ÁñÁ«ÊÓƵ

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2004

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2004

Commission file number 1-16811

(Exact name of registrant as specified in its charter)

600 Grant Street, Pittsburgh, PA 15219-2800

(Address of principal executive offices)

Tel. No. (412) 433-1121

Securities registered pursuant to Section 12 (b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for at least the past 90 days.  Yes     ü     No             

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      ü    

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes     ü     No             

Aggregate market value of Common Stock held by non-affiliates as of June 30, 2004 (the last business day of the registrant’s most recently completed second fiscal quarter): $4.0 billion. The amount shown is based on the closing price of the registrant’s Common Stock on the New York Stock Exchange composite tape on that date. Shares of Common Stock held by executive officers and directors of the registrant are not included in the computation. However, the registrant has made no determination that such individuals are “affiliates” within the meaning of Rule 405 under the Securities Act of 1933.

There were 114,161,845 shares of U. S. Steel Corporation Common Stock outstanding as of February 24, 2005.

Documents Incorporated By Reference:

Portions of the Proxy Statement for the 2005 Annual Meeting of Stockholders are incorporated into Part III.

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INDEX

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FORWARD-LOOKING STATEMENTS

Certain sections of the Annual Report of ÁñÁ«ÊÓƵ (U. S. Steel) on Form 10-K, particularly Item 1. Business, Item 3. Legal Proceedings, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk, include forward-looking statements concerning trends or events potentially affecting U. S. Steel. These statements typically contain words such as “anticipates,” “believes,” “estimates,” “expects” or similar words indicating that future outcomes are uncertain. 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 additional factors affecting the businesses of U. S. Steel, see “Supplementary Data – Disclosures About Forward-Looking Statements.”

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PART I

Item 1. BUSINESS

Introduction

U. S. Steel is an integrated steel producer with major production operations in the United States and Central Europe. An integrated producer uses iron ore and coke as primary raw materials for steel production. U. S. Steel has domestic annual raw steel production capability of 19.4 million net tons (tons) and Central European annual raw steel production capability of 7.4 million tons. U. S. Steel is also engaged in several other business activities, most of which are related to steel manufacturing. These include the production of iron ore pellets from taconite (rock containing iron) in the United States and the production of coke in both the United States and Central Europe; transportation services (railroad and barge operations); real estate operations and engineering and consulting services.

In 2004, U. S. Steel concentrated on successfully integrating the businesses acquired in 2003 (discussed below), improving its balance sheet, increasing liquidity and continuing to strengthen its core steel businesses in order to be better positioned for further expansion and continued improvements to its existing facilities. An equity offering of 8 million common shares was completed in March 2004 for net proceeds of $294 million, which were primarily used to redeem certain senior notes. In April 2004, U. S. Steel redeemed $187 million principal amount of its 10 ³/4% senior notes, resulting in a reduction of the principal amount outstanding to $348 million, and redeemed $72 million principal amount of its 9 ³/4% senior notes, resulting in a reduction of the principal amount outstanding to $378 million. In addition, U. S. Steel Kosice (ÁñÁ«ÊÓƵK) retired $281 million of long-term debt in 2004.

Also during 2004, U. S. Steel made voluntary contributions of $295 million to its main domestic defined benefit pension plan and $30 million to a Voluntary Employee Benefit Association trust.

In October 2004, U. S. Steel’s $600 million revolving credit facility was amended and restated to: 1) extend the maturity to October 2009, 2) increase the borrowing base, 3) reduce the pricing for both borrowings and undrawn commitments, and 4) limit the application of many of the restrictive covenants.

In February 2004, U. S. Steel continued to divest its non-core assets when it sold substantially all of the remaining mineral interests administered by the Real Estate segment for $67 million.

In 2003, U. S. Steel engaged in several significant transactions aimed at strengthening its core steel businesses.

On May 20, 2003, U. S. Steel acquired out of bankruptcy substantially all of the integrated steelmaking assets of National Steel Corporation (National). See Note 2 to the Financial Statements for further information regarding the acquisition. The facilities that were acquired included two integrated steel plants, Granite City Works in Granite City, Illinois, and Great Lakes Works in Ecorse and River Rouge, Michigan; the Midwest Plant in Portage, Indiana; ProCoil Company LLC (ProCoil) in Canton, Michigan; a 50 percent equity interest in Double G Coatings Company, L.P. (Double G) near Jackson, Mississippi; the iron ore pellet operations in Keewatin, Minnesota (Keetac); and the Delray Connecting Railroad Company (Delray) in Michigan.

In connection with the acquisition of National, U. S. Steel negotiated a collective bargaining agreement with the United Steelworkers of America (USWA) that is substantially different from historical contracts with the USWA. This innovative agreement, which expires in September 2008, covers both U. S. Steel and former National employees and provides U. S. Steel the flexibility to staff and operate its domestic facilities on a world competitive basis.

On September 12, 2003, U. S. Steel acquired out of bankruptcy Sartid a.d. (In Bankruptcy), an integrated steel company located in the Union of Serbia and Montenegro, and certain of its subsidiaries (collectively, Sartid). U. S. Steel is operating these facilities as U. S. Steel Balkan (ÁñÁ«ÊÓƵB). See Note 2 to the Financial Statements for further information regarding the acquisition.

On June 30, 2003, U. S. Steel completed the sale of its coal mines and related assets (Mining Sale). As a result, U. S. Steel no longer mines any coal. See Note 3 to the Financial Statements for further information regarding the sale.

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In a non-monetary transaction in November 2003, U. S. Steel’s plate mill at Gary Works was exchanged for a pickling line located in East Chicago, Indiana. This was U. S. Steel’s only plate mill; however, U. S. Steel still produces plate in coil on its hot strip mills at Gary Works and at its European operations.

In April 2003, U. S. Steel sold certain coal seam gas interests in Alabama for $34 million. In December 2003, U. S. Steel contributed timber cutting rights with an appraised value of $59 million to its defined benefit pension plan.

Straightline Source (Straightline), a steel distribution business, was closed to new business effective December 31, 2003, and was shut down in 2004.

Segments

During 2004, U. S. Steel had four reportable operating segments: Flat-rolled Products (Flat-rolled), U. S. Steel Europe (ÁñÁ«ÊÓƵE), Tubular Products (Tubular) and Real Estate. As of January 1, 2004, the residual results of Straightline are included in the Flat-rolled segment. The application of Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” resulted in U. S. Steel consolidating the Clairton 1314B Partnership, L.P. (1314B Partnership) effective January 1, 2004. The results of the 1314B Partnership, which are included in the Flat-rolled segment, were previously accounted for under the equity method. For further information, see Notes 4 and 18 to the Financial Statements.

The Flat-rolled segment includes the operating results of U. S. Steel’s domestic integrated steel mills and equity investees involved in the production of sheet, tin mill products and strip mill plate, as well as all domestic coke production facilities. These operations are principally located in the United States and primarily serve customers in the service centers, conversion, transportation (including automotive), containers, construction and appliance markets. Effective May 20, 2003, the Flat-rolled segment includes the operating results of Granite City Works, Great Lakes Works, the Midwest Plant, ProCoil and U. S. Steel’s equity interest in Double G, which were acquired from National. In November 2003, U. S. Steel disposed of the Gary Works plate mill.

The ÁñÁ«ÊÓƵE segment includes the operating results of ÁñÁ«ÊÓƵK, U. S. Steel’s integrated steel mill in Slovakia; and, effective September 12, 2003, ÁñÁ«ÊÓƵB, U. S. Steel’s integrated steel facilities in Serbia. Beginning March 8, 2002 and prior to September 12, 2003, this segment included the operating results of activities under certain agreements with Sartid. These agreements were terminated in conjunction with the acquisition. ÁñÁ«ÊÓƵE produces and sells sheet, strip mill plate, tin mill, tubular, precision tube and specialty steel products. ÁñÁ«ÊÓƵE primarily serves customers in the central and western European construction, conversion, service centers, appliance, containers, transportation, and oil, gas and petrochemicals markets.

The Tubular segment includes the operating results of U. S. Steel’s domestic tubular production facilities. These operations produce and sell both seamless and electric resistance weld (ERW) tubular products and primarily serve customers in the oil, gas and petrochemicals markets.

The Real Estate segment includes the operating results of U. S. Steel’s residential, commercial and industrial real estate that is managed and developed for sale or lease. In April 2003, U. S. Steel sold certain coal seam gas interests in Alabama for $34 million. In December 2003, U. S. Steel contributed timber cutting rights with an appraised value of $59 million to its defined benefit pension plan. In February 2004, U. S. Steel sold substantially all of the remaining mineral interests administered by the Real Estate segment for $67 million. Prior to the disposition of these assets, results they generated were reported in the Real Estate segment.

All other U. S. Steel businesses not included in reportable segments are reflected in Other Businesses. These businesses are involved in the production and sale of iron ore pellets, transportation services, and engineering and consulting services. Effective May 20, 2003, Other Businesses include the operating results of Keetac and Delray, which were acquired from National. Prior to the Mining Sale on June 30, 2003, Other Businesses were involved in the mining, processing and sale of coal.

The transfer value for rounds supplied to Tubular from Flat-rolled and the transfer value of iron ore pellets supplied to Flat-rolled from Other Businesses are set at the beginning of each year based on expected total production costs.

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Revenues by Product

The following table sets forth the total revenues and other income of U. S. Steel by major product group for each of the last three years.

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Steel Shipments by Segment and Product

The following tables set forth steel shipment data for U. S. Steel by segment and product for 2004, 2003 and 2002. Such data does not include shipments by joint ventures and other equity investees of U. S. Steel for all three years or shipments from Straightline for 2003 and 2002.

(Thousands of Tons)

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Steel Shipments by Segment and Market

The following tables set forth steel shipment data for U. S. Steel by segment and major market for 2004, 2003 and 2002. Such data does not include shipments by joint ventures and other equity investees of U. S. Steel for all three years or shipments from Straightline for 2003 and 2002. No single customer accounted for more than 10 percent of gross annual revenues; however, Tubular has a customer that accounts for more than 10 percent of its segment revenues.

(Thousands of Tons)

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Business Strategy

U. S. Steel’s strategy is based on the stated aspiration that U. S. Steel will be a conservative, responsible company that generates a competitive return on capital and meets its financial and stakeholder obligations. Within this value framework, the following outlines U. S. Steel’s business strategy.

U. S. Steel’s business strategy is to continue to grow its investment in high-end finishing assets, expand its global business platform, reduce its costs and become a world leader in safety performance. In North America, U. S. Steel is focused on providing value-added steel products to its target markets where management believes that U. S. Steel’s leadership position, production and processing capabilities and technical service provide a competitive advantage. These products include advanced high strength steel and coated sheets for the automotive and appliance industries, sheets for the manufacture of motors and electrical equipment, galvanized and Galvalume^® sheets for the construction industry, improved tin mill products for the container industry and oil country tubular goods. U. S. Steel continues to enhance its value-added businesses through the upgrading and modernization of its key production facilities.

As previously mentioned, on May 20, 2003, U. S. Steel acquired substantially all of the integrated steelmaking assets of National. U. S. Steel continues to be interested in participating in further consolidation of the North American steel industry if it would be beneficial to customers, shareholders, creditors and employees. U. S. Steel conducted due diligence in relation to the potential purchase of Stelco Inc., a Canadian steel producer, but ultimately decided not to pursue an acquisition.

Through its November 2000 purchase of ÁñÁ«ÊÓƵK in Slovakia, U. S. Steel initiated a major offshore expansion into the European market. U. S. Steel extended its presence in Central Europe in 2003 with the acquisition on September 12, 2003 of ÁñÁ«ÊÓƵB. U. S. Steel continues to explore additional opportunities for steel and raw materials investments in Europe. U. S. Steel’s strategy is to be a leading European steel producer and the prime supplier of steel to growing European markets, to grow its customer base in Europe by providing reliable delivery of high-quality steel and to invest in value-added facilities, including a planned automotive hot-dip galvanizing line, to improve ÁñÁ«ÊÓƵE’s product mix.

Expansion opportunities in Europe and North America would be attractive to U. S. Steel. South America, China and India are also possible areas of interest. While U. S. Steel has recently pursued expansion through 100 percent acquisition, U. S. Steel may also participate in future expansion through joint ventures, acquisitions of less than 100 percent equity interests and other means.

U. S. Steel has a commitment to continuously reduce costs. The National acquisition and the 2003 labor agreements with the USWA covering all of U. S. Steel’s domestic production facilities provided U. S. Steel with an opportunity to achieve a major reduction in the cost structure of its domestic business. Total savings from National operational synergies, workforce reductions at both U. S. Steel and former National plants, and administrative cost reduction programs have exceeded $400 million in annual repeatable cost savings.

The foregoing statements of belief are forward-looking statements. Predictions regarding future cost savings are subject to uncertainties. Factors that may affect the amount of cost savings include the possibility that U. S. Steel may need more employees than anticipated to operate its business and management’s ability to implement and maintain its cost reduction strategy. Actual results could differ materially from those expressed in these forward-looking statements.

U. S. Steel has also entered into a number of joint ventures with domestic and international partners to take advantage of market or manufacturing opportunities in the sheet, tin mill and plate-consuming industries.

Steel Industry Background and Competition

The steel industry is cyclical and highly competitive and has been characterized by excess world supply, which has restricted the ability of U. S. Steel and the industry to raise prices during periods of economic growth and resist price decreases during periods of economic contraction. In 2004, worldwide supply and demand were more in balance and supply was constrained by the availability of raw materials leading to substantial price increases.

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Supply and demand relationships worldwide are heavily influenced by supply and demand in China. The steel industry faces competition in many markets from producers of materials such as aluminum, cement, composites, glass, plastics and wood.

