 
 SG&A
        expenses were $54 million compared to $51 million in 2006 and $48 million
        in
        2005, largely due to the impact of currency translation for reporting purposes
        and pension adjustments recorded this year.  Other income of $3
        million includes a $4 million embedded derivative gain on a cobalt supply
        contract.  Depreciation and amortization was lower at $13 million
        compared to $15 million in the prior year and level with 2005.
 
 During
        2007, MDS Nordion signed a number of new customer agreements, strengthening
        its
        position in the molecular imaging market. These agreements included a
        collaboration agreement with Avid Radiopharmaceuticals Inc. (Avid) to support
        clinical studies for Avid's novel radiopharmaceuticals designed to diagnose
        and
        monitor Alzheimer's disease. These trials will use advanced molecular imaging
        known as single photon emission computed tomography (SPECT). Under the terms
        of
        the agreement, MDS Nordion will radiolabel Avid's proprietary compounds for
        use
        in proof-of-concept clinical trials for SPECT imaging of Alzheimer's disease.
        In
        addition, MDS Nordion is collaborating with the University of Ottawa Heart
        Institute, Canada's largest cardiovascular health centre, to establish a
        Molecular Imaging Centre of Excellence to advance cardiology
        research.
 
 During
        2006, MDS Nordion signed two new strategic customer agreements, including
        a
        six-year renewable contract with Molecular Insight Pharmaceuticals, Inc.
        to
        manufacture and supply ZemivaTM, a molecular imaging pharmaceutical being
        developed for cardiac ischemia, and a three-year contract with Bradmer
        Pharmaceuticals Inc., for the development and clinical trial supply of
        NeuradiabTM, a monoclonal antibody conjugated to an isotope and used to treat
        glioblastoma multiforme, the most common and deadly form of brain
        cancer.
 
 Although
        these new agreements are not individually significant, they are consistent
        with
        our strategic direction in this business as we focus on broadening our product
        offerings in medical imaging and radiotherapeutics.
 
 Capital
        expenditures by MDS Nordion in 2007 totaled $8 million, including amounts
        spent
        to expand our production capability in Belgium, where we produce GlucotraceTM, an
        extremely short half-life isotope used for positron emission tomography or
        PET
        scans. Capital expenditures were negligible in 2006 as AECL assumed full
        responsibility for costs incurred in the year for the construction of MAPLE.
        Capital costs were $50 million in 2005, primarily due to the significant
        investment then being made in MAPLE. Aside from capital expenditures, MDS
        Nordion invests significantly in maintenance for its facilities, and all
        such
        costs are expensed as incurred.
 
 MDS
        Analytical Technologies
 Financial
        Highlights
 2007
              %
                  of net
                  revenues
              
              2006
              %
                  of net
                  revenues
              
              2005
              %
                  of net
                  revenuesProduct
                  revenues
              $
              280
              80%
              $
              148
              73%
              $
              153
              74%Service
                  revenues
              
              72
              20%
              
              54
              27%
              
              53
              26%Net
                  revenues
              
              352
              100%
              
              202
              100%
              
              206
              100%Cost
                  of product revenues
              
              (213)
              (61%)
              
              (149)
              (73%)
              
              (137)
              (67%)Cost
                  of service revenues
              
              (3)
              (1%)
              
              -
              -
              
              -
              -Selling,
                  general and administration
              
              (57)
              (16%)
              
              (20)
              (10%)
              
              (27)
              (13%)Research
                  and
                  development
              
              (64)
              (18%)
              
              (48)
              (24%)
              
              (44)
              (21%)Depreciation
                  and
                  amortization
              
              (29)
              (8%)
              
              (6)
              (3%)
              
              (7)
              (3%)Restructuring
                  charges
              
              -
              -
              
              -
              -
              
              (3)
              (1%)Other
                  income (expense)
                  net
              
              (6)
              (2%)
              
              5
              2%
              
              1
              -Operating
                  income
              
              (20)
              (6%)
              
              (16)
              (8%)
              
              (11)
              (5%)Adjustments:Equity
                  earnings
              
              53
              15%
              
              54
              27%
              
              46
              22%Acquisition
                  integration
              
              19
              6%
              
              -
              -
              
              -
              -Restructuring
                  charges
              
              -
              -
              
              -
              -
              
              3
              1%52
              15%
              
              38
              19%
              
              38
              18%Depreciation
                  andamortization
              
              29
              8%
              
              6
              3%
              
              7
              3%Adjusted
                  EBITDA
              $
              81
              23%
              $
              44
              22%
              $
              45
              21%Margins:Gross
                  margin
              
              39%
              
              
              26%
              
              
              33%Adjusted
                  EBITDA
                  margin
              
              23%
              
              
              22%
              
              
              21%Capital
                  expenditures
              $
              8
              
              $
              4
              
              $
              5
 
 Net
        revenues were up $150 million, or 74%, for MDS Analytical Technologies compared
        to 2006. The acquisition of MD in March contributed $138 million, or 68%
        growth.
        The balance reflects growth in Sciex product revenues, which continued to
        benefit from strength in small molecule markets where our LC/MS instruments
        are
        market leaders. As was the case in 2006, strong sales of high-end instruments
        were the driver of results this year. Sciex products grew at a 6% rate for
        the
        year, and end-user revenues grew at 11% for 2007.  We did not track
        end-user revenue growth in prior years.
 
 MD
        has
        been a strong contributor to segment revenues and adjusted EBITDA since it
        was
        combined with Sciex.  During the second half of 2007, MD revenues grew
        14% versus the same six-month period in 2006.  Given the strong start,
        we believe the division is on track to meet or exceed the first-year target
        of
        $190 million in revenues and $45 to
 $50
        million in adjusted EBITDA.
 
 A
        substantial majority of the Sciex products are sold through two joint ventures.
        Under these joint venture agreements, Sciex manufactures products that are
        sold
        to the joint ventures. The joint ventures, in turn, sell these products to
        our
        joint venture partners, earning a profit margin on these transactions. The
        joint
        ventures are currently structured so that all profit earned on the worldwide
        business associated with these products is earned by the joint
        ventures.
 
 In
        addition to the role Sciex plays as a manufacturer, Sciex also undertakes
        R&D and provides certain administrative services to the joint ventures.
        These activities result in the service revenues reported by MDS Analytical
        Technologies.
 
 We
        include equity earnings from the Sciex joint ventures in the determination
        of
        adjusted EBITDA for MDS Inc. and for this segment because senior management
        of
        the division are actively engaged in the management of these joint ventures
        and
        this view is consistent with our internal measurement of the results of this
        division, as reported to executive management and the Board. Under US GAAP,
        MDS
        is required to account for its joint venture activities on an equity basis.
        These equity earnings are included in income before income taxes on the
        consolidated statements of operations because we consider these joint venture
        activities to be a key component of our core operations. Because of this
        US GAAP
        reporting requirement, MDS Analytical Technologies reports an operating loss
        each year, including a loss of
 $20
        million in the current year, before considering the income earned in the
        joint
        ventures.
 
 Adjusted
        EBITDA was $81 million, up $37 million or 84% compared to 2006. MD contributed
        $33 million of the increase, with the balance being attributable to improved
        operating results for Sciex. Aside from including equity earnings,
        adjustments for the current year included costs related to the integration
        of
        MD. We reported $19 million of acquisition integration costs, including $14
        million of purchase accounting fair value adjustments for inventory, order
        backlog, and deferred revenue. There were no additional adjusting items in
        2006,
        and adjustments to 2005 reflected the restructuring costs recorded for the
        year.
        Adjusted EBITDA for 2006 was lower than that for 2005 due primarily to the
        impact of currency on revenues.
 
 SG&A
        expenses totaled $57 million for 2007, up $37 million compared to 2006 and
        $30
        million for 2005. The increase over 2006 is primarily due to the acquisition
        of
        MD. The increase from 2005 to 2006 reflects the impact of currency and initial
        costs incurred last year associated with new product launches. Unlike Sciex,
        MD
        has a significant sales and marketing function. As a result, their SG&A
        costs are higher than those of Sciex, which has only limited selling
        expenses.
 
 R&D
        expense totaled $64 million for 2007, up $16 million from the $48 million
        spent
        in 2006. Fiscal 2005 R&D expenses totaled $44 million. The increase includes
        $13 million of expenses incurred by MD for research and product development
        during the seven months under MDS ownership. MDS Analytical Technologies
        invests
        significantly in new products and during 2007 made approximately seven new
        product introductions.  MDS Sciex and its joint venture partners
        introduced the FlashQuantTM, a new technology platform that combines
        triple-quadrupole mass spectrometry with MALDI technology to streamline the
        identification of viable drug candidates. Molecular Devices announced the
        first
        live cell kinetic neurotransmitter transport uptake assembly kit, which aims
        to
        improve the quality of assay results while reducing processing time and cost,
        as
        well as the release of the AquaMax 2000 and AquaMax 4000 series of microplate
        washers to add speed and flexibility to microplate washing for bioanalytical
        assays. During the fourth quarter, MDS Analytical Technologies announced
        the
        launch of a significant advance in high-speed imaging technologies with the
        release of the MetaMorph(R)
        ICS
        (Integrated Confocal System), in partnership with VisiTech International,
        a
        manufacturer of confocal hardware. The division also introduced a new automated
        toxicology testing application for drugs of abuse. The new CliquidTM Drug Screen
        and Quant Software for Routine Forensic Toxicology applications equips
        toxicology laboratories for the first time with a built-in library of 1,200
        compounds and a search reporting function designed to screen hundreds of
        drugs
        in less than 20 minutes.
 
 The
        $23
        million increase in depreciation and amortization in 2007 relates primarily
        to
        the acquisition of MD during the year. MD accounts for $20 million of the
        increase, including $16 million related to the amortization of the preliminary
        values assigned to purchased intangibles, largely acquired
        technology.  Also, equity earnings reported for the joint ventures are
        net of $6 million of depreciation and amortization expense recorded by those
        entities (2006 – $5 million; 2005 – $3 million).
 
 Capital
        expenditures totaled $8 million compared to $4 million in 2006 and $5 million
        in
        2005. The increase over prior years relates mainly to the addition of MD
        and
        spending on our plants in Singapore and Shanghai, China.
 
