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2003

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the Fiscal Year Ended December 31, 2003

OR

For the transition period from                      to                    

Commission file number 1-16811

UNITED STATES STEEL CORPORATION

(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   þ    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.    ¨

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

Aggregate market value of Common Stock held by non-affiliates as of June 30, 2003 (the last business day of the registrant’s most recently completed second fiscal quarter): $1.7 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 105,141,786 shares of U. S. Steel Corporation Common Stock outstanding as of February 20, 2004.

Documents Incorporated By Reference:

Portions of the Proxy Statement for the 2004 Annual Meeting of Stockholders are incorporated into Part III.

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NOTE ON PRESENTATION

United States Steel Corporation (U. S. Steel or the Corporation) owns and operates the former steel businesses of USX Corporation, now named Marathon Oil Corporation (Marathon). Prior to December 31, 2001, the businesses of U. S. Steel comprised an operating unit of Marathon. Marathon had two outstanding classes of common stock: USX—Marathon Group common stock, which was intended to reflect the performance of Marathon’s energy business, and USX—U. S. Steel Group common stock (Steel Stock), which was intended to reflect the performance of Marathon’s steel business. On December 31, 2001, U. S. Steel was capitalized through the issuance of 89.2 million shares of common stock to holders of Steel Stock in exchange for all outstanding shares of Steel Stock on a one-for-one basis (the Separation). For additional information about the Separation, see Note 1 to the Financial Statements.

The accompanying consolidated balance sheets as of December 31, 2003 and 2002, and statements of operations and cash flows for the years ended December 31, 2003 and 2002, reflect the financial position, results of operations and cash flows of U. S. Steel as a separate, stand-alone entity. Combined statements of operations and of cash flows for the period ended December 31, 2001, represent a carve-out presentation of the businesses comprising U. S. Steel, and are not intended to be a complete presentation of the results of operations and cash flows of U. S. Steel on a stand-alone basis. Marathon’s net investment in U. S. Steel represented the combined net assets of the businesses comprising U. S. Steel and was presented in lieu of common stockholders equity.

For information regarding accounting matters and policies affecting U. S. Steel’s financial statements, see Notes 1 and 4 to the Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates.” For information regarding dividend limitations and dividend policies affecting holders of U. S. Steel common stock, see “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

For a Glossary of Certain Defined Terms used in this document, see page 75.

FORWARD-LOOKING STATEMENTS

Certain sections of U. S. Steel’s 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

Introduction

United States Steel Corporation (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 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-bearing taconite pellets in the United States and coke in both the United States and Central Europe; transportation services (railroad and barge operations); real estate operations and engineering and consulting services.

U. S. Steel engaged in several significant transactions in 2003 aimed at strengthening the focus on its core 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 taconite pellet operations in Keewatin, Minnesota; and the Delray Connecting Railroad Company (Delray) in Michigan.

In connection with the acquisition of National, U. S. Steel negotiated a new 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 (USSB). 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 and processes any of the coal used in the production of coke. 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.

Straightline Source (Straightline) was closed to new business effective December 31, 2003, and will be shut down in 2004 after existing contractual obligations are fulfilled and inventories are depleted.

Segments

During 2003, U. S. Steel had five reportable operating segments: Flat-rolled Products (Flat-rolled), U. S. Steel Europe (USSE), Tubular Products (Tubular), Real Estate and Straightline.

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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 transportation (including automotive), appliance, service center, conversion, container, and construction 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 USSE segment includes the operating results of U. S. Steel Kosice (USSK), U. S. Steel’s integrated steel mill in Slovakia; and, effective September 12, 2003, USSB, U. S. Steel’s facilities in Serbia. Prior to September 12, 2003, this segment included the operating results of activities under facility management and support agreements with Sartid. These agreements were terminated in conjunction with the acquisition. USSE produces and sells sheet, strip mill plate, tin mill, tubular, precision tube and specialty steel products. USSE primarily serves customers in the central and western European construction, conversion, appliance, transportation, service center, container, and oil, gas and petrochemical markets. In June 2003, USSK sold its interest in Rannila Kosice s.r.o.

The Tubular segment includes the operating results of U. S. Steel’s domestic tubular production facilities and, prior to its sale in May 2003, included U. S. Steel’s interest in Delta Tubular Processing (Delta). These operations produce and sell both seamless and electric resistance weld tubular products and primarily serve customers in the oil, gas and petrochemical markets.

The Real Estate segment includes the operating results of U. S. Steel’s mineral interests that are not assigned to other operating units; and 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. Prior to the coal seam gas sale and the timber contribution, income generated from these assets was reported in the Real Estate segment. U. S. Steel has entered into an agreement to sell the remaining mineral interests administered by the Real Estate segment. See Note 15 to the Financial Statements.

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

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-bearing taconite pellets, transportation services, and engineering and consulting services. Effective May 20, 2003, Other Businesses include the operating results of the Keewatin, Minnesota taconite pellet operations 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.

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Revenues by Product

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

Revenues and other income

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Steel Shipments by Market and Product

The following table sets forth steel shipment data for U. S. Steel’s domestic operations by major markets and products for each of the last three years. Such data does not include shipments by joint ventures and other equity investees of U. S. Steel or shipments from Straightline.

Domestic

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The following table sets forth steel shipment data for USSE by major markets and products for 2003, 2002 and 2001.

USSE

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Business Strategy

U. S. Steel’s business strategy is to grow its investment in high-end finishing assets, expand globally and continually reduce costs. 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, and on June 30, 2003, U. S. Steel completed the Mining Sale. U. S. Steel continues to be interested in participating in further consolidation of the domestic steel industry as part of its focus on growing its investment in high-end finishing assets, if it would be beneficial to customers, shareholders, creditors and employees.

Through its November 2000 purchase of USSK in Slovakia, U. S. Steel initiated a major offshore expansion into the European market. U. S. Steel expanded its presence in Central Europe in 2003 with the acquisition on September 12, 2003 of Sartid, which is now operated as USSB. U. S. Steel continues to explore additional opportunities for investment in Europe. U. S. Steel’s strategy is to be a leading European steel producer and the prime supplier of flat-rolled steel to growing European markets, to grow its customer base in Europe by providing reliable delivery of high-quality flat-rolled steel and to invest in value-added facilities to improve USSE’s product mix.

U. S. Steel has a commitment to continuously reduce costs. The National acquisition and the new labor agreements with the United Steelworkers of America (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. Near-term, U. S. Steel’s operating focus is on achieving savings from its combined operating configuration, consolidating purchasing and raw materials sourcing, optimizing freight savings, and expanding U. S. Steel’s comprehensive supply chain management system to support customers from the new facilities. In total, savings from National operational synergies, workforce reductions at both U. S. Steel and former National plants, and administrative cost reduction programs are expected to exceed $400 million in annual repeatable cost savings. U. S. Steel expects full implementation by year-end 2004.

At the time of the National acquisition in May 2003, domestic employees at U. S. Steel and National totaled 28 thousand. As a result of the implementation of the new labor agreement, the elimination of redundant personnel following the acquisition, efforts to reduce domestic administrative costs and the Mining Sale, U. S. Steel reduced domestic employment to 22 thousand as of December 31, 2003.

Over and above these savings, U. S. Steel has maintained its focus on continuous cost improvement. Employee efforts over the last two years have resulted in cost improvements of more than $200 million domestically and in excess of $120 million in Europe. These efforts will continue in 2004 and beyond.

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 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, tubular and plate-consuming industries.

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Steel Industry Background and Competition

The steel industry is cyclical and highly competitive and is affected by excess global capacity, which has restricted price increases during periods of economic growth and led to price decreases during periods of economic contraction. In addition, 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 largest integrated steel producer in North America and, through USSK and USSB, 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 generally produce a narrower range of steel products than integrated producers, but 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. 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 and transportation costs for steelmaking commodities such as steel scrap, coal, coke and iron ore have increased sharply. U. S. Steel’s balanced domestic raw materials position and limited dependence on steel scrap should improve the competitive position of U. S. Steel’s domestic operations.

The domestic steel industry is restructuring after many years of oversupply and low prices attributable largely to excess imports, which resulted in significant temporary or permanent capacity closures starting in late 2000 and led to the introduction of trade remedies announced by President Bush on March 5, 2002, under Section 201 of the Trade Act of 1974. The combination of capacity closures, trade restrictions and the imposition of tariffs led to a recovery of steel prices from 20-year lows in late 2001 and early 2002.

The trade remedies announced by President Bush on March 5, 2002, 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. U. S. Steel intends to monitor imports closely and file anti-dumping and countervailing duty petitions if unfairly traded imports adversely impact, or threaten to adversely impact, financial results. 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 an increase in the global demand for steel, especially in China.

Steel imports to the United States accounted for an estimated 19 percent of the domestic steel market in 2003, compared to 27 percent in 2002 and 24 percent in 2001.

During 2004, two events will occur that may have a significant effect on the amount of steel imports that will be allowed to enter the United States. The International Trade Commission will commence a five-year review required by rules of the World Trade Organization to determine whether antidumping findings against hot-rolled steel from Japan, Russia and Brazil should be continued. Also, the Comprehensive Steel Trade Agreement with Russia, under which Russia has voluntarily limited the quantity of its exports to the United States of steel products that are not covered by antidumping orders, will expire in July.

The Bush Administration is continuing discussions at the Organization of Economic Cooperation and Development aimed at the reduction of inefficient steel production capacity and the elimination and limitation of certain subsidies to the steel industry throughout the world.

