Operations Overview

The Company's operations consist of seven steelmaking and finishing plants that produce flat-rolled carbon steels, including premium-quality coated, cold-rolled and hot-rolled products, and specialty stainless and electrical steels that are sold in hot band, sheet and strip form. These products are sold to the automotive, infrastructure and manufacturing, and distributors and converters markets. The Company sells its carbon products principally to domestic customers. The Company's electrical and stainless steel products are sold both domestically and increasingly, internationally. The Company's continuing operations also include two plants operated by AK Tube where flat-rolled carbon and stainless steel is further finished into welded steel tubing. In addition, the Company operates European trading companies that buy and sell steel and steel products.

Safety, quality and productivity are the focal points of AK Steel's operations and the hallmarks of its success. AK Steel has led the steel industry in safety performance for many years. In 2008, the Company experienced another year of outstanding safety performance and received a variety of awards. For the third consecutive year, the Company's Ashland, Kentucky coke plant received the Max Eward Safety Award, recognizing it for the best safety record in the industry. The Company's Zanesville Works was honored by the Ohio Bureau of Workers Compensation with two awards for its safety performance. Similarly, the Walbridge plant of AK Tube LLC, a wholly-owned subsidiary of the Company, received two awards from the Ohio Bureau of Workers Compensation for its safety performance.

The Company also had one of its best performances with respect to quality in 2008. The Company has been recognized repeatedly in leading surveys for being industry-best in overall quality for carbon, stainless and electrical steels and received such recognition again in 2008. The Company also received a variety of quality awards from customers and others in 2008. The Company was added to the list of "World-Class Steelmakers" by World Steel Dynamics, a prominent steel industry strategic information service. The Company also received a MANNY award for excellence in manufacturing from Cincy Magazine, a leading business publication in Cincinnati, Ohio. All of the Company's steel plants have been awarded ISO/TS 16949:2002 Quality Management System certification, which is an international quality management system standard developed by the International Automotive Task Force and the Japan Automobile Manufacturers Association in conjunction with the international standards community. All of the Company's steel facilities also have been awarded certificates of registration under ISO 14001, a set of voluntary environmental management systems standards that enable an organization to control the impact of its activities, products or services on the environment. Audits to maintain these certifications are performed on a periodic and timely basis, and the Company continues to be ISO/TS 16949:2002 and ISO 14001 certified.

With respect to productivity, in 2008 the Company continued to improve on its historically excellent productivity performance and achieved record performances at numerous units at all locations. Until the dramatic decline in the United States and global economies that occurred during the fourth quarter of 2008, all of the Company's units were operating at excellent productivity rates, with numerous records being set at its specialty steel plants. Unfortunately, the severe downturn in the economy resulted in sharply lower demand for the Company's products, causing the Company to substantially reduce production and to temporarily idle facilities during the fourth quarter.

The Company announced or completed several capital projects in 2008 which should have a favorable ongoing impact on its operations and financial results. In July 2008, the Company announced a capital investment project at its Butler Works in the amount of $21.0 to further expand the Company's production capabilities for high-end, grain-oriented electrical steels that in recent years have been in strong demand in both the United States and global markets. While the demand for those electrical steel products has moderated recently due to the economic downturn, the large stimulus package recently signed into law by President Obama may spur an increase in that demand. In any event, the Company anticipates that strong demand for high-end electrical steel products will return early in the economic recovery and this expansion will position it to meet that demand. The project includes installation of new production equipment at the Company's Butler Works to utilize the Company's proprietary special annealing technology, as well as upgrades to an existing processing line at Butler Works.

The Company also announced a project with SunCoke Energy, Inc. ("SunCoke") to construct a new state-of-the-art, environmentally friendly heat-recovery coke battery capable of producing 550,000 net tons of metallurgical grade coke, as well as electrical power, for the Company's Middletown Works. The new coke battery will be constructed, owned and operated by SunCoke and the Company will purchase the coke and electricity pursuant to a 20-year supply contract. Construction of the new facility was delayed due to delays in the issuance of a required environmental permit-to-install. That required permit now has been issued and construction has begun. Appeals to the Ohio Environmental Review Appeals Commission from the issuance of the permit-to-install have been filed by a limited number of third parties who objected to the issuance of the permit and oppose the project. Those appeals remain pending. On January 28, 2009, the City of Monroe filed an action in federal district court in Cincinnati, Ohio, Case No. 1:09-CV-00063, pursuant to Section 304(a)(3) of the Clean Air Act seeking, among other things, to block construction of the new coke battery. The Company is not a party to this litigation. The defendants in the action are SunCoke Energy, Inc. and Middletown Coke Company, Inc.

