The following discussion should be read in conjunction with the Financial Statements and related notes that appear elsewhere in this document.

Certain sections of Management's Discussion and Analysis include forward-looking statements concerning trends or events potentially affecting the businesses of U. S. Steel. These statements typically contain words such as "anticipates," "believes," "estimates," "expects" or similar words indicating that future outcomes are not known with certainty and are subject to risk factors that could cause these outcomes to differ significantly from those projected. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For discussion of risk factors affecting the businesses of U. S. Steel see "Item 1A - Risk Factors" and "Supplementary Data - Disclosures About Forward-Looking Statements."

Overview

U. S. Steel, the eighth largest steel producer in the world and the largest integrated steel producer headquartered in North America, has a broad and diverse mix of products and customers. U. S. Steel uses iron ore, coal, coke, steel scrap, zinc, tin and other metallic additions to produce a wide range of steel products, concentrating on value-added steel products for customers with demanding technical applications in the automotive, appliance, container, industrial machinery, construction and oil, gas and petrochemical industries. In addition to our facilities in the United States, U. S. Steel has significant operations in Canada through U. S. Steel Canada Inc. (USSC) and in Europe through U. S. Steel Košice (USSK), located in Slovakia, and U. S. Steel Serbia (USSS), located in Serbia. U. S. Steel's financial results are primarily determined by the combined effects of shipment volume, selling prices, production costs and product mix. While the operating results of our various businesses are affected by a number of business-specific factors (see "Item 1. Business - Steel Industry Background and Competition"), the primary drivers for U. S. Steel are general economic conditions in North America, Europe and, to a lesser extent, other steel-consuming regions; the levels of worldwide steel production and consumption; pension and other benefits costs; and raw material (iron ore, coal, coke, steel scrap, zinc, tin and other metallic additions) and energy (natural gas and electricity) costs.

The difficult global economic environment is having significant negative effects on our business. Our raw steel capability utilization, which has averaged between 79 and 87 percent during the years 2004-2008, averaged only 46 percent in the fourth quarter of 2008. We have reduced production levels to correspond with customer order rates by temporarily idling certain facilities and cutting back production at others. We also have significantly reduced planned capital expenditures, reduced our inventory levels, placed a temporary freeze on salaries and hiring, offered a voluntary early retirement program (VERP) which has been accepted by approximately 500 non-represented Headquarters and Operations employees in the United States, suspended the company match on employee 401(k) contributions, suspended our common stock buyback program and discontinued all non-essential spending for travel and entertainment and outside services in an effort to maximize liquidity and lower costs.

U. S. Steel cannot predict the trajectory or duration of the global recession. Lead times for steel orders are shorter now than they have been in the past, making it more difficult than usual to forecast the future. If the situation grows worse, we may be forced to further curtail production including idling additional facilities, laying off employees and further deferring capital and other projects. Published indices report that a number of our major customer groups have significantly reduced their inventory levels leading us to believe that an upturn in general economic levels will translate into increased orders for steel products. This is a forward-looking belief that may be impacted by many factors beyond our control. An increase in orders will likely require an increased investment in working capital, the cost of which will depend upon conditions in the financial markets (see "Liquidity").

U. S. Steel's long-term success depends on our ability to earn a competitive return on capital employed by implementing our strategy to be a world leader in safety and environmental performance; to continue to increase

our value-added product mix; to further expand our global business platform; to maintain a strong capital structure, balance sheet and liquidity position; to continue to improve our reliability and cost competitiveness; and to attract and retain a diverse and talented workforce. For a fuller description of our strategy, see "Item 1. Business Description - Business Strategy." Some of the other key issues which are impacting the global steel industry, including U. S. Steel, are the level of unfunded pension and other benefits obligations; the degree of industry consolidation; the impact of production and consumption of steel in China and other developing countries; and the levels of steel imports into the markets we serve.