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 major domestic integrated steel competitors are confronted by substantially similar conditions

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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. For further information, see “Legal Proceedings—Environmental Proceedings” and “Management’s Discussion and Analysis of Environmental Matters, Litigation and Contingencies.”

USSK and USSB 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. USSK and USSB 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, USSK and USSB are subject to economic conditions and political factors in Europe, which if changed could negatively affect results of operations and cash flow. Political factors include, but are not limited to, taxation, nationalization, inflation, currency fluctuations, increased regulation, and quotas, tariffs and other protectionist measures. USSK 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. USSB 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 European Union (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. USSE 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 USSK upon Slovakia’s accession into the EU, which is expected to occur 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). To date, those measures have not been terminated. In light of market opportunities elsewhere, USSE’s experience operating under these measures and the fact that the measures will cease to affect USSK upon EU accession by Slovakia, Poland and Hungary, it appears unlikely that these measures will have a material adverse effect on USSE’s operating profit during 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 14.9 million tons in 2003 including results from the National assets following the acquisition, compared with 11.5 million tons in 2002 and 10.1 million tons in 2001. Raw steel production averaged 88 percent of capability in 2003 recognizing the capability of National on a prorata basis, compared with 90 percent of capability in 2002 and 79 percent of capability in 2001. All steel produced in U. S. Steel’s domestic facilities is continuous cast.

Flat-rolled shipments were 13.5 million tons in 2003 including partial year shipments from the facilities acquired from National, 9.9 million tons in 2002 and 8.8 million tons in 2001. Exports accounted for approximately 3 percent of Flat-rolled’s shipments in 2003, and 4 percent in 2002 and 2001.

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 automotive, appliance, service center,

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conversion and construction 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 Ferralloy Processing Company joint venture. Flat-rolled’s plate customer base is comprised primarily of industrial equipment manufacturers and service centers. The majority of coke produced at the integrated steel plants is used to support Flat-rolled operations; however, some coke, especially from Clairton Works, is sold to trade customers. 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 of 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. Ironmaking facilities consist of four coke batteries and four blast furnaces. Gary Works consumes the coke it produces and sells several coke by-products. Gary Works has three basic oxygen converters, three Q-BOP vessels, a vacuum degassing unit and four continuous slab casting machines. 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. East Chicago Tin and the Midwest Plant are operated as part of Gary Works.

East Chicago Tin, located in East Chicago, Indiana, was acquired on March 1, 2001. 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.

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, a hot dip galvanizing line, a Galvalume^® line, a tin coating line and a tin-free steel line. Principal products include tin mill products and hot dip galvanized, Galvalume^®, cold-rolled and electrical lamination sheets. Midwest was acquired from National on May 20, 2003.

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. Great Lakes also operates an on-site coke battery that is owned by an unregulated affiliate of a local utility company. 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 and an additional three coke batteries that are operated for the Clairton 1314B Partnership, L.P. (1314B Partnership), which is discussed below. Clairton (including the 1314B Partnership) produces coke for the domestic steel industry and produced 4.5 million tons of coke in 2003, 4.5 million tons 2002 and 4.3 million tons in 2001. Approximately

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30 percent of annual production (including the 1314B Partnership) was consumed by U. S. Steel facilities in 2003 and the remainder was sold to other domestic steel producers. Several coke by-products are sold to the chemicals and raw materials industries.

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 three coke batteries located at U. S. Steel’s Clairton Works. U. S. Steel’s share of profits and losses during 2003 was 45.75 percent. The partnership at times had operating cash shortfalls in 2003, 2002 and 2001 that were funded with loans from U. S. Steel. There were no outstanding loans with the partnership at December 31, 2003 or 2002, and $3 million was outstanding at December 31, 2001. 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.

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 consumes 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 Acero Prime, S.R.L. de CV (Acero Prime) and Feralloy Processing Company (Ferralloy), in which U. S. Steel holds 44 percent and 49 percent interests, respectively. For financial information regarding joint ventures and other investments, see Note 16 to the Financial Statements.

U. S. Steel and Pohang Iron & Steel Co., Ltd. (POSCO) of South Korea participate in a joint venture, USS-POSCO Industries (USS-POSCO), located in Pittsburg, California. The joint venture markets high quality sheet and tin mill products, principally in the western United States. USS-POSCO produces cold-rolled sheets, galvanized sheets, tin plate and tin-free steel from hot bands principally provided by U. S. Steel and POSCO. On May 31, 2001, a fire damaged USS-POSCO’s facilities. The start-up in the first quarter of 2002 included the commissioning and subsequent operation of a rebuilt pickling line and cold reduction mill. Total shipments by USS-POSCO were 1.2 million tons in 2003 and 2002, and 0.8 million tons in 2001.

U. S. Steel and Kobe Steel, Ltd. 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 1.0 million tons. Total shipments by PRO-TEC were 1.1 million tons in 2003 and 2002, and 0.9 million tons in 2001.

U. S. Steel and Rouge Steel Company, which was acquired in early 2004 by Russian steelmaker OAO Severstal, participate in Double Eagle Steel Coating Company (DESCO), a joint venture which operates an

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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 2003, 2002 and 2001, DESCO produced 683 thousand tons, 163 thousand tons and 636 thousand tons, respectively, of electrogalvanized steel.

U. S. Steel and International Steel Group 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 in 2003 was 290 thousand tons.

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 2003, 2002 and 2001, Worthington Specialty Processing shipments were 282 thousand tons, 250 thousand tons and 241 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 an increasing number of body fabrication applications. U. S. Steel is the venture’s primary customer and is responsible for marketing the laser-welded blanks. Olympic Laser Processing shipped 2.1 million parts in 2003, 1.7 million parts in 2002 and 1.3 million parts in 2001.

Feralloy 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 at the Port of 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. Feralloy provides processing services to the joint venture partners and other steel consumers and service centers.

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., and Intacero de Mexico, S.A. de C.V., participate in a joint venture, 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 in one location automotive sales, service, distribution and logistics services, product technology and applications research. 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 its Research and Technology Center located in Monroeville, Pennsylvania.

USSE

In November 2000, U. S. Steel acquired USSK, headquartered in Kosice, Slovakia. Currently, USSK has annual steelmaking capability of 5.0 million net tons and produces and sells sheet, strip mill plate, tin mill, tubular, precision tube and specialty steel products.

In 2003, USSK raw steel production was 4.7 million tons, compared to 4.4 million tons in 2002 and 4.1 million tons in 2001. USSK has two coke batteries, three blast furnaces, two steel shops with two vessels

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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, two dynamo lines and a color coating line. During 2002, USSK started up the vacuum degassing facility to increase its capability to produce steel grades required for high-value applications. In 2003, USSK started up a continuous annealing line and the second tin coating line to expand its supply of tin mill products. Construction of a third dynamo line is in progress, with start-up scheduled to occur in the second quarter of 2004. USSK’s steel shipments totaled 4.6 million net tons in 2003 including those realized under toll conversion agreements with Sartid, 3.9 million net tons in 2002 and 3.7 million net tons in 2001.

In addition, USSK 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 USSK. USSK also has facilities for manufacturing heating radiators and spiral welded pipe.

A majority of product sales by USSK are denominated in euros. In addition, interest and debt payments are primarily in U.S. dollars and the majority of other 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 USSK’s cash flows. Significant changes in currency mix, which may be caused by Slovakia’s admission to the EU (scheduled to occur May 1, 2004) and adoption of euro currency, 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 Sartid, headquartered in Smederevo, Serbia. U. S. Steel operates these facilities as USSB. 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 has determined that, with improved operating practices and an extensive rehabilitation and capital spending program, USSB has annual raw steel design production capability of about 2.4 million tons. During 2003, only about a third of the raw steel design capability was operational. In 2003, following the acquisition, USSB’s raw steel production was 146 thousand net tons and steel shipments totaled 150 thousand net tons.

A majority of product sales by USSB 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’s tubular production facilities produce both seamless and electric resistance weld (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 1.6 million tons of tubular products in the 5 million ton tubular markets it serves. Tubular shipments were 0.9 million tons in 2003, 0.8 million tons in 2002 and 1.0 million tons in 2001. Exports accounted for approximately 15 percent of Tubular’s shipments in 2003, and 17 percent in 2002 and 2001.

Real Estate

Real Estate manages U. S. Steel’s mineral interests that are not assigned to other operating units, and manages real estate assets. These assets and properties include approximately 300,000 acres of surface rights and 1,500,000 acres of mineral rights in 14 states. Income is derived primarily from mineral royalties, the sale of

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developed and undeveloped land, and real estate leases. The primary sources of mineral royalties are from leases to produce coal and coal seam gas in Alabama. Real estate development and sales occur over approximately 20,000 acres of residential, commercial and industrial development and brownfield industrial redevelopment principally in Alabama, Pennsylvania and Maryland. Undeveloped land sales occur primarily in Alabama, Michigan, Minnesota and Wisconsin. Real estate lease income is derived from various leases primarily in Pennsylvania and Alabama. U. S. Steel has entered into an agreement to sell the remaining mineral interests administered by the Real Estate segment. See Note 15 to the Financial Statements.

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. As previously mentioned, Straightline was closed to new business effective December 31, 2003, and will be shut down in 2004.

