• are deploying what we anticipate will be the world's most advanced uranium enrichment technology, known as the American Centrifuge,

• are the exclusive executive agent for the U.S. government under a nuclear nonproliferation program with Russia, known as Megatons to Megawatts,

• perform contract work for the U.S. Department of Energy ("DOE") and its contractors at the Paducah and Portsmouth gaseous diffusion plants ("GDPs"), and

• provide transportation and storage systems for spent nuclear fuel and provide nuclear and energy consulting services.

Low Enriched Uranium
LEU consists of two components: separative work units ("SWU") and uranium. SWU is a standard unit of measurement that represents the effort required to transform a given amount of natural uranium into two components: enriched uranium having a higher percentage of U235 and depleted uranium having a lower percentage of U235. The SWU contained in LEU is calculated using an industry standard formula based on the physics of enrichment. The amount of enrichment deemed to be contained in LEU under this formula is commonly referred to as the SWU component and the quantity of natural uranium deemed to be used in the production of LEU under this formula is referred to as its uranium component.
We produce or acquire LEU from two principal sources. We produce LEU at the Paducah GDP in Paducah, Kentucky. Under the Megatons to Megawatts program, we acquire LEU from Russia under a contract, which we refer to as the Russian Contract, to purchase the SWU component of LEU recovered from dismantled nuclear weapons from the former Soviet Union for use as fuel in commercial nuclear power plants.
Our View of the Business Today
The long-term outlook for the nuclear industry continues to strengthen as government policy, public acceptance and environmental concerns about climate change have encouraged utilities to begin the process of building new nuclear reactors in the United States for the first time in four decades. Although no new reactors are yet under construction in the United States and potential new reactors are facing cost and financing pressures, U.S. utilities have filed 17 applications for construction and operating licenses for 26 new reactors with the U.S. Nuclear Regulatory Commission ("NRC") and the NRC has indicated that license applications for approximately 10 more reactors are expected by 2012.

Higher SWU demand, higher production cost for gaseous diffusion enrichment plants in the United States and France due to increases in electric power costs, and the need to recover capital cost for new enrichment capacity are three drivers for increased market prices for SWU. In the first nine months of 2008, long-term SWU price indicators associated with sales for deliveries in future periods increased 11% to $159 per SWU. Looking forward, market supply and demand fundamentals suggest that SWU prices should continue to firm as new reactors are ordered and built in the markets we serve, unless the balance of supply and demand in the United States is adversely affected by imports of unfairly priced LEU.
These factors have combined to provide a strong business environment for the nuclear fuel industry, which we believe provides a strong foundation for our substantial investment in the American Centrifuge Plant (the "ACP"). Nonetheless, we face significant challenges both over the next twelve months, as we seek additional financing needed to continue the ACP, and over the next several years, as we transition our sources of LEU supply. See the American Centrifuge Plant Update below.
During this transition period, we will seek to effectively manage the ramp up in ACP capacity, determine the end date for commercial production from the Paducah GDP and conclude the Megatons to Megawatts program in 2013. We will also be looking at the potential expansion of the ACP beyond the initial 3.8 million SWU plant, which could be done incrementally once the initial ACP construction phase is complete. Gross profit margins will remain extremely tight over the next several years due to higher electric power costs at the Paducah GDP and increasing purchase costs from Russia under the Megatons to Megawatts program. We are currently in discussions with Russia regarding pricing for our purchases in 2009 and beyond.
Earlier this year, we exercised our option to extend the lease with DOE for the Paducah GDP through June 2016, providing us with flexibility within our current enrichment process to help us through this critical transitional period. Although we are operating the Paducah GDP at the highest efficiency in decades, the costs to operate the Paducah GDP have increased in the past several years because of increases in power costs. Our long-term plan for the Paducah GDP is dependent upon a number of factors, including the successful and timely startup of the ACP, the cost of electric power under our contract with the Tennessee Valley Authority ("TVA"), the availability and cost of electric power beyond the expiration of the TVA contract in May 2012, the demand for SWU and uranium, the cost to maintain the Paducah GDP, and the timing and nature of any potential tails re-enrichment program or other programs we may undertake.
We are one of the largest industrial consumers of electric power in the United States. We have a fixed-price contract that sets the base price for most of the power we purchase, but our costs can fluctuate above or below the base contract price based on fuel and purchased power costs experienced by TVA. In 2008, this fuel cost adjustment has increased our power cost over the base contract price by 13% through September 30 and TVA has indicated that it expects the fuel cost adjustment for the remainder of 2008 to be even higher. Accordingly, we expect higher power purchase costs to negatively affect our production costs and cash flow for the remainder of 2008. We expect the fuel cost adjustment to continue to cause our purchase cost to remain above base contract prices in 2009. Recent volatility in energy prices adds substantial uncertainty to any forward cost projection.
We also face potential uncertainty and instability in the enrichment market during this transition period as a result of certain appellate court rulings that imports of LEU under certain SWU contracts are not subject to U.S. trade law intended to prevent dumping of unfairly priced foreign merchandise in the U.S. market. We disagree with this conclusion, and in April 2008 the U.S. Supreme Court granted petitions for certiorari filed by us and the U.S. government requesting review of those decisions. USEC and the Solicitor General of the United States filed briefs in July, and the Supreme

