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," "intends" or similar words indicating that future outcomes are not known with certainty and are subject to risk factors that could cause these outcomes to differ significantly from those projected. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors that could cause future outcomes to differ materially from those set forth in forward-looking statements. For discussion of risk factors affecting the businesses of U. S. Steel, see Item 1A. Risk Factors and "Supplementary Data - Disclosures About Forward-Looking Statements" in U. S. Steel's Annual Report on Form 10-K for the year ended December 31, 2008, and Item 1A. Risk Factors in this Form 10-Q. References in this Quarterly Report on Form 10-Q to "U. S. Steel," "the Company," "we," "us" and "our" refer to U. S. Steel and its consolidated subsidiaries unless otherwise indicated by the context. As discussed in this Quarterly Report on Form 10-Q, we are unable to predict the timing or strength of economic recovery; therefore, in calculating many of the accruals and estimates required to be made, we have assumed a relatively static operating environment.

U. S. Steel has been and continues to be adversely impacted by the current global recession. Our raw steel capability utilization rate in the first half of 2009 was 35 percent for North American operations and 56 percent for European operations. As further described below, we incurred an operating loss of $943 million in the first half of 2009 and we expect an operating loss in the third quarter as our order book and prices remain at low levels and idled facility carrying costs continue to be incurred. See page 12 of our Annual Report on Form 10-K for the year ended December 31, 2008 and pages 29-30 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 for the numerous actions we have taken to enhance our liquidity, maintain a solid balance sheet and position us for growth over the long term.

CRITICAL ACCOUNTING ESTIMATES

The following critical accounting estimates should be read in conjunction with those included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Inventories - Inventories are carried at the lower of cost or market on a worldwide basis.

LIFO (last-in, first-out) is the predominant method of inventory costing for inventories in the United States and FIFO (first-in, first-out) is the predominant method used in Canada and Europe. The LIFO method of inventory costing was used on 48 percent and 39 percent of consolidated inventories at June 30, 2009 and December 31, 2008, respectively.

If steel selling prices continue to decrease, additional write-downs of inventory may be necessary specifically, inventories valued under the FIFO method at U. S. Steel Europe (USSE) and U. S. Steel Canada (USSC) and recently acquired inventories at Texas Operations.

Equity Method Investments- Investments in entities over which U. S. Steel has significant influence are accounted for using the equity method of accounting and are carried at U. S. Steel's share of net assets plus loans and advances and our share of earnings and distributions. Differences in the basis of the investment and the underlying net asset value of the investee, if any, are amortized into earnings over the remaining useful life of the associated assets.

Income from investees includes U. S. Steel's proportionate share of income from equity method investments, which is generally recorded a month in arrears, except for significant and unusual items which are recorded in the period of occurrence. Gains or losses from changes in ownership of unconsolidated investees are recognized in the period of change. Unrealized profits and losses on transactions with equity investees have been eliminated in consolidation unless it has been determined that the inventory value is not recoverable.

U. S. Steel evaluates impairment of its equity method investments whenever circumstances indicate that a decline in value below carrying value is other than temporary. Under these circumstances, we would adjust the investment down to its estimated fair value, which would become its new carrying value.

Goodwill - Goodwill represents the excess of the cost over the fair value of acquired identifiable tangible and intangible assets and liabilities assumed from businesses acquired. We have two reporting units that have a significant amount of goodwill. Our Flat-rolled reporting unit was allocated goodwill from the Stelco and Lone Star acquisitions in 2007. These amounts reflect the benefits we expect the Flat-rolled reporting unit to realize from expanding our flexibility in meeting our customers' needs and running our Flat-rolled facilities at higher operating rates to source our semi-finished product needs. Our Texas Operations reporting unit, which is part of our Tubular operating segment, was allocated goodwill from the Lone Star acquisition, reflecting the benefits we expect the reporting unit to realize from expanding our tubular operations.

