of Operations

Income and Expense Items as a Percentage of Net Sales

Year Ended December 31,                                   2008       2007      2006

Net sales                                               100.0  %   100.0  %   100.0 %
Cost of goods sold                                        80.2      78.4      78.1

  Production margin                                       19.8       21.6      21.9

Marketing and administrative expenses                      9.1       9.7      10.2
Research and development expenses                          2.1       2.4       2.7
Impairment of assets                                        --       8.8        --
Restructuring charges                                      1.2       1.5        --

  Income (loss) from operations                            7.4      (0.8)      9.0

  Income (loss) before provision for taxes on income,
         minority interests and discontinued operations    7.4      (1.1)      8.5
Provision for taxes on income                              2.2       1.0       2.7
Minority interests                                         0.3       0.3       0.3

  Income (loss) from continuing operations                 4.9      (2.4)      5.5
  Income (loss) from discontinued operations               1.0      (3.5)     (0.6)

Net income (loss) 5.9 % (5.9) % 4.9 %

Executive Summary

The Company reported earnings per share of $3.44 in 2008, the highest in its history, as compared with a loss of $3.31 per share in 2007 when the Company initiated a major restructuring program. During the first three quarters of 2008, the Company achieved an excellent earnings performance due to the realization of savings from the restructuring program undertaken in 2007, increased selling prices to mitigate the effect of escalating raw materials and energy costs, the favorable effect of foreign exchange and manufacturing cost savings. In the fourth quarter of 2008, however, the precipitous downturn in the steel, paper, construction and automotive end markets resulted in a significant drop in demand for the Company's products. As a result, earnings per share for the fourth quarter decreased 64 percent from the fourth quarter of 2007 and 69 percent from the third quarter of 2008.

In response to the downturn in business activity, the Company established incremental procedures to generate and conserve its cash and reduce costs by suspending its stock buyback program, curtailing production through shortened work weeks, and by continuing its intensive expense control and procurement initiatives. In addition, the Company reallocated its asset portfolio in its pension plan to preserve capital and reduce exposure to market risk. The Company also implemented an additional restructuring program to reduce its workforce by approximately 14% through both layoffs and permanent reductions. Severance related costs associated with this workforce reduction were approximately $3.9 million.

Worldwide net sales for 2008 were $1.112 billion, a three-percent increase over 2007 sales of $1.078 billion. Foreign exchange had a favorable impact on sales of $25 million, or 2 percentage points of growth. Income from operations were $82.0 million in 2008 as compared with a loss of $8.5 million in the prior year. Included in income from operations in 2008 were restructuring and impairment charges of $13.6 million. Included in the operating loss of the prior year were restructuring costs of $16.0 million and impairment of assets charges of $94.1 million.

Income from continuing operations was $55.0 million as compared with a loss of $25.7 million in the prior year due to the restructuring charges. Income from discontinued operations was $10.3 million in 2008, due primarily to gains from the sale of four idle facilities previously written down. In 2007, we had a loss from discontinued operations of $37.8 million primarily due to restructuring and impairment charges. Net income was $65.3 million as compared with a loss of $63.5 million in the prior year.

The Company's balance sheet at December 31, 2008 continues to be very strong. Cash, cash equivalents and short-term investments at December 31, 2008 was over $190 million. In addition, we have available lines of credit of $156 million, our debt to equity ratio was very low at 14%, and our current ratio was 3.5. Our cashflows from operations were in excess of $134 million in 2008.

We are facing unprecedented uncertainty in the economic environment as a result of the global financial crisis. However, as a result of the initiatives we undertook in 2007 to restructure and realign our business, and due to our strong balance sheet, the Company believes it is in a strong position to manage through these difficult and uncertain times.