Court held oral arguments in the case in early November 2008 and is expected to render a decision in the first half of 2009. The general counsels of U.S. Departments of Commerce, Defense, Energy and State joined the Solicitor General in both the U.S. government's petition for review and its brief filed with the Supreme Court. Although there can be no assurance with respect to the outcome of the appeal, we are optimistic that the Supreme Court will overturn the appellate court decisions and ensure that all imports of LEU, regardless of the form of contract involved, are covered by the U.S. antidumping law. Such a decision will restore certainty in the market that dumping of LEU that materially injures the U.S. industry can be restricted. We believe that preserving the U.S. government's ability to prevent dumping of imported LEU irrespective of the form of sale is essential to providing the market stability needed to deploy a new generation of enrichment capacity in the United States.
In September 2008, Congress enacted, and the President signed, legislation that included a provision to ensure that the uncertainty created by the appellate court rulings on imports of LEU does not adversely impact the implementation of the Russian Contract. The legislation imposes quotas on imports of Russian LEU through 2020 that are similar to the quotas agreed to with Russia earlier this year, with the possibility of expanded quotas of up to an additional 5% of the domestic market beginning in 2014 if the Russian Federation continues to downblend highly enriched uranium after the Russian Contract is complete. This legislation significantly reduces the threat of injury from imports of dumped Russian LEU, but does not apply to imports from any other country, including France.
American Centrifuge Plant Update
During the past five years, we have been developing and demonstrating a gas centrifuge technology that we call the American Centrifuge that we will deploy in the American Centrifuge Plant being built in Piketon, Ohio. This technology was initially developed by DOE during the 1970s and 80s and successfully demonstrated, but was ultimately not commercially deployed for reasons unrelated to the technology itself. We have modified and improved this technology through the use of modern materials, advanced computer-aided design, digital controls and state-of-the-art manufacturing processes.
We have been operating the Lead Cascade integrated testing program since August 2007. We have been testing prototype machines and have demonstrated the ability of the cascade to generate product assays in a range useable by commercial nuclear power plants, obtained data on machine-to-machine interactions, verified cascade performance models under a variety of operating conditions, and obtained operating experience for our plant operators and technicians. The centrifuge machines involved in the Lead Cascade integrated testing program have operated for more than 125,000 total machine hours, providing data on equipment reliability and identifying opportunities to further optimize the machine and cascade design. These prototype machines confirmed design and performance targets while verifying the predictions of our analytical performance models. During the past year, we strenuously tested the centrifuge machines in operating conditions unlikely to be seen in normal plant operations. Lead Cascade operations have also given our employees experience in operating a cascade of machines in a variety of conditions that has allowed us to refine operating and maintenance procedures.
We refer to our production centrifuge design as the AC100 series centrifuge machine. The initial design for the AC100 machine reflects improvements learned during individual machine testing and subsequent integrated testing. The AC100 series centrifuge machine is designed to produce 350 SWU per year. The initial AC100 machine design is final, drawings have been released to our strategic suppliers and we have qualified the suppliers to begin manufacturing components. The strategic suppliers are manufacturing parts for the 40 to 50 AC100 machines that will be installed in the Lead Cascade in Piketon. The first of these machines will be delivered in November 2008. The