Critical Accounting Estimates

Management's discussion and analysis of U. S. Steel's financial condition and results of operations is based upon U. S. Steel's financial statements, which have been prepared in accordance with accounting standards generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end, and the reported amount of revenues and expenses during the year. Management regularly evaluates these estimates, including those related to employee benefits liabilities and assets held in trust relating to such liabilities; the carrying value of property, plant and equipment; goodwill and intangible assets; valuation allowances for receivables, inventories and deferred income tax assets; liabilities for deferred income taxes, potential tax deficiencies, environmental obligations and potential litigation claims and settlements. Management's estimates are based on historical experience, current business and market conditions, and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Accordingly, actual results may differ materially from current expectations under different assumptions or conditions.

Management believes that the following are the more significant judgments and estimates used in the preparation of the financial statements.

Pensions and Other Benefits - The recording of net periodic benefit costs for defined benefit pensions and other benefits is based on, among other things, assumptions of the expected annual return on plan assets, discount rate, escalation or other changes in retiree health care costs and plan participation levels. Changes in the assumptions or differences between actual and expected changes in the present value of liabilities or assets of U. S. Steel's plans could cause net periodic benefit costs to increase or decrease materially from year to year as discussed below.

U. S. Steel's investment strategy for its domestic pension and retiree medical trusts provides that at least half of plan assets are invested in common stock with the balance primarily invested in bonds and other fixed-income securities. U. S. Steel believes that returns on common stock over the long term will be higher than returns from fixed-income securities as actual historical returns from U. S. Steel's trusts have shown. Returns on bonds and other fixed-income securities tend to offset some of the shorter-term volatility of common stocks. Both equity and fixed-income investments are made across a broad range of industries and companies to provide protection against the impact of volatility in any single industry as well as company specific developments. U. S. Steel is currently using an 8.0 percent assumed rate of return for purposes of the expected return on assets for the development of net periodic cost for the main defined benefit pension plan and other benefits. This rate was chosen by taking into account the intended asset mix and the historical premiums that fixed-income and equity investments have yielded above government bonds. Actual returns since the inception of the plans have exceeded this 8.0 percent rate and while recent returns have not, it is U. S. Steel's expectation that future periods will return to this level. For USSC defined benefit pension plans, a 7.5 percent rate of return is being used for the development of net periodic costs in 2009. This rate was based on an investment strategy that provides that at least half of plan assets be invested in equity securities and the historical premiums that fixed-income and equity investments have yielded above government bonds.

The discount rate reflects the current rate at which the pension and other benefits liabilities could be effectively settled at the measurement date. In setting the domestic rates, we utilize several AAA and AA corporate bond indices as an indication of interest rate movements and levels, and we also look to an internally calculated rate determined by matching our expected benefit payments to payments from a stream of AA or higher rated zero

coupon corporate bonds theoretically available in the marketplace. Based on this evaluation at December 31, 2008, U. S. Steel increased the discount rate used to measure both domestic pension and other benefits obligations to 6.0 percent. For USSC benefit plans, a discount rate was selected through a similar review process using Canadian bond rates and indices and at December 31, 2008, U. S. Steel increased the discount rate to 6.5 percent for its Canadian-based pension and other benefits.

U. S. Steel determines the escalation trend in per capita health care costs based on historical rate experience under U. S. Steel's insurance plans. Much of our costs for the domestic USW participants' retiree health benefits (other than for most surviving spouses) in the Company's main domestic insurance plan are subject to a cost cap that was negotiated in 2003. As a result of the collective bargaining agreements with the United Steelworkers (USW) entered into effective September 1, 2008 (the 2008 CBAs) (see Note 16 to the Financial Statements), our costs are subject to the full impact of escalation for the surviving spouse beneficiaries since their retiree premium contributions are now a flat fixed amount. Escalation applies to most other groups within the Company's insurance plans, but does not apply to most domestic non-union retirees since their benefits are limited to flat dollar amounts. For measurement of its domestic retiree medical plans, U. S. Steel has assumed an initial escalation rate of 8.0 percent for 2009. This rate is assumed to decrease gradually to an ultimate rate of 5.0 percent in 2013 and remain at that level thereafter. In our Canadian retiree medical plans, liabilities decreased as a result of lower escalation impacts due to favorable claims cost rate experience and exchange rate changes. For measurement of its Canadian retiree medical plans, U. S. Steel has assumed an initial escalation rate of 7.0 percent for 2009. This rate is assumed to decrease gradually to an ultimate rate of 5.0 percent in 2013 and remain at that level thereafter.