Goodwill is tested for impairment at the reporting unit level annually in the third quarter and whenever events or circumstances indicate that the carrying value may not be recoverable. The evaluation of impairment involves comparing the fair value of the associated reporting unit to its carrying value, including goodwill. Fair value is determined using the income approach, which is based on projected future cash flows discounted to present value using factors that consider the timing and the risk associated with the future cash flows. Effective January 1, 2009, fair value will be determined in accordance with Financial Accounting Standard (FAS) No. 157, "Fair Value Measurements," using a combination of the income, market and cost approaches as applicable.

Our annual goodwill impairment test completed in the third quarter of 2008 did not indicate that goodwill was impaired for either reporting unit. The change in business and economic conditions in the fourth quarter of 2008 was considered a triggering event as defined by FAS No. 142, "Goodwill and Other Intangible Assets," and goodwill was subsequently tested for impairment as of December 31, 2008. Fair value for the Flat-rolled and Texas Operations reporting units was estimated using future cash flow projections based on management's long range estimates of market conditions over a five-year horizon with a 2.25 percent compound annual growth rate thereafter. We used a discount rate of approximately 11 percent for both reporting units. Our testing did not indicate that goodwill was impaired for either reporting unit as of December 31, 2008. A 0.25 percent increase and a one percent increase in the discount rate used for the Flat-rolled and Texas Operations reporting units, respectively, may have resulted in a material impairment charge. A 0.25 percent and a one percent reduction in the assumed compound annual growth rate used for the Flat-rolled and Texas Operations reporting units, respectively, may have resulted in a material impairment charge.

In order to determine if an interim goodwill impairment test was necessary in the second quarter of 2009, U. S. Steel evaluated the events and economic factors that occurred since the last goodwill impairment test, including the restart of certain idled facilities due to improvements in the order book for our Flat-rolled reporting unit, improved economic indicators, lower import levels, increases in our market capitalization and continued operating losses for both reporting units. U. S. Steel determined that these factors and others, when viewed collectively, did not require an interim goodwill impairment test as of June 30, 2009.

If business conditions deteriorate or other factors have an adverse effect on our estimates of discounted future cash flows or compound annual growth rate, or if we experience a sustained decline in our market capitalization, our annual test of goodwill impairment in the third quarter of 2009 may result in an impairment charge.

RESULTS OF OPERATIONS

Net sales by segment for the second quarter and first six months of 2009 and
2008 are set forth in the following table:



                                    Quarter Ended                       Six Months Ended
                                       June 30,                             June 30,
(Dollars in millions,                                     %                                      %
excluding intersegment)            2009       2008      Change         2009         2008       Change
Flat-rolled Products
(Flat-rolled)                     $ 1,310    $ 4,018       -67 %     $   2,903    $   7,180       -60 %
U. S. Steel Europe                    645      1,760       -63 %         1,266        3,116       -59 %
Tubular Products (Tubular)            157        912       -83 %           672        1,533       -56 %

Total sales from reportable
segments                            2,112      6,690       -68 %         4,841       11,829       -59 %
Other Businesses                       15         54       -72 %            36          111       -68 %

Net sales                         $ 2,127    $ 6,744       -68 %     $   4,877    $  11,940       -59 %

Management's analysis of the percentage change in net sales for U. S. Steel's reportable business segments for the quarter ended June 30, 2009 versus the quarter ended June 30, 2008 is set forth in the following table:

Quarter Ended June 30, 2009 versus Quarter Ended June 30, 2008

                                Steel Products (a)
                                                                  Coke &           Net
                      Volume      Price      Mix      FX (b)      Other           Change
        Flat-rolled      -59 %       -2 %      0 %        -2 %        -4 %           -67 %
        USSE             -37 %      -14 %     -1 %        -7 %        -4 %           -63 %
        Tubular          -77 %       -1 %      0 %         0 %        -5 %           -83 %

(a) Excludes intersegment sales

(b) Currency translation effects

Sales for all three reportable segments in the 2009 periods were negatively affected by the impacts of the global recession.