U. S. Steel is the second largest integrated steel producer in North America and, through ÁñÁ«ÊÓƵK and ÁñÁ«ÊÓƵB, one of the largest integrated flat-rolled producers in Central Europe. U. S. Steel competes with many domestic and foreign steel producers. Competitors include integrated producers which, like U. S. Steel, use iron ore and coke as primary raw materials for steel production, and mini-mills, which primarily use steel scrap and, increasingly, iron-bearing feedstocks as raw materials. Mini-mills typically enjoy certain competitive advantages in the markets in which they compete through lower capital expenditures for construction of facilities and non-unionized work forces with lower total employment costs. Some mini-mills utilize thin slab casting technology to produce flat-rolled products and are increasingly able to compete directly with integrated producers of flat-rolled products. Depending on market conditions, including market conditions for steel scrap, the production generated by flat-rolled mini-mills could have an adverse effect on U. S. Steel’s selling prices and shipment levels. Due primarily to growth in worldwide steel production, especially in China, prices for steelmaking commodities such as steel scrap, coal, coke and iron ore escalated to unprecedented levels in 2004 and remain at these levels. U. S. Steel’s balanced domestic raw materials position and limited dependence on steel scrap has helped the competitive position of U. S. Steel’s domestic operations.

The domestic steel industry has been under pressure for many years. Oversupply and low prices, which were attributable largely to excess imports, resulted in significant temporary or permanent capacity closures starting in late 2000. Numerous bankruptcies created many opportunities for consolidation and the domestic steel industry has been significantly restructured over the last few years. Domestic and global consolidation is expected to continue. The combination of capacity closures, consolidation and the increase in global demand for steel led to a recovery of steel prices from 20-year lows in late 2001 and early 2002 to all-time highs in 2004.

The trade remedies announced by President Bush on March 5, 2002, under Section 201 of the Trade Act of 1974, were removed by executive proclamation effective December 5, 2003, prior to running their full term of three years. Upon announcing termination of the Section 201 relief, the administration committed to continuing and improving a steel import monitoring system that will assist the domestic steel industry in identifying steel import problems in a timely manner. The negative impact of removing the tariffs has been mitigated by a number of factors including the relative value of the dollar, significant increases in ocean freight rates and the increase in the global demand for steel; however, imports have increased significantly in the past several months compared to 2003 and early 2004. Despite the decline in December, total sheet imports in the fourth quarter of 2004 increased by almost 200 percent from the same quarter of 2003 and by almost 140 percent from the first quarter of 2004. Steel imports to the United States accounted for an estimated 26 percent of the domestic steel market in the first 11 months of 2004, compared to 19 percent in 2003 and 26 percent in 2002.

The U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC) are currently conducting five year “sunset” reviews of trade relief granted in 1999 regarding hot-rolled flat steel products. In these proceedings, the agencies will determine whether the following should remain in efffect: anti-dumping orders against product from Brazil and Japan, a suspension agreement pertaining to dumped product from Russia and a countervailing duty order against product from Brazil. The DOC has completed its investigations, finding that dumping or illegal subsidization, as the case may be, would be likely to continue or recur if any of these orders or the suspension agreement is revoked. The ITC will hold a hearing in March 2005 and thereafter decide whether injury to the domestic industry would be likely to continue or recur if any of the orders or the suspension agreement is revoked.

The Organization of Economic Cooperation and Development announced on June 29, 2004, that it was postponing until 2005 discussions aimed at the reduction and elimination of government investment in and support for steelmaking.

U. S. Steel will monitor imports closely and file anti-dumping and countervailing duty petitions if unfairly traded imports adversely impact, or threaten to adversely impact, financial results.

U. S. Steel’s domestic businesses are subject to numerous federal, state and local laws and regulations relating to the storage, handling, emission and discharge of environmentally sensitive materials. U. S. Steel believes that its

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major domestic integrated steel competitors are confronted by substantially similar conditions and thus does not believe that its relative position with regard to such competitors is materially affected by the impact of environmental laws and regulations. However, the costs and operating restrictions necessary for compliance with environmental laws and regulations may have an adverse effect on U. S. Steel’s competitive position with regard to domestic mini-mills and some foreign steel producers and producers of materials which compete with steel, which may not be required to undertake equivalent costs in their operations. In addition, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities and its production methods. U. S. Steel is also responsible for remediation costs related to its prior disposal of environmentally sensitive materials. Domestic integrated facilities that have emerged from bankruptcy proceedings, mini-mills and other competitors generally do not have similar liabilities. For further information, see “Item 3. Legal Proceedings – Environmental Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters, Litigation and Contingencies.”

U. S. Steel has approximately 48,000 active employees worldwide and provides defined benefit pension and other postretirement benefits to approximately 84,000 retirees. Domestic integrated producers that have emerged from bankruptcy proceedings and mini-mills do not have comparable fixed retiree obligations.

ÁñÁ«ÊÓƵK and ÁñÁ«ÊÓƵB conduct business primarily in Central and Western Europe and are subject to market conditions in those areas which are influenced by many of the same factors that affect domestic markets, as well as matters peculiar to international markets such as quotas and tariffs. ÁñÁ«ÊÓƵK and ÁñÁ«ÊÓƵB are affected by the worldwide overcapacity in the steel industry and the cyclical nature of demand for steel products and the sensitivity of that demand to worldwide general economic conditions. In particular, ÁñÁ«ÊÓƵK and ÁñÁ«ÊÓƵB are subject to economic conditions, environmental regulations and political factors in Europe, which if changed could negatively affect results of operations and cash flow. These economic conditions, environmental regulations and political factors include, but are not limited to, taxation, nationalization, inflation, currency fluctuations, increased regulation, limits on emissions (see “Environmental Matters” for a discussion regarding carbon dioxide emissions limits, which are applicable to European Union (EU) member countries), and quotas, tariffs and other protectionist measures. ÁñÁ«ÊÓƵK and ÁñÁ«ÊÓƵB are affected by the volatility of raw materials prices. ÁñÁ«ÊÓƵK and ÁñÁ«ÊÓƵB are susceptible to these risks as they arise in Slovakia and the Union of Serbia and Montenegro, respectively. ÁñÁ«ÊÓƵK is subject to foreign currency exchange risks because its revenues are primarily in euros and its costs are primarily in U.S. dollars and Slovak koruna. ÁñÁ«ÊÓƵB is subject to foreign currency exchange risks because its revenues are primarily in euros and Serbian dinars and its costs are primarily in U.S. dollars and Serbian dinars.

In response to the termination of the U.S. Section 201 proceedings, on December 5, 2003, the European Commission announced the termination of the definitive safeguard measures imposed on September 27, 2002. The EU safeguard proceedings, which were similar to the Section 201 proceedings, involved quota/tariff measures restricting the import of certain steel products into the EU. ÁñÁ«ÊÓƵE had been impacted by the quota/tariff measures on four products: non-alloy hot-rolled coils, hot-rolled strip, hot-rolled sheet and cold-rolled flat products. Annual shipment quotas were set for all four products and tariffs imposed if the quotas were exceeded. The measures were scheduled to expire on March 28, 2005; however, they would have ceased to impact ÁñÁ«ÊÓƵK upon Slovakia’s accession into the EU, which occurred on May 1, 2004.

During 2003, safeguard measures, similar to the EU measures, were also imposed by Poland (on March 8) and Hungary (on March 28). These measures ceased to affect ÁñÁ«ÊÓƵK upon EU accession by Slovakia, Poland and Hungary on May 1, 2004.

Flat-rolled

The acquisition of the assets of National on May 20, 2003, increased U. S. Steel’s stated annual raw steel production capability for domestic operations from 12.8 millions tons to 19.4 million tons. Raw steel production was 17.3 million tons in 2004, compared with 14.9 million tons in 2003, including results from the National assets following the acquisition, and 11.5 million tons in 2002. Raw steel production averaged 89 percent of capability in 2004, compared with 88 percent of capability in 2003, recognizing the capability of National on a prorata basis, and 90 percent of capability in 2002. All steel produced in U. S. Steel’s domestic facilities is continuous cast.

Flat-rolled shipments were 15.6 million tons in 2004, 13.5 million tons in 2003, including partial year shipments from the facilities acquired from National, and 9.9 million tons in 2002. Exports accounted for approximately 3 percent of Flat-rolled’s shipments in 2004, and 4 percent in 2003 and 2002.

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Flat-rolled produces sheets, tin mill products, strip mill plate and coke. Sheet products include hot-rolled, cold-rolled and coated. Flat-rolled’s sheet customer base includes service center, conversion, transportation (including automotive), construction and appliance customers. Flat-rolled also supplies a full line of tin plate and tin-free steel products, primarily used in the container industry. U. S. Steel produces plate in coil on the hot strip mill at Gary Works, which is further processed at the Feralloy Processing Company (FPC) joint venture. The majority of coke produced at the integrated steel plants is used to support Flat-rolled operations; however, some coke from Clairton Works and the 1314B Partnership is sold to trade customers. Throughout 2004, U. S. Steel operated under a force majeure declaration to its coke customers due to U. S. Steel’s inability to obtain adequate supplies of specific types of coal to meet all the specification requirements of customers. U. S. Steel declared force majeure in early 2005 as coal supplies to Clairton Works were disrupted due to river lock closures resulting from flooding. U. S. Steel has long-standing relationships with many of its customers, as do its joint ventures.

With the exception of the Fairfield pipe mill, the operating results of all the facilities within U. S. Steel’s domestic integrated steel mills are included in Flat-rolled. These facilities include Gary Works, Great Lake Works, Mon Valley Works, Granite City Works and Fairfield Works.

Gary Works, located at Gary, Indiana, has annual raw steel production capability of 7.5 million tons. Gary Works has four coke batteries, four blast furnaces, three basic oxygen converters, three Q-BOP vessels, a vacuum degassing unit and four continuous slab casters. Gary Works generally consumes all the coke it produces and sells several coke by-products. Finishing facilities include a hot strip mill, two pickling lines, two cold reduction mills, three temper mills, a double cold reduction line, two tin coating lines, an electrolytic galvanizing line and a hot dip galvanizing line. Principal products include hot-rolled, cold-rolled and coated sheets and tin mill products. Gary Works also produces strip mill plate. The Midwest Plant and East Chicago Tin are operated as part of Gary Works.

The Midwest Plant, located in Portage, Indiana, finishes hot-rolled bands. Midwest facilities include a pickling line, two cold reduction mills, two temper mills, a double cold reduction mill, two hot dip galvanizing lines, a tin coating line and a tin-free steel line. Principal products include tin mill products and hot dip galvanized, cold-rolled and electrical lamination sheets. Midwest was acquired from National on May 20, 2003.

East Chicago Tin is located in East Chicago, Indiana. Facilities include a pickling line, which was acquired in late 2003 in a non-monetary exchange with International Steel Group, a cold reduction mill, a temper mill, a tin coating line and a tin-free steel line.

Great Lakes Works, located in Ecorse and River Rouge, Michigan, has annual raw steel production capability of approximately 3.8 million tons. Great Lakes facilities include three blast furnaces, two basic oxygen converters, a vacuum degassing unit, two slab casters, a hot strip mill, a high-speed pickling line, a tandem cold reduction mill, a temper mill, an electrolytic galvanizing line and a hot dip galvanizing line. Principal products include hot-rolled, cold-rolled, electrolytic galvanized and hot dip galvanized sheets. Great Lakes Works was acquired from National on May 20, 2003.

Mon Valley Works consists of the Edgar Thomson Plant, located in Braddock, Pennsylvania; the Irvin Plant, located in West Mifflin, Pennsylvania; the Fairless Plant, located in Fairless Hills, Pennsylvania; and Clairton Works, located in Clairton, Pennsylvania. Mon Valley Works has annual raw steel production capability of 2.9 million tons. Facilities at the Edgar Thomson Plant include two blast furnaces, two basic oxygen converters, a vacuum degassing unit and a slab caster. Irvin Plant facilities include a hot strip mill, two pickling lines, a cold reduction mill, a temper mill, a hot dip galvanizing line and a hot dip galvanizing/Galvalume^® line. The only operational facility at the Fairless Plant is a hot dip galvanizing line. Principal products include hot-rolled, cold-rolled and coated sheets, as well as coke produced at Clairton Works.

Clairton Works is comprised of nine coke batteries owned and operated by U. S. Steel, one coke battery leased and operated by U. S. Steel and an additional two coke batteries that are operated by U. S. Steel for the 1314B Partnership, which is discussed below. Clairton (including the 1314B Partnership) produced 4.3 million tons of coke in 2004 and 4.5 million tons in 2003 and 2002. Approximately 35 percent of annual production (including the 1314B Partnership) was consumed by U. S. Steel facilities in 2004 and the remainder was sold to other domestic steel producers. Several coke by-products are sold to the chemicals and raw materials industries.

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U. S. Steel is the sole general partner of and owns an equity interest in the 1314B Partnership. As general partner, U. S. Steel is responsible for operating and selling coke and by-products from the partnership’s two coke batteries located at U. S. Steel’s Clairton Works. U. S. Steel’s share of profits and losses during 2004 was 45.75 percent. The partnership at times had operating cash shortfalls in 2004, 2003 and 2002 that were funded with loans from U. S. Steel. There were no outstanding loans with the partnership at December 31, 2004, 2003 or 2002. U. S. Steel may dissolve the partnership under certain circumstances including if it is required to make equity investments or loans in excess of $150 million to fund such shortfalls. As the primary beneficiary of the partnership, U. S. Steel consolidates the results of the 1314B Partnership in its financial statements.