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 2003, these reserves totaled approximately 992 million short tons of iron ore concentrate equivalents available from low-grade iron-bearing materials. All reserves are located in Minnesota. Approximately 29 percent of these reserves are owned and the remaining 71 percent are leased. Current lease expiration dates vary from five to sixty years in the future, with the largest (cvering 36% of leased reserves) expiring in 2058. Leases are routinely revised and extended in term. U. S. Steel’s iron ore operations at Mt. Iron, Minnesota (Minntac) produced 15.8 million net tons of taconite pellets in 2003, 16.7 million net tons in 2002, and 14.5 million net tons in 2001. U. S. Steel’s iron ore operations at Keewatin, Minnesota (Keetac) produced 2.9 million net tons of taconite pellets in 2003, following the acquisition from National. Taconite pellet shipments were 18.2 million tons in 2003, including shipments from Keetac following the acquisition, compared with 16.2 million tons in 2002, and 14.9 million tons in 2001.

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, which is located in Michigan and 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, integrated computer systems 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 on the open market to domestic and foreign consumers. 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.

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USSE purchases all of its iron ore requirements from third parties. U. S. Steel believes that supplies of iron ore, adequate to meet USSE’s needs, are readily available at competitive market prices. The main sources of iron ore for USSE are Russia and the Ukraine.

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 readily available from third parties at competitive market prices. Coal supplies were disrupted during late 2003 largely due to the declaration of force majeure by one of U. S. Steel’s major coal suppliers. U. S. Steel has entered into contracts at currently competitive market prices for its domestic coal requirements in 2004.

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

Coke

Domestically, U. S. Steel operates coke-making facilities at its Clairton, Pennsylvania; Gary, Indiana; and Granite City, Illinois locations. U. S. Steel also operates and maintains the Great Lakes, Michigan No. 5 coke battery on a contract basis and purchases coke produced from this battery under a requirements contract, with firm pricing through 2005. These owned and operated facilities have the capability to supply all of U. S. Steel’s metallurgical coke requirements for blast furnace production. However, market conditions and transportation costs often encourage U. S. Steel to purchase metallurgical coke from third parties and sell some of its coke production to other steelmakers. Blast furnace coal injection processes at Gary Works, Great Lakes Works and Fairfield Works continue to reduce U. S. Steel’s domestic coke requirements.

USSK operates a coke-making facility that primarily serves the steelmaking operations at USSK. Depending on market conditions and operational schedules, USSK may purchase or sell small quantities of coke on the open market and may also supply a portion of USSB’s needs. Blast furnace coal injection processes at USSK continue to reduce its coke requirements. USSB purchases predominantly all of its coke requirements from third party suppliers. While the coke market is expected to be constrained in 2004, U. S. Steel believes that supplies of coke, adequate to meet USSK’s and USSB’s needs, are available at competitive market prices. The main sources of coke for USSK and USSB include Poland, the Czech Republic, the Ukraine and Russia.

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 USSK are purchased from a third party under a long-term contract. USSB sources approximately 50 percent of its limestone requirements from third party suppliers with the balance coming from production from a limestone mine under direct control. U. S. Steel believes that supplies of limestone, adequate to meet USSB’s needs, are readily 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 readily available from third parties at competitive market prices. U. S. Steel utilizes some hedging and derivative purchasing practices with regard to domestic requirements for tin and zinc.

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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 readily 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.

USSK and USSB purchase their natural gas requirements from third parties under annual contracts. U. S. Steel believes that supplies of natural gas, adequate to meet USSK’s and USSB’s needs, are readily 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 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 “Legal Proceedings—Environmental Proceedings and “Management’s Discussion and Analysis of 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

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facilities and its production methods. For further information, see “Legal Proceedings—Environmental Proceedings” and “Management’s Discussion and Analysis of Environmental Matters, Litigation and Contingencies.”

Slovak standards relative to air, water and solid waste pollution are set by statute and these standards are similar to those in the United States and the EU. USSK is in material compliance with these standards. USSK’s environmental expenses in 2003 included usage fees, permit fees and/or penalties totaling approximately $7 million. There are no legal proceedings pending against USSK involving environmental matters. USSK’s capital spending commitment to the Slovak government is sufficient to include all expenditures necessary to bring USSK into compliance with all EU environmental standards by 2005.

USSB is subject to the laws of the Union of Serbia and Montenegro, which are currently more lenient 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 is being conducted at USSB’s facilities. Under the terms of the acquisition, USSB will be responsible for only those costs and liabilities associated with environmental events occurring subsequent to the completion of that study. A portion of the $157 million USSB committed to spend in connection with the acquisition of Sartid is expected to be used for environmental controls and upgrades.

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. It is unclear what international action will be taken concerning greenhouse gases or the economic impact of such programs.

Air

The CAA imposed more stringent limits on air emissions, established a federally mandated operating permit program and allowed for 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 is in the process of developing an estimate of the cost to comply that will include controls on the Line 3 waste gas stack at Minntac and the waste gas stack at Keetac.

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.

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

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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.

Water

U. S. Steel maintains the necessary discharge permits as required under the National Pollutant Discharge Elimination System (NPDES) program of the CWA, and it is in compliance with such permits. On January 26, 1998, pursuant to an action filed by the 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 the EPA which resolved alleged violations of the 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 potential 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 monitoring costs and U. S. Steel is obligated to purchase and restore several parcels of property that have been or will be conveyed to the trustees. During the negotiations leading up to the settlement with the EPA, capital improvements were made to upgrade plant systems to comply with the NPDES requirements. The sediment remediation project is an approved final interim measure under the corrective action program for Gary Works. As of January 15, 2004, project costs have amounted to $50.3 million with another $0.6 million presently projected to complete the project. Construction began in January 2002 on a Corrective Action Management Unit (CAMU) to contain the dredged material and construction was completed in February 2003. Phase 1 removal of PCB-contaminated sediment was completed in December 2002. Dredging resumed in February 2003 and was completed in December 2003. Closure costs for the CAMU are estimated to be an additional $4.9 million. Costs for restoration of natural resources in this section of the Grand Calumet River are estimated to be $2.5 million.

In addition, 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 pre-assessment screen pursuant to federal regulations and have determined to perform a Natural Resource Damages Assessment. U. S. Steel was identified as a potentially responsible party (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 the 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. No formal legal proceedings have been filed in this matter. U. S. Steel with the PRP joint defense group and the trustees are finalizing a Consent Decree.

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.”

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Remediation

A significant portion of U. S. Steel’s currently identified environmental remediation projects relate to the remediation of former and present operating locations. These projects include the remediation of the Grand Calumet River (discussed above), 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, and it is possible that additional matters may come to its attention which may require remediation. For a discussion of remedial actions related to U. S. Steel, see “Legal Proceedings—Environmental Proceedings.”

Property, Plant and Equipment Additions

For property, plant and equipment additions, including capital leases, see “Management’s Discussion and Analysis of Financial Condition, Cash Flows and Liquidity—Cash Flows—Capital Expenditures” and Notes 17 and 27 to the Financial Statements.

Employees

As of December 31, 2003, U. S. Steel’s employees totaled 22 thousand domestically and 25 thousand in Europe. Most domestic hourly employees of U. S. Steel’s steel, coke and taconite pellet facilities are covered by a collective bargaining agreement with the United Steelworkers of America (USWA), which expires in September 2008 and includes a no-strike provision. Employees at Granite City Works who work at the coke plant and blast furnaces are represented by the International Chemical Workers, the Bricklayers and Laborers International. Domestic hourly employees engaged in transportation activities are represented by the USWA and other unions. In addition, most employees of USSK are represented by the union OZ Metalurg under a collective bargaining agreement expiring February 2007, which is subject to annual wage negotiations. Most employees of USSB are represented by two unions under a collective bargaining agreement expiring in November 2006, which is subject to annual wage negotiations.

Available Information

U. S. Steel’s Internet address is www.ussteel.com. U. S. Steel posts its annual reports 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 EDGAR system.

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 are also available in print to any shareholder who requests them. Such requests should be sent to the Office of the Corporate Secretary, United States Steel Corporation, 600 Grant Street, Pittsburgh, Pennsylvania 15219-2800 (telephone: 412-433-4801).

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 6 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-50 and F-51.

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

Domestic Operations

International Operations

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

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properties obtained. In addition, the Bankruptcy Court order provides 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 USSK, certified copies of the property registrations were obtained and examined by local counsel prior to the acquisition. In the case of USSB, the Serbian bankruptcy law provides that USSB acquired its assets free and clear of any prior claims.

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 is 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 is subject to a lease through 2012, with an early buyout option in 2010. The lessor of this coke battery has options which could require U. S. Steel to purchase the facilities on the anniversary dates of the lease for each of the years 2004-2006. 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 “Management’s Discussion and Analysis of Financial Condition, Cash Flows and Liquidity—Cash Flows—Capital Expenditures” and Notes 17 and 27 to the Financial Statements.

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 3,900 active cases in which, as of December 31, 2003, approximately 14,800 plaintiffs have filed claims alleging injury resulting from exposure to asbestos. Almost all of these cases involve multiple defendants (typically from fifty to more than one hundred defendants). Over 13,800, or more than 90 percent, of the plaintiffs in cases in which U. S. Steel is a defendant are in cases filed in Mississippi, Ohio and Texas, jurisdictions which permit filings with massive numbers of plaintiffs. Based upon U. S. Steel’s experience in such cases, the actual number of plaintiffs who ultimately assert claims against U. S. Steel is likely to 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 an electrical cable product 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.