 Corporate
        and Other
 Financial
        Highlights
 2007
              
              2006
              
              2005Selling,
                  general and administration
              $
              (24)
              $
              (24)
              $
              (
                  19)Research
                  and
                  development
              
              -
              
              -
              
              1Depreciation
                  and
                  amortization
              
              (2)
              
              -
              
              (1)Restructuring
                  charges
              
              (9)
              
              5
              
              (25)Otherexpense
              
              (3)
              
              (7)
              
              (1)Operating
                  income
              
              (38)
              
              (26)
              
              (45)Adjustments:Equity
                  earnings
              
              -
              
              (4)
              
              (5)Gain
                  on sale of
                  investments
              
              (7)
              
              -
              
              -Valuation
                  provisions
              
              8
              
              6
              
              5Restructuring
              
              9
              
              (5)
              
              25Depreciation
                  and
                  amortization
              
              2
              
              -
              
              1Adjusted
                  EBITDA
              $
              (26)
              $
              (29)
              $
              (19)
 
 Corporate
        and other includes costs
        associated with our Corporate offices and executive management functions,
        the
        majority of which are incurred in Canadian dollars. Corporate SG&A for
        fiscal 2007 was2%
        of consolidated net revenues compared
        to 3% for fiscal 2006 and 2% for 2005. Corporate expenses for 2006 included
        $4
        million associated with
        the costs of the self-review of ourMontrealbioanalytical
        operations.Costs
        for 2006 also included the
        corporate portion of our first-year Sarbanes/Oxley compliance efforts and
        incremental audit costs associated with that certification.
 
 Corporate
        results for fiscal 2007
        include $9 million of restructuring charges associated primarily with the
        transition of our global information technology (IT) support services to
        a new
        provider and to the reduction of certain central support services following
        the
        sale of our diagnostics business. This cost has been treated as an adjusting
        item for the current year. In 2005, net restructuring charges incurred in
        Corporate amounted to $25 million  related to plans designed to
        improve our global competitiveness. In 2006, we were successful in negotiating
        the termination of a global IT support services contract, and as a result,
        we
        did not have to pay a termination fee that had been provided for as part
        of the
        2005 restructuring provision. This reserve was reversed in 2006. Both the
        2005
        restructuring charge and the 2006 reserve reversal were treated as adjusting
        items in the respective years.   Adjusted EBITDA for 2007 also
        includes $3 million of foreign exchange translation losses compared to $6
        million in 2006 and none in 2005.
 
 On
        December 2, 2005, Hemosol Corp. (Hemosol), an investee in which we held
        approximately 6.5 million shares, declared bankruptcy.  As a result of
        the bankruptcy, MDS honoured a $20 million guarantee of the company’s bank
        credit facility.  In doing so, we assumed the loan and the senior
        security position held by the bank.  During fiscal 2007, we sold
        our secured
        interest in Hemosol for total proceeds of $15 million and realized a $2 million
        gain. In addition,other expense for 2007 is net of $5 million of
        bankruptcy proceeds resulting from the wind-up of Protana Inc., a successor
        company to MDS Proteomics. The liquidator for the company advised us of these
        proceeds late in the fourth quarter and we expect to receive the funds in
        the
        first half of 2008.  Both of these gains are treated as adjusting
        items for the current year.
 
 During
        fiscal 2007, we recorded a $6 million valuation provision related to our
        investment in MDS Capital Corp. We began efforts to sell our interest in
        MDS
        Capital Corp. in 2005; however, efforts to sell the remaining business were
        not
        successful. On-going operations of MDS Capital Corp. were restructured during
        the year and the company was renamed Lumira Capital Corp. We determined that
        our
        investment in MDS Capital Corp. had experienced a decline in value that was
        other-than temporary and, as a result, we wrote the value of the investment
        down
        to our $10 million estimate of recoverable value in the second quarter of
        2007.
 
 In
        early
        August 2007, we invested in $17 million of Canadian asset-backed commercial
        paper (ABCP) that has since been affected by the recent liquidity disruption
        in
        that market. We recorded a valuation provision of $2 million in our fiscal
        2007
        fourth quarter as an adjusting item to reflect our estimate of the current
        value
        of that asset. The provision reflects management’s best estimate of the likely
        impairment based on a risk-adjusted estimate of expected future cash
        flows.  Continuing uncertainties regarding the value of the assets,
        the nature and timing of future cash flows, and the outcome of the restructuring
        of this financial market may impact the amount that MDS will ultimately realize
        on this investment.
 
 Consolidated
        interest expense,
        net
 Interest
        expense for 2007 was $27
        million compared to $21 million in 2006 and $15 million in 2005. Prior to
        February 2006, MDS capitalized interest on a portion of its long-term debt
        as
        part of the capital cost of the MAPLE project. We stopped capitalizing this
        interest when we transferred ownership of this asset to AECL under the terms
        of
        our 2006 settlement agreement and,as
        a result, no interest was capitalized
        in 2007. In 2006 and 2005, we capitalized $2 million and $9 million of interest,
        respectively.The
        balance of the increase in interest
        expense is due to rising short-term interest rates and the translation impact
        of
        reporting our Canadian dollar interest costs in US dollars.
 
 Interest
        income was $25 million for
        fiscal 2007 compared to $15 million in 2006 and $9 million in 2005. Rising
        short-term interest rates, increasing cash balances, and the translation
        effect
        of reporting interest income on Canadian cash reserves in US dollars all
        contributed to the increase in interest income over the period. In addition,
        interest income for 2007 includes non-cash accrued interest that we recorded
        on
        long-term notes receivable for amounts due from AECL related to the saleofuranium
        target inventory to them last
        year and those related to the sale of our diagnostics
        business.
 
 Consolidated
        income
        taxes
 The
        effective tax rate for 2007 was 41% (2006 – 269%; 2005 – 33%).  The
        2007 tax rate was higher than our expected rate of 35%, due largely to the
        $17
        million (2006 –  $46 million; 2005 – $10 million) of investment tax
        credits that we classified as a reduction of our income tax expense for the
        year.  As we incurred a loss before income taxes in 2007, we have
        reported an income tax recovery and, therefore, the impact of the investment
        tax
        credits is to increase the amount of the recovery and therefore also to increase
        the reported tax rate associated with that recovery.
 
 The
        impact of investment tax credits on our 2006 tax rate was more significant
        because we applied investment tax credits
        totaling $20 million that had been recognized in years prior to 2006 against
        our
        income tax expense for 2006. These investment tax credits related to the
        MAPLE
        project, and had previously been deferred and recognized as a reduction to
        the
        carrying value of the project.  Following the disposal of our interest
        in the project in 2006, these investment credits were recorded as a reduction
        of
        income tax expense.
 
 During
        2007, we incurred losses in certain foreign jurisdictions where we currently
        do
        not meet the criteria for recognition of a deferred tax asset.  As a
        result, we have recorded full valuation allowances against these losses.
        The
        impact of these losses resulted in a reduction to our income tax recovery,
        reducing our effective income tax rate by 13% (2006 – 32%; 2005 –
13%).
 
 Discontinued
        operations
 The
        results of our discontinued
        businesses were as follows:
 2007
              
              2006
              
              2005Net
                  revenues
              $
              95
              $
              362
              $
              555Cost
                  of
                  revenues
              
              (57)
              
              (225)
              
              (392)Selling,
                  general and
                  administration
              
              (16)
              
              (53)
              
              (95)Depreciation
                  and
                  amortization
              
              -
              
              (10)
              
              (12)Goodwill
                  write-down
              
              -
              
              -
              
              (13)Restructuring
                  charges
              
              -
              
              (1)
              
              (9)Other
                  expenses
              
              -
              
              (3)Operating
                  income
              
              22
              
              70
              
              34Gain
                  on sale of discontinued
                  operations
              
              904
              
              24
              
              -Interest
                  expense
              
              -
              
              -
              
              (1)Interest
                  income
              
              1
              
              2
              
              3Income
                  taxes
              
              (117)
              
              7
              
              (7)Minority
                  interest
              
              (5)
              
              (8)
              
              (9)Equity
                  earnings
              
              1
              
              3
              
              2Income
                  from discontinued
                  operations
              $
              806
              $
              98
              $
              22BasicEPS
                  from discontinued
                  operations
              $
              6.12
              $
              0.68
              $
              0.16
 
 Financial
        results from discontinued
        operations for 2007 include the operating results of MDS Diagnostic Services
        from November 1, 2006 to the date of sale and the gain realized as a result
        of
        the sale.
 
 Income
        taxes applicable to our
        discontinued operations for fiscal 2006 include a $4 million recovery related
        to
        assets disposed of in the year and a $13million
        tax recovery related to the
        recognition in 2006 of the tax benefit provided by capital losses of prior
        years
        that were not previously recognized.  We expect to use these capital
        losses to reduce the amount of cash taxes payable resulting from the sale
        of the
        diagnostics business and accordingly have classified this recovery within
        discontinued operations.
 
 The
        sale of Calgary Laboratory Services
        was finalized in early 2006. A goodwill impairment charge of $13 million
        was
        recorded in 2005 to reflect our anticipated recovery from this
        sale.
 
 In
        November 2005, we completed the sale
        of our interest in SourceMedical Corporationand
        recorded a gain
        of
 $24
        million.  The gain on this
        transaction was taxed at a low rate due to the availability of certain capital
        losses within MDS.
 
 Other
        expenses indiscontinued
        operations for 2006 include a $3 million non-cash valuation provision on
        long-term investments.
 
 Liquidity
        and capital resources
 2007
              
              2006
              ChangeCash,
                  cash equivalents, and
                  short-term investments
              $
              337
              $
              382
              (12%)Operating
                  working
                  capital1
              $
              59
              $
              97
              (39%)Cashprovided
                  bycontinuing
                  operating
                  activities
              $
              178
              $
              25
              612%Cash
                  used in continuing investing
                  activities
              $
              (622)
              $
              (168)
              270%Cash
                  used in continuing financing
                  activities
              $
              (449)
              $
              (1)
              n/mCurrent
                  ratio (excludes net assets
                  held for sale)
              
              1.6
              
              2.4
              n/m
 1Our
        measure of operating working capital equals accounts receivable plus unbilled
        revenue and inventory less accounts payable, accrued liabilities, and current
        deferred revenue.
 