2008 Financial Results Overview

Until the dramatic downturn in the economy which occurred in the fourth quarter of 2008, the Company was well on its way to its best-ever annual financial performance. Unfortunately, that economic downturn had a severe negative impact on the Company's business in the fourth quarter and likewise hurt the Company's full-year results. That said, the Company still was able to establish new annual records for average selling price and revenue, as well as adjusted operating profit and adjusted operating profit per ton.

In addition to being impacted by the economic downturn, most of the key financial metrics reported by the Company were adversely impacted by two significant non-cash charges which the Company recorded in the fourth quarter of 2008. The first of these charges was a "corridor charge" of $660.1 which the Company recognized in the fourth quarter under its method of accounting for pensions and other postretirement employee benefits. See discussion in the "Pension & Other Postretirement Employee Benefit Charges" section below for further information concerning this corridor charge. The second charge was a curtailment charge of $39.4 associated with the "lock and freeze" of a defined benefit pension plan covering all salaried employees. While both of these items were pre-tax, non-cash

charges, they collectively resulted in a significant reduction in the reported results for the Company's fourth quarter and full-year operating profit and net income.

For the fourth quarter of 2008, excluding the above-referenced non-cash corridor and curtailment charges, the Company reported adjusted income before taxes of $0.6 and adjusted operating profit of $10.3, or approximately $10 per ton. Including those charges, the Company reported a loss before taxes of $698.9 and an operating loss of $689.2, or approximately $642 per ton in the fourth quarter. For all of 2008, excluding the non-cash corridor and curtailment charges referred to above, the Company reported adjusted pre-tax income of $692.6, its best ever, and adjusted operating profit of $727.5, or approximately $124 per ton, also a record. Including those charges, the Company reported net income of $4.0, or $0.04 per diluted share, and operating profit of $28.0, or $5 per ton for 2008. Net sales increased by 9% over 2007 to a new annual net sales record of $7.6 billion in 2008. The average annual selling price for the Company's products rose to $1,303 per ton, also a Company record.

Despite contributing $225.0 to the Company's pension trust fund and $468.0 to the Middletown Works retirees VEBA Trust, the Company's cash at 2008 year-end was $562.7 versus $713.6 at 2007 year-end. The Company also ended 2008 with $682.3 of availability under its credit facility, resulting in a total liquidity of $1,245.0.

Key Factors Generally Impacting Financial Results

There were several key factors which impacted the Company's financial results. On the positive side, strong product demand (principally during the first three quarters), a keen focus on business basics, and excellent operational performance combined to enable the company to achieve a record average annual selling price and record annual revenue in 2008. On the negative side, the Company's financial results for the year were impacted significantly by the unanticipated and dramatic decline in the economies of the United States and the world during the fourth quarter of 2008 and by a pre-tax pension corridor charge of $660.1 and curtailment charges of $39.4.

Through the first three quarters of 2008, the Company was well on its way to record annual results with respect to virtually all of its key financial metrics. For example, the Company had record operating profit of $717.2 for the nine-month period ended September 30, 2008 and its operating profit per ton of $210 for the three months ended September 30, 2008 also was a record. The downturn that occurred principally during the fourth quarter was the swiftest and the most severe that the steel industry has faced in many decades. The Company began to see a significant deterioration in its business early in the fourth quarter and, as it became clearer that the reduction in product orders was not going to significantly improve soon, the Company quickly took steps to bring costs and inventories in line with its reduced level of business. Initially, those steps included operational adjustments and reduced purchases of raw materials. As economic conditions worsened, Management determined that the Company would need to take additional measures, including idling some of its facilities, laying off personnel, and otherwise reducing employment and input costs. By November 2008, the Company announced that it would temporarily idle some of its production and finishing facilities and would lay off a significant number of employees. In December 2008, that announcement was followed by the announcement of reductions in salaried employee base salaries and benefits, as well as a program to provide incentives for early retirements.