Net periodic pension cost, including multiemployer plans, is expected to total approximately $200 million in 2009 compared to $78 million in 2008. Pension expense for 2009 includes an estimated $10 million curtailment charge. Total other benefits costs in 2009 are expected to be approximately $180 million, compared to $149 million in 2008. The increases are due primarily to 2008 asset performance.

A sensitivity analysis of the projected incremental effect of a hypothetical 1/2 percentage point change in the significant assumptions used in the pension and other benefits calculations is provided in the following table:

                                                                       Hypothetical Rate
                                                                      Increase (Decrease)
(In millions of dollars)                                           1/2%               (1/2%)
Expected return on plan assets
Incremental increase (decrease) in:
Net periodic pension costs for 2009                             $      (55 )       $         55
Discount rate
Incremental increase (decrease) in:
Net periodic pension & other benefits costs for 2009            $      (23 )       $         29
Pension & other benefits liabilities at December 31, 2008       $     (465 )       $        510
Health care cost escalation trend rates
Incremental increase (decrease) in:
Service and interest cost components for 2009                   $        7         $         (8 )

Changes in the assumptions for expected annual return on plan assets and the discount rate do not impact the funding calculations used to derive minimum funding requirements for the pension plans. For further cash flow discussion see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Cash Flows and Liquidity - Liquidity."

Goodwill and identifiable intangible assets - Goodwill represents the excess of the cost over the fair value of acquired identifiable tangible and intangible assets and liabilities assumed from businesses acquired.

Goodwill is tested for impairment annually in the third quarter and whenever events or circumstances indicate that the carrying value may not be recoverable. The change in business conditions in the fourth quarter of 2008 was considered a triggering event as defined by FAS 142, "Goodwill and Other Intangible Assets," and goodwill was subsequently re-tested for impairment as of December 31, 2008. The evaluation of impairment involves comparing

the fair value of the associated reporting unit to its carrying value, including goodwill. U. S. Steel's reporting units are generally consistent with our reportable operating segments, except for our Tubular segment. Within the Tubular segment we have three reporting units corresponding to our different manufacturing processes and products. Fair value for each reporting unit with goodwill was estimated using discounted future cash flows based on management's long range estimates of market conditions over a five-year horizon with a 2.25 percent compound annual growth rate. U. S. Steel's risk free interest rate is approximately two percent and our systematic risk premium is approximately nine percent. Our testing did not indicate that goodwill was impaired as of December 31, 2008. However, if our future cash flow projections are not realized, either because of an extended recessionary period or other unforeseen events, goodwill may be subject to impairment in future periods. A five percent decrease in the estimated fair value of our reporting units may result in an impairment.

U. S. Steel has determined that certain acquired intangible assets have indefinite useful lives. These assets are reviewed for impairment annually and whenever events or circumstances indicate that the carrying value may not be recoverable.

Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives and are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. The impairment test performed as of December 31, 2008 for property, plant and equipment, as described below, also addressed intangible assets with finite lives. None of the long-lived asset groupings with intangible assets were impaired as of December 31, 2008.