Net sales were $2,127 million in the second quarter of 2009, compared with $6,744 million in the same quarter last year. The decrease in sales for the Flat-rolled segment primarily reflected lower shipments. The decrease in sales for the European segment was primarily due to lower shipments, lower average realized euro-based prices and unfavorable currency effects. Including the currency effects, average realized prices for USSE decreased $384 per ton from the same period last year. The decrease in sales for the Tubular segment resulted primarily from lower shipments.

Management's analysis of the percentage change in net sales for U. S. Steel's reportable business segments for the six months ended June 30, 2009 versus the six months ended June 30, 2008 is set forth in the following table:

Six Months Ended June 30, 2009 versus Six Months Ended June 30, 2008

                                Steel Products (a)
                                                                  Coke &           Net
                      Volume      Price      Mix      FX (b)      Other           Change
        Flat-rolled      -55 %        1 %      0 %        -3 %        -3 %           -60 %
        USSE             -40 %       -9 %      0 %        -7 %        -3 %           -59 %
        Tubular          -63 %       10 %      2 %         0 %        -5 %           -56 %

(a) Excludes intersegment sales

(b) Currency translation effects

Net sales were $4,877 million in the first six months of 2009, compared with $11,940 million in the same period last year. The decrease in sales for the Flat-rolled segment primarily reflected lower shipments. The decrease in sales for the European segment was primarily due to lower shipments, lower average realized euro-based prices and unfavorable currency effects. Including the currency effects, average realized prices for USSE decreased $256 per ton from the same period last year. The decrease in sales for the Tubular segment resulted primarily from lower shipments, partially offset by higher average realized prices (up $592 per ton).

Operating expenses

Profit-based union payments

Results for the second quarter and first six months of 2009 did not include any costs for profit-based payments to employees represented by the United Steelworkers (USW) because the provisions of the 2008 Collective Bargaining Agreements with the USW (the 2008 CBAs) provide for such payments only after a base threshold of operating income is earned. Results for the second quarter and first six months of 2008 included costs of $73 million and $97 million, respectively. These costs are included in cost of sales on the statement of operations.

Profit-based payment amounts per the agreements with the USW are calculated as a percentage of consolidated income from operations (as defined in the agreements) and are paid as profit sharing to active USW-represented employees (excluding employees of U. S. Steel Canada (USSC)) based on 7.5 percent of profit between $10 and $50 per ton and 10 percent of profit above $50 per ton.

Pension and other benefits costs

Defined benefit and multiemployer pension plan costs totaled $58 million in the second quarter of 2009, compared to $15 million in the second quarter of 2008. Defined benefit and multiemployer pension plan costs totaled $167 million in the first six months of 2009, compared to $29 million in the first six months quarter of 2008. Pension costs in the second quarter and first six months of 2009 included charges of $9 million and $72 million, respectively, of settlement, termination and curtailment charges primarily related to several voluntary early retirement programs (VERPs) accepted by approximately 540 employees. Defined benefit and multiemployer pension plan costs in the first six months of 2009 also included a $10 million pension curtailment charge in connection with the sale of a majority of the operating assets of Elgin, Joliet and Eastern Railway Company (EJ&E). Excluding these charges, the increased expense in both periods mainly reflected the decreased funded status of the main U. S. Steel pension plan.

Costs related to defined contribution plans totaled $3 million and $20 million in the second quarter and first six months of 2009, respectively, compared to $9 million and $17 million in the comparable periods in 2008. The first six months of 2009 included $13 million for VERP-related benefits under these plans.

Other benefits costs, including multiemployer plans, totaled $46 million and $101 million in the second quarter and first six months of 2009, respectively, compared to $34 million and $68 million in the corresponding periods of 2008. The increases in both periods reflected the benefit enhancements encompassed by the 2008 CBAs, partially offset by lower costs at USSC as a result of favorable claims experience. The increase in the six month period also reflected termination charges of $11 million related to the VERP that was offered in the first quarter of 2009.