By taking these steps, the Company is reducing its costs to a level more consistent with the volume of business it received in the fourth quarter. Nonetheless, the reduction in orders attributable to the severe economic downturn which occurred in the fourth quarter still had a significant adverse impact on the Company's financial results for the fourth quarter and for the full-year 2008. The performance of the economy is typically a factor which affects the market conditions for the Company's products, as well as the products of the steel industry generally. Modest declines in the performance of the economy can often be overcome through adjustments to other factors affecting operating levels and profit, such as reducing input and other costs, increasing productivity to reduce cost per ton, increasing market share, etc. The economic downturn which occurred during the fourth quarter of 2008, however, was so severe that it could not be entirely overcome by such adjustments, or by the positive factors which contributed to the Company's otherwise strong performance in 2008.

2008 Compared to 2007

Shipments

Steel shipments in 2008 were 5,866,000 tons, compared to 6,478,700 tons in 2007. The year-to-year decrease was primarily the result of decreased sales in the fourth quarter due to the extreme decline in overall economic conditions. Shipments of stainless, coated, cold-rolled and tubular products all declined in 2008 compared to 2007. Partially offsetting these declines were increases in shipments of the Company's high-end, grain-oriented electrical steel products and shipments by the Company's European operations. The increase in high-end electrical steel shipments

was principally the result of strong demand for such products through the first nine months of the year, both domestically and internationally, and was facilitated by the Company's prior capital investments to increase its production capacity of electrical steel products. As a result of the overall decline throughout most of the Company's business, the value-added shipments remained relatively constant at 80.7% compared to 80.3%. Tons shipped by product category for 2008 and 2007 were as follows:

(tons in thousands)                          2008              2007
Stainless/electrical                     957.1        16.3 %     1,072.0        16.5 %
Coated                                 2,477.8        42.2 %     2,665.2        41.1 %
Cold-rolled                            1,185.2        20.2 %     1,325.7        20.5 %
Tubular                                  117.3         2.0 %       144.7         2.2 %
Subtotal value-added shipments         4,737.4        80.7 %     5,207.6        80.3 %
Hot-rolled                               949.2        16.2 %     1,008.5        15.6 %
Secondary                                179.4         3.1 %       262.6         4.1 %
Subtotal non value-added shipments     1,128.6        19.3 %     1,271.1        19.7 %

Total shipments                        5,866.0       100.0 %     6,478.7       100.0 %

Net Sales

The Company set an all-time record for net sales in 2008 of $7,644.3, up 9% from the 2007 then-record sales of $7,003.0. The year-to-year increase was driven by a record 2008 average annual selling price of $1,303 per ton compared to $1,081 per ton in 2007. Several factors helped drive this improvement. First, the Company benefited from an increase in pricing related to its contract business, with approximately 50% of its total shipments for the year being made subject to such pricing. Second, with respect to the Company's spot market sales, prices increased as a result of strong demand during the first nine month of the year, before retreating significantly during the fourth quarter. Third, over the course of the last several years, the Company has focused on optimizing its product mix to focus on growing its niche markets where its profit margins are strongest. Lastly, as a result of volatile raw material and energy costs, the Company has negotiated variable pricing mechanisms with most of its contract customers, which enable the Company to pass on rising or falling commodity and energy costs during the life of the contract. The Company had such variable pricing mechanisms with respect to approximately 75% of its contract shipments in 2008.

Net sales to customers outside the United States were $1,267.9, or 17% or total steel sales, for 2008, and $925.1, or 13% of total steel sales, for 2007. A substantial majority of the revenue outside of the United States is associated with electrical and stainless steel products.