Asset Impairments - U. S. Steel evaluates impairment of its property, plant and equipment whenever circumstances indicate that the carrying value may not be recoverable. The change in business conditions in the fourth quarter of 2008 was considered a triggering event as defined by Financial Accounting Standard (FAS) 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and subsequently long-lived asset groupings were tested for impairment. (Our asset groupings are the same as our reporting units). Asset impairments are recognized when the carrying value of an asset grouping exceeds its aggregate projected undiscounted cash flows. Undiscounted cash flows for each asset grouping were estimated using management's long range estimates of market conditions associated with each asset grouping over the estimated useful life of the principal asset within the group. Our testing did not indicate that any of our long-lived asset groupings were impaired as of December 31, 2008. However, if our future cash flow projections are not realized, either because of an extended recessionary period or other unforeseen events, impairment charges may be required in future periods. A 10 percent decrease in the projected cash flows of our asset groupings would not result in an impairment.

Taxes - U. S. Steel records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event that U. S. Steel determines that it would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset valuation allowance would increase income in the period such determination was made. Likewise, should U. S. Steel determine that it would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the valuation allowance for deferred tax assets would be charged to income in the period such determination was made. U. S. Steel expects to generate future taxable income to realize the benefits of our net deferred tax assets.

U. S. Steel makes no provision for deferred U.S. income taxes on undistributed foreign earnings because as of December 31, 2008, it remained management's intention to continue indefinitely to reinvest such earnings in foreign operations. See Note 9 to the Financial Statements. Undistributed foreign earnings at December 31, 2008 amounted to approximately $3,088 million. If such earnings were not indefinitely reinvested, a U.S. deferred tax liability of approximately $930 million would have been required.

U. S. Steel records liabilities for potential tax deficiencies. These liabilities are based on management's judgment of the risk of loss for items that have been or may be challenged by taxing authorities. In the event that U. S. Steel were to determine that tax-related items would not be considered deficiencies or that items previously not considered to be potential deficiencies could be considered potential tax deficiencies (as a result of an audit, court case, tax ruling or other authoritative tax position), an adjustment to the liability would be recorded through income in the period such determination was made.

Environmental Remediation - U. S. Steel provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Remediation liabilities are

accrued based on estimates of known environmental exposures and are discounted in certain instances. U. S. Steel regularly monitors the progress of environmental remediation. Should studies indicate that the cost of remediation is to be more than previously estimated, an additional accrual would be recorded in the period in which such determination was made. As of December 31, 2008, the total accrual for environmental remediation was $162 million, excluding liabilities related to asset retirement obligations under FAS 143, "Accounting for Asset Retirement Obligations." Due to uncertainties inherent in remediation projects, it is possible that total remediation costs for active matters may exceed the accrued liability by as much as 25 to 45 percent.

Segments

U. S. Steel has three reportable operating segments: Flat-rolled Products (Flat-rolled), U. S. Steel Europe (USSE) and Tubular Products (Tubular). The results of several operating segments that do not constitute reportable segments are combined and disclosed in the Other Businesses category.

Effective with the fourth quarter of 2008, the operating results of our iron ore operations, which were previously included in Other Businesses, are included in the Flat-rolled segment. The iron ore operations are managed as part of our Flat-rolled segment, which consumes almost all of our iron ore production. Prior periods have been restated to reflect this change.

The Flat-rolled segment includes the operating results of U. S. Steel's North American integrated steel mills and equity investees involved in the production of slabs, sheets, tin mill products, strip mill plates and rounds for Tubular, as well as all iron ore and coke production facilities in the United States and Canada. These operations primarily serve North American customers in the service center, conversion, transportation (including automotive), construction, container and appliance and electrical markets.

Flat-rolled has annual raw steel production capability of 24.3 million tons. Raw steel production was 19.2 million tons in 2008, 16.8 million tons in 2007 and 16.4 million tons in 2006. Raw steel production averaged 79 percent of capability in 2008, 83 percent of capability in 2007 and 84 percent of capability in 2006.