However, we face some significant risks and challenges in the future:

• Our global business could continue to be adversely affected by decreases in economic activity. U.S. steel production is at its lowest levels since the mid 1980's at 1.2 million tons per week. Housing starts are at 24 year lows with the December 2008 annualized rate at 550,000 units and the full year 2008 rate at 900,000 units, as compared to 2.1 million units in 2005. In the automotive industry, light vehicle sales were down 18% in 2008 and 35% in the fourth quarter of 2008. In the Paper industry, production levels within the North American and European uncoated freesheet markets, our most significant market areas, continued to contract to adjust to reduced demand.
• The ongoing tightening of credit in the financial markets could adversely affect the ability of our customers or our suppliers to obtain financing.
• The uncertainty in the global economy may also continue to impact our pension costs. Changes in the fair market value of our pension assets, rates of return on assets, and discount rates could have a significant impact on our net periodic pension costs and well as our funding requirements.
• Our success depends in part on the performance of the industries we serve, particularly paper, steel, construction and automotive. Some of our customers may experience further consolidations and shutdowns or may face increased liquidity issues, which could deteriorate the aging of our accounts receivable, increase our bad debt exposure and possibly trigger impairment of assets.
• Consolidations in the paper and steel industries concentrate purchasing power in the hands of fewer customers, increasing pricing pressure on suppliers such as Minerals Technologies Inc.
• Most of our Paper PCC sales are subject to long-term contracts that may be terminated pursuant to their terms, or may be renewed on terms less favorable to us.
• Our filler-fiber composite technology continues in development through customer trials, but has yet to be proven on a long-term commercial scale.
• We are subject to volatility in pricing and supply availability of our key raw materials used in our Paper PCC product line and Refractory product line. Our ability to recover increased costs is uncertain and may become more difficult in this economic environment.
• We continue to rely on China for the majority of our supply of magnesium oxide in the Refractories segment and may be subject to uncertainty in availability and cost.
• The performance of our Processed Minerals and Specialty PCC product lines are subject to fluctuations in energy costs.
• As we expand our operations abroad we face the inherent risks of doing business in many foreign countries, including foreign exchange risk, import and export restrictions, and security concerns.

During the third quarter of 2008, Katahdin Paper Company shut down indefinitely one of its paper machines in Millinocket, Maine, due to increased energy costs. The Company's satellite PCC facility has also shutdown indefinitely in conjunction with the paper machine shut down. Katahdin Paper Company is currently evaluating the possibility of installing a biomass boiler. If the Millinocket mill does not resume operations, the Company would incur an impairment of assets charge of approximately $7.0 million.

The Company will continue to focus on innovation and new product development and other opportunities for continued growth as follows:

• Development of the filler-fiber composite program, which continues to undergo large-scale paper machine trials, to increase the fill-rate for uncoated freesheet paper.
• Increasing our sales of PCC for paper by further penetration of the markets for paper filling at both freesheet and groundwood mills, particularly in emerging markets.
• Further expansion of the Company's PCC coating product line using the satellite model.
• Leverage the Company's expertise in crystal engineering, especially in helping papermakers customize PCC morphologies for specific paper applications.
• Development of unique calcium carbonates used in the manufacture of novel biopolymers, a new market opportunity.
• Rapid deployment of value-added formulations of refractory materials that not only reduce costs but improve performance.
• Continuing our penetration in emerging markets through our manufacturing facilities in China and Turkey, both within the Refractories segment.

Results of Operations

Sales

(Dollars in millions)

                                  % of                             % of                             % of
                                  Total                            Total                            Total
      Net Sales          2008     Sales     Growth        2007     Sales     Growth        2006     Sales

U.S.                  $   587.5    52.8 %       1  %   $   581.9    54.0 %      (2) %   $   592.6    57.9 %
International             524.7    47.2 %       6  %       495.8    46.0 %      15  %       430.9    42.1 %

   Net sales          $ 1,112.2   100.0 %       3  %   $ 1,077.7   100.0 %       5  %   $ 1,023.5   100.0 %

Paper PCC             $   547.2    49.2 %       1  %   $   542.0    50.3 %       8  %   $   500.6    48.9 %
Specialty PCC              58.5     5.3 %      (3) %        60.6     5.6 %       7  %        56.4     5.5 %

   PCC Products       $   605.7    54.5 %       1  %   $   602.6    55.9 %       8  %   $   557.0    54.4 %

Talc                  $    35.9     3.2 %      (4) %   $    37.3     3.5 %      (4) %   $    38.9     3.8 %
GCC                        74.8     6.7 %      (2) %        76.7     7.1 %      (4) %        79.7     7.8 %

   Processed Minerals $   110.7     9.9 %      (3) %   $   114.0    10.6 %      (4) %   $   118.6    11.6 %
   Products


   Specialty Minerals $   716.4    64.4 %      --  %   $   716.6    66.5 %       6  %   $   675.6    66.0 %
   Segment