cascade of these AC100 machines is expected to be operational by the end of the first quarter of 2009 and is intended to provide additional data on equipment operation and reliability and identify opportunities to further optimize the machine and cascade design. In addition, improved AC100 components and design features are being tested in special test stands in Oak Ridge, Tennessee, and have been incrementally introduced into the current cascade. We also continue to work on the design for the value-engineered AC100 machine, which is expected to be completed in March 2009. The value-engineered AC100 machine is the machine we expect to deploy in the commercial plant.
Because the highly specialized U.S. manufacturing base needed to build the AC100 did not exist, a major focus for our American Centrifuge team has been creating this crucial industrial infrastructure. For example, we significantly refurbished a facility we purchased in Oak Ridge and installed new production machining equipment, robotics, and computer controls and testing systems to support the ramp-up to manufacturing centrifuge components. We have contracted with B&W Clinch River, LLC, a subsidiary of the Babcock and Wilcox Co., to manufacture upper suspension assemblies, lower suspension assemblies, cap assemblies and column parts at this facility as well as assembling rotors and procuring unclassified metal parts. A subsidiary of Alliant Techsystems Inc., or ATK, is expanding facilities it has at the Allegany Ballistics Laboratory in Rocket Center, West Virginia. It will produce the carbon-fiber rotor tubes for the centrifuges. Major Tool & Machine, Inc. is significantly expanding facilities at its Indianapolis, Indiana plant to fabricate the steel casings for the machines. Teledyne Brown Engineering, Inc. will manufacture service modules for the ACP. These steel framed structures hold pipe headers and valves, control and instrument cabling, electrical distribution cables and other controls. The manufacturing infrastructure that we are putting into place to deploy the initial plant capacity will be available to support any future expansion beyond 3.8 million SWU. Because an expansion would not require creating this manufacturing infrastructure or another demonstration of the technology, the cost of any expansion is anticipated to be less than the initial project.
Following receipt of a construction and operating license from the NRC in April 2007, we began renovating and building the ACP in Piketon, Ohio. Contractors completed preparing one production building floor for machine mounts and are preparing the second production building. A facility where uranium feed is introduced into plant systems and low enriched uranium is withdrawn is undergoing substantial renovation, and a new boiler that will provide heat to the ACP is being installed. We continue to build out the ACP balance of plant and signed an engineering, procurement, construction and construction management services contract with Fluor Corporation totaling approximately $1 billion during the third quarter. Under the new contract, which runs from 2008 to 2012, Fluor will be reimbursed for costs plus a fixed fee. Fluor can also earn an incentive fee based on cost savings produced.
We completed a thorough, bottom-up review of the cost to build the ACP and in August announced a project budget of $3.5 billion. This budget includes amounts already spent but does not include financing costs or financial assurance. See "Liquidity and Capital Resources - Financial Assurance and Related Liabilities" for a discussion of the financial assurance requirements of the American Centrifuge Plant. The expenditures to date and budgeted at completion follow (in millions):

                                                                     Cumulative
                                                                        as of               Project
                                                                    September 30,          Budget at
                                                                        2008              Completion
Machine technology, lead cascade and program management            $         341.1        $     464.2
Machine manufacturing and assembly                                           328.8            1,592.5
Commercial plant                                                             339.2            1,442.1

Project development, deployment and construction                   $       1,009.1        $   3,498.8


Other costs:
Capitalized interest                                                          19.6
Capitalized asset retirement obligations                                      11.3


Total ACP expenditures, including accruals                         $       1,040.0


Amount expensed as part of advanced technology costs               $         513.3
Amount capitalized as part of construction work in progress        $         473.5