Granite City Works, located in Granite City, Illinois, has annual raw steel production capability of approximately 2.8 million tons. Granite City’s facilities include two coke batteries, two blast furnaces, two basic oxygen converters, two slab casters, a hot strip mill, a pickling line, a tandem cold reduction mill, a hot dip galvanizing line and a hot dip galvanizing/Galvalume^® line. Granite City Works generally consumes all the coke it produces and sells several coke by-products. Principal products include hot-rolled, hot-dipped galvanized and Galvalume^® sheets. Granite City Works was acquired from National on May 20, 2003.

Fairfield Works, located in Fairfield, Alabama, has annual raw steel production capability of 2.4 million tons. Fairfield Works facilities included in Flat-rolled are a blast furnace, three Q-BOP vessels, a vacuum degassing unit, a slab caster, a rounds caster, a hot strip mill, a pickling line, a cold reduction mill, two temper/skin pass mills, a hot dip galvanizing line and a hot dip galvanizing/Galvalume^® line. Principal products include hot-rolled, cold-rolled and coated sheets, and rounds for Tubular.

ProCoil, a wholly owned subsidiary located in Canton, Michigan, slits and cuts steel coils to desired specifications, provides laser welding services and warehouses material to service automotive customers. ProCoil was acquired from National on May 20, 2003.

U. S. Steel participates directly and through subsidiaries in a number of joint ventures which are included in Flat-rolled. All such joint ventures are accounted for under the equity method. Certain of the joint ventures and other investments are described below, all of which are 50 percent owned except FPC, in which U. S. Steel holds a 49 percent interest. For financial information regarding joint ventures and other investments, see Note 14 to the Financial Statements.

U. S. Steel and Pohang Iron & Steel Co., Ltd. (POSCO) of South Korea participate in a joint venture, ÁñÁ«ÊÓƵ-POSCO Industries (ÁñÁ«ÊÓƵ-POSCO), located in Pittsburg, California. The joint venture markets high quality sheet and tin mill products, principally in the western United States. ÁñÁ«ÊÓƵ-POSCO produces cold-rolled sheets, galvanized sheets, tin plate and tin-free steel from hot bands principally provided by U. S. Steel and POSCO. Total shipments by ÁñÁ«ÊÓƵ-POSCO were 1.4 million tons in 2004, and 1.2 million tons in 2003 and 2002.

U. S. Steel and Kobe Steel, Ltd. of Japan participate in a joint venture, PRO-TEC Coating Company (PRO-TEC). PRO-TEC owns and operates two hot-dip galvanizing lines in Leipsic, Ohio, which primarily serve the automotive industry. PRO-TEC’s annual capability is approximately 1.2 million tons. Total shipments by PRO-TEC were 1.1 million tons in 2004, 2003 and 2002.

U. S. Steel and Severstal North America, Inc. participate in Double Eagle Steel Coating Company (DESCO), a joint venture which operates an electrogalvanizing facility located in Dearborn, Michigan. The facility can coat both sides of sheet steel with free zinc or zinc alloy coatings, primarily for use in the automotive industry. Availability of the facility is shared equally by the partners. On December 15, 2001, production at DESCO was halted due to a fire. The facility restarted operations on September 10, 2002, with full operating levels achieved by December 2002. In 2004, 2003 and 2002, DESCO produced 650 thousand tons, 683 thousand tons and 163 thousand tons, respectively, of electrogalvanized steel.

U. S. Steel and International Steel Group, which is being acquired by Mittal Steel Co. NV, participate in the Double G joint venture, a hot dip galvanizing and Galvalume^® facility located near Jackson, Mississippi, which primarily serves the construction industry. U. S. Steel’s interest was acquired from National on May 20, 2003. Double G’s production was 316 thousand tons in 2004 and 288 thousand tons in 2003.

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U. S. Steel and Worthington Industries, Inc. participate in a joint venture known as Worthington Specialty Processing, which operates a steel processing facility in Jackson, Michigan. The plant is operated by Worthington Industries, Inc. The facility contains state-of-the-art technology capable of processing master steel coils into both slit coils and sheared first operation blanks including rectangles, trapezoids, parallelograms and chevrons. It is designed to meet specifications for the automotive, appliance, furniture and metal door industries. In 2004, 2003 and 2002, Worthington Specialty Processing shipments were 326 thousand tons, 282 thousand tons and 250 thousand tons, respectively.

U. S. Steel and Olympic Steel, Inc. participate in a joint venture to process laser welded sheet steel blanks at a facility in Van Buren, Michigan. The joint venture conducts business as Olympic Laser Processing. Laser welded blanks are used in the automotive industry for a number of body fabrication applications. Olympic Laser Processing shipped 2.1 million parts in 2004 and 2003, and 1.7 million parts in 2002.

FPC is a joint venture between U. S. Steel and Feralloy Corporation that converts coiled hot strip mill plate into sheared and flattened plates for shipment to customers. The plant, located in Portage, Indiana, has a temper mill linked to a cut-to-length leveling line. The line provides stress-free, leveled product with a superior surface finish. FPC provides processing services to the joint venture partners and other steel consumers and service centers. FPC had annual revenues of $5.1 million in 2004, $3.4 million in 2003 and $3.6 million in 2002.

Chrome Deposit Corporation (CDC) is a joint venture between U. S. Steel and Court Holdings. The joint venture reconditions finishing work rolls, which require grinding, chrome plating, and/or texturing. The rolls are used on rolling mills to provide superior finishes on steel sheets. CDC has 7 locations across the United States, with all locations near major steel mills. In 2004, 2003, and 2002, CDC had annual revenues of $19.9 million, $19.0 million, and $18.0 million, respectively.

U. S. Steel, through its wholly owned subsidiary, U. S. Steel Export Company de Mexico, along with Feralloy Mexico, S.R.L. de C.V., participates in a joint venture, Acero Prime, S.R.L. de C.V. (Acero Prime). Acero Prime operates in Mexico with facilities in San Luis Potosi and Ramos Arizpe, and a leased warehouse in Toluca. Acero Prime provides slitting, warehousing and logistical services.

U. S. Steel also owns an automotive technical center in Troy, Michigan. This 43,000 square foot facility brings together automotive sales, service, distribution and logistics services, product technology and applications research in one location. Much of U. S. Steel’s work in developing new grades of steel to meet the demands of automakers for high-strength, light-weight and formable materials is carried out at this location.

U. S. Steel also carries out a wide range of applied research, development and technical support functions at a leased Research and Technology Center located in Monroeville, Pennsylvania. In December 2004, U. S. Steel, through a consolidated entity established to facilitate the purchase and sale of certain fixed assets, purchased a building in Munhall, Pennsylvania. It is anticipated that the research, development and technical support functions currently performed in Monroeville will be relocated to this new facility sometime during 2006.

ÁñÁ«ÊÓƵE

The ÁñÁ«ÊÓƵE segment consists of ÁñÁ«ÊÓƵK, ÁñÁ«ÊÓƵB and several subsidiaries of each.

ÁñÁ«ÊÓƵK, headquartered in Kosice, Slovakia, has annual steelmaking capability of 5.0 million tons and produces and sells sheet, strip mill plate, tin mill, tubular, precision tube and specialty steel products.

In 2004, ÁñÁ«ÊÓƵK raw steel production was 4.5 million tons, compared to 4.7 million tons in 2003 and 4.4 million tons in 2002. ÁñÁ«ÊÓƵK has two coke batteries, three blast furnaces, two steel shops with two vessels each, a vacuum degassing unit, a dual strand caster attached to each steel shop, a hot strip mill, two pickling lines, two cold reduction mills, a temper mill, a temper/double cold reduction mill, two hot dip galvanizing lines, two tin coating lines, three dynamo lines and a color coating line. During 2002, ÁñÁ«ÊÓƵK started up the vacuum degassing facility to increase its capability to produce steel grades required for high-value applications. In 2003, ÁñÁ«ÊÓƵK started up a continuous annealing line and the second tin coating line to expand its supply of tin mill products. In 2004, ÁñÁ«ÊÓƵK started up a third dynamo line. ÁñÁ«ÊÓƵK’s steel shipments totaled 3.9 million tons in 2004, 4.7 million tons in 2003, including those realized under toll conversion agreements with Sartid, and 4.0 million tons in 2002.

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In addition, ÁñÁ«ÊÓƵK owns 100 percent of Walzwerk Finow GmbH, located in eastern Germany, which produces and ships about 90 thousand tons per year of welded precision steel tubes and cold-rolled specialty shaped sections from both cold-rolled and hot-rolled product supplied primarily by ÁñÁ«ÊÓƵK. ÁñÁ«ÊÓƵK also has facilities for manufacturing heating radiators, spiral welded pipe and refractories.

A majority of product sales by ÁñÁ«ÊÓƵK are denominated in euros and the majority of spending is in U.S. dollars and Slovak koruna. This results in exposure to currency fluctuations. U. S. Steel continually evaluates the currency mix of ÁñÁ«ÊÓƵK’s cash flows. Significant changes in currency mix could result in a change in the functional currency from U.S. dollars to euros in the future.

In September 2003, U. S. Steel acquired ÁñÁ«ÊÓƵB. The facilities acquired include an integrated plant in Smederevo which has two blast furnaces, three basic oxygen converters, a vacuum degassing unit, two slab casters, a hot strip mill, a pickling line, a cold reduction mill, a temper mill and a temper/double cold reduction mill. Other facilities purchased include a tin mill in Sabac, a limestone mine in Kucevo, a river port and a foundry, all located in Serbia.

U. S. Steel’s technical assessment determined that, with improved operating practices and an extensive rehabilitation and capital spending program, ÁñÁ«ÊÓƵB has annual raw steel design production capability of about 2.4 million tons. During 2004, capability utilization averaged 48 percent, raw steel production was 1.2 million tons and steel shipments totaled 1.1 million tons. In 2003, following the acquisition, ÁñÁ«ÊÓƵB’s raw steel production was 146 thousand tons and steel shipments totaled 150 thousand tons. A second blast furnace at ÁñÁ«ÊÓƵB is expected to be returned to production in the third quarter of 2005.

A majority of product sales by ÁñÁ«ÊÓƵB are denominated in euros and Serbian dinars and the majority of spending is in U.S. dollars and Serbian dinars. This results in exposure to currency fluctuations. The U.S. dollar is currently the functional currency.

Tubular

U. S. Steel produces both seamless and ERW tubular products. Seamless products are produced on a mill located at Fairfield Works in Fairfield, Alabama, and on two mills located in Lorain, Ohio. ERW products are produced on a mill located in McKeesport, Pennsylvania, which is operated by Camp-Hill Corporation. U. S. Steel has the capability to produce 1.9 million tons of tubular products in the 5 million ton tubular markets it serves. Tubular shipments were 1.1 million tons in 2004, 0.9 million tons in 2003 and 0.8 million tons in 2002. Exports accounted for approximately 9 percent of Tubular’s shipments in 2004, 15 percent in 2003 and 17 percent in 2002. The transfer value for rounds supplied by Flat-rolled is set at the beginning of the year based on expected total production costs.

Real Estate

Real Estate manages U. S. Steel’s real estate assets, which include approximately 200,000 acres of surface rights primarily in 5 states. Income is derived mainly from the sale of developed and undeveloped land and real estate leases. Real estate development and sales occur over approximately 25,000 acres of residential, commercial and industrial development and brownfield industrial redevelopment principally in Alabama, Pennsylvania and Maryland. Undeveloped land sales occur primarily in Alabama and Minnesota. Real estate lease income is derived from various leases primarily in Pennsylvania and Alabama.

Straightline

Straightline specialized in the distribution of processed, flat-rolled steel products to companies of all sizes that did not typically buy steel products directly from steel producers. Straightline was closed to new business effective December 31, 2003, and was shut down in 2004. As of January 1, 2004, the residual results of Straightline are included in the Flat-rolled segment.

Other Businesses

U. S. Steel controls domestic iron ore properties having proven and probable iron ore reserves in grades that can be processed by U. S. Steel’s domestic operations. At year-end 2004, these reserves totaled approximately

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969 million short tons of iron ore concentrate equivalents available from low-grade iron-bearing materials. All reserves are located in Minnesota. Approximately 30 percent of these reserves are owned and the remaining 70 percent are leased. Current lease expiration dates vary from five to sixty years in the future, with the largest (covering 36 percent of leased reserves) expiring in 2058. Leases are routinely revised and extended. U. S. Steel’s iron ore pellet operations at Mt. Iron, Minnesota (Minntac) produced 16.9 million tons of iron ore pellets in 2004, 15.8 million tons in 2003 and 16.7 million tons in 2002. Keetac produced 6.0 million tons of iron ore pellets in 2004 and 2.9 million tons in 2003, following the acquisition from National. Iron ore pellet shipments were 24.3 million tons in 2004, 18.2 million tons in 2003, including shipments from Keetac following the acquisition, and 16.2 million tons in 2002.

U. S. Steel owns 100 percent of Transtar, Inc. Transtar and its subsidiaries (the Elgin, Joliet and Eastern Railway Company in Illinois and Indiana; the Lake Terminal Railroad Company in Ohio; Union Railroad Company and McKeesport Connecting Railroad Company in Pennsylvania; and the Birmingham Southern Railroad Company, Fairfield Southern Company, Inc., Mobile River Terminal Company, and Warrior and Gulf Navigation Company, all located in Alabama) comprise substantially all of U. S. Steel’s transportation business. Transtar provides rail and barge transportation services to a number of U. S. Steel’s domestic facilities as well as other domestic customers in the steel, coal, chemicals, oil refining and forest production industries.

U. S. Steel also owns 100 percent of Delray, a small transportation company located in Michigan, which was acquired from National on May 20, 2003.