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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 200 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 no case is there any allegation of monetary damages against U. S. Steel. Approximately 89 percent of the cases against U. S. Steel state that the damages sought exceed 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 do not specify any damages sought at all, approximately 6 percent allege damages of $1 million or less, another 0.5 percent allege damages between $2 million and $10 million, and 0.5 percent allege 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 for reasonable, and frequently nominal, amounts. For example, in 2001, U. S. Steel settled 11,166 claims for a total of approximately $190,000, and had about 4,102 claims dismissed or otherwise resolved and 1,679 new claims filed. 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 discussed below, 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.

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.

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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 our 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 U. S. Steel has been subject to a total of approximately 34,000 asbestos claims over the past 12 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 electric cable; 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, 2003, under federal and state environmental laws. Except as described herein, it is not possible to accurately predict the ultimate outcome of these matters. 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.

CERCLA Remediation Sites

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, 2003, U. S. Steel had been identified as a PRP at a total of 19 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 six of these sites will be between $100,000 and $1 million per site, and for 11 of these sites will be under $100,000.

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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:

In addition, there are 17 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 46 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 10 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 4 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 potential 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 11 sites are not presently determinable.

Gary Works

On January 26, 1998, pursuant to an action filed by the 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 the 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

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Grand Calumet River that runs through Gary Works. Contemporaneously, U. S. Steel entered into a consent decree with the public trustees, which resolves potential 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 monitoring costs, and U. S. Steel is obligated to purchase and restore several parcels of property that have been or will be conveyed to the trustees. During the negotiations leading up to the settlement with the EPA, capital improvements were made to upgrade plant systems to comply with the NPDES requirements. The sediment remediation project is an approved final interim measure under the corrective action program for Gary Works. As of January 15, 2004, project costs have amounted to $50.3 million with another $0.6 million presently projected to complete the project. Construction began in January 2002 on a Corrective Action Management Unit (CAMU) to contain the dredged material and construction was completed in February 2003. Phase 1 removal of PCB-contaminated sediment was completed in December 2002. Dredging resumed in February 2003 and was completed in December 2003. Closure costs for the CAMU are estimated to be an additional $4.9 million. Costs for restoration of natural resources in this section of the Grand Calumet River are estimated to be $2.5 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. A CAMU for the West End Maintenance Area of Gary Works has been proposed that will include wastes from the D5 and T2 disposal sites. Total costs to close D2, D5, T2 and the refuse area are estimated to be $18.8 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 the 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. No formal legal proceedings have been filed in this matter. U. S. Steel with the PRP joint defense group and the trustees are finalizing a Consent Decree.

On October 23, 1998, a final Administrative Order on Consent was issued by the 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 the EPA in January 1997 and was approved by the EPA in 1998. Phase I RFI work plans have been approved for the Coke Plant, the Process Sewers, Background Soils at the site, the C-Lot Lagoons, and the Buchanan Street Basins along with the approval of one self-implementing interim stabilization measure. Another six Phase I RFI work plans have been submitted for EPA approval, thereby completing the Phase I work plan requirement, along with two Phase II RFI work plans and one further self-implementing interim stabilization measure. The costs to complete these studies are estimated to be $6.4 million. Until they are completed, it is impossible to assess what additional expenditures will be necessary.

On October 21, 1994, and again on December 30, 1994, IDEM issued notices of violation (NOVs) relating to Gary Works alleging various violations of air pollution requirements. In early 1996, U. S. Steel paid a

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$6 million penalty and agreed to install additional pollution control equipment and to implement environmental protection programs over a period of several years. A substantial portion of these programs has been implemented, with expenditures through 2003 of approximately $103 million. The cost to complete these programs is presently indeterminable. On March 8, 1999, U. S. Steel entered into an agreed order with IDEM to resolve outstanding air issues. U. S. Steel paid a penalty of $207,400 and installed equipment at the No. 8 Blast Furnace and the No. 1 BOP to reduce air emissions.

On November 30, 1999, IDEM issued an 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. Because IDEM has not yet determined the merits of the defenses raised by U. S. Steel, the cost of the settlement of this matter is currently indeterminable. An agreed order is being negotiated.

On March 11, 2003, Gary Works received an NOV from the EPA alleging construction of two desulfurization facilities without proper installation permitting. The EPA and U. S. Steel are finalizing an Administrative Order on Consent that includes emission limits, testing and recordkeeping requirements but no civil penalty.

Clairton Works

On February 12, 1987, U. S. Steel and the PADER entered into a Consent Order to resolve an incident in January 1985 involving the alleged unauthorized discharge of benzene and other organic pollutants from Clairton Works in Clairton, Pa. That Consent Order required U. S. Steel to pay a penalty of $50,000 and a monthly payment of $2,500 for five years. In 1990, U. S. Steel and the PADER reached agreement to amend the Consent Order. Under the amended Order, U. S. Steel agreed to remediate the Peters Creek Lagoon, a former coke plant waste disposal site; to pay a penalty of $300,000; and to pay a monthly penalty of up to $1,500 each month until the former disposal site is closed. Remediation costs for the Peters Creek Lagoon have amounted to $11.4 million with another $250,000 presently projected to complete the project.

Fairless Plant

In January 1992, U. S. Steel commenced negotiations with the EPA regarding the terms of an Administrative Order on consent, pursuant to the 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. The RFI/CMS will determine whether there is a need for, and the scope of, any remedial activities at the Fairless Plant.

Fairfield Works

In December 1995, U. S. Steel reached an agreement in principle with the EPA and the U.S. Department of Justice (DOJ) with respect to alleged RCRA violations at Fairfield Works. A consent decree was signed by U. S. Steel, the EPA and the 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, implemented two Supplemental Environmental Projects costing a total of $1.75 million and implemented a RCRA corrective action 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 the EPA. The first Phase I RFI work plan was approved for the site on September 16, 2002. Field sampling for the work plan commenced immediately after approval and will continue through 2004. The cost to complete this study is estimated to be $1.2 million. In January 1999, ADEM included the former Ensley facility site in Fairfield Corrective Action. The Phase I work plan for Ensley has been reviewed by ADEM. The cost to prepare a response to ADEM’s comments on this work plan is approximately $520,000.

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Lorain Pipe Mills

In 1997, USS/Kobe Steel Company (USS/Kobe), a former joint venture between U. S. Steel and Kobe Steel, Ltd. (Kobe), was the subject of a multi-media audit by the EPA that included an air, water and hazardous waste compliance review. USS/Kobe and the EPA entered into a tolling agreement pending issuance of the final audit and commenced settlement negotiations in July 1999. In August 1999, the steelmaking and bar producing operations of USS/Kobe were combined with companies controlled by Blackstone Capital Partners II to form Republic. The tubular operations of USS/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 is continuing negotiations with the EPA, and has made an offer of settlement that involves a cash penalty of $100,025 and a supplemental environmental project to do PCB transformer replacement for a combined amount of $774,025. Most of the matters raised by the EPA relate to Republic’s facilities; however, air discharges from U. S. Steel’s No. 3 seamless pipe mill have also been cited. U. S. Steel will be responsible for matters relating to its facilities. The final report and citations from the EPA have not been issued. Issues related to Republic have been resolved in its bankruptcy proceedings.

Granite City Works, Great Lakes Works and the Midwest Plant

Prior to U. S. Steel’s acquisition of the Granite City, Great Lakes and Midwest facilities, the DOJ had filed against National Steel Corporation (National) proofs of claim asserting noncompliance allegations under various environmental statutes, including the Clean Air Act, RCRA, the Clean Water Act, the Emergency Planning and Community Right to Know Act, CERCLA and the Toxic Substances Control Act at these three facilities. The EPA had conducted inspections of the facilities and entered into negotiations with National toward resolving these allegations with a consent decree. U. S. Steel is currently engaged in discussions with the EPA and the State of Illinois related to the conditions previously noted at these facilities. After a substantial evaluation of U. S. Steel’s management of these facilities, the DOJ has withdrawn from participation in these discussions and is no longer pursuing this matter with U. S. Steel. At Granite City Works, the EPA had determined that ditches and dewatering beds currently in operation were allegedly not in compliance with applicable waste oil management standards. U. S. Steel is currently discussing with the EPA and the State of Illinois appropriate measures to investigate and remediate the ditches and dewatering beds, which is expected to cost $1.3 million. Air emissions from the steelmaking shop at Great Lakes Works are also under discussion. It has not been determined what, if any, corrective action may be necessary to address those emissions. Other, less significant issues are also under discussion, including Ferrous Chloride Solution handling at Granite City Works and Great Lakes Works, Spill Prevention Control and Countermeasures Plans at both facilities, RCRA training at Great Lakes Works and other waste handling issues.

Prior to U. S. Steel’s acquisition of Great Lakes Works, it had operated under a permit for indirect discharge of wastewater to the Detroit Water and Sewerage Department (DWSD). National had reported to the DWSD violations of effluent limitations, including mercury, contained in the facility’s indirect discharge to the DWSD treatment plant and had entered into a consent order with the DWSD that required improvements in plant equipment to remedy the violations. Great Lakes Works continues to operate under a DWSD permit for this discharge and anticipates spending approximately $2.9 million to improve operating equipment to come into compliance with discharge limits in the current DWSD permit. As of December 31, 2003, project costs have amounted to $2.2 million.

Duluth Works

At the former Duluth Works in Minnesota, U. S. Steel spent a total of approximately $12.1 million for cleanup through 2003. 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. The EPA has

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consolidated and included the Duluth Works site with the St. Louis River and Interlake sites on the 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 $860,000. 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.