Refractory Products   $   320.8    28.9 %      10  %   $   290.5    27.0 %      10  %   $   264.6    25.9 %
Metallurgical              75.0     6.7 %       6  %        70.6     6.5 %     (15) %        83.3     8.1 %
Products

   Refractories       $   395.8    35.6 %      10  %   $   361.1    33.5 %       4  %   $   347.9    34.0 %
   Segment

   Net sales          $ 1,112.2   100.0 %       3  %   $ 1,077.7   100.0 %       5  %   $ 1,023.5   100.0 %

Worldwide net sales in 2008 increased 3% from the previous year to $1.112 billion. Foreign exchange had a favorable impact on sales of $25.0 million or 2 percentage points of growth. Sales in the Specialty Minerals segment, which includes the PCC and Processed Minerals product lines, decreased slightly to $716.4 million compared with $716.6 million for the same period in 2007. Sales in the Refractories segment grew 10% over the previous year to $395.8 million. In 2007, worldwide net sales increased 5% to $1.078 billion from $1.024 billion in the prior year. Specialty Minerals segment sales increased approximately 6% and Refractories segment sales increased approximately 4% in 2007.

Worldwide net sales of PCC, which is primarily used in the manufacturing process of the paper industry, increased 1% to $605.7 million from $602.6 million in the prior year. Foreign exchange had a favorable impact on sales of approximately $15.6 million or 3 percentage points of growth. Worldwide net sales of Paper PCC increased 1% to $547.2 million from $542.0 million in the prior year. In the fourth quarter of 2008, production levels within the North American and European uncoated free sheet markets, our most significant market areas, continued to contract to adjust to reduced demand and inventories in reaction to the global economic crisis. Compared to the fourth quarter of last year, we saw additional machine shutdowns and paper mill closures, which could only be partially offset by increased volumes from our new facilities in Thailand and Brazil. As a result, volume declines of 10% occurred in the fourth quarter which resulted in full year Paper PCC sales volumes declining by 4% from the prior year. Volume declines partially offset increased selling prices from the pass through of raw material cost increases and foreign exchange, resulting in 1% sales growth. Sales of Specialty PCC declined 3% to $58.5 million from $60.6 million in 2007. This decrease was primarily attributable to lower volumes.

Worldwide net sales of PCC increased 8% in 2007 to $602.6 million from $557.0 million in the prior year. Net sales of Paper PCC increased 8% to $542.0 million while Paper PCC volumes grew slightly. In 2007, sales growth was attributable to increased selling prices from the pass through of raw material cost increases and to foreign currency. Sales of Specialty PCC grew 7% in 2007 to $60.6 million from $56.4 million in the prior year. This increase was primarily attributable to improved volumes, particularly in Europe, and to favorable effects of foreign exchange.

Net sales of Processed Minerals products in 2008 decreased 3% to $110.7 million from $114.0 million in 2007. GCC products and talc products decreased 2% and 4% to $74.8 million and $35.9 million, respectively. The decrease in the Processed Minerals product line was attributable to further weakness in the residential and commercial construction markets as well as the automotive market. As a result, volumes have declined 8% from the prior year.

Net sales of Processed Minerals products in 2007 decreased 4% to $114.0 million from $118.6 million in 2006. This decrease was primarily attributable to weakness in the residential construction and automotive markets.

Net sales in the Refractories segment in 2007 increased 4% to $361.1 million from $347.9 million in the prior year. Sales of refractory products and systems increased 10% to $290.5 million in 2007 from $264.6 million in the prior year. This growth was attributable to foreign currency and the Turkish acquisition. Sales of metallurgical products decreased 15% in 2007 to $70.6 million from $83.3 million in the prior year. This decline was due to volumes in all regions of the world and lower prices resulting from reduction in the cost of raw materials for this product that is traditionally passed through to the customers.

Net sales in the United States increased approximately 1% to $587.5 million in 2008 and represented approximately 52.8% of consolidated net sales. International sales increased approximately 6% to $524.7 million, due primarily to foreign currency.