UEC Technologies LLC, a wholly owned subsidiary of U. S. Steel, sells technical services worldwide to the steel, mining, chemical and related industries. Together with its subsidiary companies, it provides engineering and consulting services for facility expansions and modernizations, operating improvement projects and environmental projects.

Raw Materials and Energy

Iron Ore

With the iron ore facilities at Minntac and Keetac, U. S. Steel has the capability of being completely self-sufficient for its domestic iron ore requirements to support blast furnace production. Any surplus pellet production is sold to domestic and foreign consumers, including ÁñÁ«ÊÓƵE. Depending on market conditions and transportation costs, internal iron ore requirements may be satisfied by the purchase of pellets from third parties, permitting the sale of additional pellets on the open market.

ÁñÁ«ÊÓƵE purchases most of its iron ore requirements from third parties, but has purchased iron ore from U. S. Steel’s domestic iron ore facilities. U. S. Steel believes that supplies of iron ore, adequate to meet ÁñÁ«ÊÓƵE’s needs, are available at competitive market prices. The main sources of iron ore for ÁñÁ«ÊÓƵE are Russia and Ukraine, with supplemental supply from Venezuela and Brazil.

Coal

All of U. S. Steel’s domestic coal requirements are purchased from third parties. U. S. Steel believes that under normal circumstances supplies of coal, adequate to meet its domestic needs, are available from third parties at competitive market prices. Coal supplies were disrupted during late 2003 and throughout 2004 largely due to the declarations of force majeure by several of U. S. Steel’s major coal suppliers. Supplies were disrupted in early 2005 due to river lock closures resulting from flooding. U. S. Steel has entered into contracts at competitive market prices for its domestic coal requirements in 2005.

ÁñÁ«ÊÓƵK’s coal requirements are purchased from third parties. U. S. Steel believes that supplies of coal, adequate to meet ÁñÁ«ÊÓƵK’s needs, are available from third parties at competitive market prices. The main sources of coal for ÁñÁ«ÊÓƵK include Poland, the Czech Republic, the United States and Russia. ÁñÁ«ÊÓƵB, which purchases coke, does not currently require coal to support its operations.

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Coke

Domestically, U. S. Steel operates cokemaking facilities at its Clairton, Pennsylvania; Gary, Indiana; and Granite City, Illinois locations. These owned and/or operated facilities have the capability to supply all of U. S. Steel’s domestic metallurgical coke requirements for blast furnace production. Following its purchase of National in May 2003, U. S. Steel operated, pursuant to an Operations and Maintenance Agreement, a cokemaking facility owned by EES Coke Battery, LLC (EES), located at U. S. Steel’s Great Lakes Works. Effective October 1, 2004, the Operations and Maintenance Agreement with EES was terminated and EES assumed responsibility for operating its cokemaking facility. Pursuant to a Coke Sales Agreement with EES, U. S. Steel purchased 100 percent of the output of the EES cokemaking facility during 2004 and will purchase a portion of such output during 2005. Blast furnace coal injection processes at Gary Works, Great Lakes Works and Fairfield Works continue to reduce U. S. Steel’s domestic coke requirements.

ÁñÁ«ÊÓƵK operates a cokemaking facility that primarily serves the steelmaking operations at ÁñÁ«ÊÓƵK. Depending on market conditions and operational schedules, ÁñÁ«ÊÓƵK may purchase small quantities of coke on the open market and may also supply a portion of ÁñÁ«ÊÓƵB’s needs. Blast furnace coal injection processes at ÁñÁ«ÊÓƵK continue to reduce its coke requirements. ÁñÁ«ÊÓƵB purchases predominantly all of its coke requirements from third party suppliers. While the coke market is expected to continue to be constrained in 2005, U. S. Steel believes that supplies of coke, adequate to meet ÁñÁ«ÊÓƵK’s and ÁñÁ«ÊÓƵB’s needs, are available at competitive market prices. The main sources of coke for ÁñÁ«ÊÓƵK and ÁñÁ«ÊÓƵB in 2005 include Poland, Ukraine, Russia, Bosnia and China.

Limestone

All domestic limestone requirements are purchased from third parties. U. S. Steel believes that supplies of limestone, adequate to meet its domestic needs, are readily available from third parties at competitive market prices.

All limestone requirements for ÁñÁ«ÊÓƵK are purchased from a third party under a long-term contract. ÁñÁ«ÊÓƵB sources approximately 50 percent of its limestone requirements from third party suppliers with the balance coming from production from a limestone mine under its direct control. U. S. Steel believes that supplies of limestone, adequate to meet ÁñÁ«ÊÓƵB’s needs, are available from third parties at competitive market prices.

Scrap and Other Materials

Supplies of steel scrap, tin, zinc and other alloying and coating materials required to fulfill U. S. Steel’s requirements for domestic and European operations are available from third parties at competitive market prices. Generally, approximately 40 percent of U. S. Steel’s scrap requirements is generated through its normal operations. U. S. Steel utilizes some hedging and derivative purchasing practices with regard to domestic requirements for tin and zinc.

Natural Gas

U. S. Steel purchases all of its domestic natural gas requirements from third parties. U. S. Steel believes that supplies of natural gas, adequate to meet its domestic needs, are available from third parties at competitive market prices. Currently, about 60 percent of U. S. Steel’s domestic natural gas purchases are based on solicited bids, on a monthly basis, from various vendors; approximately 30 percent are made through long-term contracts; and the remainder are made daily. U. S. Steel utilizes some hedging and derivative purchasing practices with regard to domestic requirements for natural gas because of the volatility of natural gas markets.

ÁñÁ«ÊÓƵK and ÁñÁ«ÊÓƵB purchase their natural gas requirements from third parties under annual contracts. U. S. Steel believes that supplies of natural gas, adequate to meet ÁñÁ«ÊÓƵK’s and ÁñÁ«ÊÓƵB’s needs, are available from third parties at competitive market prices.

Environmental Matters

U. S. Steel maintains a comprehensive environmental policy overseen by the Corporate Governance and Public Policy Committee of the U. S. Steel Board of Directors. The Environmental Affairs organization has the

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responsibility to ensure that U. S. Steel’s operating organizations maintain environmental compliance systems that are in accordance with applicable laws and regulations. The Executive Environmental Committee, which is comprised of officers of U. S. Steel, is charged with reviewing its overall performance with various environmental compliance programs. Also, U. S. Steel, largely through the American Iron and Steel Institute, continues its involvement in the development of various air, water and waste regulations with federal, state and local governments concerning the implementation of cost effective pollution reduction strategies.

The domestic businesses of U. S. Steel are subject to numerous federal, state and local laws and regulations relating to the protection of the environment. These environmental laws and regulations include the Clean Air Act (CAA) with respect to air emissions; the Clean Water Act (CWA) with respect to water discharges; the Resource Conservation and Recovery Act (RCRA) with respect to solid and hazardous waste treatment, storage and disposal; and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) with respect to releases and remediation of hazardous substances. In addition, all states where U. S. Steel operates have similar laws dealing with the same matters. These laws are constantly evolving and becoming increasingly stringent. The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that certain implementing regulations for laws such as RCRA and the CAA have not yet been promulgated or in certain instances are undergoing revision. These environmental laws and regulations, particularly the CAA, could result in substantially increased capital, operating and compliance costs.

For a discussion of environmental capital expenditures and the cost of compliance for air, water, solid waste and remediation, see “Item 3. Legal Proceedings – Environmental Proceedings and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters, Litigation and Contingencies.”

U. S. Steel has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet CAA obligations, although ongoing compliance costs have also been significant. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of U. S. Steel’s products and services, operating results will be adversely affected. U. S. Steel believes that its major domestic integrated steel competitors are confronted by substantially similar conditions and thus does not believe that its relative position with regard to such competitors is materially affected by the impact of environmental laws and regulations. However, the costs and operating restrictions necessary for compliance with environmental laws and regulations may have an adverse effect on U. S. Steel’s competitive position with regard to domestic mini-mills and some foreign steel producers and producers of materials which compete with steel, which may not be required to undertake equivalent costs in their operations. In addition, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities and its production methods. U. S. Steel is also responsible for remediation costs related to its prior disposal of environmentally sensitive materials. Domestic integrated facilities that have emerged from bankruptcy proceedings, mini-mills and other competitors generally do not have similar liabilities. For further information, see “Item 3. Legal Proceedings – Environmental Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters, Litigation and Contingencies.”

ÁñÁ«ÊÓƵK is subject to the laws of Slovakia and the European Union (EU). The environmental requirements of Slovakia and the EU are comparable to domestic environmental standards. ÁñÁ«ÊÓƵK’s environmental expenses in 2004 included usage fees, permit fees and/or penalties totaling approximately $6 million. There are no legal proceedings pending against ÁñÁ«ÊÓƵK involving environmental matters. ÁñÁ«ÊÓƵK also has entered into an agreement with the Slovak government to bring its facilities into environmental compliance, and expects to do so by 2006.

In April 2004, ÁñÁ«ÊÓƵK submitted information to the Slovak government regarding emissions of carbon dioxide (CO2) from U. S. Steel’s plant in Kosice. This information request related to requirements imposed by the European Commission (EC) to establish carbon dioxide emission limits for member countries in preparation for the commencement of CO2 emissions trading in January 2005. Slovakia was required to submit to the EC for approval a national allocation plan (NAP) specifying its total CO2 allowances in tons of emissions for the period 2005 to 2007. Slovakia submitted its proposed NAP to the EC in early July 2004. On October 20, 2004, the EC approved an NAP for Slovakia that reduced Slovakia’s original proposed CO2 allocation by approximately 14 percent. On December 20, 2004, ÁñÁ«ÊÓƵK filed an application for annulment of the EC´s October 20 decision in the Court of First

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Instance of the European Communities (CFI) contesting the EC’s reduction of Slovakia’s original proposed NAP. ÁñÁ«ÊÓƵK’s application requests that the CFI maintain the CO2 emissions allowances granted by the EC’s October 20, 2004 decision pending the outcome of this litigation. On February 3, 2005, ÁñÁ«ÊÓƵK was advised informally by the Slovak Ministry of the Environment (Ministry) that it can expect to receive an amount of CO2 allowances for the period 2005 to 2007 that is approximately 8 percent less than the amount for ÁñÁ«ÊÓƵK included in Slovakia’s proposed NAP submitted in July 2004. Following publication on the Ministry web site of the reduced CO2 allowances proposed for individual installations, on February 11, 2005, ÁñÁ«ÊÓƵK filed comments with the Ministry objecting to any reduction in the CO2 allowances originally requested by ÁñÁ«ÊÓƵK. The Slovak Minister of Environment announced, on February 16, 2005, that Slovakia will not challenge at the European Court of Justice the EC’s October 20 decision and that industrial installations in Slovakia would receive their CO2 allocations for the period 2005 to 2007 within a week. As of the filing of this report on Form 10-K, however, ÁñÁ«ÊÓƵK had not been advised by the Ministry of its CO2 allocation. The legal action by ÁñÁ«ÊÓƵK against the EC will not stay the final decision of the Ministry concerning ÁñÁ«ÊÓƵK´s allowances of CO2. If the expected 8 percent reduction is confirmed by the Ministry, there are a number of alternatives available to ÁñÁ«ÊÓƵK ranging from the potential purchasing of CO2 allowances to reducing steel production. The best alternative for ÁñÁ«ÊÓƵK may vary depending upon a number of factors and it is not possible at this time to predict the results.

ÁñÁ«ÊÓƵB is subject to the laws of the Union of Serbia and Montenegro, which are currently less restrictive than either the EU or U.S. standards, but this is expected to change over the next several years in anticipation of possible EU accession. An environmental baseline study has been conducted at ÁñÁ«ÊÓƵB’s facilities. Under the terms of the acquisition, ÁñÁ«ÊÓƵB will be responsible for only those costs and liabilities associated with environmental events occurring subsequent to the completion of that study. The study was completed in June 2004 and submitted to the Government of Serbia in accordance with the terms of the acquisition.

The 1997 Kyoto Global Climate Change Agreement produced by the United Nations Convention on Climate Change, which would have required restrictions on greenhouse gas emissions in the United States, has not been ratified by the U.S. Senate, and it appears unlikely that it will be implemented domestically in the near future. It is unclear what international action will be taken concerning greenhouse gases or the economic impact of such programs; however, inter-government discussions continue.

Air

The CAA imposes stringent limits on air emissions with a federally mandated operating permit program and enhanced civil and criminal enforcement sanctions. The principal impact of the CAA on U. S. Steel is on the cokemaking and primary steelmaking operations of U. S. Steel, as described in this section.

The CAA requires the regulation of hazardous air pollutants and development and promulgation of Maximum Achievable Control Technology (MACT) Standards. It was determined in 1995 that the Chrome Electroplating MACT did not apply to steel mill sources; however, the U.S. Environmental Protection Agency (EPA) stated that MACT standards applicable to these sources would be forthcoming. To date, there has been no action taken. Potentially affected U. S. Steel facilities are the electrolytic tinning lines at Gary Works and the tin-free steel lines at East Chicago Tin and the Midwest Plant. The EPA finalized MACT standards for integrated iron and steel plants on May 20, 2003, that require compliance by May 22, 2006. The taconite iron ore processing MACT was finalized on October 30, 2003, and requires compliance by October 30, 2006. U. S. Steel anticipates that additional emissions control equipment will be needed to comply with the taconite iron ore processing MACT at Minntac and Keetac. Costs associated with compliance with these MACT standards are included in the capital expenditures disclosed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters, Litigation and Contingencies.”