Not applicable.

EXECUTIVE OFFICERS OF REGISTRANT

The executive officers of U. S. Steel and their ages as of February 1, 2004, 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

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-48.

As of January 31, 2004, there were 37,800 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, U. S. Steel established an initial quarterly dividend rate of $0.05 per share effective with the March 2002 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 “Management’s Discussion and Analysis of Financial Condition, Cash Flows and Liquidity—Liquidity.”

Equity Compensation Plan Information

The Non-Employee Director Stock Plan provides that each new non-employee director may receive a grant of up to 1,000 shares of U. S. Steel common stock. In order to qualify, a director must first purchase an equivalent number of shares in the open market during the 60 days following the first date of his or her service on the Board.

For a description of the other non-security holder approved plans, see Note 18 to the Financial Statements.

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Recent Sales of Unregistered Securities

In 2003, U. S. Steel issued an aggregate of 2,000 unregistered shares pursuant to the Non-Employee Director Stock Plan to two new directors. (For a description of the plan, see Note (ii), above.) These transactions were exempt from registration under Section 4(2) of the Securities Act of 1933, as transactions not involving a public offering.

In 2003, 11,882 unregistered shares were issued pursuant to the Non-Employee Director Deferred Compensation Plan. These shares were issued to two of U. S. Steel’s directors upon their retirement from the Board of Directors in 2003. (For a description of the plan, see Note 18 to the Financial Statements.) These transactions were exempt from registration under Section 4(2) of the Securities Act of 1933, as transactions not involving a public offering.

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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 United States Steel Corporation (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 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 (USSK), located in Slovakia, and U. S. Steel Balkan (USSB), 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-driven 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 and zinc) and energy (natural gas and electricity) costs.

The most important issue affecting U. S. Steel will be its ability to successfully 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 recent volatility of steel prices; the recent 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 which appears to be in progress; 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. Imports to the United States have declined recently, but could increase rapidly depending on the relative strength of the dollar and market pricing and consumption in the United States versus other regions.

Strategy

U. S. Steel’s strategy is to continue to grow its value-added capabilities, expand its global business platform and reduce its costs. U. S. Steel took the following major steps in 2003 in implementing this strategy.

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 taconite pellet operations in Keewatin, Minnesota; and the Delray Connecting Railroad Company (Delray) in Michigan. This acquisition increased annual domestic raw steel production capability to 19.8 million tons.

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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 healthcare 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 USSB. See Note 2 to the Financial Statements for further information regarding the acquisition. This acquisition increased annual European raw steel production capability to 7.4 million tons.

On June 30, 2003, U. S. Steel completed the sale of its coal mines and related assets (Mining Sale). 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.

Straightline Source (Straightline) was closed to new business effective December 31, 2003, and will be shut down in 2004 after existing contractual obligations are fulfilled and inventories are depleted.

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

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has decreased the expected annual return on pension plan assets from 8.2 percent in 2003 to 8.0 percent beginning with the September 30, 2003 remeasurement. This decrease in the expected return will negatively affect the return on asset component of net periodic pension costs by approximately $12 million in 2004 as compared to 2003. Net periodic pension cost, excluding multiemployer plans, is expected to total $207 million in 2004 as compared to $97 million (before workforce reduction charges) in 2003. A  ¹/2 percentage point increase or decrease in the expected return on plan assets for 2004 would have decreased or increased the expected net periodic pension cost by $35 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, 2003, U. S. Steel lowered the discount rate used to measure both pension and OPEB obligations from 6.25 percent as of the prior measurement at September 30, 2003, to 6.0 percent. Lower discount rates increase the actuarial losses of the plans and will unfavorably impact net periodic benefit costs by approximately $5 million for pensions in 2004 principally due to the impact of required amortization amounts, which in recent years prior to 2003 had not been a significant component of benefit costs. Total OPEB costs in 2004 are expected to be approximately $106 million, excluding multiemployer plans. A  ¹/2 percentage point increase in the discount rate would have decreased the estimated 2004 net periodic pension and OPEB costs by approximately $18 million and $5 million, respectively. A  ¹/2 percentage point decrease in the discount rate would have increased the estimated 2004 net periodic pension and OPEB costs by approximately $19 million and $4 million, respectively. As of December 31, 2003, a  ¹/2 percentage point increase in the discount rate would have decreased pension and OPEB liabilities by $350 million and $140 million, respectively. A  ¹/2 percentage point decrease in the discount rate would have increased pension and OPEB liabilities by $390 million and $130 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 and through consultation with health care experts. Assumed health care cost trend rates no longer have a significant effect on 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 union which freezes all 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 2004. 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 $4 million in 2004. A  ¹/2 percentage point decrease in the escalation trend would have decreased expected net periodic OPEB costs by approximately $4 million in 2004.

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 “Management’s Discussion and Analysis of 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

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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 deferred tax assets recorded as of December 31, 2003, was $604 million, net of an established valuation allowance of $241 million. See Note 14 to the Financial Statements. U. S. Steel expects to generate future taxable income to realize the benefits of these deferred tax assets.

U. S. Steel makes no provision for deferred U.S. and certain foreign income taxes on the undistributed earnings of USSK and other consolidated foreign subsidiaries because management intends to permanently reinvest such earnings in foreign operations. As of December 31, 2003, the amount of undistributed earnings was approximately $481 million. If circumstances change and it is determined that earnings will be remitted in the foreseeable future, a charge of up to $140 million could 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 as 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, 2003, total accruals for environmental remediation were $131 million.

Segments

During 2003, U. S. Steel had five reportable operating segments: Flat-rolled Products (Flat-rolled), U. S. Steel Europe (USSE), Tubular Products (Tubular), Real Estate and Straightline. In addition, the results of several operating segments that do not constitute reportable segments were combined and disclosed in the Other Businesses category.

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 USSK segment was renamed USSE and includes the operating results of USSB.

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 recent 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 6 to the Financial Statements for details. These changes were made so that the 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 retiree obligations. Comparative results for 2002 and 2001 have been conformed to the current year presentation.

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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 transportation (including automotive), appliance, service center, conversion, container, and construction 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 USSE segment includes the operating results of USSK, U. S. Steel’s integrated steel mill in Slovakia; and, effective September 12, 2003, USSB, U. S. Steel’s facilities in Serbia. Prior to September 12, 2003, this segment included the operating results of activities under facility management and support agreements with Sartid. These agreements were terminated in conjunction with the acquisition. USSE produces and sells sheet, strip mill plate, tin mill, tubular, precision tube and specialty steel products. USSE primarily serves customers in the central and western European construction, conversion, appliance, transportation, service center, container, and oil, gas and petrochemical markets. In June 2003, USSK sold its equity interest in Rannila Kosice, s.r.o.

The Tubular segment includes the operating results of U. S. Steel’s domestic tubular production facilities and, prior to its sale in May 2003, included U. S. Steel’s equity interest in Delta Tubular Processing (Delta). These operations produce and sell both seamless and electric resistance weld tubular products and primarily serve customers in the oil, gas and petrochemical markets.

The Real Estate segment includes the operating results of U. S. Steel’s mineral interests that are not assigned to other operating units; and 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. Prior to the coal seam gas sale and the timber contribution, income generated from these assets was reported in the Real Estate segment. U. S. Steel has entered into an agreement to sell the remaining mineral interests administered by the Real Estate segment. See Note 15 to the Financial Statements.

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

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-bearing taconite pellets, transportation services, and engineering and consulting services. Prior to the Mining Sale on June 30, 2003, Other Businesses were involved in the mining, processing and sale of coal. Effective May 20, 2003, Other Businesses include the operating results of the Keewatin, Minnesota taconite pellet operations and Delray, which were acquired from National.

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Management’s Discussion and Analysis of Income

The principal drivers of U. S. Steel’s financial results are price, volume, costs 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.

Revenues and other income

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 USSE 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 taconite pellets. Net gains on disposal of assets in 2003 included $55 million resulting from the timber contribution to the pension plan. Other income in 2003 included $34 million from the sale of coal seam gas interests. Other income in 2002 included $38 million from a Federal excise tax refund.

Total revenues and other income in 2002 increased by $679 million from 2001 primarily due to higher shipments and average realized prices for domestic sheet products; the absence of the $104 million impairment of receivables primarily from Republic, which was included in 2001; increased Straightline shipments as a result of a full year of operations; and higher average realized prices for USSK, which were partially due to foreign exchange effects. These were partially offset by reduced domestic tubular and plate shipment volumes.

Pension and OPEB costs

Pension benefit costs, which are included in income (loss) from operations, totaled $556 million in 2003, compared to pension credits of $3 million in 2002 and $120 million in 2001. The cost in 2003 included $447 million of settlement, curtailment and termination benefit charges, which are included in the 2003 workforce reduction charge described below in “Items not allocated to segments.” The credit in 2002 included $100 million of settlement charges, which comprise the 2002 workforce reduction charge also described below in “Items not allocated to segments.” Excluding these charges, 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 asset assumption and a lower discount rate. The credit in 2001 included $34 million of termination and settlement charges due principally to a non-union voluntary early retirement program offered in conjunction with the Separation and a

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shutdown of a majority of the Fairless Plant. Excluding settlement and termination charges, net periodic pension credits reflected a reduction from 2001 to 2002 of $51 million primarily due to a lower return on assets and a lower discount rate.