 The
        Company has maintained strong cash balances throughout the year and operating
        working capital is lower than the prior year at $59 million compared to $97
        million.  The decline in the level of working capital compared to the
        2006 year-end reflects higher than usual accounts payable and accrued
        liabilities as at October 31, 2007. This reflects, in part, the balance that
        remains unpaid from the FDA and restructuring provisions recorded in the
        second
        quarter, along with an increase in trade payables at year-end, which was
        partially driven by increased capital expenditures in the fourth
        quarter.  The FDA and restructuring provisions are offsetting the
        addition of operating working capital associated with MD.
 
 The
        increase in accounts payable has also caused a drop in the current ratio
        from
        2.4 at the end of fiscal 2006 to 1.6 at October 31, 2007. Current liabilities
        also reflect higher taxes payable balances than was the case for 2006 and
        a
        significant increase in the current portion of long-term debt. Neither of
        these
        liabilities is considered in the calculation of operating working capital.
        The
        significant increase in the current portion of long-term debt reflects the
        scheduled repayment of the first tranche of our December 2002 US dollar notes
        payable. This repayment was made on December 19, 2007.
 
 Our
        primary uses of cash flow are operational expenses, investment in capital,
        interest and principal payments on our debt securities, and, in prior years,
        our
        dividend and share repurchase programs.  During 2007, following the
        sale of our diagnostics business, we discontinued our quarterly dividend
        and we
        launched a share repurchase under the terms of a substantial issuer bid.
        Under
        this bid, we repurchased and cancelled approximately 22.8 million Common
        shares
        at a total cost of $441 million. Later in the year, we renewed a normal course
        issuer bid (NCIB) that authorizes us to repurchase up to 4,506,236 Common
        shares
        from time to time for a one-year period ending July 2, 2008.  The
        repurchase of shares, if any, will be dependent upon the availability and
        alternative uses of capital, market conditions, and other
        factors.  Although we renewed our NCIB during 2007, we repurchased no
        shares following the completion of the substantial issuer bid. In addition,
        no
        shares were repurchased during 2006; however, in 2005, we repurchased and
        cancelled 799,000 Common shares for $11 million under an NCIB.
 
 Cash
        provided by continuing operating activities was $178 million, representing
        an
        increase of $153 million compared to last year.  Cash used in
        discontinued operations amounted to $56 million for the period prior to the
        sale. These amounts compare to cash from continuing operations and from
        discontinued operations of $25 million and $104 million respectively for
        2006
        and $48 million and $65 million respectively for 2005.
 
 Overall
        investing activities were a net source of $307 million of cash in 2007,
        principally due to the proceeds of
 $929
        million received from the sale of our diagnostics business. We utilized $600
        million of this cash in the acquisition of Molecular Devices, and a further
        $71
        million to purchase property, plant, and equipment. Short-term investing
        was a
        net source of cash this year as we reduced our short-term investment balance
        by
        $33 million. Cash used in investing activities in 2006 included $51 million
        for
        the purchase of property, plant, and equipment and $135 million invested
        in
        short-term investments. Fiscal 2005 investing activities included $102 million
        spent on capital expenditures, an amount that significantly exceeded the
        current
        level of capital spending, due to the on-going investment in MAPLE.
 
 As
        at the
        date of this report, we had $17 million in short-term investments in ABCP
        that
        was purchased in August 2007.  This ABCP was due to mature on
        September 7, 2007 and the issuer has been affected by the recent liquidity
        issues in these investment markets.  We received notice on the
        roll-over date that the sponsor of these obligations would be unable to meet
        its
        obligations. At the present time, we have limited information that would
        help us
        to determine the amount and timing of the repayment of these obligations.
        Based
        on the information we do have, we have estimated that a write-down in the
        value
        of these investments is required and, accordingly, we recorded a $2 million
        provision in the fourth quarter of 2007. In addition, while these investment
        vehicles would ordinarily qualify as cash equivalents, we believe that the
        current market conditions are such that it is no longer appropriate to record
        these investments as current assets. We have therefore classified these
        commercial paper assets as long-term investments that are available for
        sale.
 
 We
        utilized $449 million of cash on financing activities this year, including
        $441
        million spent on the substantial issuer bid. Other sources and uses of cash
        for
        financing activities were largely consistent with prior years.
 
 We
        expect
        our operating cash inflows to remain strong throughout fiscal
        2008.  Cash outflows are expected to include FDA–related
        reimbursements to our customers and the payment of severance obligations
        associated with our restructuring activities. In addition, we made a principal
        repayment of $79 million on our long-term debt in December 2007.  We
        believe that cash flow generated from operations, coupled with available
        cash on
        hand and borrowing capacity from existing financing sources, will be sufficient
        to meet these cash outflows along with our anticipated capital expenditures,
        research and development expenditures, and other cash requirements in
        2008.  We have available a
 C$500
        million, five-year, committed, revolving credit facility to fund our liquidity
        requirements. There were no borrowings under this facility as at October
        31,
        2007.  At this time, we do not reasonably expect any presently known
        trend or uncertainty to affect our ability to access our current sources
        of
        liquidity, and we do not believe that the current liquidity issues affecting
        the
        ABCP markets will have any significant impact on our liquidity.  We
        remain in compliance with all covenants for our senior unsecured notes and
        our
        bank credit facility.
 
 Contractual
        obligations
 The
        following table summarizes our
        contractual obligations as at October 31, 2007 and the effect such obligations
        are expected to have on our liquidity and cash flows in future years. The
        table
        excludes amounts already recorded on the consolidated balance sheet as current
        liabilities and certain other purchase obligations discussed
        below:
 
 2008
              2009
              2010
              2011
              2012
              ThereafterLong-term
                  debt and capital leases
              $
              94
              $
              20
              $
              29
              $
              17
              $
              18
              $
              206Operating
                  leases
              
              22
              
              22
              
              21
              
              17
              
              15
              
              47Other
                  contractual obligations
              
              104
              
              47
              
              41
              
              23
              
              27
              
              206$
              220
              $
              89
              $
              91
              $
              57
              $
              60
              $
              459
 
 Long-term
        debt consisted of $307 million of senior unsecured notes issued under a private
        placement during 2003, a
 $16
        million note payable in connection with our MALDI acquisition in 2004, a
        $46
        million, non-interest bearing, government loan; and other commitments totaling
        $15 million.
 
 We
        have
        long-term supply arrangements totaling $336 million with certain suppliers
        that
        provide us with radioisotopes.  This amount is included in other
        contractual obligations.  These agreements provide for minimum
        purchase quantities, and certain prices are based on market rates at the
        time of
        delivery.  The remaining balance of other contractual obligations is
        inclusive of commitments totaling $67 million relating to the outsourcing
        of
        certain information technology infrastructure services.
 
 The
        Company has entered into contracts for other outsourced services; however,
        the
        obligations under these contracts are not significant and the contracts
        generally contain clauses allowing for cancellation without significant
        penalty.
 
 The
        expected timing of payment of the obligations discussed above is estimated
        based
        on current information. The timing of payments and actual amounts paid may
        be
        different depending on the time of receipt of goods or services or, for some
        obligations, changes to agreed-upon amounts.
 
 Guarantees
 In
        the
        normal course of operations, we provide indemnifications that are often standard
        contractual terms to counterparties in transactions such as purchase and
        sale
        contracts, service agreements and leasing transactions. These indemnification
        agreements may require us to compensate the counterparties for costs incurred
        as
        a result of various events. The terms of these indemnification agreements
        will
        vary based upon the contract and may not be subject to limitation in certain
        cases. The nature of these indemnifications prevents us from making a reasonable
        estimate of the maximum potential amount that we could be required to pay
        to
        counterparties. None of the guarantees entered into by the Company required
        recognition on our books at October 31, 2007.
  Off-balance
        sheet
        arrangements
 MDS
        does
        not have any relationships with unconsolidated entities or financial
        partnerships, such as entities referred to as structured finance or special
        purpose entities, which are established for the purpose of facilitating
        off-balance sheet arrangements or other contractually narrow or limited
        purposes.
 
 Derivative
        instruments
 We
        use
        derivative financial instruments primarily to manage our foreign currency
        and
        interest rate exposure.  These instruments consisted of forward
        foreign exchange and option contracts and interest rate swap agreementsentered into in accordance
        with the
        Company’s established risk management policies and
        procedures.All derivative instrument contracts are with banks
        listed on Schedules I to III to the Bank Act (Canada) and we utilize financial
        information provided by certain of these banks to assist us in determining
        the
        fair market values of the financial instruments.
 
 The
        net
        unrealized mark-to-market value of all derivative instruments at October
        31,
        2007 was a liability of $6 million compared to a liability of $1 million
        at the
        end of 2006. The substantial increase from 2006 relates primarily to unrealized
        gains on forward foreign currency contracts on hand at October 31, 2007.
        These
        gains arose largely because of the significant drop in value of the US dollar
        relative to the Canadian dollar that occurred late in our fiscal
        year.
 
 In
        addition to these traditional derivatives, isotope supply agreements totaling
        $107 million include terms that result in the creation of an embedded currency
        derivative under SFAS 133 –“Accounting for
        Derivative
        Instruments and
 Hedging
        Activities”.Under
        the rules contained in SFAS 133, we have determined the value of this derivative
        and marked it to market as at October 31, 2007. The supply contract is
        denominated in US dollars, and, as a result of the significant decrease in
        the
        value of the US dollar versus the Canadian dollar, we have recorded an
        unrealized, mark-to-market gain of $4 million on the contract in 2007. There
        was
        no significant mark-to-market adjustment required for the prior
        year.
 
 Capitalization
 2007
              
              2006
              
              ChangeLong-term
                  debt
              $
              384
              $
              394
              
              (3%)Less:
                  cash, cash equivalents, and
                  short-term investments
              
              (337)
              
              (382)
              
              (12%)Net
                  debt
              
              47
              
              12
              
              292%Shareholders’
                  equity
              
              1,897
              
              1,354
              
              40%Capital
                  employed1
              $
              1,944
              $
              1,366
              
              42%
 1Capital
        employed is a measure of how much of our net assets are financed by debt
        and
        equity.
 