The CAA specifically addressed the regulation and control of coke oven batteries. The National Emission Standard for Hazardous Air Pollutants for coke oven batteries was finalized in October 1993, setting forth the MACT standard and, as an alternative, a Lowest Achievable Emission Rate (LAER) standard. Effective January 1998, U. S. Steel elected to comply with the LAER standards. U. S. Steel believes it will be able to meet the current LAER standards. The LAER standards will be further revised in 2010 and additional health risk-based standards are expected to be adopted in 2020. The EPA finalized the Phase II Coke MACT for pushing, quenching and battery stacks on April 14, 2003, that requires compliance by April 14, 2006. U. S. Steel is in the process of developing an estimate of the cost to comply.

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In September 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and particulate matter, which are significantly more stringent than prior standards. The EPA is also developing regulations to address Regional Haze. The impact of these revised standards could be significant to U. S. Steel, but the cost cannot be reasonably estimated until the final regulations are promulgated and, more importantly, the states implement their State Implementation Plans covering their standards. For additional information regarding significant enforcement actions, capital expenditures and costs of compliance, see “Item 3. Legal Proceedings – Environmental Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters, Litigation and Contingencies.”

Water

U. S. Steel maintains the necessary discharge permits as required under the National Pollutant Discharge Elimination System program of the CWA, and conducts its operations to be in compliance with such permits. For additional information regarding enforcement actions, capital expenditures and costs of compliance, see “Item 3. Legal Proceedings – Environmental Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters, Litigation and Contingencies.”

Solid Waste

U. S. Steel continues to seek methods to minimize the generation of hazardous wastes in its operations. RCRA establishes standards for the management of solid and hazardous wastes. Besides affecting current waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the regulation of storage tanks. Corrective action under RCRA related to past waste disposal activities is discussed below under “Remediation.” For additional information regarding significant enforcement actions, capital expenditures and costs of compliance, see “Item 3. Legal Proceedings – Environmental Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters, Litigation and Contingencies.”

Remediation

A significant portion of U. S. Steel’s currently identified environmental remediation projects relate to the remediation of former and present operating locations. A number of these locations were sold by U. S. Steel and are subject to cost-sharing and remediation provisions in the sales agreements. Projects include completion of the remediation of the Grand Calumet River and the closure and remediation of permitted hazardous and non-hazardous waste landfills.

U. S. Steel is also involved in a number of remedial actions under CERCLA, RCRA and other federal and state statutes, particularly third party waste disposal sites where disposal of U. S. Steel-generated material occurred, and it is possible that additional matters may come to its attention which may require remediation. For additional information regarding remedial actions, capital expenditures and costs of compliance, see “Item 3. Legal Proceedings – Environmental Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters, Litigation and Contingencies.”

Property, Plant and Equipment Additions

For property, plant and equipment additions, including capital leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Cash Flows and Liquidity – Cash Flows” and Notes 15 and 24 to the Financial Statements.

Employees

As of December 31, 2004, U. S. Steel employees totaled approximately 22,000 domestically and approximately 26,000 in Europe. Most domestic hourly employees of U. S. Steel’s steel, coke and iron ore pellet facilities are covered by a collective bargaining agreement with the USWA, which expires in September 2008 and contains a no-strike provision. At Granite City Works, employees who work in the cokemaking and blast furnace operations are represented by the International Chemical Workers Union; and a small number of employees are represented

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by the Bricklayers and Laborers International unions. Agreements with these unions expire in November and December 2008, and also contain no-strike provisions. Domestic hourly employees engaged in transportation activities are represented by the USWA and other unions and are covered by collective bargaining agreements with varying expiration dates. In Europe, most represented employees at ÁñÁ«ÊÓƵK are represented by the OZ Metalurg union and are covered by an agreement that expires in February 2007, which is subject to annual wage negotiations. Represented employees at ÁñÁ«ÊÓƵB are covered by a collective bargaining agreement that expires in November 2006, which is also subject to annual wage negotiations.

Available Information

U. S. Steel’s Internet address is www.ussteel.com. U. S. Steel posts its annual report on Form 10-K, its quarterly reports on Form 10-Q and its proxy statement to its web site as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission. U. S. Steel also posts all press releases and earnings releases to its web site.

All other filings are available via a direct link on the U. S. Steel web site to the Securities and Exchange Commission’s web site, the Internet address of which is www.sec.gov.

Also available on the U. S. Steel web site are U. S. Steel’s Corporate Governance Principles and the charters of the Audit & Finance Committee, Compensation & Organization Committee and Corporate Governance & Public Policy Committee of the Board of Directors. These documents and the Annual Report on Form 10-K are also available in print to any shareholder who requests them. Such requests should be sent to the Office of the Corporate Secretary, ÁñÁ«ÊÓƵ, 600 Grant Street, Pittsburgh, Pennsylvania 15219-2800 (telephone: 412-433-4801).

U. S. Steel does not intend to incorporate the contents of any web site into this document.

Other Information

Information on revenues and income (loss) of the reportable segments and Other Businesses and on revenues and other income and assets by geographic area are set forth in Note 5 to the Financial Statements.

For significant operating data for U. S. Steel for each of the last five years, see “Five-Year Operating Summary” on pages F-57 and F-58.

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Item 2. PROPERTIES

The following table lists U. S. Steel’s properties, their locations and their products and services:

With the exception of properties acquired from National on May 20, 2003, U. S. Steel or its predecessors have owned most of its domestic properties for at least 30 years with no material adverse claims asserted. In connection with the National acquisition, U. S. Steel obtained title reports and insurance covering each of the properties obtained. In addition, the Bankruptcy Court order provided that U. S. Steel acquired all of the assets free and clear of any liabilities, rights restrictions or other interests. In the case of the real property and buildings of ÁñÁ«ÊÓƵK, certified copies of the property registrations were obtained and examined by local counsel prior to the acquisition. In the case of ÁñÁ«ÊÓƵB, the Serbian bankruptcy law provides that ÁñÁ«ÊÓƵB acquired its assets free and clear of any prior claims.

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Several steel production facilities are leased. The caster facility at Fairfield, Alabama is subject to a lease expiring in 2012, with an option to purchase or to extend the lease. A coke battery at Clairton, Pennsylvania is subject to a lease through 2012, at which time title will pass to U. S. Steel. This facility was subleased to the Clairton 1314B Partnership until July 2, 2004. A ladle metallurgy and caster facility at Ecorse, Michigan is subject to a lease expiring in 2007, with an option to purchase at the end of the lease term. The electrolytic galvanizing facility at Ecorse, Michigan is subject to a lease expiring in 2007, with an option to purchase or to extend the lease. A coke battery at Granite City, Illinois, which had been subject to a lease through 2012, was purchased in June 2004. At Gary Works and the Midwest Plant in Indiana, U. S. Steel has supply agreements for various utility services with third parties who own cogeneration facilities located on U. S. Steel property. The Gary Works agreement expires in 2011 and includes a fixed buyout provision at the option of U. S. Steel. The Midwest Plant agreement expires in 2013. The headquarters office space in Pittsburgh, Pennsylvania used by U. S. Steel is leased through 2018.

For property, plant and equipment additions, including capital leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Cash Flows and Liquidity – Cash Flows” and Notes 15 and 24 to the Financial Statements.

Item 3. LEGAL PROCEEDINGS

U. S. Steel is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are included below in this discussion. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the financial statements. However, management believes that U. S. Steel will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably.

Asbestos Litigation

U. S. Steel is a defendant in approximately 500 active cases, involving approximately 11,000 plaintiffs. Many of these cases involve multiple defendants (typically from fifty to more than one hundred defendants). More than 10,300, or approximately 94 percent, of these claims are pending in jurisdictions which permit filings with massive numbers of plaintiffs. Based upon U. S. Steel’s experience in such cases, it believes that the actual number of plaintiffs who ultimately assert claims against U. S. Steel will likely be a small fraction of the total number of plaintiffs.

These claims against U. S. Steel fall into three major groups: (1) claims made under certain federal and general maritime laws by employees of the Great Lakes Fleet or Intercoastal Fleet, former operations of U. S. Steel; (2) claims made by persons who allegedly were exposed to asbestos at U. S. Steel facilities (referred to as “premises claims”); and (3) claims made by industrial workers allegedly exposed to products formerly manufactured by U. S. Steel. While U. S. Steel has excess casualty insurance, these policies have multi-million dollar self-insured retentions. To date, U. S. Steel has not received any payments under these policies relating to asbestos claims. In most cases, this excess casualty insurance is the only insurance applicable to asbestos claims.

These asbestos cases allege a variety of respiratory and other diseases based on alleged exposure to asbestos. U. S. Steel is currently a defendant in cases in which a total of approximately 215 plaintiffs allege that they are suffering from mesothelioma. The potential for damages against defendants may be greater in cases in which the plaintiffs can prove mesothelioma. In many such cases in which claims have been asserted against U. S. Steel, the plaintiffs have been unable to establish any causal relationship to U. S. Steel or its products or premises. In addition, in many asbestos cases, the plaintiffs have been unable to demonstrate that they have suffered any identifiable injury or compensable loss at all; that any injuries that they have incurred did in fact result from alleged exposure to asbestos; or that such alleged exposure was in any way related to U. S. Steel or its products or premises.

In every asbestos case in which U. S. Steel is named as a party, the complaints are filed against numerous named defendants and generally do not contain allegations regarding specific monetary damages sought. To the extent that any specific amount of damages is sought, the amount applies to claims against all named defendants and in

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no case is there any allegation of monetary damages against U. S. Steel. Historically, approximately 89 percent of the cases against U. S. Steel stated that the damages sought exceeded the amount required to establish jurisdiction of the court in which the case was filed. (Jurisdictional amounts generally range from $25,000 to $75,000.) Approximately 4 percent did not specify any damages sought at all, approximately 6 percent alleged damages of $1.0 million or less, another 0.6 percent alleged damages between $2.0 million and $10.0 million, and 0.4 percent alleged damages over $10 million. U. S. Steel does not consider the amount of damages alleged, if any, in a complaint to be relevant in assessing its potential exposure to asbestos liabilities. The ultimate outcome of any claim depends upon a myriad of legal and factual issues, including whether the plaintiff can prove actual disease, if any; actual exposure, if any, to U. S. Steel products; or the duration of exposure to asbestos, if any, on U. S. Steel’s premises. U. S. Steel has noted over the years that the form of complaint including its allegations, if any, concerning damages often depends upon the form of complaint filed by particular law firms and attorneys. Often the same damage allegation will be in multiple complaints regardless of the number of plaintiffs, the number of defendants, or any specific diseases or conditions alleged.

U. S. Steel aggressively pursues grounds for the dismissal of U. S. Steel from pending cases and litigates cases to verdict where it believes litigation is appropriate. U. S. Steel also makes efforts to settle appropriate cases, especially mesothelioma cases, for reasonable, and frequently nominal, amounts. At December 31, 2001, U. S. Steel had a total of approximately 17,100 active claims outstanding. In 2002, U. S. Steel settled 1,135 claims for a total of approximately $700,000, and had a total of 2,662 claims dismissed or otherwise resolved and 842 new claims filed. At December 31, 2002, U. S. Steel had a total of approximately 14,100 active claims outstanding. In 2003, except for the aberrant result in the Madison County case referred to in the following paragraph, U. S. Steel settled 83 claims for a total of approximately $4.6 million, and had a total of 2,038 claims dismissed or otherwise resolved and added 514 new cases (or 2,856 new claims). At December 31, 2003, U. S. Steel had a total of approximately 14,800 active claims outstanding. During 2004, U. S. Steel paid approximately $14.6 million in settlements. These settlements and voluntary and involuntary dismissals resulted in the disposition of approximately 5,300 claims. New case filings added 1,464 claims. At December 31, 2004, U. S. Steel had a total of approximately 11,000 active claims outstanding.

On March 28, 2003, a jury in Madison County, Illinois returned a verdict against U. S. Steel for $50 million in compensatory damages and $200 million in punitive damages. U. S. Steel believes that the court erred as a matter of law by failing to find that the plaintiff’s exclusive remedy was provided by the Indiana workers’ compensation law. U. S. Steel believes that this issue and other errors at trial would have enabled U. S. Steel to succeed on appeal. However, in order to avoid the delay and uncertainties of further litigation and the posting of a large appeal bond in excess of the amount of the verdict, U. S. Steel settled this case for an amount which was substantially less than the compensatory damages award and which represented a small fraction of the total award. This settlement is reflected in the results for the quarter ended March 31, 2003, and for the year ended December 31, 2003.

Management views the verdict and resulting settlement in the Madison County case as aberrational, and believes that the likelihood of similar results in other cases is remote, although not impossible. U. S. Steel has not experienced any material adverse change in its ability to resolve pending claims as a result of the Madison County settlement.

The amount U. S. Steel has accrued for pending asbestos claims is not material to U. S. Steel’s financial position. U. S. Steel does not accrue for unasserted asbestos claims because it believes it is not possible to determine whether any loss is probable with respect to such claims or even to estimate the amount or range of any possible losses. Among the reasons that U. S. Steel cannot reasonably estimate the number and nature of claims against it is that the vast majority of pending claims against it allege so-called “premises” liability based exposure on U. S. Steel’s current or former premises. These claims are made by an indeterminable number of people such as truck drivers, railroad workers, salespersons, contractors and their employees, government inspectors, customers, visitors and even trespassers.