OPEB costs, which are also included in income (loss) from operations, totaled $241 million in 2003, compared to $150 million in 2002 and $129 million in 2001. Costs in 2003 included $58 million of curtailment charges, which are included in the 2003 workforce reduction charge described below. The increase in 2003 compared to 2002, excluding those charges, was primarily due to the addition of liabilities for National employees, changes in rate of retirement assumptions and a lower discount rate. The increase of $21 million from 2001 to 2002 was primarily due to higher medical claim costs and a higher assumed escalation trend applied to those claim costs.

For additional information on pensions and other postretirement benefits, including defined contribution plans, see Note 22 to the Financial Statements.

Selling, general and administrative expenses

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 other postretirement benefit costs as previously discussed; increased compensation expense related to stock appreciation rights; and higher expenses at USSE 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. Selling, general and administrative expenses increased by $148 million in 2002 compared to 2001. The increase in 2002 was primarily due to the decrease in the pension credit and higher postretirement benefit costs as previously discussed, the impairment of remaining retiree medical cost reimbursements receivable from Republic, increased legal and consulting expenses primarily due to the Section 201 trade cases and potential industry consolidation, and the expansion of Straightline.

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Restructuring charges

Restructuring charges of $683 million in 2003 consisted primarily of the workforce reduction charge of $621 million, costs related to the Straightline shutdown totaling $16 million and $46 million of the asset impairments, all of which are reflected in the following table under “Other items not allocated to segments.” See Note 10 to the Financial Statements for further details.

Segment results for Flat-rolled

Flat-rolled recorded a segment loss of $54 million in 2003, compared to a loss of $84 million in 2002. The decreased loss was primarily due to higher average realized prices and favorable effects resulting from ongoing cost-improvement programs, the National acquisition and workforce reductions. These were partially offset by increased prices for raw materials, natural gas and utilities; higher employee benefit costs; increased costs for repair outages; and costs associated with the August 2003 power outage, which interrupted operations in Michigan and Ohio.

The segment loss for Flat-rolled of $84 million in 2002 reflected an improvement of $512 million from 2001. The substantially decreased loss was primarily due to improved operating efficiencies, higher average realized prices and shipment volumes for sheet products, lower energy costs and cost saving initiatives, partially offset by lower results from coke operations.

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Segment results for USSE

USSE segment income for the full-year 2003 was $203 million, an increase of $93 million from 2002. The improvement was primarily due to higher average realized prices as a result of favorable exchange rate effects and price increases, as well as higher shipment volumes. Prior to September 12, 2003, USSE shipments included those realized under toll conversion agreements with Sartid and, effective September 12, 2003, included all shipments from Sartid, now USSB. These improvements were partially offset by the unfavorable effect on costs of changes in foreign exchange rates; costs associated with the conversion and facility management agreements with Sartid, which were terminated in conjunction with the acquisition; and post-acquisition operating losses at USSB including effects from a 38-day strike.

USSE segment income for 2002 was $110 million, a decrease of $13 million compared to 2001. The decrease was primarily due to the unfavorable effect of changes in foreign exchange rates on costs, higher freight costs, costs associated with the conversion and facility management agreements with Sartid, and business development expenses associated with Sartid and other expansion opportunities in Europe. These were partially offset by higher average realized prices, which were in part due to favorable exchange rate effects. The net currency exchange effect on total year income from operations was not material.

Segment results for Tubular

The segment loss for Tubular in 2003 reflected a decline of $19 million from 2002 primarily due to lower average realized prices for seamless products and higher natural gas prices, partially offset by increased shipment volumes for seamless products and income from the sale of Delta.

The Tubular segment recorded a loss of $6 million for 2002, compared to income of $74 million in 2001. The decline was primarily due to lower shipment volumes and lower average realized prices for tubular products.

Segment results for Real Estate

Real Estate segment income for 2003 and 2002 was $50 million. Increased coal seam gas royalties were offset by lower real estate sales.

Real Estate segment income for 2002 was $50 million, compared with $63 million in 2001. The decrease primarily reflected lower mineral interest royalties.

Segment results for Straightline

Straightline had a segment loss of $70 million for 2003, reflecting a decline of $25 million compared to 2002. The increased losses resulted mainly from higher 2003 sales volumes at negative margins.

Straightline recorded a segment loss of $45 million in 2002, its first full year of operations, compared with a loss of $19 million in 2001 for the period following the start-up of operations on October 30, 2001.

Results for Other Businesses

The loss for Other Businesses for 2003 reflected a decline of $68 million from income of $33 million in 2002. The decrease mainly reflected lower results from taconite pellet operations due primarily to reduced shipment volumes, lower results from coal operations mainly due to the Mining Sale on June 30, 2003, and lower results for transportation services.

Income for Other Businesses for 2002 was $33 million, a significant improvement from 2001’s loss of $62 million. The increase primarily reflected higher income from taconite pellet and coal operations.

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Items not allocated to segments:

Stock appreciation rights resulted in $75 million of compensation expense accrued in 2003, due primarily to the 91 percent increase in U. S. Steel’s stock price during the fourth quarter of 2003. These stock appreciation rights were issued over the last ten years and allow the holders to receive cash and/or common stock equal to the excess of the fair market value of the common stock over the exercise price.

Costs related to Straightline shutdown consisted of the write-down of fixed assets and certain employee benefit costs resulting from the shutdown of Straightline, which will be completed in 2004.

Workforce reduction charges totaling $621 million in 2003 related to U. S. Steel’s ongoing operating and administrative cost reduction programs and consisted of curtailment expenses of $310 million for pensions and $64 million for other postretirement benefits related to employee reductions under the Transition Assistance Program (TAP) for union employees (excluding former National employees retiring under the TAP), other retirements, layoffs and asset dispositions; $103 million for early retirement cash incentives related to the TAP; pension settlement losses of $97 million due to a high level of retirements of salaried employees; termination benefit charges of $40 million primarily for enhanced pension benefits provided to U. S. Steel employees retiring under the TAP; and $7 million for the cost of layoff unemployment benefits provided to non-represented employees. The workforce reduction charge of $100 million in 2002 reflected pension settlement losses related to retirements of personnel covered under the non-union qualified pension plan and the non tax-qualified excess and supplemental pension plans for executive and senior management.

Asset impairments of $57 million in 2003 resulted from a non-monetary asset exchange with International Steel Group, which was completed effective November 1, 2003, and the impairment of a cost method investment. Asset impairments in 2002 and 2001 were for charges related to reserves established against receivables exposure from financially distressed steel companies, primarily Republic. Asset impairments in 2001 also included $20 million of charges resulting from the impairment of an intangible asset related to the five-year agreement for LTV to supply U. S. Steel with pickled hot bands entered into in conjunction with the acquisition of LTV’s tin mill products business. This impairment followed the discontinuation of LTV operations at East Chicago.

Gain on timber contribution to pension plan reflected a $55 million gain resulting from the excess of fair value over net book value for timber cutting rights valued at $59 million, which U. S. Steel voluntarily contributed to its defined benefit pension fund in December 2003.

Insurance recoveries related to USS-POSCO fire represent U. S. Steel’s share of insurance recoveries in excess of facility repair costs for the cold reduction mill fire at USS-POSCO, which occurred in May 2001. The final payment was received in December 2002.

Federal excise tax refund represents the recovery of black lung excise taxes that were paid on coal export sales during the period 1993 through 1999. During 2002, U. S. Steel received cash and recognized pre-tax income of $38 million, which is included in other income on the statement of operations. Of the $38 million received, $11 million represented interest.

Net interest and other financial costs

Net interest and other financial costs were $130 million in 2003, compared to $115 million in 2002 and $141 million in 2001. The $15 million increase in 2003 was primarily due to interest on the new 9¾% senior notes and an increase in interest for tax deficiencies, partially offset by a favorable $17 million adjustment related to prior years’ taxes and more favorable changes in foreign currency effects. The decrease of $26 million in 2002 as compared with 2001 was primarily due to lower average debt levels following the December 31, 2001 value transfer of $900 million from Marathon, as well as a favorable change in foreign currency effects. These were

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partially offset by the absence in 2002 of a favorable $67 million adjustment related to prior years’ taxes, which occurred in 2001. The foreign currency effects were primarily due to remeasurement of USSK and USSB net monetary assets into the U.S. dollar, which is their functional currency, and resulted in net gains of $20 million and $16 million in 2003 and 2002, respectively, and a net loss of $1 million in 2001.

Income taxes

The income tax benefit in 2003 was $454 million, compared with benefits of $48 million in 2002 and $328 million in 2001. The tax benefit in 2003 included a $19 million favorable effect relating to an adjustment of prior years’ taxes, compared to $8 million in 2002 and $18 million in 2001. The tax benefit in 2001 included a $33 million deferred tax benefit associated with the Transtar reorganization. The increase in the tax benefit in 2003 compared to 2002 was primarily due to increased pre-tax losses for domestic operations, including increased benefit costs, while the decrease in the tax benefit from 2001 to 2002 was primarily due to reduced pre-tax losses from domestic operations.

