Consolidated Earnings

Earnings

For the year ended December 31, 2008, our net earnings were $450 million ($1.28 per share diluted), $34 million higher than net earnings of $416 million ($1.13 per share diluted) recorded in 2007. The increase was due largely to higher earnings in the gold and electricity businesses. Earnings from the uranium business increased marginally over the prior year as a 5% increase in the realized selling price was offset by higher costs.

The aggregate gross profit margin decreased in 2008 to 37% from 38% in 2007 due to higher costs in all business segments. (Gross profit equals revenue less products and services sold less depreciation, depletion and reclamation).

Corporate Expenses

Administration

In 2008, direct administration costs were $177 million, an increase of $48 million compared to 2007 due to business development costs at BPLP, an increase in the workforce, higher charges for recruiting and retention programs and systems enhancements.

Cameco also recorded a net recovery of $61 million in 2008 for stock compensation expense as a result of the decline in the share price during 2008. A recovery of $2 million was recorded in 2007.

Interest and Other

In 2008, interest and other charges were $333 million higher than in 2007 due to an increase of $42 million in realized losses on financial instruments and a $14 million reduction in interest income related to lower average cash balances during the year. There was also a $277 million increase in unrealized losses on financial instruments, as a result of the significant decline in the value of the Canadian dollar against the US dollar from 2007.

Cameco voluntarily de-designated its foreign currency forward sales contracts as hedges effective August 1, 2008. See note 3 to the financial statements.

In 2008, gross interest charges of $53 million were $10 million higher than the $43 million recorded in 2007 while interest capitalized increased to $39 million from $31 million in 2007. See note 13 to the financial statements.

Income Taxes

In 2008, we recorded a net recovery of income taxes of $25 million compared to an expense of $29 million for 2007. This change was due largely to a recovery of tax expense related to the restructuring of the gold business. See note 16 to the financial statements for more complete information.

In 2008, as part of the ongoing annual audits of Cameco's Canadian tax returns, Canada Revenue Agency (CRA) disputed the transfer pricing methodology used by Cameco and its wholly-owned Swiss subsidiary, Cameco Europe Ltd. (CEL), in respect of sale and purchase agreements for uranium products for the year 2003. We believe it is likely that CRA will reassess Cameco's tax returns for the years 2004 through 2008 on a similar basis. Our view is that CRA is incorrect and we intend to contest their position. However, to reflect the uncertainties of CRA's appeals process and litigation, Cameco has decided to increase its reserve for uncertain tax positions and recognize an income tax expense of $15 million in 2008 for the years 2003 through 2008. See note 16 to the financial statements.

Adjusted Earnings

For the year ended December 31, 2008, our adjusted net earnings were $589 million ($1.67 per share adjusted and diluted), $17 million higher than the adjusted net earnings of $572 million ($1.54 per share adjusted and diluted) recorded in 2007. In 2008, based on adjusted net earnings, we recorded a tax expense of $50 million compared to $28 million for 2007. Our effective tax rate increased to 7% from 5% in 2007. This change was due to a higher proportion of taxable income being earned in Canada where tax rates are higher.

Cameco uses the measure "adjusted earnings" in order to provide a more meaningful basis for period-to-period comparisons of the financial results. For a description of the adjustments, see "Use of Non-GAAP Financial Measures". Adjusted net earnings, a non-GAAP measure, should be considered as supplemental in nature and not a substitute for related financial information prepared in accordance with GAAP.

Cash Resources

Operating Activities

In 2008, Cameco generated cash from operations of $708 million compared to $801 million in 2007. The decrease of $93 million reflects an increase in working capital requirements that more than offset the benefits of higher revenues. Trade receivables were $221 million higher than at the end of 2007 due to the timing of sales in the uranium and fuel services businesses. Materials inventories and prepaid expenses were also higher compared to 2007.

Investing Activities

In 2008, cash used in investing activities was $1,145 million compared to $527 million in 2007. Total expenditures for property, plant and equipment in 2008 were $629 million, an increase of $135 million over 2007 due to increased capital expenditures at the Saskatchewan uranium operations. In 2008, Cameco spent $503 million in the acquisition of its interests in Kintyre ($351 million), GLE ($124 million) and GoviEx ($28 million).

For 2008, expenditures for property, plant and equipment included $112 million for sustaining capital at McArthur River/Key Lake, $86 million for sustaining capital at Rabbit Lake, $57 million in development costs at Cigar Lake and $39 million in capitalized interest charges.

Financing Activities

In 2008, Cameco's financing activities provided $540 million compared to a net use of $437 million in 2007 due largely to financing of acquisitions in the year. In 2007, Cameco spent $429 million to repurchase and cancel 9.6 million shares. In 2008, the company paid a record total of $80 million in dividends, up from $67 million in 2007.