Postemployment benefits

U. S. Steel recorded charges of $3 million and $93 million in the second quarter and first six months of 2009, respectively, related to the recognition of estimated future layoff benefits for employees associated with the temporary idling of certain facilities and reduced production at others. These charges have been recorded in accordance with FAS No. 112 "Employers' Accounting for Postemployment Benefits," which requires that costs associated with ongoing benefit arrangements, such as supplemental unemployment benefits, salary continuance and the continuation of health care benefits and life insurance coverage, be recorded no later than the period when it becomes probable that the costs will be incurred and the costs are reasonably estimable.

Selling, general and administrative expenses

Selling, general and administrative expenses were $154 million in the second quarter of 2009, compared to $171 million in the second quarter of 2008. Selling, general and administrative expenses were $297 million in the first six months of 2009, compared to $313 million in the same period of 2008. The decrease in both periods mainly resulted from the absence of accruals for profit-based payments in the 2009 periods and overhead cost reduction efforts, partially offset by higher pension and other benefits costs as discussed above.

(Loss) income from operations by segment for the second quarter and first six months of 2009 and 2008 is set forth in the following table:

                                     Quarter Ended                            Six Months Ended
                                       June 30,               %                   June 30,                  %
(Dollars in millions)              2009         2008        Change         2009             2008          Change
Flat-rolled                       $  (362 )     $ 468         -177 %     $    (784 )     $      565         -239 %
USSE                                  (53 )       298         -118 %          (212 )            459         -146 %
Tubular                               (88 )       177         -150 %            39              228          -83 %

Total (loss) income from
reportable segments                  (503 )       943         -153 %          (957 )          1,252         -176 %
Other Businesses                       (7 )        16         -144 %           (10 )             34         -129 %

Segment (loss) income from
operations                           (510 )       959         -153 %          (967 )          1,286         -175 %
Retiree benefit expenses              (34 )         1                          (66 )              2
Other items not allocated to
segments:
Litigation reserve                     45           -                           45              (45 )
Federal excise tax refund              34           -                           34                -
Net gain on sale of assets              -           -                           97                -
Workforce reduction charges             -           -                          (86 )              -
Flat-rolled inventory
transition effects                      -          (6 )                          -              (23 )

Total (loss) income from
operations                        $  (465 )     $ 954         -149 %     $    (943 )     $    1,220         -177 %

Segment results for Flat-rolled

                                                Quarter Ended                          Six Months Ended
                                                   June 30,              %                 June 30,                 %
                                              2009         2008        Change         2009           2008         Change
(Loss) income from operations ($ millions)   $  (362 )    $   468        -177 %    $     (784 )    $     565        -239 %
Raw steel production (mnt)                     1,964        5,614         -65 %         4,243         11,172         -62 %
Capability utilization                          32.4 %       92.7 %       -65 %          35.2 %         92.2 %       -62 %
Steel shipments (mnt)                          1,815        4,849         -63 %         3,938          9,550         -59 %
Average realized steel price per ton         $   677      $   777         -13 %    $      697      $     713          -2 %

The decrease in Flat-rolled results in the second quarter of 2009 compared to the same period in 2008 resulted mainly from lower commercial effects (approximately $710 million), increased carrying costs for idled facilities (approximately $130 million), lower income from sales of semi-finished steel to Tubular (approximately $80 million), inventory write-downs (approximately $60 million) and lower income from joint ventures (approximately $20 million). These were partially offset by lower raw material costs (approximately $80 million) and the absence of accruals for profit-based payments (approximately $80 million).

The decrease in Flat-rolled results in the first six months of 2009 compared to the same period in 2008 resulted mainly from lower commercial effects (approximately $860 million), increased carrying costs for idled facilities (approximately $240 million), lower income from sales of semi-finished steel to Tubular (approximately $130 million), inventory write-downs (approximately $80 million), the recognition of future layoff benefits (approximately $70 million) and lower income from joint ventures (approximately $40 million). These were partially offset by the absence of accruals for profit-based payments (approximately $100 million).