As of December 31, 2003, U. S. Steel had net federal, state and foreign deferred tax assets of $500 million, $95 million and $9 million, respectively. The amount of net domestic deferred tax assets determined to be realizable was measured by calculating the tax effect of tax planning strategies that are estimated to generate approximately $1.3 billion in taxable income. Tax planning strategies include actions that are prudent and feasible, and that management ordinarily might not take, but would take, if necessary to realize a deferred tax asset, unless the need to do so is eliminated in future years. These tax planning strategies include the implementation of the previously announced plan to dispose of non-strategic assets, the sale of non-integral domestic and foreign operating assets as well as the ability to elect alternative accounting methods. Based on this assessment, as of December 31, 2003, the company determined that it is more likely than not that $604 million of such assets will be realized, therefore resulting in a valuation allowance of $241 million.

The Slovak Income Tax Act provides an income tax credit, which is available to USSK if certain conditions are met. In order to claim the tax credit in any year, 60 percent of USSK’s sales must be export sales and USSK must reinvest the tax credits claimed in qualifying capital expenditures during the five years following the year in which the tax credit is claimed. The provisions of the Slovak Income Tax Act permit USSK to claim a tax credit of 100 percent of USSK’s tax liability for years 2000 through 2004 and 50 percent for the years 2005 through 2009. Management believes that USSK fulfilled all of the necessary conditions for claiming the tax credit for the years for which it was claimed and anticipates meeting such requirements in 2004. As a result of claiming these tax credits and management’s intent to reinvest earnings in foreign operations, virtually no income tax provision is recorded for USSK income.

In October 2002, a tax credit limit was negotiated by the Slovak government as part of the Accession Treaty governing Slovakia’s entry into the European Union (EU). The Treaty limits to $500 million the total tax credit to be granted to USSK during the period 2000 through 2009. The impact of the tax credit limit is expected to be minimal since Slovak tax laws have been modified and tax rates have been reduced since the acquisition of USSK. The Treaty also places limits upon USSK’s flat-rolled production and export sales to the EU, allowing for modest growth each year through 2009. The limits upon export sales to the EU take effect upon Slovakia’s entry into the EU, which is expected to occur in May 2004. A question has recently arisen with respect to the effective date of the production limits. Slovak Republic representatives have stated their belief that the Treaty intended that these limits take effect upon entry into the EU, whereas the European Commission has taken the position that the flat-rolled production limitations apply as of 2002. Discussions between representatives of Slovakia and the European Commission are ongoing, but U. S. Steel has not seen discernable progress in these talks to date. Although it is not possible to predict the outcome of those discussions, a settlement could take many forms including a reduction in USSK’s tax credit, a payment for taxes based on a portion of production for years 2002 and 2003 or the acceleration of the restrictions upon USSK’s flat-rolled production and/or sales into the EU. At this time, it is not possible to predict the impact of such a settlement upon U. S. Steel’s financial position, results of operations or cash flows.

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The Bush Administration is continuing discussions at the Organization of Economic Cooperation and Development (OECD) aimed at the reduction of inefficient steel production capacity and the elimination and limitation of certain subsidies to the steel industry throughout the world. It is possible that these discussions could result in the adoption of an OECD agreement which could negatively impact USSK’s tax credit.

See Note 14 to the Financial Statements for further information regarding income taxes.

Management’s Discussion and Analysis of Operations

Flat-rolled shipments were 13.5 million tons in 2003 including partial year shipments from the facilities acquired from National, 9.9 million tons in 2002 and 8.8 million tons in 2001. Tubular shipments were 0.9 million tons in 2003, 0.8 million tons in 2002 and 1.0 million tons in 2001. Exports accounted for approximately 4 percent of U. S. Steel’s domestic shipments in 2003, and 5 percent in 2002 and 2001.

USSE shipments were 4.8 million net tons in 2003 including partial year shipments from USSB, 3.9 million net tons in 2002 and 3.7 million net tons in 2001.

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 14.9 million tons in 2003 including production from the National assets following the acquisition, compared with 11.5 million tons in 2002 and 10.1 million tons in 2001. Raw steel production averaged 88 percent of capability in 2003 recognizing the National capability on a prorata basis, compared with 90 percent of capability in 2002 and 79 percent of capability in 2001. All steel produced in U. S. Steel’s domestic facilities is continuous cast. In 2003, domestic raw steel production was negatively affected by a scheduled repair outage at Gary Works for U. S. Steel’s largest blast furnace. In 2002, domestic raw steel production was negatively affected by poor market conditions during the first quarter, the acceleration into the fourth quarter of some blast furnace repair work that was originally scheduled to occur in 2003 and the high level of imports. In 2001, domestic raw steel production was negatively impacted by poor economic conditions and the high level of imports.

The acquisition of Sartid on September 12, 2003, increased USSE’s stated annual raw steel production capability from 5.0 million net tons to 7.4 million net tons. USSE raw steel production was 4.8 million net tons in 2003, 4.4 million net tons in 2002 and 4.1 million net tons in 2001. USSE’s raw steel production averaged 84 percent of capability in 2003, compared to 88 percent in 2002 and 81 percent in 2001. USSE’s capability utilization in 2003 was negatively affected by the partial period inclusion of USSB as only about a third of USSB’s annual raw steel design capability was operational. Achievement of higher operational levels will require improved operating practices and an extensive rehabilitation and capital spending program.

The domestic steel industry is restructuring after many years of oversupply and low prices attributable largely to excess imports, which resulted in significant temporary or permanent capacity closures starting in late 2000 and led to the introduction of trade remedies announced by President Bush on March 5, 2002, under Section 201 of the Trade Act of 1974. The combination of capacity closures, trade restrictions and the imposition of tariffs led to a recovery of steel prices from 20-year lows in late 2001 and early 2002.

The trade remedies announced by President Bush on March 5, 2002, 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. U. S. Steel intends to monitor imports closely and file anti-dumping and countervailing duty petitions if unfairly traded imports adversely impact, or threaten to adversely impact, financial results. 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 and an increase in the global demand for steel.

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Steel imports to the United States accounted for an estimated 19 percent of the domestic steel market in 2003, compared to 27 percent in 2002 and 24 percent in 2001.

During 2004, two events will occur that may have a significant effect on the amount of steel imports that will be allowed to enter the United States. The International Trade Commission will commence a five-year review required by rules of the World Trade Organization to determine whether antidumping findings against hot-rolled steel from Japan, Russia and Brazil should be continued. Also, the Comprehensive Steel Trade Agreement with Russia, under which Russia has voluntarily limited the quantity of its exports to the United States of steel products that are not covered by antidumping orders, will expire in July.

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 European Union (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. USSE 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 USSK upon Slovakia’s accession into the EU, which is expected to occur 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). To date, those measures have not been terminated. In light of market opportunities elsewhere, USSE’s experience operating under these measures and the fact that the measures will cease to affect USSK upon EU accession by Slovakia, Poland and Hungary, it appears unlikely that these measures will have a material adverse effect on USSE’s operating profit during 2004.

Management’s Discussion and Analysis of Financial Condition, Cash Flows and Liquidity

Financial Condition

SFAS No. 87 “Employer’s Accounting for Pensions” provides that if, at any plan measurement date, the fair value of plan assets is less than the plan’s accumulated benefit obligation (ABO), the sponsor must record a minimum liability at least equal to the amount by which the ABO exceeds the fair value of the plan assets and any pension asset must be removed from the balance sheet. The sum of the liability and pension asset is offset by the recognition of an intangible asset and/or as a direct charge to stockholders’ equity, net of tax effects. Such adjustments have no direct impact on earnings per share or cash. At December 31, 2003, the fair value of plan assets for U. S. Steel’s pension plans was $7.5 billion. Based on asset values as of December 31, 2003, the ABO exceeded the fair value of plan assets by $237 million. Consequently, required minimum liability adjustments were recorded, resulting in the recognition of an intangible asset of $440 million and a total cumulative net charge against equity of $1,462 million at December 31, 2003.

Current assets at year-end 2003 increased $667 million from year-end 2002 primarily due to increased trade receivables and inventory balances related to the National acquisition. The increase also reflected higher cash and cash equivalents. For details, see “Cash Flows.”

Investments and long-term receivables declined $52 million from December 31, 2002. The decrease resulted mainly from cash distributions received from PRO-TEC Coating Company and the impairment of a cost method investment.

Net property, plant and equipment at year-end 2003 increased $437 million from year-end 2002 mainly reflecting the addition of the National facilities.

The pension asset at year-end 2003 decreased $1,646 million from year-end 2002 because additional minimum liability adjustments were required to reflect the underfunded status of U. S. Steel’s main defined

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benefit pension plan at December 31, 2003. Most of the pension asset reflected at year-end 2002 was related to the overfunded status of the main non-union defined benefit pension plan, which was merged into the underfunded main union defined benefit pension plan on November 30, 2003.

The intangible pension asset at December 31, 2003, increased by $26 million from December 31, 2002, as a result of the additional minimum liability adjustments that were recorded for U. S. Steel’s pension plans.

Other intangible assets—net of $37 million at December 31, 2003, were acquired from National and were comprised primarily of proprietary software.

Deferred income tax benefits increased by $365 million from December 31, 2002, from the establishment of federal and state deferred tax assets primarily related to employee benefits, including a portion of the adjustments to the additional minimum liability for U. S. Steel’s pension plans, and also as a result of net operating losses generated in 2003.

Other noncurrent assets of $171 million at year-end 2003 increased $27 million from year-end 2002 mainly as a result of an increase in restricted cash deposits primarily used to collateralize letters of credit to provide financial assurance.