 Long-term
        debt decreased from $394 million to $384 million between October 2006 and
        October 2007 due to principal payments of $18 million, partially offset by
        currency translation for reporting purposes. The significant increase in
        shareholders’ equity is a result of the $806 million after-tax gain on the sale
        of the diagnostics business, partially offset by the impact of the substantial
        issuer bid.
 
 Share
        capital
 Shares
                  issued and
                  outstanding
              
              2007
              
              2006
              
              2005Outstanding
                  beginning of the
                  year
              
              144,319
              
              142,099
              
              141,826Issued
                  during the
                  year
              
              1,090
              
              2,220
              
              1,072Repurchased
                  and
                  cancelled
              
              (22,831)
              
              -
              
              (799)Outstanding
                  - end of
                  year
              
              122,578
              
              144,319
              
              142,099Dividends
                  declared per
                  share
              $
              0.03
              $
              0.13
              $
              0.09Market
                  price per
                  share:High
              $
              22.15
              $
              23.20
              $
              21.65Average
              $
              21.08
              $
              20.81
              $
              18.37Low
              $
              19.31
              $
              18.25
              $
              15.39Book
                  value per share1
              $
              15.48
              $
              11.02
              $
              10.03
 1Book
        value per share is calculated as Common shareholders’ equity divided by the
        number of Common shares outstanding.
 
 As
        of December 31, 2007, the Company had
        122,609,391Common shares outstanding and options outstanding to acquire
        5,489,866 common shares
  Risks
        and
        uncertainties
 This
        section outlines risks and
        uncertainties that can have an impact on our operating results and financial
        position over the course of a year.  A more detailed discussion of
        long-term risks and uncertainties and industry trends is contained in our
        AIF.
 
 Exposure
        to foreign
        currencies
 Approximately90%
        of revenue is earned outside ofCanadabased
        on the customer’s
        location.  The majority of our export product revenues and a
        significant component of our foreign activities are denominated in US
        dollars.  We believe that continued expansion outside of Canadian
        markets is essential if we are to achieve our growth targets.  This
        expansion will subject us to volatility associated with changes in the value
        of
        the Canadian dollar.  We manage certain exchange rate risks primarily
        through
        the use of forward foreign exchange
        controls.
 
 In
        addition to foreign operations and
        export sales, our senior unsecured notes payable are denominated in US
        dollars.  This long-term debt is recorded in the Canadian-dollar books
        of MDS Inc., the parent company, and is considered a hedge of our net investment
        in ourUSoperations.
 
 MDS
        maintains a centralized treasury function that operates under policies and
        guidelines approved by the Audit Committee of the Board of Directors, covering
        foreign currency exchange, funding, investing, and interest rate
        management.  MDS’s policies and guidelines prevent it from using any
        derivative instrument for trading or speculative purposes.
 
 MDS
        will
        continue to monitor its current and anticipated exposure to fluctuations
        in
        foreign currency exchange rates and enter into currency derivatives contracts
        to
        manage the exposure.
 
 Government
        regulation and
        funding
 The
        cost of compliance with government
        regulation is necessary and impacts most of our businesses.  Changes
        in policies, procedures, systems and staff training required by government
        regulation can have the effect of increasing the costs we incur to provide
        our
        products and services. We manage this risk to the degree possible through
        active
        participation in the review and approval process with regulatory bodies such
        as
        the FDA and the Canadian Nuclear Safety Commission.
 
 Our
        pharmaceutical research facilities
        and our isotope manufacturing facilities are subject to audit and approval
        by
        the FDA and similar agencies.  Failure to achieve approval by these
        agencies will impact our ability to secure contracts to perform
        work.  Audit reports issued by relevant regulatory bodies could
        directly impact our ability to attract and retain work, as was our recent
        experience inourMontreal-area
        bioanalytical
        research facilities. We capitalize on such experiences by formalizing the
        learning into our standards to improve our quality assurance practices and
        customer quality and services.
 
 Regulatory
        policies are designed to
        protect the public’s health and canaffectour
        drug development revenues if our
        customers are unable to move compounds from one stage to the next in a timely
        manner.  We mitigate this risk by limiting our exposure to individual
        compounds and we maintain a balanced portfolio of development
        contracts.
 
 Intellectual
        property
 Our
        businesses are each dependent on
        intellectual property either in the form of patent protection of key
        technologies or unpatented proprietary methods and knowledge.  We are
        exposed to the risk that others may gain knowledge of our proprietary methods,
        infringe on patents, or develop non-infringing competitive
        technologies.  While we take vigorous action to defend our positions,
        we may not be able to control usage of this intellectual property by others
        to
        compete against us.
 
 Acquisition
        and
        integration
 MDS’s
        growth strategy involves our
        ability to acquire, successfully integrate and operate businesses that
        contribute to our overall core focus.  These acquisitions involve the
        commitment of capital and other resources, and large acquisitions will have
        a
        major financial impact in the year of acquisition and later.  Our
        ability to effectively integrate, within our existing businesses, acquired
        technologies and products and services, or to retain key technical and
        managerial personnel can have a significant short-term impact on our ability
        to
        achieve our growth and profitability targets.
 
 Research
        and
        development
 During
        2007, we recorded $68 million ofR&Dexpenses
        in our analytical instruments
        and isotopes business units.  All of our businesses depend to one
        extent or another on our ability to maintain technological competitiveness
        and
        our ability to provide leading-edge solutions to our
        customers.  Ongoing investment in R&D will be required to grow and
        keep pace with a changing technological environment.  The likelihood
        of success for any R&D project is inherently difficult to predict and could
        require a significant investment.  We manage our R&D projects
        independently, and together with strategic alliance partners, against tightly
        defined project outlines that prescribe expected deliverables for each stage
        of
        a project.  Projects must deliver certain measurable outcomes that we
        believe are indicators of the likelihood of future success in order to proceed
        through these design gates and qualify for additional
        funding.
 
 Supply
        of reactor
        isotopes
 Radioisotopes
        used in nuclear medicine
        are manufactured in electric-powered cyclotrons or nuclear
        reactors.  A continuous and reliable supply of reactor radioisotopes
        such as molybdenum-99 and cobalt-60 is important to certain of our businesses.
        Routine and/or unscheduled shutdowns of these reactors can have a dramatic
        impact on our supply of radioisotopes at any point.
 
 We
        have taken steps to build additional
        cobalt processing capacity with a major supplier, Rosenergoatom, and established
        new or negotiated extensions of existing long-term supply arrangements to
        diversify and secure our source of supply.  Changes in maintenance
        schedules or the continued operations of the reactors manufacturing cobalt
        could
        impact the availability and timing of our purchases.
 
 Contract
        cancellations
 A
        majority of the revenues earned by the MDS Pharma Services business result
        from
        contracts which typically run several months for early stage clinical trials
        and
        as much as several years for Phase III/IV clinical trials.  Terms of
        most contracts entered into by MDS Pharma Services entitle clients to
        cancellation rights that may be exercised by the client in the event of
        regulatory delay, if unexpected results are encountered at any stage of the
        development program or if a client makes decisions affecting the on-going
        development of a compound. Replacement of revenues expected to be earned
        from
        cancelled contracts may take an extended period of time, and as a result,
        MDS
        Pharma Services revenue growth and profitability may be negatively impacted
        by
        contract cancellations in a material amount.
 
 Venture
        capital
        investments
 MDS
        has certain venture capital
        investments in biotechnology companies.  We monitor our investees’
capacity to raise and spend funds andtodevelop
        a commercial market for their
        products and services as well as their regulatory approval
        experience.  We initially record investments on our books at cost and
        adjust these values to fair value, when available,by
        a change to other comprehensive
        income.  There exists a risk that the carrying value of such
        investments could be in excess of fair value due to market conditions and
        this
        could result in provisions related to these investments.
 
 Litigation
        and
        insurance
 From
        time to time during the normal
        course of business, the Company and its subsidiaries are subject to
        litigation.  At the present time there is no material outstanding
        litigation that is not covered by our insurance policies and that could have
        a
        material adverse impact on the Company’s results or its financial
        position.  We are aware of no threatened or pending litigation which
        could have a material adverse impact.  We maintain a global insurance
        program with liability coverage up to $100 million to protect us from the
        financial risk associated with a claim made against us.  Our ability
        to maintain insurance coverage with adequate limits and at a reasonable cost
        may
        be impacted by market conditions beyond our control.
  Quarterly
        highlights
 Following
        is a summary of selected financial information derived from the Company’s
        unaudited interim period consolidated financial statements for each of the
        eight
        most recently completed quarters. Prior periods have been restated to reflect
        the discontinuance of the operations discussed above.
 
 (millions
                  of US dollars, except earnings per share)Fiscal
                  2007
              October
                  2007
              July2007
              April2007
              January
                  2007Net
                  revenues
              $
              1,119
              
              307
              
              308
              
              263
              
              241Operating
                  income (loss)
              $
              (108)
              
              1
              
              (4)
              
              (96)
              
              (9)Income
                  (loss) from continuing operations
              $
              (33)
              
              15
              
              7
              
              (55)
              
              -Net
                  income (loss)
              $
              773
              
              13
              
              7
              
              737
              
              16Earnings
                  (loss) per share from continuing operationsBasic
                  and diluted
              $
              (0.25)
              
              0.12
              
              0.06
              
              (0.40)
              
              -Earnings
                  (loss) per shareBasic
              $
              5.87
              
              0.11
              
              0.05
              
              5.37
              
              0.11Diluted
              
              5.86
              
              0.11
              
              0.05
              
              5.35
              
              0.11(millions
                  of US dollars, except earnings per share)Fiscal
                  2006
              October
                  2006
              July2006
              April2006
              January
                  2006Net
                  revenues
              $
              955
              
              250
              
              241
              
              234
              
              230Operating
                  income (loss)
              $
              (56)
              
              (3)
              
              (21)
              
              (36)
              
              4Income
                  (loss) from continuing operations
              $
              22
              
              12
              
              (2)
              
              (1)
              
              13Net
                  income (loss)
              $
              120
              
              45
              
              14
              
              15
              
              46Earnings
                  (loss) per share from continuing operationsBasic
                  and diluted
              $
              0.15
              
              0.08
              
              (0.01)
              
              (0.01)
              
              0.09Earnings
                  (loss) per shareBasic
                  and diluted
              $
              0.83
              
              0.30
              
              0.10
              
              0.11
              
              0.32
 
 There
        were no unusual seasonal variations in these two 12-month
        periods.  The acquisition of Molecular Devices occurred in the quarter
        ended April 30, 2007.  The results from that quarter also reflect a
        provision of $61 million of FDA-related costs and $28 million of restructuring
        charges.
 