Operating Costs and Expenses
(Dollars in millions)          2008        Growth       2007        Growth       2006

Cost of goods sold           $ 891.7           6  %   $ 845.1           6  %   $ 798.7
Marketing and administrative $ 101.8          (3) %   $ 104.6          --  %   $ 104.6
Research and development     $  23.1         (13) %   $  26.3          (5) %   $  27.8
Impairment of assets         $   0.2           *  %   $  94.1           *  %   $    --
Restructuring charges        $  13.4         (17) %   $  16.0           *  %   $    --

* Percentage not meaningful

Cost of goods sold in 2008 was 80.2% of sales compared with 78.4% in the prior year. Our cost of goods sold grew 6% compared with 3% sales growth resulting in a 5% decrease in production margin. In the Specialty Minerals segment, the production margin decreased 9% as compared with a relatively flat sales growth. This segment has been affected by increased raw materials and energy costs, lower volumes in the Processed Minerals product line and the Paper PCC product line and price concessions in the Paper PCC product line. This was partially offset by the recovery of raw material costs through price increases, the benefits of the restructuring program, manufacturing cost savings initiatives and foreign exchange. In the Refractories segment, the production margin increased 1% as compared with 10% sales growth. This segment has been affected by increased raw material costs and lower volumes, partially offset by price increases, the benefits of the restructuring program, and foreign exchange.

Cost of goods sold in 2007 was 78.4% of sales compared with 78.1% in the prior year. Our cost of goods sold grew 6%, compared with 5% sales growth resulting in a 3% increase in production margin. In the Specialty Minerals segment, the production margin increased 5% as compared with 6% sales growth. This segment has been affected by reduced demand in the Processed Minerals product line and paper machine and paper mill shutdowns, which were partially offset by the recovery of raw material costs and the benefit of foreign currency. In the Refractories segment, the production margin increased 1% as compared with 4% sales growth. This segment has been affected by lower margins in the metallurgical product line.

Marketing and administrative costs were $101.8 million in 2008, a decline of 3% as compared to the prior year, and represented 9.1% of net sales as compared with 9.7% in the prior year. This reduction was due to the benefits of the restructuring program and other cost saving initiatives. In 2007, marketing and administrative expenses were the same as the prior year.

Research and development expenses decreased 13% in 2008 to $23.1 million and represented 2.1% of net sales. This decline was due to cost savings from the restructuring program as the Company realigned its research and development structure to effectively bring new developments to market faster. In 2007, research and development expenses decreased 5% to $26.3 million and represented 2.4% of net sales.

The Company recorded restructuring charges of $13.4 million in 2008. Approximately $6.8 million related to a SFAS No. 88 pension settlement loss in our defined benefit plan in the United States. The remainder of the charges relate to additional provisions for severance and other employee benefits as part of our restructuring program initiated in 2007, and to an additional restructuring program initiated in the fourth quarter of 2008 resulting in charges of $3.9 million.

In 2007, the Company initiated a plan to realign its operations as a result of an in-depth strategic review of all of its operations. This realignment resulted in impairment of assets charges and restructuring charges in 2007 as follows:

Impairment of assets charges:

                     Paper PCC                         $ 65.3
                     Specialty PCC                       12.7

                                 Total PCC               78.0
                     Processed Minerals                   1.3

                          Specialty Minerals Segment     79.3
                          Refractories Segment           14.8

                                                       $ 94.1


   Restructuring and other costs:

                  Severance and other employee benefits $ 13.5
                  Contract termination costs               1.8
                  Other exit costs                         0.7

                                                        $ 16.0

The restructuring program resulted in a reduction of over 200 employees.

Income (Loss) from Operations
(Dollars in millions)           2008     Growth      2007      Growth      2006


Income (loss) from operations $ 82.0       * %     $ (8.5)     (109) %   $ 92.4

The Company recorded income from operations in 2008 of $82.0 million as compared with a loss from operations of $8.5 million in the prior year. Included in the 2008 income from operations was a restructuring charge of $13.4 million and impairment of assets charge of $0.2 million. The loss in the prior year was primarily attributable to the aforementioned impairment of assets charges and restructuring and other exit costs.

The Specialty Minerals segment recorded income from operations in 2008 of $57.0 million as compared with a loss from operations of $20.0 million in 2007. Included in the prior year loss from operations was an impairment of assets charge of $79.3 million and restructuring and other exit costs of $11.3 million.

The Refractories segment recorded income from operations of $26.3 million in 2008 as compared with $11.5 million in the prior year. Included in income from operations in 2008 was a restructuring charge of $5.7 million. Included in income from operations in 2007 was an impairment of assets charge of $14.8 million and restructuring and other exit costs of $4.7 million.