Current liabilities at year-end 2003 increased $758 million from year-end 2002 primarily due to an increase in payroll and benefits payable due to obligations related to active employees at the acquired National facilities, increased other postretirement benefit liabilities due to higher expected cash outlays in 2004 resulting from a reduction in trust assets available for benefit payments, an accrual for stock-based compensation, an accrual for a planned voluntary contribution to the pension fund and payables related to the Transition Assistance Program for union employees; and an increase in accounts payable due mainly to the addition of the National facilities.

Long-term debt at December 31, 2003, was $1,890 million, $482 million higher than year-end 2002. The increase in debt was primarily due to the issuance of $450 million of 9 ³/4% senior notes in May 2003. For discussion, see “Liquidity.” The increase also reflected additional capital lease obligations.

Deferred income tax liabilities at December 31, 2003, reflected a decrease of $217 million from December 31, 2002. The change primarily resulted from the establishment of federal and state deferred tax assets, which were previously discussed, in excess of deferred income tax liabilities.

Employee benefits at December 31, 2003, decreased $219 million from year-end 2002. Employee benefits for both periods included the net pension liability related to an additional minimum liability adjustment for defined benefit pension plans. On November 30, 2003, the overfunded main non-union defined benefit pension plan (which was reported in pension assets at year-end 2002) was merged into the underfunded main union defined benefit pension plan. Employee benefits at year-end 2003 were lower than the amount recorded for the union plan by itself a year earlier since the surplus of assets over the liabilities of the non-union plan offset some of the shortfall of the union plan once merged. This decrease was partially offset by the addition of liabilities related to union employees at the acquired National facilities.

Preferred stock increased by $226 million from December 31, 2002, due to an offering of 5 million shares of 7% Series B Mandatory Convertible Preferred Shares (Series B Preferred) that was completed in February 2003 for $242 million, partially offset by preferred stock dividend payments which were applied against the Series B Preferred paid-in capital because of the retained deficit.

Accumulated other comprehensive loss of $1,501 million at December 31, 2003, increased by $698 million from year-end 2002, primarily reflecting an incremental net charge to equity resulting from the additional minimum liability adjustments that were recorded for U. S. Steel’s pension plans.

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Cash Flows

Net cash provided from operating activities was $577 million in 2003, compared with $279 million in 2002. The improvement resulted mainly from lower working capital requirements.

Net cash provided from operating activities was $279 million in 2002, a decrease of $390 million from 2001. Absent the favorable effects of the $819 million intergroup tax settlements from Marathon in 2001 as described below, net cash provided from operating activities in 2002 reflected an improvement of $429 million from 2001. This improvement primarily resulted from higher net income, partially offset by increased working capital requirements primarily as a result of higher operating levels.

Net cash provided from operating activities in 2001 included favorable intergroup tax settlements from Marathon totaling $819 million. The $819 million tax settlement is reflected in net cash provided by operating activities primarily as favorable working capital changes of $364 million related to the settlement of the income tax receivable established in 2000 arising from tax attributes primarily generated in the year 2000; increases in net income of $426 million for tax benefits generated by U. S. Steel in 2001; and net increases in all other items net of $15 million for state tax benefits generated in 2000. The last two items were included in the $441 million settlement with Marathon, which occurred in 2001 as a result of the Separation.

Capital expenditures in 2003 were $316 million, compared with $258 million in 2002. Major domestic projects in 2003 included the quench and temper line project at Lorain Pipe Mills. Major projects at USSE in 2003 included continued work on a new dynamo line and the installation of additional tin mill facilities at USSK.

Capital expenditures in 2002 were $258 million, including $97 million for USSE. Major projects in 2002 included the quench and temper line project at Lorain Pipe Mills and various projects at USSK, including continued work on the new tinning and continuous annealing lines and the sinter plant dedusting project, completion of the scrap management and hot strip mill reheat furnace upgrade projects, commencement of work on a new dynamo line and installation of a vacuum degassing facility.

Capital expenditures of $287 million in 2001 included exercising a buyout option of a lease for half of the Gary Works No. 2 slab caster; repairs to the No. 3 blast furnace at Mon Valley Works; work on the No. 2 stove at the No. 6 blast furnace at Gary Works; the completion of the replacement coke battery thruwalls at Gary Works; the completion of an upgrade to the Mon Valley Works cold reduction mill; systems development projects; and projects at USSK, including the tin mill expansion and the vacuum degassing project.

U. S. Steel’s domestic contract commitments to acquire property, plant and equipment at December 31, 2003, totaled $23 million compared with $24 million at December 31, 2002.

USSK has a commitment to the Slovak government for a capital improvements program of $700 million, subject to certain conditions, over a period commencing with the acquisition date of November 24, 2000, and ending on December 31, 2010. The remaining commitments under this capital improvements program as of December 31, 2003, and December 31, 2002, were $433 million and $541 million, respectively. In addition, USSB has a commitment to the Serbian government that requires it to spend up to $157 million during the first five years for working capital; the repair, rehabilitation, improvement, modification and upgrade of facilities; and community support and economic development. USSB spent approximately $46 million through December 31, 2003, leaving a balance of $111 million under this commitment. See Note 31 to the Financial Statements for further information.

Capital expenditures for 2004 are expected to be approximately $435 million, including approximately $190 million for USSE. Major domestic items include significant mobile equipment replacements, mainly at U. S. Steel’s iron ore operations; and the capital portion of planned blast furnace repair outages. Major projects in Europe include a dedusting facility, an air separation unit and completion of the new dynamo line at USSK, and upgrades to the cold reduction mill at USSB.

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The preceding statement concerning expected 2004 capital expenditures is a forward-looking statement. This forward-looking statement is based on assumptions, which can be affected by (among other things) levels of cash flow from operations, general economic conditions, business conditions, availability of capital, whether or not assets are purchased or financed by operating leases, and unforeseen hazards such as weather conditions, explosions or fires, which could delay the timing of completion of particular capital projects. Accordingly, actual results may differ materially from current expectations in the forward-looking statement.

Acquisition—U. S. Steel Kosice consisted of cash payments of $37.5 million in 2003 and 2002, and $14 million in 2001. The payment in 2003 was the final payment.

Disposal of assets in 2003 consisted mainly of proceeds from the Mining sale, cash collections on notes received in prior years’ asset disposals, the sale of the former National headquarters building and the sale of U. S. Steel’s interest in Delta. Disposal of assets in 2002 consisted mainly of proceeds from the sale of U. S. Steel’s investment in stock of VSZ, which was previously discussed, and the sale/leaseback of certain assets.

Restricted cash—Net deposits of $32 million in 2003 and $67 million in 2002 were mainly used to collateralize letters of credit to meet financial assurance requirements.

Investees—return of capital in 2001 of $13 million reflected a return of capital on the investment in stock of VSZ.

Net change in attributed portion of Marathon consolidated debt and other financial obligations was a decrease of $74 million in 2001. This decrease primarily reflected the net effects of cash provided from operating activities less cash used for investing activities and dividend payments prior to the Separation.

Repayment of specifically attributed debt in 2001 of $370 million was primarily due to the termination and repayment of the accounts receivable facility, which was accounted for as secured borrowing and specifically attributed to U. S. Steel prior to the Separation.

Settlement with Marathon of $54 million in 2002 reflected a cash payment made during the first quarter in accordance with the terms of the Separation.

Issuance of long-term debt in 2003 resulted from the issuance of $450 million of 9 ³/4% senior notes in May 2003, net of deferred financing costs associated with the notes and the new inventory facility. For discussion, see “Liquidity.”

Repayment of long-term debt in 2003 and 2002 was mainly on the USSK loan.

Preferred stock issued in 2003 reflected net proceeds from the offering of 5 million shares of Series B Preferred.

Common stock issued in 2003 and 2002 reflected proceeds from stock sales to the U. S. Steel Corporation Savings Fund Plan for Salaried Employees and sales through the Dividend Reinvestment and Stock Purchase Plan. Common stock issued in 2002 also reflected $192 million of net proceeds from U. S. Steel’s equity offering completed in May 2002.

Dividends paid in 2003 were $35 million, compared with $19 million in 2002 and $57 million in 2001. Dividends paid in 2003 and 2002 reflected the quarterly dividend rate of $0.05 per common share established by U. S. Steel after the Separation, and effective with the March 2002 payment. Dividends paid in 2003 also included an initial dividend of $1.206 per share for the Series B Preferred, which was paid on June 16, 2003, and

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quarterly dividends of $0.875 per share, paid on September 15, 2003 and December 15, 2003. Dividends paid in 2001 reflected a quarterly dividend rate of $0.25 per share paid to USX—U. S. Steel Group common stockholders for the March 2001 payment and a quarterly dividend rate of $0.10 per share, effective with the June 2001 payment. Dividends paid in 2001 also included quarterly dividends on the 6.50% Cumulative Convertible Preferred Stock that was retained and repaid by Marathon as part of the Separation.

For discussion of restrictions on future dividend payments, see “Liquidity.”

Debt and Convertible Preferred Shares Ratings

On January 9, 2003, Standard & Poor’s Ratings Services (S&P) placed its credit ratings for U. S. Steel on credit watch with negative implications. On the same day, Moody’s Investors Service (Moody’s) placed its ratings for U. S. Steel under review for possible downgrade and Fitch Ratings (Fitch) placed its ratings for U. S. Steel on rating watch negative. These actions followed U. S. Steel’s announced bid for certain assets of National.

As of January 9, 2003, S&P, Moody’s and Fitch assigned BB, Ba3 and BB ratings, respectively, to U. S. Steel’s senior unsecured debt.