 Outlook
 On
        November 30 and December 5, 2007, we announced that MDS Nordion was experiencing
        an interruption in supply of medical isotopes from our primary supplier,
        Atomic
        Energy of Canada Limited while they completed a scheduled shutdown and an
        upgrade to the electrical system of the National Research Universal reactor.
        Our
        supplier worked closely with industry regulators and the Government of Canada
        on
        this matter, and they were able to resume production in late
        December.  While we worked closely with our global supply network to
        lessen the impact of this shutdown, we were not able to mitigate fully the
        impact of this supply disruption on our results. We currently estimate the
        impact of this disruption on adjusted EBITDA at $5 million in total for the
        first quarter of 2008.
 
 We
        closed
        our 2007 fiscal year strongly and, despite the supply issues at MDS Nordion,
        we
        believe that the Company is well positioned as we enter fiscal 2008. We are
        encouraged by the projected outlook for continued growth in our global markets,
        and we are focusing on being positioned in these markets to capitalize on
        these
        opportunities.
 
 Our
        integration of MDS Analytical Technologies is tracking well to plan and we
        continue to believe that the MD business will meet or exceed our first year
        targets of $190 million in revenue and adjusted EBITDA of between
 $45
        million and $50 million. We also anticipate continuing strong adjusted EBITDA
        margins from MDS Analytical Technologies as we complete our integration and
        migrate additional  production capabilities to Asia. The addition of
        MD in 2007 included a global sales and marketing capability not previously
        available to us and we are taking steps to leverage this new
        potential.
  We
        are
        pleased by the pace of new product launches for both our Sciex and MD brands,
        and we expect to continue to drive innovation in this business next year.
        Our
        MetaMorph®
        ICS
        microscope launch in our fourth quarter was well received and is an example
        of
        our commitment to provide leading-edge technology to our customers in the
        drug
        development industry. Strong sales of FLIPR Tetra and Image Express during
        the
        year have contributed to positive momentum as we enter fiscal 2008, and we
        expect continued growth from our new product platforms.
 
 The
        improved profitability at MDS Pharma Services in 2007 is a first step towards
        moving this division to industry level performance.  We believe that
        the majority of customer site audits required by the FDA have been substantially
        completed and all associated costs are expected to be covered by the remaining
        balance of our FDA provision.   By year-end, the business had
        implemented 80% of the restructuring initiatives announced earlier in the
        year.
        As many of these initiatives were completed in the second half of 2007, the
        majority of the benefits are expected to be realized in 2008. We also invested
        heavily in new or expanded capacity in our core services to accelerate growth
        in
        key global markets. These investments include a significant expansion of
        our
        Phoenix Phase I facility and our Beijing central laboratory, as well as
        investments in customer-facing technology and systems designed to achieve
        our
        On-Time brand promise. We expect adjusted EBITDA in this business to benefit
        further in fiscal 2008 because of the actions we took this year.
 
 Although
        we have been pleased with the performance of our late-stage operations this
        year, which produced strong revenue growth and solid adjusted EBITDA, we
        have
        been disappointed by a higher than normal rate of contract cancellations
        that
        occurred in the second half of the year and that have continued as we enter
        fiscal 2008. As noted in our previous MD&A discussion, these cancellations
        have resulted largely from corporate mergers and adverse events associated
        with
        the compounds affected, which is a risk of the business more fully described
        in
        our AIF. While the contract cancellations have resulted in reduced reported
        backlog at year-end, our focus on bidding on contracts from which we can
        achieve
        solid profitability has improved the quality of the remaining backlog. At
        this
        time, we have a number of proposals in the hands of clients and we are focused
        on building our backlog with new, profitable business; nevertheless, we expect
        that these cancellations will result in a reduction in the rate of revenue
        growth for our Phase II to IV services in 2008 compared to what we experienced
        in 2007.
 
 MDS
        Nordion has continued solid performance this year and has been able to grow
        both
        revenues and adjusted EBITDA after taking into account the impact of foreign
        exchange, the Biogen Idec Inc. deferred revenue, and the unusual market
        conditions that existed in the first half of 2006. Our expanded contract
        for
        cobalt supply with Rosenergoatom positions MDS Nordion well to serve continued
        growth in cobalt sterilization demand in the future. The new products and
        partnerships we have announced in the past two years present growth
        opportunities as we focus on expanding our global molecular imaging
        franchise.
 
 Changes
        in accounting standards and policies
 In
        July
        2006, the US Financial Accounting Standards Board (FASB) issued FASB
        interpretation (“FIN”) No. 48 , “Accounting for Uncertainty in Income Taxes, an
        Interpretation of FASB Statement No. 109”. FIN 48 clarifies the accounting for
        uncertainty in income taxes by prescribing the recognition threshold a tax
        position is required to meet before being recognized in the financial
        statements.  It also provides guidance on de-recognition,
        classification, interest
 and
        penalties, accounting in interim periods, disclosure, and
        transition.  FIN 48 is effective for fiscal years beginning after
        December 15, 2006 and is required to be adopted by the Company in the first
        quarter of fiscal 2008.  The cumulative effects, if any, of applying
        FIN 48 will be recorded as an adjustment to retained earnings as of the
        beginning of the period of adoption.  The Company is currently
        evaluating the effect that the adoption of FIN 48 will have on its consolidated
        results of operations and financial condition and is not yet in a position
        to
        determine the effects.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value
        Measurements”.  SFAS 157 provides guidance for using fair value to
        measure assets and liabilities.  It also responds to investors’
requests for expanded information about the extent to which companies measure
        assets and liabilities at fair value, the information used to measure fair
        value, and the effect of fair value measurements on earnings.  SFAS
        157 applies whenever other standards require (or permit) assets or liabilities
        to be measured at fair value, and does not expand the use of fair value in
        any
        new circumstances.  SFAS 157 is effective for financial statements
        issued for fiscal years beginning after November 15, 2007 and is required
        to be
        adopted by the Company in the first quarter of fiscal 2009.  The
        Company is currently evaluating the effect that the adoption of SFAS 157
        will
        have on its consolidated results of operations and financial condition and
        is
        not yet in a position to determine such effects.
  In
        September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
        Misstatements in Current Year Financial Statements”. SAB 108 provides guidance
        on the consideration of the effects of prior year misstatements in quantifying
        current year misstatements for the purpose of a materiality
        assessment.  SAB 108 establishes an approach that requires
        quantification of financial statement errors based on the effects of each
        of the
        Company’s statement of financial position and statement of operations and the
        elated financial statement disclosures.  The Company applied the
        provisions of SAB 108 in the first quarter of fiscal 2007, and it did not
        have a
        material impact on its consolidated results of operations and financial
        condition.
 
 On
        October 31, 2007, the Company adopted the recognition and disclosure
        requirements of SFAS No. 158, “Accounting for Defined Benefit Plans and Other
        Post-retirement Benefits” —an amendment of FASB Statements No. 87, 88, 106, and
        132(R)”. This statement requires employers that sponsor defined benefit plans to
        recognize the funded status of a benefit plan on its balance sheet; recognize
        gains, losses and prior service costs or credits that arise during the period
        that are not recognized as components of net periodic benefit cost as a
        component of other accumulated comprehensive income, net of tax; measure
        defined
        benefit plan assets and obligations as of the date of the employer’s fiscal
        year-end balance sheet; and disclose in the notes to financial statements
        additional information about certain effects on net periodic benefit cost
        for
        the next fiscal year that arise from delayed recognition of the gains or
        losses,
        prior service costs or credits, and transition asset or obligation.
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities—Including an Amendment of FASB
        Statement No. 115”.  This Statement permits entities to choose to
        measure many financial instruments and certain other items at fair value.
        The
        objective is to improve financial reporting by providing entities with the
        opportunity to mitigate volatility in reported earnings caused by measuring
        related assets and liabilities differently without having to apply complex
        hedge
        accounting provisions. The Company is required to adopt the provisions of
        SFAS
        159 effective for its 2009 fiscal year and is currently evaluating the effect
        that the adoption of SFAS 157 will have on its consolidated results of
        operations and financial condition and is not yet in a position to determine
        such effects.
 
 In
        December 2007, the FASB issued SFAS No. 141R, “Business Combinations” a
        substantial amendment to SFAS 141. The objective of this statement is to
        improve
        the relevance, representational faithfulness, and comparability of the
        information that a reporting entity provides in its financial reports about
        a
        business combination and its effects. To accomplish that, this statement
        establishes principles and requirements for how the acquirer: a) recognizes
        and
        measures in its financial statements the identifiable assets acquired, the
        liabilities assumed, and any non-controlling interest in the acquiree; b)
        recognizes and measures the goodwill acquired in the business combination
        or a
        gain from a bargain purchase; c) determines what information to disclose
        to
        enable users of the financial statements to evaluate the nature and financial
        effects of the business combination. The Company is required to adopt the
        provisions of SFAS 141R effective for acquisitions occurring after October
        31,
        2009.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements—an Amendment of ARB No. 51”  The
        objective of this Statement is to improve the relevance, comparability, and
        transparency of the financial information that a reporting entity provides
        in
        its consolidated financial statements related to the non-controlling interest
        held by others in entities that are consolidated by the reporting entity.
        MDS
        does not consolidate entities with material non-controlling interests and
        the
        provisions of SFAS 160 are not expecting to have a material impact on its
        consolidated results of operations and financial condition.
 
 Critical
        accounting policies and estimates
 Our
        discussion and analysis of our financial condition and results of operations
        is
        based upon our consolidated financial statements, which have been prepared
        in
        accordance with US GAAP.  These principles differ in certain
        significant respects from Canadian GAAP, and these differences are described
        and
        quantified in note 27 to the consolidated financial statements.
 