The USSE segment includes the operating results of USSK, U. S. Steel's integrated steel mill and coke production facilities in Slovakia; USSS, U. S. Steel's integrated steel mill and other facilities in Serbia; and equity investees located in Europe. USSE primarily serves customers in the European construction, service center, conversion, container, transportation (including automotive), appliance and electrical, and oil, gas and petrochemical markets. USSE produces and sells sheet, strip mill plate, tin mill and tubular products, as well as heating radiators and refractories.

USSE has annual raw steel production capability of 7.4 million tons. USSE's raw steel production was 6.4 million tons in 2008, 6.8 million tons in 2007 and 7.1 million tons in 2006. USSE's raw steel production averaged 86 percent of capability in 2008, 92 percent of capability in 2007 and 95 percent of capability in 2006.

The Tubular segment includes the operating results of U. S. Steel's tubular production facilities, primarily in the United States, and equity investees in the United States and Brazil. These operations produce and sell both seamless and electric resistance welded tubular products and primarily serve customers in the oil, gas and petrochemical markets. Tubular's annual production capability is 2.8 million tons.

All other U. S. Steel businesses not included in reportable segments are reflected in Other Businesses. These businesses include transportation services, the management and development of real estate, and engineering and consulting services.

For further information see Note 3 to the Financial Statements.

Net Sales

(a) Includes Lone Star facilities from the date of acquisition on June 14, 2007 and USSC from the date of acquisition on October 31, 2007.

Net Sales by Segment



(Dollars in millions, excluding intersegment sales)     2008           2007           2006
Flat-rolled(a)                                        $ 13,789       $  9,986       $  9,693
USSE                                                     5,487          4,667          3,968
Tubular                                                  4,251          1,985          1,798

Total sales from reportable segments                    23,527         16,638         15,459
Other Businesses(a)                                        227            235            256

Net sales                                             $ 23,754       $ 16,873       $ 15,715

(a) Certain amounts have been restated versus prior years' disclosures. See Note 3 to the Financial Statements.

Management's analysis of the percentage change in net sales for U. S. Steel's reportable business segments is set forth in the following tables:

Year Ended December 31, 2008 versus Year Ended December 31, 2007

                                    Steel Products(a)
                                                                          Coke &
                   Volume         Price         Mix         FX(b)         Other              Net Change
     Flat-rolled       19 %          19 %        -1 %           0 %            1 %                   38 %
     USSE              -7 %          18 %         1 %           7 %           -1 %                   18 %
     Tubular           40 %          64 %         4 %           0 %            6 %                  114 %

(a) Excludes intersegment sales

(b) Foreign currency effects

The increase in sales for Flat-rolled primarily reflected higher average realized prices (up $138 per ton) and increased shipments, primarily due to the inclusion of USSC for all of 2008. The increase in sales for USSE was primarily due to higher average realized euro-based prices and favorable currency effects, partially offset by reduced shipments. Including the currency effects, average realized prices increased $212 per ton from 2007. The increase in sales for Tubular resulted primarily from higher average realized prices (up $706 per ton) and increased shipments, partially due to the inclusion of the former Lone Star Technologies, Inc. (Lone Star) facilities for the entire year in 2008.

Year Ended December 31, 2007 versus Year Ended December 31, 2006

                                    Steel Products(a)
                                                                          Coke &
                   Volume         Price         Mix         FX(b)         Other              Net Change
     Flat-rolled        2 %           3 %        -2 %           0 %            0 %                    3 %
     USSE              -2 %           8 %         2 %           8 %            2 %                   18 %
     Tubular           16 %          -2 %        -4 %           0 %            0 %                   10 %

(a) Excludes intersegment sales

(b) Foreign currency effects

Sales for Flat-rolled were up mainly due to higher average realized prices (up $8 per ton) and higher shipments as a result of the addition of shipments from USSC. Sales for USSE increased mainly as a result of higher average realized prices and favorable currency effects. Including the currency effects, average realized prices increased $112 per ton from 2006. Tubular sales were up due . . .