The Company's direct automotive sales declined to approximately 32% of the Company's total sales in 2008, compared to 40% in 2007. The relative decline in automotive sales is principally the result of significantly reduced light vehicle production in North America due to the downturn in the economy, which led to reduced orders from the Company's automotive customers, particularly in the fourth quarter of 2008. It also is attributable to an increased volume of sales into the spot market of hot rolled products to non-automotive customers. Also contributing to the decline in the percentage of direct automotive sales was an increase in the Company's revenues from 2007 to 2008 attributable to electrical steel products which are included below in the infrastructure and manufacturing markets for the Company's products. The increase in revenue for electrical steel products was the result of both higher prices and increased shipments, particularly with respect to high-end, grain-oriented electrical steel products. The Company's infrastructure and manufacturing market sales increased to 29% of the Company's total sales in 2008, compared to 26% in 2007. This increase is principally the result of the increased electrical steel sales and reduced direct automotive sales. The Company's distributor and converter sales increased to 39% from 34% in 2007. The principal reason for this percentage increase also was the decline in direct automotive sales. The following table sets forth the percentage of the Company's net sales attributable to various markets:

  Market                                 2008   2007
  Automotive                             32%    40%
  Infrastructure and Manufacturing (a)   29%    26%
  Distributors and Converters (a)        39%    34%

(a) The Company historically has referred to these markets by somewhat different names. The names have been updated to simplify them, but the nature of the product sales and customers included in each market

has not changed. For more information, see footnote to the table contained in the discussion of Customers in Item 1, on page 2.

Operating Profit and Adjusted Operating Profit

The Company reported an operating profit for 2008 of $28.0, compared to an operating profit of $624.4 for 2007. Included in 2008 and 2007 annual results were pre-tax, primarily non-cash corridor charges, which are described more fully below. The exclusion of those charges results in record adjusted operating profit for 2008 of $727.5 compared to $664.2 for 2007.

Exclusion of the non-cash charges, discussed below, from the operating results is presented in order to clarify the effects of those charges on the Company's operating results and to more clearly reflect the operating performance of the Company on a comparative basis for 2008 and 2007. The excluded charges consist of a pension corridor charge in 2008 and pension curtailment charges in 2008 and 2007.

The Company incurred a corridor charge in 2008 of $660.1 related to its pension obligations. There were no corridor charges in 2007. A corridor charge, if required after a remeasurement of the Company's pension and other postretirement obligations, historically has been recorded in the fourth quarter of the year in accordance with the method of accounting for pension and other postretirement benefits which the Company adopted as a result of its merger with Armco Inc. in 1999. Since 2001, the Company has recorded approximately $2.5 billion in non-cash pre-tax corridor charges as a result of this accounting treatment. These corridor charges have had a significant negative impact on the Company's financial statements including a substantial reduction in the Company's stockholders' equity. Additional information concerning these corridor charges is contained in the "Pension & Other Postretirement Employee Benefit Charges" section below. Though these corridor charges have been required in seven of the last eight years, it is impossible to reliably forecast or predict whether they will occur in future years or, if they do, what the magnitude will be. They are driven mainly by events and circumstances beyond the Company's control, primarily changes in interest rates, performance of the financial markets, healthcare cost trends and mortality and retirement experience.

The 2008 curtailment charges were a result of salaried workforce cost reductions implemented by the Company. A defined benefit plan covering all salaried employees was "locked and frozen" and was replaced with a fixed percent contribution to a defined contribution pension plan. As a result, the Company was required to recognize in the fourth quarter of 2008 the past service pension expense that previously would have been amortized. Additional information concerning these charges is contained in the "Pension & Other Postretirement Employee Benefit Charges" section below.

The 2007 curtailment charge was a result of new labor agreements that the Company entered into with the represented employees at the Company's Middletown Works and Mansfield Works. Under these agreements, the existing defined benefit pension plan was "locked and frozen" in 2007, with subsequent Company contributions being made to multiemployer pension trusts. As a result, the Company was required to recognize in 2007 the past service pension expense that previously would have been amortized. These new labor agreements extend until 2011 and no further curtailment or other charges are anticipated to occur for the duration of the agreements. Additional information concerning these charges is contained in the "Pension & Other Postretirement Employee Benefit Charges" section below.