 Our
        significant accounting policies are contained in Note 3 to the consolidated
        financial statements.  Certain of these policies involve critical
        accounting estimates because they require us to make particularly subjective
        or
        complex judgments about matters that are inherently uncertain and because
        of the
        likelihood that materially different amounts could be reported under different
        conditions or using different assumptions.
  Revenue
        recognition
 Revenues
        are recorded when title to goods passes or services are provided to customers,
        the price is fixed or determinable, and collection is reasonably
        assured.  For the majority of product revenues, title passes to the
        buyer at the time of shipment and revenue is recorded at that time.
 
 Certain
        services are provided to customers on a per-unit pricing
        basis.  Revenues for such services are recognized when the service has
        been performed and a contractual right to bill exists.
 
 A
        significant portion of the Company’s pharmaceutical research services revenues
        are provided under the terms of long-term contracts that can extend from
        several
        months to several years.  Revenues on these contracts are recognized
        using the percentage-of-completion method based on a proportional performance
        basis using output as a measure of performance.  Losses, if any, on
        these contracts are provided for in full at the time such losses are
        identified.  Services performed in advance of billings are recorded as
        unbilled revenue pursuant to the contractual terms.  In general,
        amounts become billable upon the achievement of certain milestones or in
        accordance with predetermined payment schedules.  Changes in the scope
        of work generally result in a renegotiation of contract
        terms.  Renegotiated amounts are not included in net revenues until
        earned.  Billings in excess of services performed to date or in excess
        of costs plus estimated profits on contracts in progress are recorded as
        deferred revenue.  Customer advances on contracts in progress are
        shown as liabilities, and reimbursable costs in excess of billings are recorded
        as unbilled revenue.
 
 The
        Company recognizes revenue and related costs for arrangements with multiple
        deliverables, such as equipment and installation, as each element is delivered
        or completed based upon its relative fair value.  If fair value is not
        available for any undelivered element, revenue for all elements is deferred
        until delivery is completed.  When a portion of the customer’s payment
        is not due until installation or acceptance, the Company defers that portion
        of
        the revenue until completion of installation or acceptance has been
        obtained.  Revenues for training are deferred until the service is
        completed.  Revenues for extended service contracts are recognized
        ratably over the contract period.  Provisions for discounts,
        warranties, rebates to customers, returns and other adjustments are provided
        for
        in the period the related sales are recorded.
 
 Valuation
        of goodwill
 Goodwill
        is not amortized, but is assessed for impairment at the reporting unit level
        annually, or sooner if events or changes in circumstances indicate that the
        carrying amount could exceed fair value. Goodwill is assessed for impairment
        using a two-step approach, with the first step being to assess whether the
        fair
        value of the reporting segment with which the goodwill is associated is less
        than its carrying value. If this is the case, a second impairment test is
        performed which requires a comparison of the fair value of goodwill to its
        carrying amount. If the fair value is less than our carrying value, goodwill
        is
        considered impaired and an impairment charge must be recognized
        immediately.
 
 Assessing
        the fair value of a reporting unit requires that we make numerous estimates,
        including estimating future cash flows and interest rates.  Variations
        in these estimates will cause material differences in the result.  We
        have not changed our approach to determining the fair value of our reporting
        units over the last two years and we are not aware of any trends that will
        affect our methodology or significant assumptions.
 
 Intangible
        assets
 Intangible
        assets include the value of the MAPLE supply agreement, acquired patents,
        technology, customer relationships, licences, and long-term service contracts,
        which are recorded as intangibles on the consolidated statements of financial
        position.  Intangible assets are recorded at cost and are amortized
        over periods that approximate their useful lives, beginning when the assets
        are
        put into service and ranging from three to seven years.
 
 Because
        many intangible assets are associated with technology that is evolving and
        for
        which obsolescence is a significant risk, the carrying value of intangible
        assets is evaluated at least once per year.  In the event that
        management determines that it is unlikely that the Company will be able to
        fully
        recover the carrying value of intangible assets from the undiscounted cash
        flow
        that can be generated in the future from related products or services, the
        intangible assets are written down to approximate our estimate of their net
        realizable value.
 
 Determining
        the acquisition cost of intangible assets and assessing the carrying value
        of
        those assets we own at a period-end requires that we make estimates related
        to
        the future cash flows we expect to generate through the ownership and use
        of the
        underlying asset or technology. These estimates are updated on an annual
        basis
        and may change from year to year, based on our expectations of future revenues
        and costs associated with the products that may be developed. We are not
        aware
        of any trends that would cause us to believe that fair value of these assets
        in
        a future period would be insufficient to support the current carrying
        value.
  Essentially
        all acquired technology and licences relate to our analytical instruments
        business. The long-term supply agreement included with intangible assets
        relates
        to our molecular imaging business.
 
 Valuation
        of long-term investments
 Long-term
        investments that are carried at cost or accounted for using the equity method
        are reviewed to determine whether their fair value is below carrying
        value.  Investments are reviewed periodically to determine if there
        has been a decline in value that is other than temporary.  An
        investment is considered impaired if any such decline is considered other
        than
        temporary. Factors considered in determining whether a loss is temporary
        include
        the length of time and extent to which fair value has been below cost; financial
        condition and near-term prospects of the investee; and our ability and intent
        to
        hold the investment for a period of time sufficient to allow for any anticipated
        recovery.  In the event that impairment has occurred, the carrying
        value of the investment is written down to an amount that reflects management’s
        estimate of what could be received from a sale of the investment after paying
        costs of disposal. We are not aware of any trends that would cause us to
        believe
        that the carrying value of long-term investments is materially in excess
        of
        their fair value.
 
 Property,
        plant, and equipment
 Property,
        plant, and equipment are recorded at cost and depreciated at varying rates
        over
        their estimated useful lives. Management sets these rates based on experience
        with these or similar assets.  Costs incurred on assets under
        construction are capitalized as construction in progress.  Costs
        capitalized on these projects include the direct costs of construction,
        equipment installation and testing, and interest costs associated with financing
        large, long-term projects.  No depreciation is recorded on such assets
        until they are placed in service.
 
 At
        each
        period-end, management reviews the total costs capitalized on all construction
        projects to determine whether or not the carrying value of the assets can
        be
        recovered from the undiscounted, expected, net future cash flow generated
        by the
        assets.  If there is no reasonable expectation that the costs can be
        recovered, the carrying value of the asset is reduced to the estimated
        recoverable amount and the excess is charged to income.  This process
        is subject to significant judgment and could be materially affected by
        variations in estimates of future cash flows.  At the present time, we
        are not aware of any trends that would cause us to change our expectations
        of
        future cash flows from these long-term investments.
 
 Income
        taxes
 We
        operate globally and are, therefore, subject to income taxes in multiple
        jurisdictions.  The income tax expense reported in the consolidated
        statements of operations is based on a number of different estimates made
        by
        management.  Our effective tax rate can change from year to year based
        on the mix of income among the different jurisdictions in which we operate,
        changes in tax laws in these jurisdictions, and changes in the estimated
        values
        of deferred tax assets and liabilities recorded on our consolidated statement
        of
        financial position. The impact of these changes is reflected in income tax
        expense for the year. We do not allocate income tax expenses to our reportable
        segments.
 
 The
        income tax expense reflects an estimate of cash taxes expected to be paid
        in the
        current year, as well as a provision for changes arising this year in the
        value
        of deferred tax assets and liabilities.  The likelihood of recovering
        value from deferred tax assets requires us to determine whether it is more
        likely than not that all or a portion of the deferred tax assets will be
        realized from such items as loss carryforwards and the future tax depreciation
        of property, plant, and equipment.  At each quarter-end, we assess the
        valuation of deferred tax assets and establish or adjust a valuation
        reserve,  if necessary.  Changes in the amount of the
        valuation reserve required can materially increase or decrease the tax expense
        in a period.  Significant judgment is applied to determine the
        appropriate amount of valuation reserve to record.
 
 Restructuring
        charges
 We
        have
        approved plans to restructure certain operations and, as such, we are required
        to establish critical estimates surrounding exit costs and workforce
        reductions.  Because the determination of the restructuring provision
        is a complex process and the roll-out of a restructuring plan could span
        multiple periods, we might be required to update estimates to reflect actual
        payments made.  Any adjustments made will be disclosed in the notes to
        our consolidated financial statements and could span all reported
        segments.
 
 Employee
        future benefits
 Certain
        estimates and assumptions are used to actuarially determine the Company’s
        defined pension and employee future benefit obligations. The expected rate
        of
        return on plan assets, discount rate, rate of compensation increase, and
        health
        care cost trend rate are important elements of cost and/or obligation
        measurement.
  The
        discount rate, which is determined annually, allows us to reflect estimated
        future benefit payments at their present value on the measurement date, and
        is
        based on market rates for high-quality fixed income investments available
        for
        the period to maturity of the benefits. A lower discount rate increases the
        benefit cost and obligation. The impact of changes in the rates used for
        estimating the value of employee future benefits is set out in note 21 to
        our
        consolidated financial statements. All reported segments are affected by
        accounting for employee future benefits.
 
 Stock-based
        compensation
 The
        Company uses the fair value method of accounting for stock-based compensation.
        The fair value of the options are estimated using the Black-Scholes option
        pricing model using estimated forfeiture rates, volatility, expected life
        of the
        options and the risk-free interest rate.
 
 Controls
        and Procedures
 Management
        is responsible for the design and operation of disclosure controls and
        procedures and internal control over financial reporting and is required
        to
        evaluate the effectiveness of these controls on an annual basis.
 
 An
        effective system of disclosure controls and procedures and internal controls
        over financial reporting is highly dependent upon adequate policies and
        procedures, human resources and information technology.  All control
        systems, no matter how well designed, have inherent limitations, including
        the
        possibility of human error and the circumvention or overriding of the controls
        or procedures.  As a result, there is no certainty that our disclosure
        controls and procedures or internal control over financial reporting will
        prevent all errors or all fraud.
 
 In
        addition, changes in business conditions or changes in the nature of the
        Company's operations may render existing controls inadequate or affect the
        degree of compliance with policies and procedures.  Accordingly, even
        disclosure controls and procedures and internal control over financial reporting
        determined to be effective can only provide reasonable assurance of achieving
        their control objectives.
 