Segment results for USSE

                                                Quarter Ended                          Six Months Ended
                                                   June 30,              %                 June 30,                 %
                                              2009         2008        Change        2009            2008         Change
(Loss) income from operations ($ millions)   $   (53 )    $   298        -118 %    $    (212 )    $      459        -146 %
Raw steel production (mnt)                     1,059        1,925         -45 %        2,058           3,833         -46 %
Capability utilization                          57.4 %      104.3 %       -45 %         56.1 %         103.9 %       -46 %
Steel shipments (mnt)                          1,035        1,696         -39 %        1,932           3,334         -42 %
Average realized steel price per ton         $   602      $   986         -39 %    $     634      $      890         -29 %

The decrease in USSE results in the second quarter of 2009 compared to the same period in 2008 was primarily due to lower commercial effects (approximately $410 million) and net unfavorable currency effects (approximately $40 million), partially offset by lower raw material costs (approximately $100 million).

The decrease in USSE results in the first half of 2009 compared to the same period in 2008 was primarily due to lower commercial effects (approximately $530 million), net unfavorable currency effects (approximately $80 million) and write-downs of inventory (approximately $60 million).

Segment results for Tubular

                                                Quarter Ended                     Six Months Ended
                                                   June 30,           %               June 30,           %
                                              2009         2008     Change         2009       2008     Change
(Loss) income from operations ($ millions)   $   (88 )    $   177     -150 %    $       39   $   228      -83 %
Steel shipments (mnt)                             92          500      -82 %           299       933      -68 %
Average realized steel price per ton         $ 1,526      $ 1,690      -10 %    $    2,100   $ 1,508       39 %

The decrease in Tubular results in the second quarter of 2009 compared to the same period last year mainly resulted from lower commercial effects (approximately $240 million) and lower of cost or market write-downs (approximately $30 million).

The decrease in Tubular results in the first six months of 2009 compared to the same period last year mainly resulted from lower commercial effects (approximately $90 million), lower of cost or market write-downs (approximately $30 million), reduced income from scrap sales (approximately $30 million), increased carrying costs for idled facilities (approximately $20 million) and recognition of future layoff benefits (approximately $20 million).

Results for Other Businesses

Other Businesses generated a loss of $7 million in the second quarter of 2009, compared to income of $16 million in the second quarter of 2008. Other Businesses generated a loss of $10 million in the first six months of 2009, compared to income of $34 million in the first six months of 2008. The decrease in both periods resulted primarily from lower results for our transportation business due mainly to the sale of EJ&E in the first quarter of 2009.

Items not allocated to segments

The increase in retiree benefit expenses in the second quarter and first six months of 2009 compared to the same periods last year primarily resulted from the decreased funded status of the main pension plan and benefit enhancements included in the 2008 CBAs.

A litigation reserve of $45 million involving a rate escalation provision in a U. S. Steel power supply contract was established in the first quarter of 2008 as a result of a court ruling and was subsequently reversed in the second quarter of 2009 as that decision was overturned. See Part II. Other Information
- Item 1. Legal Proceedings.

During the second quarter of 2009, U. S. Steel received a federal excise tax refund of $34 million associated with the recovery of black lung excise taxes that were paid on coal export sales during the period October 1, 1990 to December 31, 1992.

We recorded a $97 million pre-tax net gain on sale of assets in the first six months of 2009 as a result of the sale of a majority of the operating assets of EJ&E. The net gain included a pension curtailment charge of approximately $10 million.

Workforce reduction charges of $86 million in the first six months of 2009 reflected employee severance and net benefit charges related to a VERP accepted by approximately 500 non-represented employees in the United States.

Unfavorable flat-rolled inventory transition effects of $6 million and $23 million in the second quarter and first six months of 2008, respectively, reflected the impact of selling inventory acquired in the acquisition of USSC, which had been recorded at fair value.

Net interest and other financial costs

                                    Quarter Ended                             Six Months Ended
                                       June 30,                %                  June 30,                 %
(Dollars in millions)             2009          2008         Change         2009            2008         Change
. . .