Balance Sheet

Cash

At December 31, 2008, our consolidated cash balance totalled $269 million with Centerra holding $205 million of this amount.

Inventories

Our total product inventories increased by $56 million to $493 million compared to the end of 2007. The increase in the inventory value was attributable to higher gold inventories. The total carrying value of the uranium and fuel services inventories was similar to 2007 as declines in the quantities in inventory were offset by higher unit costs. The average cost of our uranium rose predominantly due to higher production costs. The cost of conversion services has risen due to higher production costs and an increase in the cost of purchased material. Refer to note 4 in the notes to the financial statements.

Debt

At December 31, 2008, our total debt was $1,313 million, representing an increase of $587 million compared to December 31, 2007. Included in the December 31, 2008, balance was $181 million, which represents our proportionate share of BPLP's capital lease obligation. At December 31, 2008, our consolidated net debt to capitalization ratio was 23%, up from 18% at the end of 2007. Refer to notes 8 and 9 in the financial statements.

Off-Balance Sheet Arrangements

In the normal course of operations, Cameco enters into certain transactions which are not required to be recorded on its balance sheet. These activities include the issuing of financial assurances and long-term product purchase contracts. These arrangements are discussed in the following sections of this MD&A and the notes to the financial statements:

• Financial Assurances:
• 2008 Nuclear Electricity Generation Business,
• Liquidity and Capital Resources,
• Risks and Risk Management, and
• Notes 8, 9, 23 and 25 of the financial statements.
• Long-Term Product Purchase Contracts
• Uranium Business,
• Liquidity and Capital Resources, and
• Note 24 of the financial statements

2006-2008 Consolidated Financial Highlights

The following points are intended to assist the reader in analyzing the trends in the annual financial highlights for the years 2006 through 2008.

• Revenue has trended higher over the three-year period, rising by 56% over 2006 to a record $2,859 million in 2008. This increase was primarily the result of an increase in the realized selling price for uranium, which averaged $43.91 per pound (Cdn) in 2008 compared to $24.72 per pound (Cdn) in 2006. Revenue from the gold business has also risen significantly over the three-year period due to improved prices.
• Earnings from operations have also trended higher during the period, but the rise has been tempered somewhat by higher costs for product sold, higher direct administration charges and greater investment in exploration. The increase in the cost of sales was attributable to higher costs for purchased and produced uranium and conversion services, driven by rising spot prices, lower production and higher royalty charges for uranium. Our administration costs have risen over the three-year period due to growth in the workforce, higher costs for regulatory compliance and business development activities.
• Net earnings have trended with revenue but our results have been significantly influenced by unusual items over the past three years. In 2006, we recorded income tax recoveries of $73 million as the result of changes in tax legislation, and we recognized a gain of $29 million (after tax) on the sale of our interest in the Fort à la Corne joint venture. In 2007, we recorded charges of $153 million after tax related to the restructuring of Centerra and $65 million after tax related to the amendment to the stock option plan to provide for a cash settlement feature, as well as a $25 million recovery of future income taxes due to tax legislation changes. In 2008, we ceased to apply hedge accounting to our portfolio of foreign exchange contracts and as a result, we recorded $166 million in unrealized mark-to-market losses due to the decline in the Canadian dollar relative to the US dollar. We also recorded $30 million in charges to reduce the carrying value of certain investments.
• Adjusted net earnings for 2008 have more than doubled to $589 million compared to the $274 million recorded in 2006. The 109% increase to $572 million in 2007 from 2006 was attributable to improved results in the uranium business related to an improved realized price, driven by a significant increase in the spot price for uranium. Adjusted net earnings rose to $589 million in 2008 compared to $572 million in 2007 due to improvement in the realized prices for gold and electricity.
• In 2008, Cameco generated cash from operations of $708 million compared to $801 million in 2007. This decrease of $93 million was mainly attributable to the higher working capital requirements in 2008, which were related to normal variations in our accounts receivable balance. Cash from operations of $801 million in 2007 represented an increase of $383 million compared to the $418 million recorded in 2006. This increase was mainly due to higher revenues in the uranium business.
• The major components of Cameco's long-term financial liabilities are long-term debt, future income taxes and the provision for reclamation. In 2008, Cameco's total long-term financial liabilities increased to $2,024 million from $1,633 million at the end of 2007 due to a $69 million increase in our provision for reclamation and a $587 million increase in debt, partially offset by a $181 million reduction in future income taxes.
• At the end of 2008, Cameco's total assets amounted to $7,011 million, an increase of $1,640 million over the previous year. Most of the change was due to investments in long-term assets including the acquisitions of interests in Kintyre, GLE and GoviEx. A $221 million increase in accounts receivable also contributed to the change.