 At
        the
        end of the period covered by this report, management conducted an evaluation
        of
        the Company’s disclosure controls and procedures and internal control over
        financial reporting. Our conclusions are set out below:
 
 Disclosure
        controls and procedures
 Management
        of MDS, including the Chief Executive Officer and Chief Financial Officer,
        has
        evaluated the effectiveness of the Company’s disclosure controls and procedures
        (as defined in the rules of the SEC and the Canadian Securities Administrators
        (CSA)) and have concluded that as a result of the material weakness described
        below related to the US GAAP valuation of certain stock-based incentive
        compensation plans under Statement of Financial Accounting Standards No.
        123
        (revised 2004) Share-Based Payments (SFAS 123R), such disclosure controls
        and
        procedures were not effective as at October 31, 2007. Management believes
        that
        the reported material weakness is narrow in scope and that it does not have
        a
        pervasive impact on disclosure controls and procedures or internal control
        over
        financial reporting at MDS.
 
 Management’s
        annual report on internal control over financial reporting
 Management
        of MDS is responsible for establishing and maintaining adequate internal
        control
        over financial reporting for the Company.
 
 Management
        of MDS, including the Chief Executive Officer and Chief Financial Officer,
        has
        evaluated the effectiveness of our internal control over financial reporting
        using the Committee of Sponsoring Organizations of the Treadway Commission
        (COSO).  Management believes that the COSO framework is a suitable
        framework for its evaluation of the Company’s internal control over financial
        reporting because it is free from bias, permits reasonably consistent
        qualitative and quantitative measurements of MDS’s internal control, is
        sufficiently complete so that those relevant factors that would alter a
        conclusion about the effectiveness of the Company’s internal control are not
        omitted, and is relevant to an evaluation of internal control over financial
        reporting.
 
 As
        permitted by the rules established by the SEC pertaining to in-year
        acquisitions, management’s assessment of and conclusion on the effectiveness of
        internal control over financial reporting did not include Molecular Devices
        Corp. (MDC), which was acquired during 2007 and is included in the 2007
        consolidated financial statements of MDS.  MDC constituted 4.6% and
        4.6% of total and net assets, respectively, as of October 31, 2007 and 11.6%
        and
        2.1% of revenues and net income, respectively, for the year then
        ended.
 
 As
        a
        result of our internal controls review, we have concluded that effective
        internal control over financial reporting was not maintained with respect
        to
        accounting for and disclosure of the fair value of compensation expense and
        period-end liabilities for certain stock-based incentive compensation plans
        for
        US GAAP reporting.  For Canadian GAAP reporting, our stock-based
        incentive compensation plans have been correctly valued and reported in
        compliance with CICA Handbook No. 3870 Stock-Based Compensation and Other
        Stock-Based Payments (HB 3870). Under HB 3870, these plans are valued for
        Canadian GAAP using an intrinsic value (market) approach, while SFAS 123R
        requires a more complex fair value methodology for US GAAP which takes into
        consideration volatility and probability to calculate the associated liability.
        During our year-end audit, it was discovered that certain stock-based incentive
        compensation plans were not correctly valued for US GAAP reporting under
        SFAS
        123R. As this error was detected during the year-end audit, it was corrected
        prior to the issuance of our 2007 US GAAP financial statements for the fiscal
        year; however, over the course of the year, our 2007 interim quarterly reports
        understated US GAAP net income by a total of $4 million as previously reported
        in the Canadian to US GAAP reconciliation tables contained in the notes to
        the
        2007 interim financial statements.  As this error resulted in a
        material audit adjustment to our US GAAP statements for fiscal 2007 and a
        restatement of the 2007 interim financial statements to correct the Canadian
        to
        US GAAP reconciliation tables in the notes to the financial statements, we
        have
        concluded that this constitutes a material weakness in the Company’s internal
        control over financial reporting and that the Company’s internal control over
        financial reporting was not effective as at October 31, 2007.
 
 A
        material weakness is a deficiency, or combination of deficiencies, in internal
        control over financial reporting, such that there is a reasonable possibility
        that a material misstatement of the company’s annual or interim financial
        statements will not be prevented or detected on a timely basis.
 
 Ernst
        & Young LLP, a registered public accounting firm that has audited the
        consolidated financial statements of MDS for the fiscal year ended October
        31,
        2007, has also issued a report on financial statements and internal control
        over
        financial reporting under Auditing Standard No. 5 of the Public Company
        Accounting Oversight Board (United States).  A copy of their report
        dated January 22, 2008 can be found on page 31.
 
 Changes
        in internal control over financial reporting
 There
        have been no changes in MDS’s internal control over financial reporting during
        the fiscal year ended
 October
        31, 2007 that have materially affected or are reasonably likely to materially
        affect the Company’s internal control over financial reporting.
 
 To
        address the material weakness identified, subsequent to October 31, 2007,
        management implemented measures to remediate the control deficiency, including
        review of the fair value of certain stock-based incentive compensation plans
        with third-party experts in the field and other measures that strengthen
        internal control associated with the calculation and reporting of the fair
        value
        of stock-based incentive compensation plan liability and expense. These measures
        were implemented for purposes of preparing the 2007 annual financial statements
        under US GAAP and will be similarly used to prepare amendments to financial
        information in our revised interim reports for the fiscal 2007 quarters.
        Although we believe that the reported material weakness is narrow in scope
        and
        that it does not have a pervasive impact on internal control over financial
        reporting at MDS, we will continue to evaluate our internal control over
        financial reporting on an on-going basis and will upgrade and enhance internal
        control over financial reporting as needed.
  
 
  A.           
        Disclosure Controls and
        Procedures




Management
      of MDS, including the Chief Executive Officer and Chief Financial Officer,
      has
      evaluated the effectiveness of the Company’s disclosure controls and procedures
      (as defined in the rules of the SEC and the Canadian Securities Administrators
      (CSA)) and have concluded that as a result of the material weakness described
      below related to the US GAAP valuation of certain stock-based incentive
      compensation plans under Statement of Financial Accounting Standards No. 123
      (revised 2004) Share-Based Payments (SFAS 123R), such disclosure controls and
      procedures were not effective as at October 31, 2007. Management believes that
      the reported material weakness is narrow in scope and that it does not have
      a
      pervasive impact on disclosure controls and procedures or internal control
      over
      financial reporting at MDS.




B.           
      Management's
      Annual Report on Internal
      Controlover Financial
      Reporting




Management
      of MDS is responsible for establishing
      and maintaining adequate internal control over financial reporting for the
      Company.





Management
      of MDS, including the Chief Executive Officer and Chief Financial Officer,
      has
      evaluated the effectiveness of our internal control over financial reporting
      using the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO).  Management believes that the COSO framework is a suitable
      framework for its evaluation of the Company’s internal control over financial
      reporting because it is free from bias, permits reasonably consistent
      qualitative and quantitative measurements of MDS’s internal control, is
      sufficiently complete so that those relevant factors that would alter a
      conclusion about the effectiveness of the Company’s internal control are not
      omitted, and is relevant to an evaluation of internal control over financial
      reporting.





As
      permitted by the rules established by the SEC pertaining to in-year
      acquisitions, management’s assessment of and conclusion on the effectiveness of
      internal control over financial reporting did not include Molecular Devices
      Corp. (MDC), which was acquired during 2007 and is included in the 2007
      consolidated financial statements of MDS.  MDC constituted 4.6% and
      4.6% of total and net assets, respectively, as of October 31, 2007 and 11.6%
      and
      2.1% of revenues and net income, respectively, for the year then
      ended.


As
      a
      result of our internal controls review, we have concluded that effective
      internal control over financial reporting was not maintained with respect to
      accounting for and disclosure of the fair value of compensation expense and
      period-end liabilities for certain stock-based incentive compensation plans
      for
      US GAAP reporting.  For Canadian GAAP reporting, our stock-based
      incentive compensation plans have been correctly valued and reported in
      compliance with CICA Handbook No. 3870 Stock-Based Compensation and Other
      Stock-Based Payments (HB 3870). Under HB 3870, these plans are valued for
      Canadian GAAP using an intrinsic value (market) approach, while SFAS 123R
      requires a more complex fair value methodology for US GAAP which takes into
      consideration volatility and probability to calculate the associated liability.
      During our year-end audit, it was discovered that certain stock-based incentive
      compensation plans were not correctly valued for US GAAP reporting under SFAS
      123R. As this error was detected during the year-end audit, it was corrected
      prior to the issuance of our 2007 US GAAP financial statements for the fiscal
      year; however, over the course of the year, our 2007 interim quarterly reports
      understated US GAAP net income by a total of $4 million as previously reported
      in the Canadian to US GAAP reconciliation tables contained in the notes to
      the
      2007 interim financial statements.  As this error resulted in a
      material audit adjustment to our US GAAP statements for fiscal 2007 and a
      restatement of the 2007 interim financial statements to correct the Canadian
      to
      US GAAP reconciliation tables in the notes to the financial statements, we
      have
      concluded that this constitutes a material weakness in the Company’s internal
      control over financial reporting and that the Company’s internal control over
      financial reporting was not effective as at October 31, 2007.





A
      material weakness is a deficiency, or combination of deficiencies, in internal
      control over financial reporting, such that there is a reasonable possibility
      that a material misstatement of the company’s annual or interim financial
      statements will not be prevented or detected on a timely basis.







Ernst
      & Young LLP, a registered public accounting firm that has audited the
      consolidated financial statements of MDS for the fiscal year ended October
      31,
      2007, has also issued a report on financial statements and internal control
      over
      financial reporting under Auditing Standard No. 5 of the Public Company
      Accounting Oversight Board (United States).




C.           
      Attestation Report of the
      Registered Public Accounting Firm




To
      the
      Shareholders and Board of Directors of MDS Inc.





We
      have
      audited MDS Inc.’s internal control over financial reporting as of October 31,
      2007, based on criteria established in Internal Control—Integrated Framework
      issued by the Committee of Sponsoring Organizations of the Treadway Commission
      (the COSO criteria). MDS Inc.’s management is responsible for maintaining
      effective internal control over financial reporting, and for its assessment
      of
      the effectiveness of internal control over financial reporting included in
      the
      accompanying Management’s annual report on internal control over financial
      reporting.  Our responsibility is to express an opinion on the
      company’s internal control over financial reporting based on our
      audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, assessing the risk that a material weakness exists, testing
      and evaluating the design and operating effectiveness of internal control based
      on the assessed risk, and performing such other procedures as we considered
      necessary in the circumstances. We believe that our audit provides a reasonable
      basis for our opinion.