It is not possible to predict the ultimate outcome of asbestos-related lawsuits, claims and proceedings due to the unpredictable nature of personal injury litigation. Despite this uncertainty, and although U. S. Steel’s results of operations and cash flows for a given period could be adversely affected by asbestos-related lawsuits, claims and proceedings, management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial condition. Among the factors considered in reaching this conclusion are: (1) that

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U. S. Steel has been subject to a total of approximately 34,000 asbestos claims over the past 13 years that have been administratively dismissed or are inactive due to the failure of the plaintiffs to present any medical evidence supporting their claims; (2) that over the last several years, the total number of pending claims has generally declined; (3) that it has been many years since U. S. Steel employed maritime workers or manufactured or sold asbestos containing products; and (4) U. S. Steel’s history of trial outcomes, settlements and dismissals, including such matters since the Madison County jury verdict and settlement in March 2003.

The foregoing statements of belief are forward-looking statements. Predictions as to the outcome of pending litigation are subject to substantial uncertainties with respect to (among other things) factual and judicial determinations, and actual results could differ materially from those expressed in these forward-looking statements.

Environmental Proceedings

The following is a summary of the proceedings of U. S. Steel that were pending or contemplated as of December 31, 2004, under federal and state environmental laws. Except as described herein, it is not possible to accurately predict the ultimate outcome of these matters.

CERCLA Remediation Sites

Claims under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and related state acts have been raised with respect to the cleanup of various waste disposal and other sites. CERCLA is intended to expedite the cleanup of hazardous substances without regard to fault. Potentially responsible parties (PRPs) for each site include present and former owners and operators of, transporters to and generators of the substances at the site. Liability is strict and can be joint and several. Because of various factors including the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs and the time period during which such costs may be incurred, it is impossible to reasonably estimate U. S. Steel’s ultimate cost of compliance with CERCLA.

Projections, provided in the following paragraphs, of spending for and/or timing of completion of specific projects are forward-looking statements. These forward-looking statements are based on certain assumptions including, but not limited to, the factors provided in the preceding paragraph. To the extent that these assumptions prove to be inaccurate, future spending for, or timing of completion of environmental projects may differ materially from what was stated in forward-looking statements.

At December 31, 2004, U. S. Steel had been identified as a PRP at a total of 20 CERCLA sites. Based on currently available information, which is in many cases preliminary and incomplete, management believes that U. S. Steel’s liability for cleanup and remediation costs in connection with 8 of these sites will be between $100,000 and $1 million per site, and for 10 of these sites will be under $100,000.

At the remaining two sites, management expects that U. S. Steel’s share in the remaining cleanup costs at each site will exceed $1 million, although it is not possible to accurately predict the amount of sharing in any final allocation of such costs. The following is a summary of the status of these sites:

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In addition, there are 9 sites related to U. S. Steel where information requests have been received or there are other indications that U. S. Steel may be a PRP under CERCLA, but where sufficient information is not presently available to confirm the existence of liability or to make any judgment as to the amount thereof.

Other Remediation Activities

The following is a discussion of other remediation activities at the major domestic U. S. Steel facilities:

There are 39 additional sites related to U. S. Steel where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Based on currently available information, which is in many cases preliminary and incomplete, management believes that liability for cleanup and remediation costs in connection with 4 of these sites will be under $100,000 per site, another 17 sites have potential costs between $100,000 and $1 million per site, and 5 sites may involve remediation costs between $1 million and $5 million. Another 4 sites, including the Grand Calumet River remediation at Gary Works, the closure of hazardous waste sites at Gary Works, the claim for investigation, restoration and compensation of injuries to sediments in the east branch of the Grand Calumet River near Gary Works, and corrective action and groundwater investigation at Gary Works, have or are expected to have costs for remediation, investigation, restoration or compensation in excess of $5 million. Potential costs associated with remediation at the remaining 9 sites are not presently determinable.

Gary Works

On January 26, 1998, pursuant to an action filed by EPA in the United States District Court for the Northern District of Indiana titled United States of America v. USX, U. S. Steel entered into a consent decree with EPA which resolved alleged violations of the Clean Water Act National Pollutant Discharge Elimination System (NPDES) permit at Gary Works and provides for a sediment remediation project for a section of the Grand Calumet River that runs through Gary Works. Contemporaneously, U. S. Steel entered into a consent decree with the public trustees, which resolves liability for natural resource damages on the same section of the Grand Calumet River. In 1999, U. S. Steel paid civil penalties of $2.9 million for the alleged water act violations and $0.5 million in natural resource damages assessment costs. In addition, U. S. Steel will pay the public trustees $1.0 million at the end of the remediation project for future ecological monitoring costs, and U. S. Steel was obligated to purchase and restore several parcels of property that have been conveyed to the trustees. During the negotiations leading up to the settlement with EPA, capital improvements were made to upgrade plant systems to comply with NPDES requirements. The sediment remediation project is an approved final interim measure under the corrective action program for Gary Works. As of December 31, 2004, project costs have amounted to $51.5 million with another $100,000 presently projected to complete work under the approved sediment remediation plan. A Dredge Completion Report was submitted to EPA on March 29, 2004. EPA responded with written comments on the report. In response, U. S. Steel conducted additional sampling of river sediments in a portion of the dredge project area. Based on the results of the additional sediment sampling, U. S. Steel is considering additional dredging that would include additional substantial bank stabilization measures. Negotiations to have this additional work considered as a final measure are proceeding. The additional dredging and bank stabilization is anticipated to cost approximately $9.0 million. At the conclusion of the dredge project, the Corrective Action Management Unit (CAMU) will remain available and could be used for containment of approved material from other corrective

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measures conducted at Gary Works pursuant to the Administrative Order on Consent for corrective action. Closure costs for the CAMU are estimated to be an additional $4.9 million. In addition to the sediment remediation project, U. S. Steel is obligated to perform, and has initiated, ecological restoration in this section of the Grand Calumet River, costs of which are estimated to be $2.4 million.

At Gary Works, U. S. Steel has agreed to close three hazardous waste disposal sites located on plant property. The D2 disposal site and a nearby refuse area will be closed collectively. Total costs to close D2, D5, T2 and the refuse area are estimated to be $19.0 million.

In October 1996, U. S. Steel was notified by the Indiana Department of Environmental Management (IDEM), acting as lead trustee, that IDEM and the U.S. Department of the Interior had concluded a preliminary investigation of potential injuries to natural resources related to releases of hazardous substances from various municipal and industrial sources along the east branch of the Grand Calumet River and Indiana Harbor Canal. The public trustees completed a preassessment screen pursuant to federal regulations and have determined to perform a Natural Resources Damages Assessment. U. S. Steel was identified as a PRP along with 15 other companies owning property along the river and harbor canal. U. S. Steel and eight other PRPs have formed a joint defense group. The trustees notified the public of their plan for assessment and later adopted the plan. In 2000, the trustees concluded their assessment of sediment injuries, which included a technical review of environmental conditions. The PRP joint defense group has proposed terms for the settlement of this claim, which have been endorsed by representatives of the trustees and EPA to be included in a consent decree that U. S. Steel expects will resolve this claim. U. S. Steel agreed to pay to the public trustees $20.5 million over a five-year period for restoration costs, plus $1.0 million in assessment costs, and obtained an 8-acre parcel of land that has been transferred to the Indiana Department of Natural Resources for addition to the Indiana Dunes National Lakeshore Park owned by the National Park Service. A Consent Decree memorializing this settlement has been executed by the parties and lodged with the United States District Court for the Northern District of Indiana on August 20, 2004. Concurrent with this lodging of the Consent Decree, the United States of America filed its complaint titled United States of America v. Atlantic Richfield, et. al. asserting liability for its claim against the settling parties. In December 2004, the U.S. Department of Justice (DOJ) filed a motion with the court that requested approval and entry of the consent decree.

On October 23, 1998, a final Administrative Order on Consent was issued by EPA addressing Corrective Action for solid waste management units throughout Gary Works. This order requires U. S. Steel to perform a Resource Conservation and Recovery Act (RCRA) Facility Investigation (RFI) and a Corrective Measure Study (CMS) at Gary Works. The Current Conditions Report, U. S. Steel’s first deliverable, was submitted to EPA in January 1997 and was approved by EPA in 1998. All remaining Phase I work plans have been approved by EPA. Two Phase II RFI work plans and a self-implementing interim measure have been submitted to EPA for approval. Two other self-implementing interim measures have been completed. Through December 31, 2004, U. S. Steel has spent approximately $14.9 million for the studies, work plans, field investigations and self-implementing interim measures. The cost to implement the remaining field investigations and the submitted work plans is estimated to be $6.4 million. Until they are completed, it is impossible to assess what additional expenditures will be necessary.

On November 30, 1999, IDEM issued a notice of violation (NOV) alleging various air violations at Gary Works, including opacity violations at the No. 1 BOP and pushing violations at the four coke batteries. On August 21, 2002, IDEM issued a revised NOV which supercedes the 1999 NOV and includes alleged violations at the blast furnaces, steel shops and coke batteries from 1998 to present. The cost of the settlement of this matter is currently indeterminable. An agreed order is being negotiated that may include a pushing compliance plan.

Fairless Plant

In January 1992, U. S. Steel commenced negotiations with EPA regarding the terms of an Administrative Order on consent, pursuant to RCRA, under which U. S. Steel would perform a RFI and a CMS at its Fairless Plant. A Phase I RFI report was submitted during the third quarter of 1997. A Phase II/III RFI will be submitted following EPA approval of the Phase I report. While the RFI/CMS will determine whether there is a need for, and the scope of, any remedial activities at the Fairless Plant, U. S. Steel continues to maintain interim measures at the Fairless Plant and has completed investigation activities on specific parcels. No remedial activities are contemplated as a result of the investigations of these parcels. The cost to U. S. Steel to continue to maintain the interim measures and develop a Phase II/III RFI Work Plan is estimated to be $424,000.

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Fairfield Works

In December 1995, U. S. Steel reached an agreement in principle with EPA and DOJ with respect to alleged RCRA violations at Fairfield Works. A consent decree was signed by U. S. Steel, EPA and DOJ and filed with the United States District Court for the Northern District of Alabama (United States of America v. USX Corporation) on December 11, 1997, under which U. S. Steel paid a civil penalty of $1.0 million, completed two Supplemental Environmental Projects at a cost of $1.75 million and initiated a RCRA corrective action program at the facility. The Alabama Department of Environmental Management (ADEM) assumed primary responsibility for regulation and oversight of the RCRA corrective action program at Fairfield Works, with the approval of EPA. The first Phase I RFI work plan was approved for the site on September 16, 2002. Field sampling for the work plan was completed in 2004. U. S. Steel is currently preparing a Phase I RFI Report for submission to ADEM in early 2005. The cost to complete this study is estimated to be $414,000. In addition, U. S. Steel is developing a corrective measure implementation plan for remediation of Upper Opossum Creek. The cost to U. S. Steel for implementing this plan is estimated to be $3.6 million. Lower Opossum Creek is approximately 4.5 miles of the Opossum Creek Area of Concern. U. S. Steel is investigating Lower Opossum Creek under a joint agreement with Beazer, Inc. whereby U. S. Steel has agreed to pay 30 percent of the investigation costs. U. S. Steel estimates its share of the remaining costs of this investigation and costs to implement sediment remediation to be $823,000. In January 1999, ADEM included the former Ensley facility site in Fairfield Corrective Action. Implementation of the Phase I fieldwork for Ensley commenced in June 2004. The cost to complete this study is approximately $478,000.

Lorain Pipe Mills

In 1997, ÁñÁ«ÊÓƵ/Kobe Steel Company (ÁñÁ«ÊÓƵ/Kobe), a former joint venture between U. S. Steel and Kobe Steel, Ltd. (Kobe), was the subject of a multi-media audit by EPA that included an air, water and hazardous waste compliance review. ÁñÁ«ÊÓƵ/Kobe and EPA commenced settlement negotiations in July 1999. In August 1999, the steelmaking and bar producing operations of ÁñÁ«ÊÓƵ/Kobe were combined with companies controlled by Blackstone Capital Partners II to form Republic. The tubular operations of ÁñÁ«ÊÓƵ/Kobe were transferred to a newly formed entity, Lorain Tubular Company, LLC (Lorain Tubular), which operated as a joint venture between U. S. Steel and Kobe until December 31, 1999, when U. S. Steel purchased all of Kobe’s interest in Lorain Tubular. The tubular operations at Lorain are now operated by U. S. Steel as Lorain Pipe Mills. U. S. Steel and EPA have agreed upon terms of settlement that include a cash penalty for U. S. Steel of $100,000 plus a supplemental environmental project to do PCB transformer replacement for a combined amount of approximately $395,000. Negotiations on the final terms and conditions of the consent decree are ongoing. Most of the matters raised by EPA relate to Republic’s facilities; however, air discharges from U. S. Steel’s No. 3 seamless pipe mill were also cited and U. S. Steel will be responsible for conducting a test of particulate emissions from its No. 3 Seamless Rotary Mill scrubber system to demonstrate compliance with its permit limitations. U. S. Steel will be responsible only for matters relating to its facilities. Issues related to Republic have been resolved in its bankruptcy proceedings.

Great Lakes Works

U. S. Steel has agreed to the terms of a consent decree that will include the installation of a new bag house for B2 Blast Furnace; the installation of baffles at the Quench Tower, which has been completed; projects to reduce emissions from the BOP; a civil penalty of $950,000; and a supplemental environmental project at a cost of $200,000 for river bank improvements. Great Lakes Works continues to identify and evaluate potential operating practices and facility improvements to reduce emissions.