Management believes that reporting adjusted operating profit (as a total and on a per-ton basis), which is not a financial measure under generally accepted accounting principles ("GAAP"), more clearly reflects the Company's current operating results and provides investors with a better understanding of the Company's overall financial performance. In addition, the adjusted operating results facilitate the ability to compare the Company's financial results to those of our competitors. Management views the reported results of adjusted operating profit as an important operating performance measure and, as such, believes that the GAAP financial measure most directly comparable to it is operating profit. Adjusted operating profit is used by management as a supplemental financial measure to evaluate the performance of the business. Management believes that the non-GAAP measure, when analyzed in conjunction with the Company's GAAP results and the accompanying reconciliations, provides additional insight into the financial trends of the Company's business versus the GAAP results alone. Management also believes that investors and potential investors in the Company's securities should not rely on adjusted operating profit as a substitute for any GAAP financial measure and the Company encourages investors and potential investors to review the reconciliations of adjusted operating profit to the comparable GAAP financial measure. While management believes that the non-GAAP measures allow for comparability to competitors, the most significant limitation on that comparison is that the Company immediately recognizes the pension and other postretirement benefit corridor charges, if required, after a remeasurement of the liability, historically, in the fourth quarter of the year. The Company's

The following table reflects the reconciliation of non-GAAP financial measures for the full year 2008 and 2007 results:

Reconciliation of Operating Profit to Adjusted Operating Profit

                                                  2008        2007
                 Operating profit, as reported   $  28.0     $ 624.4
                 Pension corridor charge           660.1           -
                 Curtailment charges                39.4        39.8

                 Adjusted operating profit       $ 727.5     $ 664.2

Reconciliation of Operating Profit Per Ton to Adjusted Operating Profit Per Ton

                                                       2008      2007
               Operating profit per ton, as reported   $   5     $  96
               Pension corridor charge per ton           112         -
               Curtailment charges per ton                 7         7

               Adjusted operating profit per ton       $ 124     $ 103

Reconciliation of Pre-Tax Income (Loss) to Adjusted Pre-Tax Income

                                                     2008        2007
               Pre-tax income (loss), as reported   $  (6.9 )   $ 591.3
               Pension corridor charge                660.1           -
               Curtailment charges                     39.4        39.8

               Adjusted pre-tax income              $ 692.6     $ 631.1

Operating Costs

Operating costs in 2008 and 2007 were $7,616.3 and $6,378.6, respectively. Operating costs for 2008 were negatively affected by higher steelmaking input costs, principally with respect to certain raw materials and energy costs. Total 2008 costs for various raw materials, including iron ore, alloys, zinc, aluminum, and purchased slabs, increased by over $780. As a result of the progressively increasing costs during both years, the Company recorded LIFO charges in 2008 and 2007 of $283.3 and $31.2, respectively. In 2008, the Company benefited from the lower costs associated with lower retiree healthcare benefits resulting from the settlement in the first quarter of 2008 with a group of retirees from its Middletown Works. Operating costs were higher in 2007 as the result of an unplanned outage at its Ashland Works blast furnace during the third and fourth quarters of 2007.

Selling and Administrative Expense

The Company's selling and administrative expense increased slightly to $223.6 in 2008 from $223.5 in 2007.

Depreciation Expense

Depreciation expense increased to $202.1 in 2008 from $196.3 in 2007, in line with the increases in the Company's capital investments in recent years.

Goodwill Impairment

The Company is required to review its goodwill for possible impairment at least annually. The 2008 and 2007 annual reviews did not result in any goodwill impairment for the Company.

Pension & Other Postretirement Employee Benefit Charges

Under the method of accounting for pension and other postretirement benefit plans which the Company adopted at the time of its merger with Armco Inc. in 1999, the Company recognized a non-cash, pre-tax charge in 2008 of $660.1 with respect to its pension benefit plans. Under this method of accounting, the Company is required to recognize into its results of operations, as a non-cash "corridor" adjustment, any unrecognized actuarial net gains or losses that exceed 10% of the larger of projected benefit obligations or plan assets. Prior to January 31, 2009, amounts inside this 10% corridor were amortized over the average remaining service life of active plan participants. Beginning January 31, 2009, the date of the "lock and freeze" of a defined benefit pension plan covering all salaried employees, the . . .