Equipment, building and land used for manufacturing and plant      $          33.4
Depreciation and transfers                                         $          (2.9 )
Prepayments to suppliers for services not yet performed            $          22.7

Based on spending in the nine months ended September 30, 2008 and expected spending for the remainder of 2008, we expect spending on the project in 2008 to be below the guidance we issued in previous quarters. The lower spending compared to prior guidance primarily reflects the timing of certain project activities that are not expected to affect the scheduled completion of the ACP at the end of 2012 and, to a lesser extent, lower than expected project management and labor costs in the current period.
While our project budget includes some degree of embedded contingency with respect to cost assumptions for labor and materials such as carbon steel and stainless steel, we remain subject to cost escalation risk. If project management determines that costs will exceed the budget (including the built-in management reserve), and such costs cannot otherwise be offset or financed, we may elect to deploy fewer centrifuge machines in the plant to mitigate such potential cost growth. The modular nature of the plant construction permits normal operation even if the scale is reduced from the current planned size. A reduced scale would reduce the output of the plant absent offsetting improvements in machine performance.
Under our current schedule, we expect to receive the first AC100 machines from our manufacturers in November 2008 and begin AC100 Lead Cascade operation by the end of the first quarter of 2009. These operations will continue through 2009. These machines may be integrated into a commercial cascade. Our suppliers have been focused on building the facilities necessary to be in position to build several hundred AC100 machines per month. Progress on building the production facilities is on track to support the production schedules for both the AC100 and AC100 value-engineered machines. Finally, in terms of plant startup and operations, we anticipate beginning commercial operations at the end of the first quarter of 2010, and reaching 1 million SWU capacity in first quarter of 2011 and the full 3.8 million SWU capacity at the end of 2012.

Our testing program in Oak Ridge has demonstrated machine productivity beyond 350 SWU per year. We anticipate being able to assemble and install machines with greater SWU capacity at a discrete point in the deployment of centrifuges for our initial two production buildings, which have space for approximately 11,500 centrifuges.
In September 2008 we created new wholly owned subsidiaries to carry out future commercial activities related to the American Centrifuge project. These subsidiaries will own the American Centrifuge plant and equipment, provide operations and maintenance, manufacture centrifuge machines and conduct ongoing centrifuge research and development. This corporate structure will separate ownership and control of centrifuge technology from ownership of the enrichment plant and also establish a separate operations subsidiary. This structure will facilitate DOE loan guarantee financing and potential third party investment at the project level, while also facilitating any future plant expansion.
We must still raise the remainder of the capital needed to build the ACP and this has been and will continue to be a focus of management. We do not believe public market financing for a large capital project such as ACP is available to us given current financial market conditions. We view the DOE loan guarantee program as the path for obtaining the debt financing to complete the American Centrifuge project. The loan guarantee program was created by the Energy Policy Act of 2005 and in December 2007, federal legislation authorized funding levels available through September 30, 2009 of up to $2 billion for advanced facilities for the front end of the nuclear fuel cycle, which includes uranium enrichment. DOE released its solicitation for the loan guarantee program on June 30, 2008 and we applied for $2 billion in funding in July. One competing project also applied for funding under this program. Nonetheless, we believe that our project is ideally suited for the loan guarantee program. Our application is under review and we are seeking a prompt commitment from DOE. However, we have no assurance that our project will be selected to move forward in the program and it could take an extended period for the loan guarantee and funding to be finalized. Accordingly, on a parallel path, we continue to evaluate alternative sources of capital including potential third-party investment at the project level. If we are not able to obtain timely action from DOE or obtain an alternate capital commitment, we will be forced to slow spending on the project, which will result in potentially significant schedule delays and increased costs, or take other actions to ensure that we have adequate liquidity for our ongoing operations. Further details are provided in Part II, Item 1A, "Risk Factors" of this report.
Our Marketing and Sales department has been engaging in discussions with our customers to sell the output of the ACP. By waiting until now to sell this production, we believe we are in a better position to structure proposals for long-term sales to customers in ways that will provide stronger support for our financing and earn an appropriate return on our capital. We have received accepted offers from customers and are in the process of negotiating and signing long-term contracts for commitments. We will continue to meet with customers to continue the process of selling ACP output. Sales contracts for this initial output represent a strategic commitment by customers to ensure a reliable, U.S.-based source of nuclear fuel that will be available for decades to come.