Duluth Works

At the former Duluth Works in Minnesota, U. S. Steel spent a total of approximately $12.9 million for cleanup and agency oversight costs through December 31, 2004. The Duluth Works was listed by the Minnesota Pollution Control Agency under the Minnesota Environmental Response and Liability Act on its Permanent List of Priorities. EPA has consolidated and included the Duluth Works site with the St. Louis River and Interlake sites on EPA’s National Priorities List. The Duluth Works cleanup has proceeded since 1989. U. S. Steel is conducting an engineering study of the estuary sediments. Depending upon the method and extent of remediation at this site, future costs are presently unknown and indeterminable. Current study and oversight costs are estimated at $363,000. These costs include risk assessment, sampling, inspections and analytical work, and development of a work plan and cost estimate to implement EPA five year review recommendations.

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Geneva Works

In November 1989, the Utah Department of Environmental Quality issued a permit to U. S. Steel for the closure of three hazardous waste impoundments including facility-wide corrective action at U. S. Steel’s former Geneva Works. The permit was administratively extended until May 14, 2004, when it was reissued to U. S. Steel and Geneva Steel Company (Geneva), the site owner. The permit allocates responsibility for corrective action between U. S. Steel and Geneva. U. S. Steel has commenced the development of work plans that are necessary to begin field investigations on some areas of the facility for which U. S. Steel has responsibility under the permit. The remaining costs to prepare these work plans, implement field investigations and continue post closure care on the three hazardous waste impoundments are estimated to be approximately $5.6 million. On June 2, 2004, Geneva filed a motion in U.S. Bankruptcy Court for the District of Utah to approve the amendment and assumption of the 1987 Asset Sales Agreement, the acceptance of the permit and the retention of a remediation contractor. On July 7, 2004, the motion was heard and granted providing for Geneva’s continuing involvement and funding of the remediation required by the permit.

Other

In September 2001, U. S. Steel agreed to an Administrative Order on Consent with the State of North Carolina for the assessment and cleanup of a Greensboro, North Carolina fertilizer manufacturing site. The site was owned by Armour Agriculture Chemical Company (now named Viad) from 1912 to 1968. U. S. Steel owned the site from 1968 to 1986 and sold the site to LaRoche Industries in 1986. The agreed order allocated responsibility for assessment and cleanup costs as follows: Viad - 48 percent, U. S. Steel – 26 percent and LaRoche – 26 percent; and LaRoche was appointed to be the lead party responsible for conducting the cleanup. In March 2001, U. S. Steel was notified that LaRoche had filed for protection under bankruptcy law. On August 23, 2001, the allocation of responsibility for this site assessment and cleanup and the cost allocation was approved by the bankruptcy court in the LaRoche bankruptcy. The estimated remediation costs are $3.1 million. U. S. Steel’s estimated share of these costs is $801,000, based on the allocation factor of 26 percent.

On December 20, 2002, U. S. Steel received a letter from the Kansas Department of Health & Environment (KDHE) requesting U. S. Steel’s cooperation in cleaning up the National Zinc site located in Cherryvale, Kansas. The site is a former zinc smelter operated by Edgar Zinc from 1898 to 1931. U. S. Steel agreed in a Consent Order before KDHE, signed April 7, 2003, with KDHE and Salomon Smith Barney Holdings, Inc. (SSB), to conduct an investigation and develop remediation alternatives. Under that agreement, U. S. Steel and SSB each bear a 50 percent share of the costs of those responsibilities. In 2004, a remedial action design report was submitted to and approved by KDHE. U. S. Steel anticipates that its share of the costs necessary to complete the remedial design and implement the preferred remedy will be approximately $2.2 million.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of U. S. Steel and their ages as of February 1, 2005, are as follows:

All of the executive officers mentioned above have held responsible management or professional positions with U. S. Steel, Marathon Oil Corporation or their subsidiaries for more than the past five years.

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PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock Information

The principal market on which U. S. Steel common stock is traded is the New York Stock Exchange. U. S. Steel common stock is also traded on the Chicago Stock Exchange and the Pacific Exchange. Information concerning the high and low sales price for the common stock as reported in the consolidated transaction reporting system and the frequency and amount of dividends paid during the last two years is set forth in “Selected Quarterly Financial Data (Unaudited)” on page F-55.

As of January 31, 2005, there were 31,747 registered holders of U. S. Steel common stock.

The Board of Directors intends to declare and pay dividends on U. S. Steel common stock based on the financial condition and results of operations of U. S. Steel, although it has no obligation under Delaware law or the U. S. Steel Certificate of Incorporation to do so. After the separation from Marathon Oil Corporation, U. S. Steel established an initial quarterly dividend rate of $0.05 per share effective with the March 2002 payment. The quarterly dividend rate was increased to $.08 per share effective with the March 2005 payment. Dividends on U. S. Steel common stock are limited to legally available funds and are subject to limitations under U. S. Steel’s debt obligations. For further information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Cash Flows and Liquidity – Liquidity.”

Recent Sales of Unregistered Securities

In 2004, no unregistered shares were issued.

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Item 6. SELECTED FINANCIAL DATA

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Item 7. MANAGEMENT’S DISCÁñÁ«ÊÓƵION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 “Supplementary Data – Disclosures About Forward-Looking Statements.”

Overview

U. S. Steel is the second largest integrated steel producer in North America and has a broad and diverse mix of products and customers. U. S. Steel uses iron ore, coal, coke, and steel scrap 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 and gas industries. In addition to its domestic facilities, U. S. Steel has significant operations in Central Europe through U. S. Steel Kosice (ÁñÁ«ÊÓƵK), located in Slovakia, and U. S. Steel Balkan (ÁñÁ«ÊÓƵB), located in Serbia. U. S. Steel ‘s financial results are primarily determined by the combined effects of shipment volume; selling prices; production costs; and value-added product mix, since these products typically provide a higher profit margin than more commodity-type steel products. The primary drivers for U. S. Steel are economic conditions in the United States, Europe and, to a lesser extent, other steel-consuming regions; the levels of worldwide steel production and consumption; pension and other postretirement benefits (OPEB) costs; and raw material (iron ore, coal, coke, steel scrap, zinc and tin) and energy (natural gas and electricity) costs.

U. S. Steel’s long-term success depends on its ability to implement the strategy described below. Some of the other key issues which will impact the global steel industry, and U. S. Steel in particular, include the sustainability of higher steel prices; the steep increase in the cost of purchased raw materials; the level of unfunded pension and OPEB liabilities; the magnitude and durability of the world economic recovery; and the impact of production and consumption of steel in China, which has led to much of the recent volatility in steel raw material supplies and global steel pricing. Steel imports to the United States increased significantly during 2004 and could continue to increase depending on the relative strength of the U.S. dollar, market pricing, and consumption in the United States versus other regions.

Strategy

U. S. Steel’s business strategy is to continue to grow its investment in high-end finishing assets, expand its global business platform, reduce its costs and become a world leader in safety performance. In North America, U. S. Steel is focused on providing value-added steel products to its target markets where management believes that U. S. Steel’s leadership position, production and processing capabilities and technical service provide a competitive advantage. These products include advanced high strength steel and coated sheets for the automotive and appliance industries, sheets for the manufacture of motors and electrical equipment, galvanized and Galvalume^® sheets for the construction industry, improved tin mill products for the container industry and oil country tubular goods. U. S. Steel continues to enhance its value-added businesses through the upgrading and modernization of its key production facilities.

U. S. Steel continues to be interested in participating in further consolidation of the North American steel industry if it would be beneficial to customers, shareholders, creditors and employees.

U. S. Steel continues to explore additional opportunities for steel and raw materials investments in Europe. U. S. Steel’s strategy is to be a leading European steel producer and the prime supplier of steel to growing

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European markets, to grow its customer base in Europe by providing reliable delivery of high-quality steel and to invest in value-added facilities, including a planned automotive hot-dip galvanizing line, to improve ÁñÁ«ÊÓƵE’s product mix.

Expansion opportunities in Europe and North America would be attractive to U. S. Steel. South America, China and India are also possible areas of interest.

In 2004, U. S. Steel concentrated on successfully integrating the businesses acquired in 2003 (discussed below), improving its balance sheet, increasing liquidity and continuing to strengthen its core steel businesses in order to be better positioned for further expansion and continued improvements to its existing facilities. An equity offering of 8 million common shares was completed in March 2004 for net proceeds of $294 million, which were primarily used to redeem certain senior notes. In April 2004, U. S. Steel redeemed $187 million principal amount of its 10 ³/4% senior notes, resulting in a reduction of the principal amount outstanding to $348 million, and redeemed $72 million principal amount of its 9 ³/4% senior notes, resulting in a reduction of the principal amount outstanding to $378 million. In addition, ÁñÁ«ÊÓƵK retired $281 million of long-term debt in 2004. In total these debt repayments reduced annualized interest expense by approximately $50 million.

Also during 2004, U. S. Steel made voluntary contributions of $295 million to its main domestic defined benefit pension plan and $30 million to a Voluntary Employee Benefit Association trust.

In October 2004, U. S. Steel’s $600 million revolving credit facility was amended and restated to: 1) extend the maturity to October 2009, 2) increase the borrowing base, 3) reduce the pricing for both borrowings and undrawn commitments, and 4) limit the application of many of the restrictive covenants.

In February 2004, U. S. Steel continued to divest its non-core assets when it sold substantially all of the remaining mineral interests administered by the Real Estate segment for $67 million.

In 2003, U. S. Steel engaged in several significant transactions aimed at strengthening its core steel businesses.

On May 20, 2003, U. S. Steel acquired out of bankruptcy substantially all of the integrated steelmaking assets of National Steel Corporation (National). See Note 2 to the Financial Statements for further information regarding the acquisition. The facilities that were acquired included two integrated steel plants, Granite City Works in Granite City, Illinois, and Great Lakes Works in Ecorse and River Rouge, Michigan; the Midwest Plant in Portage, Indiana; ProCoil Company LLC (ProCoil) in Canton, Michigan; a 50 percent equity interest in Double G Coatings Company, L.P. (Double G) near Jackson, Mississippi; the iron ore pellet operations in Keewatin, Minnesota (Keetac); and the Delray Connecting Railroad Company (Delray) in Michigan. This acquisition increased annual domestic raw steel production capability by 6.6 million net tons (tons) to 19.4 million tons.

U. S. Steel and the United Steelworkers of America (USWA) reached a five-year labor agreement that was effective upon the completion of the National acquisition and which covers both U. S. Steel and former National employees. This agreement allowed for a workforce restructuring aimed at achieving a 20 percent productivity improvement, expanded profit-based variable compensation, provided cost-sharing mechanisms for employee and retiree health care expenses, and provided a joint mechanism to consider further acquisitions of steel and steel-related assets in North America.

On September 12, 2003, U. S. Steel acquired out of bankruptcy Sartid a.d. (In Bankruptcy), an integrated steel company located in the Union of Serbia and Montenegro, and certain of its subsidiaries (collectively, Sartid). U. S. Steel is operating these facilities as ÁñÁ«ÊÓƵB. See Note 2 to the Financial Statements for further information regarding the acquisition. This acquisition increased annual European raw steel production capability by 2.4 million tons to 7.4 million tons.

On June 30, 2003, U. S. Steel completed the sale of its coal mines and related assets (Mining Sale). As a result, U. S. Steel no longer mines any coal. See Note 3 to the Financial Statements for further information regarding the sale.

In a non-monetary transaction in November 2003, U. S. Steel’s plate mill at Gary Works was exchanged for a pickling line located in East Chicago, Indiana. This was U. S. Steel’s only plate mill; however, U. S. Steel still produces plate in coil on its hot strip mills at Gary Works and at its European operations.

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In April 2003, U. S. Steel sold certain coal seam gas interests in Alabama for $34 million. In December 2003, U. S. Steel contributed timber cutting rights with an appraised value of $59 million to its defined benefit pension plan.

Straightline Source (Straightline) was closed to new business effective December 31, 2003, and was shut down in 2004.

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 of America. 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 the carrying value of property, plant and equipment; valuation allowances for receivables, inventories and deferred income tax assets; liabilities for deferred income taxes, potential tax deficiencies, environmental obligations, potential litigation claims and settlements; and assets and obligations related to employee benefits. Management estimates are based on historical experience 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 OPEB – The recording of net periodic benefit costs (credits) for defined benefit pensions and OPEB are 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 bases its estimate of the annual expected return on plan assets on the historical long-term rate of return experienced by U. S. Steel’s plan assets, the investment mix of plan assets between debt, equities and other investments, and its view of market returns expected in the future. Based on a review of these factors, U. S. Steel has kept the expected annual return on pension plan assets for its main pension plan at 8.0 percent for 2005. Net periodic pension cost, excluding multiemployer plans, is expected to total $230 million in 2005. A  ¹/2 percentage point increase or decrease in the expected return on plan assets for 2005 would have decreased or increased, respectively, the expected net periodic pension cost by $34 million.

U. S. Steel determines the discount rate applied to pension and OPEB obligations at each year end or required interim period based on a number of external barometers used to measure the status of high quality bond rates consistent with the expected payout period of the obligations. Based on this evaluation at December 31, 2004, U. S. Steel lowered the discount rate used to measure both pension and OPEB obligations from 6.0 percent to 5.75 percent. Lower discount rates increase the actuarial losses of the plans and will unfavorably impact net periodic benefit costs by approximately $6 million for pensions in 2005 principally due to the impact of required amortization amounts. Total OPEB costs in 2005 are expected to be approximately $109 million. A  ¹/2 percentage point increase in the discount rate would have decreased the estimated 2005 net periodic pension and OPEB costs by approximately $14 million and $3 million, respectively. A  ¹/2 percentage point decrease in the discount rate would have increased the estimated 2005 net periodic pension and OPEB costs by approximately $14 million and $3 million, respectively. As of December 31, 2004, a  ¹/2 percentage point increase in the discount rate would have decreased pension and OPEB liabilities by $340 million and $110 million, respectively. A  ¹/2 percentage point decrease in the discount rate would have increased pension and OPEB liabilities by $370 million and $120 million, respectively.