As
      indicated in the accompanying Management’s annual report on internal control
      over financial reporting, Management’s assessment of and conclusion on the
      effectiveness of internal control over financial reporting did not include
      the
      internal controls of Molecular Devices Corp., which is included in the 2007
      consolidated financial statements of MDS Inc. and constituted 4.6% and 4.6%
      of
      total and net assets, respectively, as of October 31, 2007 and 11.6% and 2.1%
      of
      revenues and net income, respectively, for the year then ended.  Our
      audit of internal control over financial reporting of MDS Inc. also did not
      include an evaluation of internal control over financial reporting of Molecular
      Devices Corp.


A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements.  Also, projections of any evaluation
      of effectiveness to future periods are subject to the risk that controls may
      become inadequate because of changes in conditions, or that the degree of
      compliance with the policies or procedures may deteriorate.





A
      material weakness is a deficiency, or combination of deficiencies, in internal
      control over financial reporting, such that there is a reasonable possibility
      that a material misstatement of the company’s annual or interim financial
      statements will not be prevented or detected on a timely basis. The following
      material weakness has been identified and included in management’s assessment.
      Management has reported a material weakness over the accounting for and
      disclosure of the fair value of compensation expense and period-end liabilities
      for certain stock-based incentive plans under SFAS 123(R). This material
      weakness was considered in determining the nature, timing, and extent of audit
      tests applied in our audit of the 2007 financial statements, and this report
      does not affect our report dated January 22, 2008 on those financial
      statements.





In
      our
      opinion, because of the effect of the material weakness described above on
      the
      achievement of the objectives of the control criteria, MDS Inc. has not
      maintained effective internal control over financial reporting as
      of


October
      31, 2007, based on the COSO criteria.











Toronto,
      Canada


January
      22, 2008






D.           
      Changes in Internal Control
      over
      Financial Reporting




There
      have been no changes in MDS’s internal control over financial
      reporting during the fiscal year ended


October
      31, 2007 that have materially affected or are reasonably likely to materially
      affect the Company’s internal control over financial reporting.





To
      address the material weakness identified, subsequent to October 31, 2007,
      management implemented measures to remediate the control deficiency, including
      review of the fair value of certain stock-based incentive compensation plans
      with third-party experts in the field and other measures that strengthen
      internal control associated with the calculation and reporting of the fair
      value
      of stock-based incentive compensation plan liability and expense. These measures
      were implemented for purposes of preparing the 2007 annual financial statements
      under US GAAP and will be similarly used to prepare amendments to financial
      information in our revised interim reports for the fiscal 2007 quarters.
      Although we believe that the reported material weakness is narrow in scope
      and
      that it does not have a pervasive impact on internal control over financial
      reporting at MDS, we will continue to evaluate our internal control over
      financial reporting on an on-going basis and will upgrade and enhance internal
      control over financial reporting as needed.


E.           
      Notice of Pension
      Fund Blackout
      Period




The
      Company was not required by Rule 104
      of Regulation BTR to send any notice to any of its directors or executive
      officers during the fiscal
      year ended October 31,2007.




F.           
      Audit Committee Financial
      Expert




The
      Company'sboard
      ofdirectors(the"Board")has
      determined that all of the members
      of the Company's
      Audit Committee are"independent"within
      the meaning of applicable SEC
      regulations and the listing standards of the New York Stock Exchange(the"NYSE").
      In addition, the Board has determined that
      Mr. Robert Luba,
      the Chair of the Audit
      Committee, Mr. William
      Anderson,and Ms. Kathleen
      O'Neillare"Audit
      Committee Financial
      Experts"withinthe
      meaning ofGeneral Instruction B(8)(b)
      of Form
      40-Funder the Exchange
      Act.




G.           
      Code of
      Ethics




The
      Company has a code of ethics,
      entitled Global Business Practice Standards, which is applicable to all its
      employees including the Chief Executive Officer, Chief Financial Officer and
      other senior officers. The Company's code of ethics can be viewed on its
      websiteatwww.mdsinc.com/pdf/Global_Business%20Practices.pdf.




H.           
      Principal Accountant Fees and
      Services


(all
      amounts are in Canadian dollars unless otherwise indicated)




Audit
      Fees




The
      aggregate fees billed by Ernst &
Young LLP(the"Independent
      Auditors")for
      professional services rendered for
      the audit of the Company's
      annual financial statements, including
      services related thereto, were$6,119,000 for the fiscal year ended
      October 31, 2007 and $6,726,000 forthe fiscal
      year ended October 31, 2006.




Audit-Related
      Fees




The
      aggregate fees billed bytheIndependent
      Auditorsfor assurance and related
      services that
      are reasonably related to the performance of the audit or review of the
      Company's
      financial statements and are not
      reported as"Audit
      Fees,"including
      consultations concerning
      financial accounting and reporting matters not classified as audit, were$634,000for
      the fiscal year ended October 31, 2007 and $255,000 for the fiscal year ended
      October 31, 2006.




Tax
      Fees




The
      aggregate fees billed bytheIndependent
      Auditorsfor professional services
      rendered for
      tax compliance, tax advice and tax planning were$333,000 for the fiscal
      year ended October 31, 2007 and $196,000 forthe fiscal year ended October
      31,
      2006.
      The servicescomprising the fees
      reported as"Tax
      Fees"included tax return preparation in
      various foreign jurisdictions, consultation regarding various tax issues,
      support provided to management in connection with income and other tax
      audits.




All
      Other Fees




During
      the fiscal years ended October 31,2007 and2006, the Independent Auditorswere not engaged to provide
      servicesother than those
      reported in the preceding three paragraphs.




I.           
      Audit Committee Pre-Approval
      Policies and
      Procedures




All
      services to be performed by the Company's
      Independent Auditor must be approved
      in advance by the Audit Committee.  The Audit Committee has determined
      that the only services to be provided by the Company's
      Independent Auditor are audit and tax
      related services, which are and will be subject to
      the Audit
      Committee's
      pre-approval.  MDS Corporate
      Finance obtains and coordinates the pre-approval process for audit and tax
      services, by receiving all requests from the various business units and
      submitting them to the Audit Committee annually, or more
      frequently, if the
      need arises for the Committee's
      pre-approval.  No fees may
      be paid to the Company's
      Independent Auditor unless this
      pre-approval has been obtained.




Pre-approval
      from the Audit Committee
      can be sought for planned engagements based on budgeted
      or committed
      fees.   No further approval is required to pay pre-approved
      fees.   Additional pre-approval is required for any increase in
      scope or in final fees.




J.           
      Off-Balance Sheet Arrangements




See
      information provided under the heading "Guarantees" (Note 23) contained in
      the
      Notes to Consolidated Financial Statements, included as Document No. 2 to this
      Form 40-F.




K.           
      Tabular Disclosure of Contractual Obligations




Tabular
      disclosure of long-term
      obligations, including
      interest obligations
      related to long-term debt and capital leases is set out in the following
      table:





2008
            2009
            2010
            2011
            2012
            ThereafterLong-term
                debt and capital leases
            $
            94
            $
            20
            $
            29
            $
            17
            $
            18
            $
            206Interest
                on long-term debt and capital leases
            
            17
            
            15
            
            14
            
            13
            
            12
            
            8Operating
                leases
            
            22
            
            22
            
            21
            
            17
            
            15
            
            47Other
                contractual obligations
            
            104
            
            47
            
            41
            
            23
            
            27
            
            206$
            237
            $
            104
            $
            105
            $
            70
            $
            72
            $
            467





L.           
      Critical Accounting
      Policies




See
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations for the year ended October 31, 2007, included as Document No. 3
      to
      this Form 40-F.




M.           
      Identification of Audit
      Committee




Company's
      Board of Directors has appointed an Audit Committee consisting of five outside
      directors - Robert W. Luba (Chair), Richard H. McCoy, James S. A. MacDonald,
      Kathleen M. O'Neill and William Anderson.




N.           
      NYSE
      Exemptions




As
      required by the NYSE, the Company will post on its corporate website any
      significant differences between the corporate governance practices followed
      by
      the Company in Canada and those applicable to US companies under the NYSE's
      listing standards.







UNDERTAKING
      AND CONSENT TO
      SERVICE OF PROCESS





Undertaking





The
      Registrant undertakes to make available, in person or by telephone,
      representatives to respond to inquiries made by the Commission Staff, and to
      furnish promptly, when requested to do so by the Commission Staff, information
      relating to the securities in relation to which the obligation to file an annual
      report on Form 40-F arises, or transactions in said securities.





Consent
      to Service of Process





Concurrently
      with the filing of the Registrant's Form 40-F on February 2, 2001 (File No.
      001-15016), the Registrant filed with the SEC a written irrevocable consent
      and
      power of attorney on Form F-X;  an amendment to that Form F-X was
      filed with the SEC on May 23, 2001.





EXHIBITS





The
      following exhibits are filed as part of this report:





Exhibit
              No.
            Description1.
            Consent
                of Ernst & Young LLP31.
            Certifications
                of Chief Executive Officer (Principal Executive Officer) and Chief
                Financial Officer (Principal Financial Officer) pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 2002.32.
            Certification
                of Chief Executive Officer (Principal Executive Officer) and Chief
                Financial Officer (Principal Financial Officer) pursuant to Section
                906 of
                the Sarbanes-Oxley Act of
                2002.


SIGNATURES








Pursuant
      to the requirements of the Exchange Act, the Registrant certifies that it meets
      all of the requirements for filing on Form 40-F and has duly caused this annual
      report to be signed on its behalf by the undersigned, thereto duly
      authorized.











Date:
                January 29, 2008
            MDS
                Inc.
              
              
              By:/s/ Douglas
                S.
                Prince
              Name:
                Douglas S. Prince
              Title:  Executive
                Vice-President Finance
              and
                Chief Financial Officer







EXHIBIT
      INDEX









Exhibit
                No.
            Description1.
            Consent
                of Ernst & Young LLP.31.
            Certifications
                of Chief Executive Officer (Principal Executive Officer) and Chief
                Financial Officer (Principal Financial Officer) pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 2002.32.
            Certifications
                of Chief Executive Officer (Principal Executive Officer) and Chief
                Financial Officer (Principal Financial Officer) pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.