In 2007, the Specialty Minerals segment recorded a loss from operations of $20.0 million as compared with income of $60.5 million in 2006. The Refractories segment recorded operating income in 2007 of $11.5 million as compared with $31.9 million in the previous year.

Non-Operating Income (Deductions)
(Dollars in millions)                    2008     Growth      2007      Growth      2006


Non-operating income (deductions), net $ 0.3        * %     $ (3.0)      (49) %   $ (5.9)

The Company recorded non-operating income of $0.3 million in 2008 as compared with non-operating deductions of $3.0 million in the prior year. This increase was primarily attributable to lower interest expense due to lower interest rates and debt levels, higher interest income generated in connection with increased cash on hand and foreign exchange gains.

Non-operating deductions decreased 49% in 2007 to $3.0 million from the prior year. This decrease was primarily attributable to an insurance recovery gain of approximately $3.0 million in 2007, $1.2 million above the prior year. Additionally, the Company recorded higher interest income of $1.3 over the prior year as a result of an increase in cash, and cash equivalents in 2007.

Provision for Taxes on Income
(Dollars in millions)           2008     Growth      2007     Growth      2006


Provision for taxes on income $ 24.1       114 %   $ 11.3      (58) %   $ 27.0

The effective tax rate in 2008 was 29.3%. In 2007, the Company recorded a provision for income tax of $11.3 million on a loss before taxes of $11.5 million. This was primarily attributable to the restructuring and impairment losses recorded in certain jurisdictions in which we were unable to record a tax benefit.

Minority Interests
(Dollars in millions)   2008     Growth      2007     Growth      2006


Minority interests    $ 3.2        10 %    $ 2.9       (15) %   $ 3.4

The increase in the provision for minority interests is attributable to improved profitability in our joint ventures.

The decrease in the provision for minority interest in 2007 was primarily related to a reduction in profitability from our consolidated joint ventures in China.

Income (Loss) from Continuing Operations
(Dollars in millions)                      2008     Growth       2007      Growth      2006


Income (loss) from continuing operations $ 55.0       * %     $ (25.7)     (146) %   $ 56.1

The Company recognized income from continuing operations of $55.0 million in 2008 as compared with a loss of $25.7 million in 2007. The loss in 2007 was due to the restructuring and impairment of assets charges.

Income from continuing operations was $56.1 million in 2006.

Income (loss) from Discontinued Operations
(Dollars in millions)                        2008     Growth       2007      Growth      2006


Income (loss) from discontinued operations $ 10.3       * %     $ (37.8)      (82) %   $ (6.2)

* Percentage not meaningful

The Company recognized income from discontinued operations in 2008 of $10.3 million as compared with a loss of $37.8 million in the prior year. Included in the 2008 income from discontinued operations was a pre-tax gain on sale of idle facilities previously written down of $13.9 million. In 2007, the loss from discontinued operations included pre-tax impairment of asset charges of $46.9 million and restructuring and other exit costs of $2.3 million. In 2006, the loss from discontinued operations included foreign currency translation losses of $1.6 million recognized upon liquidation of the Company's investment in Israel.

In 2007, the Company reflected in discontinued operations its Synsil® product line and its two plants in the Midwest that process imported ores. In 2006, the Company liquidated its wholly-owned subsidiary in Hadera, Israel, and classified such business as discontinued operations.

Net Income (Loss)
(Dollars in millions)   2008     Growth       2007      Growth      2006


Net income (loss)     $ 65.3       * %     $ (63.5)     (227) %   $ 50.0

The Company recorded net income of $65.3 million in 2008 as compared with a net loss of $63.5 million in 2007. The loss in 2007 was attributable to impairment of assets and restructuring charges in both continuing operations and discontinued operations.

The Company recorded net income of $50.0 million in 2006.

Looking forward, we remain concerned about the current state of the global economy and the impact it will have on our product lines. U.S. and global economic conditions worsened significantly in the last quarter of 2008. The stress caused to international credit markets, initially driven in large part by the devaluation of risky U.S. sub-prime debt, led to a dramatic tightening in liquidity. The U.S. and foreign governments have responded with several initiatives to alleviate the strain on the financial markets. While these . . .