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. Assumed health care cost trend rates no longer have a significant effect on

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the amounts reported for U. S. Steel’s health care plans, other than the benefit plan offered to retired mineworkers, since a cost cap was negotiated in 2003 with the USWA, which freezes Steelworker retiree medical costs after the 2006 base year. Most salaried benefits are limited to flat dollar payments that are not affected by escalation. For measurement purposes, U. S. Steel has assumed an initial escalation rate of 9 percent for 2005. This rate is assumed to decrease gradually to an ultimate rate of 4.75 percent in 2013 and remain at that level thereafter. A  ¹/2 percentage point increase in the escalation trend would have increased expected net periodic OPEB costs by approximately $8 million in 2005. A  ¹/2 percentage point decrease in the escalation trend would have decreased expected net periodic OPEB costs by approximately $7 million in 2005.

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.”

Asset Impairments – Asset impairments are recognized when the carrying value of those productive assets exceeds their aggregate projected undiscounted cash flows. These undiscounted cash flows are based on management’s long range estimates of market conditions and the overall performance associated with the individual asset or asset grouping. If future demand and market conditions are less favorable than those projected by management, or if the probability of disposition of the assets differs from that previously estimated by management, additional asset write-downs may be required.

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 were to determine 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 assets 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 its 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. The amount of net foreign deferred tax assets recorded as of December 31, 2004, was $36 million, net of an established valuation allowance of $48 million. See Note 13 to the Financial Statements. U. S. Steel expects to generate future taxable income to realize the benefits of these net deferred tax assets.

U. S. Steel makes no provision for deferred U.S. and certain foreign income taxes on the undistributed earnings of ÁñÁ«ÊÓƵK and other consolidated foreign subsidiaries because management intends to permanently reinvest such earnings in foreign operations. While U. S. Steel is currently studying the impact of the one-time favorable foreign dividend provisions recently enacted as part of the American Jobs Creation Act of 2004, as of December 31, 2004 and based on the tax laws in effect at that time, it was U. S. Steel’s intention to continue to indefinitely reinvest undistributed foreign earnings and, accordingly, no deferred tax liability has been recorded in connection therewith. Undistributed foreign earnings at December 31, 2004 amounted to approximately $952 million. If such earnings were not permanently reinvested, a U.S. deferred tax liability of approximately $300 million would be required.

U. S. Steel records liabilities for potential tax deficiencies. These liabilities are based on management’s judgment of the risk of loss should those items 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, tax ruling or other positions or authority), 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, 2004, total accruals for environmental remediation were $123 million, excluding liabilities related to asset retirement obligations under Statement of Financial Accounting Standards (FAS) No. 143.

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Segments

During 2004, U. S. Steel had four reportable operating segments: Flat-rolled Products (Flat-rolled), U. S. Steel Europe (ÁñÁ«ÊÓƵE), Tubular Products (Tubular) and Real Estate. As of January 1, 2004, the residual results of Straightline are included in the Flat-rolled segment. The application of Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003) (FIN 46R), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” resulted in U. S. Steel consolidating the Clairton 1314B Partnership, L.P. (1314B Partnership) effective January 1, 2004. The results of the 1314B Partnership, which are included in the Flat-rolled segment, were previously accounted for under the equity method. For further information, see Notes 4 and 18 to the Financial Statements.

The National acquisition changed the composition of the Flat-rolled segment and Other Businesses as described below, but did not result in a change in U. S. Steel’s reportable segments. Effective with the Mining Sale, Other Businesses are no longer involved in the mining, processing and sale of coal. Effective with the acquisition of Sartid, the ÁñÁ«ÊÓƵK segment was renamed ÁñÁ«ÊÓƵE and includes the operating results of both ÁñÁ«ÊÓƵK and ÁñÁ«ÊÓƵB.

Effective with the third quarter of 2003, the composition of the Flat-rolled segment was changed to include the results of the coke operations at Clairton Works and Gary Works, which were previously reported in Other Businesses. This change reflected U. S. Steel’s management consolidations. Effective with the fourth quarter of 2003, benefit expenses for current retirees are separately identified and are no longer allocated to the reportable segments and Other Businesses. These expenses include pensions, health care, life insurance and any profit-based expenses for the benefit of retirees. Benefit expenses for active employees continue to be allocated to the reportable segments and Other Businesses. Furthermore, U. S. Steel changed its methodology for allocating certain corporate costs. See Note 5 to the Financial Statements for details. These changes were made so that operating results of U. S. Steel’s reportable segments will better reflect their current contribution and so that U. S. Steel’s segment results will be more comparable to those of its primary competitors who do not have significant fixed retiree obligations. Comparative results have been conformed to the current year presentation.

The Flat-rolled segment includes the operating results of U. S. Steel’s domestic integrated steel mills and equity investees involved in the production of sheet, tin mill products and strip mill plate, as well as all domestic coke production facilities. These operations are principally located in the United States and primarily serve customers in the service centers, conversion, transportation (including automotive), containers, construction and appliance markets. Effective May 20, 2003, the Flat-rolled segment includes the operating results of Granite City Works, Great Lakes Works, the Midwest Plant, ProCoil and U. S. Steel’s equity interest in Double G, which were acquired from National. In November 2003, U. S. Steel disposed of the Gary Works plate mill.

The ÁñÁ«ÊÓƵE segment includes the operating results of ÁñÁ«ÊÓƵK, U. S. Steel’s integrated steel mill in Slovakia; and, effective September 12, 2003, ÁñÁ«ÊÓƵB, U. S. Steel’s integrated steel facilities in Serbia. Beginning March 8, 2002 and prior to September 12, 2003, this segment included the operating results of activities under certain agreements with Sartid. These agreements were terminated in conjunction with the acquisition. ÁñÁ«ÊÓƵE produces and sells sheet, strip mill plate, tin mill, tubular, precision tube and specialty steel products. ÁñÁ«ÊÓƵE primarily serves customers in the central and western European construction, conversion, service centers, appliance, containers, transportation, and oil, gas and petrochemicals markets.

The Tubular segment includes the operating results of U. S. Steel’s domestic tubular production facilities. These operations produce and sell both seamless and electric resistance weld tubular products and primarily serve customers in the oil, gas and petrochemicals markets.

The Real Estate segment includes the operating results of U. S. Steel’s residential, commercial and industrial real estate that is managed and developed for sale or lease. In April 2003, U. S. Steel sold certain coal seam gas interests in Alabama for $34 million. In December 2003, U. S. Steel contributed timber cutting rights with an appraised value of $59 million to its defined benefit pension plan. In February 2004, U. S. Steel sold substantially all of the remaining mineral interests administered by the Real Estate segment for $67 million. Prior to the disposition of these assets, results they generated were reported in the Real Estate segment.

The Straightline segment included the operating results of U. S. Steel’s technology-enabled distribution business that was closed to new business effective December 31, 2003, and was shut down in 2004.

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All other U. S. Steel businesses not included in reportable segments are reflected in Other Businesses. These businesses are involved in the production and sale of iron ore pellets, transportation services, and engineering and consulting services. Effective May 20, 2003, Other Businesses include the operating results of Keetac and Delray, which were acquired from National. Prior to the Mining Sale on June 30, 2003, Other Businesses were involved in the mining, processing and sale of coal.

The transfer value for rounds supplied to Tubular from Flat-rolled and the transfer value of iron ore pellets supplied to Flat-rolled from Other Businesses are set at the beginning of each year based on expected total production costs.

Income

The principal drivers of U. S. Steel’s financial results are price, volume, cost and product mix. To the extent that these factors are affected by industry conditions and the overall economic climate, revenues and income will reflect such conditions.

Total revenues and other income in 2004 increased $4,650 million compared to 2003. The increases primarily reflected higher average realized prices for Flat-rolled, Tubular and European operations; higher shipment volumes for domestic sheet, tin and tubular products; higher shipment volumes for ÁñÁ«ÊÓƵE; and higher revenues on commercial coke shipments due primarily to the consolidation of the 1314B Partnership effective January 1, 2004. These were partially offset by lower 2004 shipment volumes for plate products resulting from the disposal in November 2003 of U. S. Steel’s only plate mill and the absence of revenues from coal sales in 2004 due to the Mining Sale. Revenues for domestic sheet and tin products benefited from the inclusion of shipments from the acquired National Steel Corporation (National) facilities for the entire 2004 period. Revenues for ÁñÁ«ÊÓƵE included shipments from the acquired Serbian facilities for the entire 2004 period. Revenues and other income in 2004 included a $43 million favorable effect resulting from the sale of certain assets, consisting of a gain on disposal of assets of $36 million and other income of $7 million. Revenues and other income in 2003 included a net gain on disposal of assets of $55 million resulting from the timber contribution to the pension plan and a $47 million favorable effect resulting from the sale of certain assets, consisting of a gain on disposal of assets of $13 million and other income of $34 million.

Total revenues and other income in 2003 increased $2,404 million compared to 2002. The increase primarily reflected higher shipment volumes for domestic sheet and tin products due to the National acquisition, increased prices and shipment volumes for ÁñÁ«ÊÓƵE and increased prices for domestic sheet products. The improvement also reflected higher prices and volumes on commercial coke shipments, increased shipments of slabs and increased shipments for Straightline. These were partially offset by lower coal revenue due to the Mining Sale, lower plate revenue due in part to the disposition of the Gary plate mill, and lower commercial shipments of iron ore pellets.

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Income from investees in 2002 included $39 million of insurance recoveries related to a 2001 fire at ÁñÁ«ÊÓƵ-POSCO, other income included $38 million from a Federal excise tax refund, and gains on disposal of assets included $20 million from the sale of U. S. Steel’s shares of VSZ a.s. (VSZ).

Profit-based union payments

Results for 2004 included costs of $241 million related to three profit-based payments pursuant to the provisions of the 2003 labor agreement negotiated with the USWA. Segment results for 2004 included $131 million of these costs and the balance was included in retiree benefit expenses. All of these costs are included in cost of revenues. Payment amounts per the agreement are calculated as percentages of consolidated income from operations after special items (as defined in the agreement) and are: (1) paid as profit sharing to active union employees based on 7.5 percent of profit between $10 and $50 per ton and 10 percent of profit above $50 per ton; (2) to be used to offset a portion of future medical insurance premiums to be paid by U. S. Steel retirees based on 5 percent of profit above $15 per ton; and (3) to be contributed to a trust to assist National retirees with healthcare costs based on between 6 percent and 7.5 percent of profit. At the end of 2003 and 2004, assumptions for the second calculation above were included in the calculation of retiree medical liabilities, and costs for this item are calculated in the same manner as other retiree medical expenses.

Pension and OPEB costs

Defined benefit pension and multiemployer pension plan benefit costs, which are included in income (loss) from operations, totaled $254 million in 2004, compared to $556 million in 2003 and a credit of $3 million in 2002. The costs in 2004 and 2003 included settlement, termination and curtailment losses of $22 million and $447 million, respectively. The credit in 2002 included $100 million of settlement losses. Excluding these one-time charges, the increase in 2004 compared to 2003 mainly reflected a lower return on assets and higher amortization of net actuarial losses due to recognition of prior years’ net asset losses, revised retirement rate assumptions, curtailment liabilities from the prior year’s Transition Assistance Program (TAP) and a lower discount rate. Excluding settlement, termination and curtailment losses, the increase of $212 million in 2003 compared to 2002 was primarily due to a lower return on assets, a decline in the expected return on assets assumption and a lower discount rate.

OPEB costs, which are also included in income (loss) from operations, totaled $106 million in 2004, compared to $241 million in 2003 and $150 million in 2002. Costs in 2003 included $58 million of curtailment charges. The reduction in OPEB expense in 2004 compared to 2003, excluding the curtailment charges, primarily reflected cost-sharing mechanisms negotiated with the USWA in 2003 in conjunction with assumed changes to retiree participation in company-sponsored prescription drug programs based on future benefits under the Medicare Prescription Drug Improvement and Modernization Act of 2003. This decrease was partially offset by higher costs in 2004 related to the early retirements under the TAP recorded at the end of the third quarter of 2003 and additional costs in 2004 due to the full-period inclusion of costs related to employees added with the National acquisition and to changes in assumed retirement ages. The increase in 2003 compared to 2002, excluding the curtailment charges, was primarily due to the addition of liabilities for National employees, changes in rate of retirement assumptions and a lower discount rate.

Costs related to defined contribution plans totaled $18 million in 2004, compared to $15 million in 2003 and 2002.

For additional information on pensions and other postretirement benefits, see Note 19 to the Financial Statements.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $66 million in 2004 compared to 2003. The increase in 2004 was primarily due to higher pension costs and increased costs following the acquisition of the Serbian facilities, partially offset by lower compensation expense related to stock appreciation rights and lower OPEB costs.

Selling, general and administrative expenses were $673 million in 2003, compared to $418 million in 2002. The increase in 2003 was primarily due to higher pension and OPEB costs, increased compensation expense related

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to stock appreciation rights, and higher expenses at ÁñÁ«ÊÓƵE due mainly to unfavorable effects of foreign currency exchange rate differences and increased business development expenses. These were partially offset by the favorable effect in 2003 of the absence of the impairment of retiree medical cost reimbursements receivable from Republic, which occurred in 2002.

Restructuring charges

Restructuring charges of $683 million in 2003 consisted of the workforce reduction charge of $621 million, costs related to the Straightline shutdown totaling $16 million and $46 million of asset impairments, all of which are reflected in the following table under “Other items not allocated to segments.” See Note 9 to the Financial Statements for further details.

Income (loss) from operations: ^(a)