Revenue from Sales of SWU and Uranium Revenue from our LEU segment is derived primarily from:
• sales of the SWU component of LEU,

• sales of both the SWU and uranium components of LEU, and

• sales of uranium.

The majority of our customers are domestic and international utilities that operate nuclear power plants, with international sales constituting approximately 35% of revenue from our LEU segment in 2007. Our agreements with electric utilities are primarily long-term, fixed-commitment contracts under which our customers are obligated to purchase a specified quantity of SWU or uranium from us or long-term requirements contracts under which our customers are obligated to purchase a percentage of their SWU requirements from us. Under requirements contracts, a customer only makes purchases if its reactor has requirements. The timing of requirements is associated with reactor refueling outages.
Our revenues and operating results can fluctuate significantly from quarter to quarter, and in some cases, year to year. Customer demand is affected by, among other things, reactor operations, maintenance and the timing of refueling outages. Utilities typically schedule the shutdown of their reactors for refueling to coincide with the low electricity demand periods of spring and fall. Thus, some reactors are scheduled for annual or two-year refuelings in the spring or fall, or for 18-month cycles alternating between both seasons. Customer payments for the SWU component of LEU typically average approximately $15 million per order. As a result, a relatively small change in the timing of customer orders for LEU due to a change in a customer's refueling schedule may cause operating results to be substantially above or below expectations. Customer requirements and orders are more predictable over the longer term, and we believe our performance is best measured on an annual, or even longer, business cycle. Our revenue could be adversely affected by actions of the NRC or nuclear regulators in foreign countries issuing orders to modify, delay, suspend or shut down nuclear reactor operations within their jurisdictions.
Our financial performance over time can be significantly affected by changes in prices for SWU. The long-term SWU price indicator, as published by TradeTech, LLC in Nuclear Market Review, is an indication of base-year prices under new long-term enrichment contracts in our primary markets. Since our backlog includes contracts awarded to us in previous years, the average SWU price billed to customers typically lags behind the current price indicators. Following are the long-term SWU price indicator, the long-term price for uranium hexafluoride, as calculated using indicators published in Nuclear Market Review, and the spot price indicator for uranium hexafluoride:

                                                September 30,          June 30,         December 31,         September 30,
                                                     2008                2008               2007                  2007
Long-term SWU price indicator ($/SWU)           $     159.00          $ 152.00          $    143.00          $     143.00
Uranium hexafluoride:
Long-term price composite ($/KgU)                     208.21            234.34               260.47                260.47
Spot price indicator ($/KgU)                          145.00            163.00               241.00                207.00

A substantial portion of our earnings and cash flows in recent years has been derived from sales of uranium and, as a result, our inventory of uranium available for sale has been reduced. We expect to continue to supplement our supply of uranium by underfeeding the production process at the Paducah GDP. We may also purchase uranium from suppliers in connection with specific customer contracts, as we have in the past. Underfeeding is a mode of operation that uses or feeds less uranium but requires more SWU in the enrichment process, which requires more electric power. In producing the same amount of LEU, we vary our production process to underfeed uranium based on the economics

of the cost of electric power relative to the price of uranium. As noted in the table above, spot market prices for uranium have declined in 2008 while electric power costs have increased, pressuring the economics of underfeeding the enrichment process to obtain uranium for resale. Given supply and demand conditions in the spot uranium market, we see fewer opportunities for near-term spot sales. We will continue to monitor and optimize the economics of our production based on the cost of power and market conditions for SWU and uranium.
We supply uranium to the Russian Federation for the LEU we receive under the Russian Contract. We replenish our uranium inventory with uranium supplied by customers under our contracts for the sale of SWU and through underfeeding our production process. Our older contracts give customers the flexibility to determine the amounts of natural uranium that they deliver to us, which can result in our receiving less uranium from customers than we transfer from our . . .